The Best Bank In Town

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I've argued several times in the past that BB&T (NYSE: BBT) might be, “The Best Big Bank,” but it seems unless you're a customer almost no one is paying attention. In fact, if you ask most people for the names of the largest banks normally you'll hear companies like Bank of America, Wells Fargo, or J.P. Morgan & Chase. BB&T is actually one of the largest financial institutions in the country, and every quarter the bank seems to report strong results to no fanfare. If you've never heard of the company, or you have any doubts about its performance, let me walk through the bank's recent earnings and I'll show you what I mean.

The Branches:

In the recent quarter, BB&T reported revenue up 15.69%, and EPS increased 27%. These numbers alone should be enough to get most investors' attention, but it's the bank's underlying performance that is equally impressive. The company reports in several different segments, so let me walk you through each one's performance. The cornerstone of the bank is its Community Banking division, which represents about 50% of net income. This is your traditional BB&T branches, and in this division income increased more than 40%. The bank seems to be literately doing everything right with both large increases in loans and deposits. Loan and deposit growth are one of the most fundamental measures of organic growth at any bank. In this division, direct retail loans increased almost 12%, and revolving credit loans increased more than 10%. On the deposit side of the house, the company attracted 28.3% more non-interest-bearing deposits, 6.1% more interest checking deposits, and money market and savings accounts increased 12.6%. Even in this challenging interest-rate environment, the bank also managed to increase its CD balances by 1.9%.

Huge Mortgage and Insurance Growth:

BB&T likes to say that it offers banking, insurance, and investments. However, the company's mortgage and insurance divisions were key growth drivers in the current quarter. In fact, almost 17% of the bank's income was derived from their Residential Mortgage Banking division. This unit saw mortgage loans up 24.8% and income increased 71.5%. The company's Insurance Services division saw huge income growth of its own, reporting an increase of 38.2%. BB&T has been an aggressive acquirer of insurance agencies, and the recent increase was primarily due to the acquisition of Crump Insurance. In part due to this acquisition, BB&T now has the seventh largest insurance agency in the world. While the insurance division represented just over 3% of income during the quarter, continued growth in this area will help the bank diversify its revenue stream away from interest-bearing products.

Financial Services, Dealer Finance, and Specialized Lending Could Use Some Improvement:

The bank's third largest income contributor was its Financial Services unit. This division includes the company's trust, estate, investment, and wealth management divisions. While net income increased just 1.43%, this is still fairly good considering the uncertain economic environment investors have been faced with. Where the bank ran into some trouble, was with Dealer Finance and Specialized Lending. Both of these units saw a decrease in income of at least 11% due primarily to an increase provision for potential credit losses. The good news for investors is each of these divisions is a smaller contributor to income than the ones we have previously discussed.

Net Interest Margin Second To None:

A popular metric that many investors use when comparing financial institutions is their net interest margin. The net interest margin simply describes the relationship of the company's assets that earn interest versus their cost for these assets. Needless to say, a high net interest margin indicates the probability of higher earnings. In the most recent quarter, BB&T reported a net interest margin of 3.94%. Just for point of comparison, M&T Bank (NYSE: MTB), which by many is considered to be a very strong institution itself, showed a net interest margin of 3.77%. In my local area, one of BB&T's direct competitors is PNC Financial (NYSE: PNC), and their net interest margin was 3.82%. Another local competitor is SunTrust (NYSE: STI), and while this bank has run into some troubles, their net interest margin also can't compare at 3.38%. Lest investors think that I'm cherry picking the results, none of the much larger banks that I mentioned at the outset can match BB&T's net interest margin either.

Credit Quality? Yep BB&T Has That Too:

With so much being made about credit quality at the big banks, you might think that BB&T is also struggling with this issue. However, the bank really never got involved with the high-risk lending practices of some of its peers. In the current quarter, the bank reported non-performing loans to total loans of just 1.35%. This number was actually high relative to past performance. Before the Great Recession, BB&T routinely reported non-performers of less than 1%. Once again relative to its peers, BB&T stands alone. M&T Bank reported non-performers of 1.44%, PNC came in at 1.88%, and SunTrust showed non-performers at 1.37%. I do have to qualify, that SunTrust sold about $540 million worth of non-performers, and prior to the sale their ratio was actually 1.8%. BB&T also said this was the, “10th consecutive quarterly decline in nonperforming assets and the amount is the lowest since the third quarter of 2008.”


In banking, sometimes things can get very complicated. What is not complicated is how clear it is that BB&T is one of, if not the best bank, in the country. Ironically the stock pays almost the same yield as competitors M&T and PNC at about 2.7%. However, where BB&T leaves these competitors in the dust is when it comes to analysts’ expectations for earnings growth in the next five years. BB&T is expected to grow earnings by over 10%, versus these two competitors are expected to see 7.7% and 4.07% growth respectively. While SunTrust is expected to grow much faster, the company recently made what I've called “The Worst Stock Sale In History”, and can't hope to compete with BB&T's organic growth in loans and deposits. Organic growth drives earnings growth, which calls into question analysts’ expectations for SunTrust over the next few years. I've called BB&T, the best big bank in the past, and this earnings report just further proves the point. Investors looking for exposure to the banking industry should look no further than the best bank in town.

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