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

Investopedia: Comerica Gets Bigger, But "Better" Has To Wait

Comerica (NYSE:CMA) might be something of a microcosm and preview for regional banks this year. This Dallas-based bank not only reported better credit numbers for its fourth quarter, but stabilization in its loan activity and an acquisition of a smaller bank in a key target market. 

The Quarter That Was
Comerica's earnings were messy, but fairly typical for banks right now. Reported revenue did climb 5% and net interest income was stable, but core PTPP (pre-tax, pre-provision) earnings were down about 2% on a sequential basis. What's more, average earning assets were down 2% on a sequential basis. Consequently, while the company did report an impressive beat on the earnings line - reporting earnings of 53 cents versus a consensus estimate of 31 cents - virtually all of that upside was outside of its core earnings potential.

As that last sentence suggests, credit and provisioning was a major driver this quarter (as it is for virtually every U.S. bank right now). The company's fourth quarter provisions for loan losses were less than half of those in the third quarter and less than a quarter of what they were a year ago. As a result, the company's ratio of non-performing assets to total assets fell on a sequential basis. Said differently, the company charged off about $113 in bad loans this quarter, but only provisioned for $57 million of that, and that boosted the reported earnings (a "release" of loan loss reserves).

Getting Even Bigger in Texas
While Comerica's history is in Michigan, the company clearly sees Texas as its future. To that end, the company announced the acquisition of Sterling Bancshares (Nasdaq:SBIB). Comerica is offering up about 0.24 of its shares for each share of SBIB, giving the company a 29% premium (even after the stock had been moving up on merger chatter).


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