The 1 Thing That Saved BB&T in 2013

It's been a tough year for banks, as revenues at the nation's biggest lenders have buckled under the pressure of increased regulatory scrutiny and low interest rates. The performance of BB&T through the first nine months of the year provide a case in point.

BB&T's rollercoaster income statement
If all you took was a cursory glance at BB&T's income statement, then you'd be excused for concluding that the North Carolina-based regional bank has had a decent year.

While its net income for the first nine months of the year fell by $338 million, or 23%, compared to the year-ago period, the entire decline related to an increase in abnormal income tax provisions -- I say "abnormal" because they relate to a long-simmering legal dispute that was only recently resolved in the government's favor.

Take this out, and BB&T's earnings before taxes grew on a year-over-year basis through the third quarter by $257 million, or 12.6%.

But here's the catch. All of the bank's earnings before taxes derived from a decrease in loan loss provisions, as opposed to an improvement in revenue or a decrease in expenses. Excluding this, its earnings before taxes were lower by $16 million relative to 2012.

A pressurized earnings environment
The pressure on BB&T's bottom line is twofold.

In the first case, the sustained low interest rate environment is weighing on its net interest income. Its net interest margin fell by 23 basis points over the 12-month time period, and its net interest income responded in kind, providing $127 million less revenue. And in the second case, BB&T's expense base increased by $41 million.

The one saving grace for the popular regional bank has been its insurance subsidiaries. As the company's most recent quarterly report notes:

Insurance income, which is BB&T's largest source of noninterest income, totaled $1.1 billion for the nine months ended September 30, 2013, an increase of $149 million, or 14.9%, compared to the corresponding period of 2012. This increase primarily reflects the impact of the acquisition of Crump Insurance on April 2, 2012, firming market conditions for insurance premiums, and a $13 million experience-based refund of reinsurance premiums that was received in the second quarter of 2013.

So, what should shareholders take away from this?
My guess is that none of the underlying market forces are bound to change anytime soon.

Just last week, the Federal Reserve said short-term interest rates are bound to "remain near zero for a considerable time," perhaps even after the unemployment rate reaches the previously announced 6.5% threshold. And we know federal regulators aren't going to let up anytime soon on their hard-fought gains on the regulatory front.

As a result, it seems reasonable to conclude that banks like BB&T will spend yet another year looking to loan loss provisions to fuel their bottom lines. How much longer can this go on? That remains to be seen, but anybody who's worried should follow that figure closely.

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