Motley Fool Income Investor advisor James Early recently interviewed BB&T
James Early: Can you explain to the layman how you make money? How do you grow profits in the future?
John Allison: While traditional deposit-gathering and retail, small business, and commercial lending are at the core of our business, we also operate the seventh-largest insurance agency system in the nation and provide investment banking, trust, wealth management, and many other services. I believe we have a number of important strengths that drive our profitability. While we are the nation's 12th-largest banking organization, and provide all the services that any large financial institution can offer, our business model is intentionally decentralized into 33 mostly autonomous community banking regions that focus on providing the perfect client experience to our clients. We sell value, not price, and work to deliver the greatest value in the industry to our clients. We also operate a superior sales system, the BB&T Decathlon. Finally, I believe our decision-making philosophy, which is rational, objective, and fact-based, improves the odds of our success. With respect to future growth, in the last three years, we have invested significantly in transforming our company into one focused on organic growth by building de novo branches, hiring additional lenders and other revenue producers, and placing renewed emphasis on deposit-gathering.
JE: Who are your top three competitors, and what do you respect most about each?
JA: Our top three banking competitors are Bank of America
JE: As an investor, what one or two numbers can I look at to gauge the health of your business?
JA: Obviously, earnings per share and the growth rate of our earnings per share are very important. We have grown diluted earnings per share at a compound annual rate of 10.6% over the last 20 years ending Dec. 31, 2006. In 2007, the most important indicators of our financial strength and performance are our asset quality indicators and our ability to generate positive operating leverage (growing revenues faster than expenses), primarily by improving expense control.
JE: You've talked a lot about restructuring your investment portfolio. How has that worked out?
JA: We did restructure $2.5 billion of investments in the fourth quarter of last year. The overall yield of the portfolio has increased 59 basis points from the third quarter last year to the first quarter of 2007. We will recover the losses taken in the restructuring during 2007 and are very pleased with the improvement in yield.
JE: Do you feel the market is fairly valuing your stock?
JA: I believe our stock often trades with the industry, which I believe ignores the lower risk of our balance sheet and our very strong track record of paying dividends. We have paid a cash dividend every year since 1903 and have increased the dividend 35 consecutive years. Also, with our Southeastern footprint we have one of the most valuable franchises of any regional bank.
JE: How are non-accruals looking, and where do you see the credit market going?
JA: At the end of the first quarter, our asset quality remained excellent with nonperforming assets at 0.30% of total assets. Traditionally, the quality of our underwriting standards and the granularity (larger numbers of lower-balance loans) of our loan portfolios have enabled our credit quality to outperform our peers during credit downturns. I believe that will prove to be true in any future downturn as well.
JE: What's your biggest challenge right now?
JA: Currently, our most significant challenge is the interest rate environment, which is characterized by an inverted yield curve (where short-term rates exceed long-term rates) that creates challenges to growing interest-based revenues for BB&T and the entire industry. We have worked to mitigate this challenge by growing our fee-based businesses, which composed 40.6% of total revenues in the first quarter this year.
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