April 22, 2010, 3:10 PM EDT

April 22 (Bloomberg) — BB&T Corp., the second-largest bank based in North Carolina, dropped the most in six months as profit fell 39 percent on commercial real estate defaults and reduced home lending.

BB&T declined $1.28, or 3.7 percent, to $33.82 at 2:20 p.m. in New York Stock Exchange composite trading, the most since Oct. 30, 2009, when shares declined 6 percent. The stock has gained 33 percent this year.

The bank said today that restructured real estate loans for customers struggling to make payments increased 60 percent to $1.7 billion during the quarter after federal officials issued guidelines on how to account for modifications. Commercial loans made up 57 percent of the restructurings and home loans accounted for 32 percent.

“It’s not an indication of any kind of deterioration,” Chief Executive Officer Kelly King, 61, said in a conference call today. “We still don’t do big rate cuts and we don’t do big forgiveness of principal and interest.”

Net income declined to $194 million, or 27 cents a share, from $318 million, or 48 cents, a year earlier, the Winston- Salem, North Carolina-based lender said today in a statement. Earnings topped the 23-cent average estimate of 30 analysts surveyed by Bloomberg.

About 3.3 percent of BB&T’s $12.5 billion in commercial real estate loans weren’t paying interest as of March 31, an increase from 2.7 percent on Dec. 31, the bank said. King called the change “manageable.”

Mortgage banking declined 53 percent to $88 million from a year earlier, with the bank originating $4.8 billion in mortgage loans during the first quarter compared with $7.4 billion in the year-earlier period, according to the statement.

Loan Provision Decreases

“BB&T’s nonperformers continued to increase, while some of its peers reported declines,” CreditSights Inc. analyst David Hendler said in a report today. “Still, the company noted that it is continuing to see signs of stabilization.”

The lender reported $4.5 billion in loans not accruing interest, up from $4.2 billion in the preceding quarter and $2.8 billion a year earlier. The bank set aside $575 million for loan losses, a decrease from $725 million in the fourth quarter of 2009.

BB&T’s net interest margin, the spread between interest paid on deposits and received on loans, increased to 3.88 percent from 3.57 percent a year earlier. It’s the widest margin since 2005, the bank said.

Noninterest income declined 18 percent on lower securities gains and weaker mortgage-banking income. Insurance income rose 0.4 percent to $253 million, the bank said. BB&T is the fifth largest U.S. insurance brokerage, according to Business Insurance magazine.

Dividend Boost Possible

The lender may boost its 15-cent a share quarterly dividend late this year or in early 2011, King said. He said rival banks cut their payout to 1-cent a share, while BB&T’s dividend yield remains at almost 2 percent.

BB&T bought Colonial Bank in August in a Federal Deposit Insurance Corp.-assisted transaction, adding $19.2 billion in deposits, $14.3 billion in loans and $3.7 billion of investment securities. The FDIC agreed to assume 80 percent of the first $5 billion of losses, plus 95 percent of any additional losses at Colonial, which ranked fifth in bank deposits in Florida.

BB&T recently was outbid for another failed bank in its region, King said without providing further details. “We aren’t going to follow the herd to the point of where it becomes a bad deal,” he said.

Bank of America Corp., based in Charlotte, North Carolina, on April 16 reported net income of $3.18 billion, its first profit in three quarters for the largest U.S. lender by assets.

–Editors: William Ahearn, Steve Dickson

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

To contact the editor responsible for this story: Alec McCabe in New York at amccabe@bloomberg.net