BB&T - Anything But Simple

BB&T (NYSE: BBT) delivered another complicated quarterly report for the fourth quarter of 2010. Although the company has clearly made a lot of progress with its credit quality and looks poised to really target growth again in 2011, it's not all positive. At some level, I am starting to wonder whether these murky reports (and the company's apparent unwillingness/inability to telegraph them better to analysts and investors) are a sign of a shift in the corporate culture - one that would not be positive for investors.

The Numbers
Looking at the numbers, operating revenue was down 3% yoy and down sequentially to about $2.3B - a slightly better result than analysts expected. Net interest income was up 2% sequentially, and although the net interest margin fell a bit (5 bp), the absolute level of 4.04% was really quite good. Fee income was down 5% sequentially, though, so BB&T has clearly been challenged to maintain this lucrative source of income - other banks have had this same problem and that makes U.S. Bancorp's (NYSE: USB) all the more impressive. Expenses were up 4% sequentially; normally this would concern me, but it is pretty clear that BBT management is ramping up ahead of some growth expectations in 2011.

Better, If Confusing, Credit
Credit was confusing, but better. The NPA ratio dropped 12bp sequentially to 2.64%, while the NPA/loan ratio dropped 24bp to 3.88%. Unlike U.S. Bancorp, Citigroup (NYSE: C), and many other banks, BBT did not release reserves this quarter. The company's NCOs for the quarter were $538M, while the provisioning was $643 million. The company ended the quarter with non-performing loan coverage of 119% which is quite high and healthy - and perhaps a sign that there could be reserve releases down the road.

One note on credit - the company continued its NPA disposal strategy this quarter and that almost certainly had to mess with the numbers. Given that losses have to be recognized upon sale, that probably inflated the loan loss recognition in this quarter and played a role in that reserve release discrepancy relative to other banks. During the quarter the company also sold over $6 billion in agency securities and $400 million in non-agency securities, swapping them for shorter-duration, floating-rate debt (a sign BBT expects rates to be moving up).

All in all, if you net out the gains from the security sales and the accelerated loan loss recognition, BBT appeared to beat estimates by $0.01.

Ramping Up For An Active 2011?
Looking out to 2011, BBT seems ready to get aggressive. The company is looking for a modest decline in NIM, but the company has been expanding its deposit base at an above-average rate (though not paying too much). The company is also seeing solid loan growth, though that isn't immediately apparent by just looking at the numbers, as the loan disposal strategy messes up the comparisons.

I'm clearly a little miffed at how the company has been presenting information to the Street, but I'm still pro-BBT and pro-management. I think BBT is a very well-run bank (maybe not better than U.S. Bancorp or M & T Bank (NYSE: MTB), but better than Wells Fargo (NYSE: WFC), Zions (Nasdaq: ZION) and quite a few others). I do believe that BBT will emerge from this mess as a winner and one of the leading large banks. Moreover, I'm happy that the company is not getting drawn into bidding wars - BBT was almost certainly interested in buying Sterling, but I'm glad they didn't outbid Comerica (NYSE: CMA) for it. After all, there are more fish in the sea and BBT can afford to be disciplined.

I still think these shares are quite undervalued. I use a return-to-equity model to value bank stocks, and I'm projecting that BBT will achieve a return on equity of 14% in five years' time. With that, I see these shares worth about $34.75. That is pretty significant undervaluation in the market; suggesting that the Street is underestimating the company's ROE recovery and/or assigning a level of risk (discount rate) that seems too high.

So, I would clearly BUY BBT shares today. That said, shop around. Citizens Republic (Nasdaq: CRBC) and Severn Bancorp (Nasdaq: SVBI) could be interesting to really aggressive investors, as could Citigroup (NYSE: C).  PNC (NYSE: PNC), Zions, Southside (Nasdaq: SBSI), Timberland (Nasdaq: TSBK), and Peoples Financial (Nasdaq: PFBX) all stand out as well, though many of these are illiquid and risky.

Buy BBT.
Disclosure: I own shares of BBT