BB&T Corporation (NYSE: BBT ) has a lot to offer, especially to those investors who want to diversify away from large-cap banks that keep on irrating investors with negative news headlines about fines and mortgage settlements.
BB&T makes a compelling value proposition: The ninth largest bank based on deposit market share convinces investors with a proven community banking business model. BB&T has a strong reputation as a deposit-catching franchise, has materially improved its underlying asset quality over the last couple of years and further convinces with top notch results in the Fed's stress test exercise.
It's all about the deposits
Classic community banking requires banks to take in deposits and use them as a basis for their loan generation.
Deposits are essential for banks, but especially community banks, to build a sustainable basis for business growth and in order to facilitate lending to local businesses and home owners.zx
As such, it is a good thing, that BB&T is a strong franchise when it comes to capturing customer deposits around the country. At the end of the first quarter 2014, BB&T reported total deposits of $127.5 billion and often manages to be among the state's top five deposit franchises.
Improving asset quality
Ever since the financial crisis caused some hurtful dips in profitability due to soured loans and mortgages, investors moved to closely watch a bank's credit trends.
A bank's underlying asset quality can be gauged via the nonperforming assets/loans ratio or a variation thereof, and should clearly be downward trending in order to water investors' mouths. Why?
Because higher average asset quality translates into lower charge-offs and, as a result, higher prospective earnings.
BB&T certainly has made some remarkable progress by working through its legacy issues.
The bank also made some remarkable progress in reducing net charge-offs, another indicator of a bank's asset quality: Annualized core net charge-offs have decreased from 0.98% in Q1 2013 (not a very high level to begin with) to 0.47% in Q1 2014 and indicate a high degree of credit quality.
Adequately positioned and capitalized to weather another storm
Though nobody hopes for it, a shock in the financial system or an economic downturn could happen anytime, especially after certain asset classes have done well for investors over an extended period of time and signs of exuberance are being ignored by the market.
The Federal Reserve recently completed a complicated exercise of determining capital adequacy levels of individual banks and how their earnings would be affected should the situation in the economic/financial sector spiral out of control once again. Those FED exercises are technically called "Comprehensive Capital Analysis and Review".
According to the Federal Reserve, the CCAR intends to "evaluate institutions' capital adequacy, internal capital adequacy assessment processes, and their plans to make capital distributions, such as dividend payments or stock repurchases."
In other words, if you are a banking institution, you probably would want to end up very high in the Fed's annual ranking of most resilient banks.
And so does BB&T: The bank achieves top spots when ranked against other bank holding companies for 'lowest loan losses' and 'highest net income under stress conditions'.
The Foolish Bottom Line
If you are looking for a quality community bank you should look for a bank that attracts deposits, consistently improves its underlying asset quality (a key earnings driver in coming quarters) and belongs to the coveted group of most resilient banks in the entire financial sector.
Since BB&T offers all of these characteristics, the community bank is well positioned to capitalize on future growth and steam ahead in the coming years.
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