Third-quarter profits fell a steep 43% at BB&T, to $268 million, or $0.37 per share, from $469 million, or $0.66 per share, a year earlier. However, the decline was due to an unusual tax item, without which profits would have come to $503 million, or $0.70 per share. The 7% increase in adjusted profits was due to sharply lower provisioning for loan losses and a decline in non-interest costs. We are not making changes to our fair value estimate or our economic moat rating at this time.

Net interest income dropped 4% on a year-on-year basis as net interest margin (taxable equivalent) fell 26 basis points to 3.68%, reflecting lower yields on loans and securities. We expect the fourth quarter to see some margin compression relative to third-quarter levels. Noninterest income dropped 6% to $905 million as mortgage-banking income shed 45%, reflecting lower margins amid higher competition. Noninterest expense fell 4% to $1.47 billion, helped by declines in foreclosed property expense and in merger and restructuring charges. Significantly lower loan-loss provisioning helped earnings, as these charges fell 62%.

We were pleased to see credit quality continue to improve. Net charge-offs fell to 0.48% of average loans and leases from 0.74% in June and 1.05% in September 2012. Non-performing assets dropped to 0.72% of total assets from 0.80% and 1.10% in the second quarter of 2013 and the 2012 third quarter, respectively.

The loan-loss allowance fell to 1.59% of loans and leases held for investment, down 5 basis points sequentially and 21 basis points year on year. BB&T’s Tier 1 ratio continued to improve, moving to a relatively solid 11.3% from 11.1% in the June quarter and 10.0% a year earlier.

While the net charge-off situation improved substantially, we continue to think that over the long term the normalized rate for these costs should be above recent levels, likely over 0.70% of loans. We think the bank’s earnings power will rev up as interest rates improve.