BB&T - Good, Bad, Awful All In One

BB&T (NYSE: BBT) put up a quarter for the second quarter that is tricky to figure out. There was good news and bad news, often the same news, and a lot of things to consider.

Revenue rose 6% (sequentially) this quarter, a strong result by this quarter's standards. Net interest income rose more than 3% - better than US Bancorp (NYSE: USB), Wells Fargo (NYSE: WFC), and PNC (NYSE: PNC). Net interest margin was 4.1%, which was likewise quite strong on a comparative basis. Loan growth was quite modest - down just a bit on an average balance basis and up slightly on a period-ending basis.

And for some people, that is all the good news there is.

Most news accounts are going to say that BBT missed earnings by $0.04, but that is not quite true. Strip out security gains and what-not and you get earnings per share more like $0.14 or $0.15 per share - far below that Wall Street guess of $0.34.

Why were earnings so weak? A big part of it was the company's decision to sell $628M in bad loans. These were "troubled assets" (polite speak for craptastic loans gone bad) that the company was looking to sell, but doing so forced them to run the losses through the income statement. On top of that, the higher costs of managing foreclosed property and integrating Colonial added to the expense ratio. Consequently, efficiency and returns on assets and equity were poor.

Loan loss reserves as a percentage of loans were 2.7% - on the low side for similar banks, while charge-offs were 2.5% (which was on the high side). Non-performing loans stayed flat quarter on quarter, as did NPLs as a percentage of loans. That stands in contrast to companies like USB and M&T Bank (NYSE:MTB) where non-performing loans dropped quarter on quarter.

Considering how things look in the economy, I like the fact that BBT management continues to be so conservative. USB management's feelings about the economy are such that they are not releasing reserves yet, and that seems reasonable. So when I see that BBT carries a rather high Tier 1 common ratio, I feel pretty good about it - why stretch your balance sheet and leverage yourself to go out and make mortgage loans when rates are at historic loans? Makes no sense to me.

All in all, I have to lower my target on BBT to $35.50, predicated on ROE going back to 14% over time. That is not an exciting amount of appreciation potential, but it is enough for me when we are talking about a well-run and conservative bank.

If I did not own BBT, what would I buy? JPMorgan (NYSE: JPM), which I always already own, also looks very cheap - maybe one of the cheapest domestic banks I know. Wells Fargo also looks appealing, and maybe Bank of America (NYSE: BAC) too, but BAC and JPM are very different businesses than BBT. Among more similar banks, like PNC, Suntrust (NYSE: STI), or Regions (NYSE: RF), I would much rather own BBT.

Disclosure - I own shares of BBT and JPM