I've tried to make the case before that BB&T (NYSE:BBT) was an underappreciated regional bank that really wasn't getting its due from the sell-side community. Now that management missed numbers with higher expenses and revised guidance lower for the next quarter, it's harder to make that argument. Although I fully expect BB&T to spend at least a quarter or two in the penalty box now, I believe the company's loan growth, credit quality, and expansion potential all will pay off in time. As such, while third quarter results frustrate me as a shareholder, I'm not looking to sell at these prices.

Forex Broker Guide: Using the right broker is essential when competing in today's forex marketplace.

A Tough Quarter Down the Line
BB&T's third quarter results were somewhat disappointing, but they were hardly a disaster. Nevertheless, this was neither the time nor the place to disappoint the Street.

Operating revenue rose 1% sequentially, but pre-provision net revenue was down about 2%; better than PNC's (NYSE:PNC) 6% decline, but worse than the single-digit improvements from Wells Fargo (NYSE:WFC), U.S. Bancorp (NYSE:USB) and Fifth Third (Nasdaq:FITB). BB&T's net interest income rose 1%, and although the bank's net interest margin is the strongest of the group at 3.94%, lower security balances led to a slight disappointment here. It's worth noting that BB&T benefits greatly from purchase accounting accretion and "core NIM" is lower.

Arguably the biggest disappointment was with the company's expenses. Expenses rose about 4%, driving a lot of the company's miss relative to estimates. Even with this disappointment, however, I think it's worth remembering that BB&T's efficiency ratio compares favorably with most banks - it's superior to all of the aforementioned names except U.S Bancorp.

SEE: How To Decode A Company's Earnings Reports

Good Loans, Good Credit, but NIM Compression Coming
Period-end loans grew about 3% at BB&T, or a little more than 2%, excluding the BankAtlantic loans. With most other banks posting loan growth of around 1%, that's not a bad result, and BB&T continues to see good growth in mortgages and commercial lending.

Credit quality also continues to improve. Non-performing loans fell 6%, and non-performing assets fell about 9%.

Unfortunately, the good times aren't going to continue into the fourth quarter. Not unlike U.S. Bancorp, BB&T management cited significant uncertainty in the commercial lending market tied to the election and the "fiscal cliff" issue. Consequently, loan growth is expected to slow. More significantly, management also sees net interest margin dropping about 20 basis points or so in the next quarter - some from unfavorable runoffs and lower yields, but also less accretion.

SEE: Breaking Down The Balance Sheet

Will a Little Aggressiveness Pay Off?
In many respects, it looks like BB&T management is not afraid to be more aggressive in the pursuit of growth. In addition to the BankAtlantic deal, management has given no particular indication that it's through considering acquisitions. Even though BB&T is already a major player in the Southeast in banking and nationwide in insurance, there could be further scope for deals in both lines.

BB&T also seems to be willing to expand specialty lending. In addition to subprime auto lending, BB&T is expanding its equipment finance lending. The recession wiped out a lot of equipment finance companies, but this can be very profitable lending with sound underwriting.

SEE: The Rise Of The Modern Investment Bank

The Bottom Line
Given how BB&T still stacks up against other regional/super-regional banks, I'm not inclined to panic over the developments and guidance in this quarter. I still believe that the bank can produce long-term returns on equity in the 13-14% range, and that suggests that these shares are undervalued. With a 13.5% long-term ROE estimate, fair value comes in around $40 to $41, making this is an attractively-priced bank relative to U.S. Bancorp and Wells Fargo today.

With that fair value, I would also offer a warning. BB&T has long had more leverage in commercial real estate than many of its comparables, and its fee income business is generally more volatile as well. So while BB&T may indeed offer more upside than Wells Fargo or U.S. Bancorp, it also offers more risk and a larger probability of disappointment.

At the time of writing, Stephen D. Simpson owned shares of BB&T since 2007.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How can insurance companies find out about DUIs and DWIs?

    An insurance company can find out about driving under the influence (DUI) or driving while intoxicated (DWI) charges against ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

Trading Center