Banks Buying Balance, NC Managers Honored

With more money flowing into equities markets through mutual funds and the boom in online stock trading, banks are experiencing an erosion of what traditionally has been the cash cow line of their balance sheet: interest income.

On top of that, interest rates are declining and the squeeze on the margin between the rate that banks borrow and the rate at which they lend is becoming intense.

That's why you're seeing banks diversify into other financial services: Charlotte'sBankAmerica(BAC/NYSE) bought San Francisco's Montgomery Securities; Winston-Salem'sWachovia(WB/NYSE) is buying Charlotte's Interstate/Johnson Lane; and Winston-Salem'sBB&T(BBT/NYSE) is buying Richmond's Scott & Stringfellow.

Banks are looking for ways to increase another important line in their balance sheet: noninterest income. Translation: fees. These can range from the amount paid to trade a share of stock to the $1 you pay to access an ATM machine.

Small businesses and consumers have complained mightily about these noninterest fees -- but be assured, they are here to stay. Because, whereas consumers complain, investors applaud this move as necessary in adding value to a banking company.

This week, I want to focus on BB&T. For the record, a bit of quick math shows that between 1996 and 1997 BB&T increased its noninterest income by 38 percent. That compares with a solid, but lower, increase in interest income of 30%.

Since I last wrote about BB&T in the Aug. 24, 1998, issue of my newsletter, the company's stock has gained about 15 percent.

But some analysts continue to see upside potential for this company for the reasons I've mentioned: (1) diversification into other services; (2) increases in noninterest income.

BB&T is making solid progress on both fronts. The management is stellar; and the company is a good size to either continue making attractive acquisitions or merge with one of the giants of the industry.

BBT has not acquired another company since August when it announced its purchase of Scott & Stringfellow. That's fine; the company needs time to digest what it has bought over the past couple of years.

During the first nine months of 1998, BB&T has continued to focus on increasing noninterest income, growing it by 12 percent while reducing noninterest expenses by 1.9 percent. Overall, BBT increased its total net income by 35 percent.

The company's stock has lagged a bit like the rest of the banking industry as investors express a bit of nervousness due to a slowing economy. Still, a 15 percent gain in five months ain't bad -- especially in light of this company's return on equity of 18 percent.

As I mentioned, banks with the broadest product mixes are the best positioned, and BBT has solid entree in securities as well as insurance. Another plus for BBT is its location in one of the top-growth markets of the nation, which includes 540 banking offices in North Carolina, South Carolina, Virginia and Washington, D.C.

Now a component of the S&P 500 Index, analysts consider BB&T a buy/hold, reflecting confidence in the company but skepticism about the impact of a slower economy on the financial sector.

For long-term investors, this looks like a potential play with a stock that can be had for less than $40 a share.

"The Wealth Equation" Honors NC Managers

One hundred of the nation's thousands of money managers have been singled out for their performance in a new book by Peter Tanous called "The Wealth Equation."

Four of them are North Carolina managers, and one is my colleague Tom Vass whom I've mentioned before in this space. Vass is president of Business & Family Financial in Raleigh.

Tanous said he selected managers "who qualify as being among the top of their peers based primarily on superior performance and longevity."

Other North Carolina managers cited were David Hollaran of NCM Capital Management in Durham; Mike Kayes of Eastover CapitalManagement in Charlotte; and Todd Rabold of Wachovia Asset Management in Winston-Salem. Congratulations gentlemen!

Have a prosperous week. Dale Gibson is a Raleigh-based journalist who publishesThe Gibson Report,a weekly electronic newsletter focused on North Carolina business. Questions or comments may be directed to him by e-mail at dale@gibsonreport.com or by phone at 919-834-1033.