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BB&T (BBT) is a North Carolina-based financial holding company with nearly $175 billion of assets that conducts much of its business through its commercial bank subsidiary, Branch Banking and Trust Company. The company likes to say that BB&T means “best bank in town’’, and it prides itself on remaining profitable in every quarter during the past four difficult years.

A Little History

BB&T traces its roots to a bank in eastern North Carolina founded in 1872 by Alpheus Branch and Thomas Jefferson Hadley (a company called Branch and Hadley) to lend funds to farmers following the Civil War. The company added trust activities in 1907 and took the name Branch Banking and Trust Company in 1913. Over the years, it added other businesses, like insurance, to its lineup. In 1994, it merged with Southern National Corporation and adopted Winston-Salem as its headquarters. Since then, it has grown rapidly throughout the Southeast, both internally and via acquisitions, and now has a small foothold in Texas.

A Strong Comeback

Superheated real estate activity in BB&T’s region just prior to the 2008 recession led to a deterioration in the company’s credit quality. BB&T’s problem loans and foreclosed real estate of $690 million at the end of 2007 surged to over $4.1 billion by the end of 2009, with the company’s largest concentrations of problem loans in Georgia, Florida, and metro Washington D.C., markets in which real estate prices fell sharply.

BB&T, like other regional banks, had to write off a large portion of the problem assets. To absorb the resulting losses, BB&T built up its loan loss reserve to over $2.7 billion in 2010, from only $1 billion back in 2007.  The sizable provisions to build the reserve were the main factor behind the earnings decline from 2007 to 2009. Expenses related to maintaining foreclosed real estate also rose.

Credit costs stayed fairly high in 2010. But the company stepped up its efforts to dispose of foreclosed property in 2011, more than halving the total by year end, and slicing another 60% from the total in the first half of 2012.  It also slashed problem loan balances by nearly a third in 2011.  The resulting decline in loan loss provisions and other credit costs powered BB&T’s earnings rebound in 2011 and into the first half of 2012.

Diversification Matters

BB&T doesn’t believe in keeping all of its eggs in one basket. At mid-2012, it derived 48% of its revenues from its community bank operations. The other 52% comes from other financial services businesses, the largest of which is insurance (16% of the total). Management believes that growth tends to be steadier when revenues come from a number of sources.

Some of the growth outside of the community banking business was the result of acquisitions, like BB&T’s purchase last April of the life and wholesale property and casualty insurance operations of Crump Group, which added annual revenues of about $300 million. Although BB&T stands ready to make more acquisitions when attractive opportunities arise, it sees plenty of room to expand internally in businesses like insurance. And the wealth management and broker/dealer operations are hiring more wealth producers and brokers.

Management also sees opportunities to increase banking revenues. It plans to add commercial bank branches in areas where the bank is underpenetrated and is focusing more on attracting very profitable small business relationships in its region. There may be opportunities to expand its presence in Texas. And in August, BB&T acquired Fort Lauderdale-based BankAtlantic Bancorp, which added $2 billion of loans, $3 billion of deposits, and 78 branches in the southern portion of the Sunshine State, complementing operations in northern Florida added via its acquisition of Colonial Bank in 2009.

A Look Ahead

Now that BB&T’s loan loss provisions and other credit costs have come down dramatically, the company’s earnings prospects in the next few years will depend more on increasing revenues and reining in expenses. Economic uncertainty and rising regulatory costs make boosting revenues and containing expenses difficult.
Nonetheless, BB&T is enjoying mid-single-digit loan growth, and its net interest margin has held up well thus far. Acquisitions and the aforementioned internal growth initiatives should also support decent growth in fee-based revenues.

BB&T is also asking its managers to rethink their businesses in an effort to find new ways to boost revenues and lower costs. The expense-reduction ideas are now being implemented.  The revenue initiatives will be put to work over the next few years.

Although bottom-line growth will moderate from the heady pace experienced in 2011-2012, we look for share net in the next few years to advance at a mid- to upper-single-digit annual clip. The stock may be a moderately rewarding holding over the pull to 2015-2017. It has been trading near its 52-week high recently, but still hasn’t recovered all of the ground lost since 2008. And BB&T’s dividend yield is slightly above average. 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.