Good results. Exceeded my projections posted at investor village.
Loan growth as expected was good. Excluding adc and commercial land runoff, loans increased around $3 billion for the qtr. Good deposit growth.
The big news was significant improvement in their bad loans. The adc and commercial land portfolios dropped from $5.8 billion to $4.8 billion respectively from 9/30/10 to 12/31/10 with nonaccruals dropping from $1.1 billion to $.7 billion over same time period. The $.7 billion is probably marked already at 25% so maybe there's another $200 million of charge-offs to be taken as the $.7 billion moves into reos. The performing portfolio at 12/31/10 of $4.1 billion ($4.8 billion, total portfolio less $.7 billion, bad loans) will continue to shrink some but we're very close to the bottom of the barrel. My guess is that it drops another $.5 billion with a charge-off exposure in the area of $250 million. After that charge-offs coming from adc and commercial land should be very small.
Here's how I see charge-offs from the 4th qtr of 2010 to 2011:
Adc charge-offs will drop from $97 million to $10 million. To get an adc loan you have to have Warren Buffet type credit.
Cre charge-offs will drop from $113 million to $40 million. Commercial land will no longer a driver and permanent income producing properties delinquencies will start to revert back to their historic norms.
Residence mortgage charge-offs will drop from $63 million to $35 million as the bad Alt A and permanent construction loans are cleaned up and stress in the prime mortgage portfolio easesw
Retail charge-offs will drop from $77 million to $25 million as bad lot loans are cleaned up and home equity/lines show some improvement.
Add it all up. Charge-offs for the above categories should drop by close to $1 billion or around 100 bsp annually by the 4th qtr of 2011.
The allowance for credit losses amounted to $2.6 billion at 12/31/10. If charge-offs by the 4th qtr of 2011 drop to 100 bsp, the $2.6 billion amount equates to about 2 1/2 year of losses. Way too much.
Under portfolio accounting I think 4 to 6 qtrs is plenty. Imo, the bank will bleed into the p&l some of the 12/31/10 ALL. Imo, the bleed should be about $1 billion which would leave the 12/31/11 ALL at 6 qtrs. of losses. I think that's very conservative given that the biggest drivers of losses, adc and commercial land have been wiped out.
Combined with lower ongoing additions to reserves means one heck of a rebound year in 2011 for BBT!
The big cloud on the horizon -- when will the Fed raise interest rates, which would squeeze margins (not to mention put a damper on the whole banking sector).
The wild card -- will BB&T make a large acquisition in 2011. They seem to be looking for another Colonial-type deal rather than a straight buyout or merger, which makes sense but will be harder to come by.
Dividends -- increase likely but may be in 2H instead of 1H. I'd like to see BBT do a two-step increase this year with the first part in 1Q. Either way, a boost to the stock price. However, the amount of the increase could be tempered by an acquisition (or a set aside for one).
All in all, my guess is a YE target in the $35 - $38 range.
S&P is calling for about 2.80 in earnings for 2011. That supports a 1.00 dividend. Since I have been following BBT they stick to a schedule on dividend announcements so we'll see it on that schedule. Don't worry about large rate increases in 2011. Worry more about macroeconomic setbacks. We could see some sell-off with an overall market correction. More opportunity to get on this long term winner.
As long as Norm hangs around, the rest of us can be pretty lazy with our research and analysis with BB&T financials. Between BB&T management and Norm we get what is working out to be a free ride and a home run as longs as we keep the faith.
"Is .65 still possible for first quarter?"
Yes and I think it would permit bbt to increase the dividend to $.20 qtr and still build significant capital. The bank had better loan growth than I expected so I believe net interest income should be $20 to $30 million higher. Nice improvement in deposit growth. Also, I was pleased with pretty much across the board improvement in credit, particularly the lower balances in the adc and commercial land stuff. 30 day delinquencies I believe dropped to the lowest level since mid 08.
My $.65 eps projection depends largely on:
1. Provision drops from 220 bsp in the 4th to 140 bsp in the 1st. Some folks may think this is pretty aggressive but over the last 2 years bbt has been making much better loans and I feel confident that the losses on the 2009 and 2010 vintages are 100 bsp or less. It time to start reducing the ALL given materially better trends in credit.
2. My projection assumes no valuation adjustment in the 1st qtr. In the 4th qtr, it amounted to another $100 million and the mark on oreos and loans held for sales was increased from 45 to 47% which I think is the 7th consecutive quarterly increases (material).
Clark Starnes said on the cc he expects declining valuation adjustments. What?? You mean to tell me 47% is not enough after all the deep dive appraisals and $700 million of extra mark expense recorded in non-interest expense over the last 2 years. His comments are bothersome and after $700 million of hits you would think it's enough.
When questioned, Starnes did talk about releasing some of the ALL in 2011 but did not quantify any amount.