2nd UPDATE: BB&T 3Q Profit Falls 57%, Delinquent Loans Rise

If last week's earnings by three of the nation's biggest banks gave hope that the end of heavy losses from soured loans might be closer, BB&T Corp. (BBT) crushed such hopes early Monday.

The Winston-Salem, N.C., bank, long considered among the most well-run large regionals, reported a continued rise in delinquent loans in states hit by the recession, such as North Carolina, rather than those hit by the mortgage meltdown. "The core BB&T sees more cracks in credit," even excluding the acquisition of failed Colonial Bank, said analyst Kevin Fitzsimmons of Sandler O'Neill & Partners LP.

If BB&T has the sniffles, the rest of the banking industry is unlikely to avoid the cold - Wall Street sold many regionals into a rising market Monday.

"Regionals simply don't have any firepower to withstand rapidly eroding commercial assets" even if losses from consumer loans are stabilizing, analyst Todd Hagerman of Collins Stewart LLC wrote in an email to Dow Jones Newswires. "Mortgage revenue are also falling much faster than anticipated as refinance volumes rapidly dissipate."

BB&T's shares recently fell $1.29, or 4.6%, to $26.96, perhaps because many investors hoped BB&T would write off bad loans more decisively than it did and that the bank would build its loan-loss reserve more aggressively, analysts said.

Chief Executive Kelly King said during a conference call with investors that the bank added $263 million to its loan loss reserve, "which again is a significant number."

BB&T "has a lot more real estate exposure than the money centers, plus it does not have nearly as much capital markets to offset" such losses than the big banks that reported earnings last week, said Jeff Davis of FTN Equity Capital Markets Corp.

The bank's third-quarter earnings fell 57% from a year earlier, to $157 million. BB&T's earnings of 23 cents per share, compared with a profit of $358 million, or 65 cents a share, beat the average analyst estimate by a penny, according to Thomson Reuters. Interest income decreased 2.5% to $1.8 billion.

BB&T said delinquencies among borrowers who are less than 60 days late improved; Citigroup Inc. (C) and Bank of America Corp. (BAC) reported the same in some portfolios. BB&T's charge-offs were stable; but nonperforming assets increased.

King said during the call, "You can see a pretty steady rate of increase" in nonperforming loans, but "certainly not" and increasing pace of souring loans. "We are not particularly alarmed" but the business loans not tied to real estate, he said.

Losses from bad loans "are going to find the peak in the next two or three quarters" King said, adding, "nonperformance of the industry and for us continue to increase probably at a declining rate of increase."

Credit-loss provisions soared 95% to $709 million from $364 million a year earlier, and rose from the second quarter's $701 million. Nonperforming assets, or loans in danger of going bad, rose to 2.48% from 1.2% a year earlier and 2.19% from the previous quarter. Net charge-offs, loans the bank doesn't expect to collect, rose to 1.71% from 1% last year but fell from 1.81% last quarter.

BB&T has strengthened its capital base in August with a $963 million offering of common stock after it purchased Colonial.

In June, the bank was among the first to pay back $3.1 billion it had received from the U.S. Treasury Department's Troubled Asset Relief Program.

BB&T's tangible common equity ratio, which measures how much of a bank's hard assets it common shareholder actually own, rose to 6.1% from 5.8% a year earlier but fell from 6.5% in the previous quarter.

Average client deposits were up 20% from a year earlier amid the Colonial takeover, while average loans and leases held for investment saw a 6% increase.

-By Matthias Rieker and Joan E. Solsman, Dow Jones Newswires; 212-416-2471; [e-mail]