BB&T: How to Play It

BB&T has taken advantage of market upheaval to position itself for growth. Shares are cheap relative to earnings projections.
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BB&T Corp.

(BBT) - Get Report

has weathered the credit storm better many other large regional banks and is an excellent pick right now for long-term investors.

BB&T's shares closed at $23.50 Monday, down 6% year-to-date according to SNL Financial. Many well-known regional players have seen much stronger year-to-date stock performance, including

Regions Financial

(RF) - Get Report

with shares returning 39%,

Fifth Third

(FITB) - Get Report

, which is up 26% and


(KEY) - Get Report

, up 53%, however, those returns simply emphasize how further those names fell during the crisis. If we look at five-year numbers, BB&T's total return of -22% isn't the loveliest figure, but during the same period, Regions declined 69%, Fifth Third saw its shares drop 59% and KeyCorp's total return was -68%.

BB&T also stands out among these four names because it has made money all through the credit crisis and is not a current participant in the

Troubled Assets Relief Program

, or TARP. The shareholders of many TARP participants face dilution risk, since regulators are likely to require common equity raises before granting permission to repay bailout money to the government.

BB&T's shares trade for 1.6 times tangible book value according to SNL Financial, which is higher than the other four regionals named above, but again reflects the company's strong capital position and lack of dilution risk associated with TARP. While the comparison isn't that meaningful in a time of higher capital requirements for banks, BB&T's shares traded for 2.4 times tangible book value at the end of 2007 and 3.7 times book at the end of 2006.

Of more interest to investors is BB&T's cheap price relative to forward earnings. Shares trade for 20.8 times the consensus earnings projection of $1.13 for all of 2010 among analysts polled by Thomson Reuters, but when based on the earnings estimate of $1.98 for 2011, the forward P/E drops to 11.9. For 2012, the consensus earnings estimate is $2.83, which would bring the forward P/E down to 8.3.

BB&T reported second-quarter net income to common shareholders of $210 million, or 30 cents a share, improving from a profit of $188 million, or 27 cents a share, the previous quarter. Net income during the second quarter of 2009 was $121 million, or 20 cents a share. Results for the second quarter of 2009 excluded $83 million in dividends paid to the government for TARP, which BB&T repaid in June 2009.

Like many banks in the low interest rate environment, BB&T's net interest margin - the difference between a bank's average yield on loans and investments and its average cost of funds - has improved. The net interest margin for the second quarter was 4.12% according to the company, increasing from 3.56% a year earlier, with BB&T crediting "higher yields on acquired loans," along with the lower deposit rates.

Still, earnings were mediocre, as the company's return on average assets was 0.56% according to SNL Financial, as BB&T was still working through its problem loans, setting aside $651 million for loan loss reserves during the second quarter. Unlike many large banks that had already begun to

release loan loss reserves

, BB&T was still building reserves during the second quarter.

The company's capital was strong as of June 30, with a Tier 1 leverage ratio of 8.86% and a total risk-based capital ratio of 15.79%. Since BB&T is profitable, it is unlikely the company will need to raise additional capital to meet whatever capital requirements regulators come up with as they interpret the Dodd-Frank banking reform legislation and phase in the

Basel III

agreement over the long haul.

BB&T also made an excellent strategic move by purchasing the failed

Colonial Bank

of Montgomery, Ala. from the

Federal Deposit Insurance Corporation

in August 2009, acquiring (according to BB&T) 357 branches to expand its footprint in Alabama, Georgia, Florida and Texas. In addition to the branches and $19.2 billion in deposits, BB&T took on $18.7 billion in assets, with the FDIC agreeing to absorb at least 80% of losses on $15.4 billion.

With low price multiples, continuing profits, a significant branch expansion during the credit crisis and a strong management team that makes money through thick and thin, BB&T stands out as a good choice for investors looking for a very long-term relatively-conservative play. BB&T's geographic footprint will serve it well over the next five years as the economy slowly improves and the mass migration to the southern states resumes.

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Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.