BB&T Wants to Become S.E.'s Top Regional, But Hurdles Remain

By absorbing Colonial Bank, BB&T Corp. is staking a claim to be the Southeast's dominant regional bank, but it will face challenges maximizing the value of the purchase.

Analysts largely expressed confidence in BB&T's ability to take on such a large bank, though it is the biggest acquisition in the company's history. BB&T is buying 346 branches, $22 billion in assets, and $20 billion in deposits. BB&T agreed to a loss-sharing agreement with the Federal Deposit Insurance Corp. on $15 billion in assets.

BB&T's last big bank purchase, First Virginia Banks Inc. in 2003, was criticized by analysts and investors upset over what they believed was a hefty price tag and an integration that impeded earnings growth. First Virginia involved 220 branches after closings, $11 billion of assets and $9 billion in deposits. Soon afterward BB&T said it needed a break, implementing a self-imposed three-year ban on such deals.

BB&T has not taken on a large-scale bank acquisition since, sparking some worries that rustiness could keep the $152.4 billion-asset Winston-Salem, N.C., company from fully taking advantage. Analysts also expressed concern over retaining high-quality deposits, the costs of running a much-larger branch network, and the challenge of keeping focus while the recession continues.

"From a long-term perspective there isn't much to find wrong with it," said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP. "But this is far from risk free."

BB&T would be the fifth-biggest depository institution in Florida (3.7% market share) with the purchase, according to the June 2008 data from the FDIC, the latest available. It also gains branches in Alabama, Georgia, Nevada and Texas.

BB&T should benefit from its June exit from the Troubled Asset Relief Program, which gives it an advantage over remaining Tarp participants that may be interested in stealing Colonial customers, analysts said. The company is likely to take its time integrating branches, with analysts prediciting that the company will remain idle with other acquisitions for up to two years.

Over that time, BB&T will focus heavily on deposits, deciding which accounts to compete for and which ones it would prefer to see run off, analysts said. Nearly half of Colonial's deposits are certificates of deposit, and analysts said those are most susceptible to competitors, particularly if BB&T sticks to its historic practice to not compete on price.

Kelly King, who became BB&T's CEO Jan. 1, expressed concerns earlier this year about an ability to keep deposits from failed institutions. Drawing from the company's December takeover of Haven Trust in Georgia, he complained during a quarterly conference call in April that the small bank's deposits were "as sticky as clean water."

Paul Miller Jr., an analyst at Friedman, Billings, Ramsey Group Inc., said it is likely that BB&T could lose up to $2 billion in CD deposits from Colonial "out of the gate," but such runoff isn't enough to tarnish a deal. "I think they can handle it," he said. "BB&T is a well-run shop."

Analysts said deposits are most vulnerable in Florida, and perhaps in Alabama. Several big competitors such as Bank of America Corp. and SunTrust Banks Inc. are likely to covet deposits that could yield strong long-term client relationships in those states, they said.

Still, analysts said BB&T isn't going to feel the urge to keep all the deposits as long as loan growth remains tepid.

Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., said BB&T should also still benefit from offering former Colonial customers improved systems, products, and management.

"This is nothing but good news for Colonial employees," Patten said. BB&T will then retrain those workers. "You'll immediately see transplanted BB&T management in Florida" followed by a lengthy, deliberate effort, he said. "They have never been the fastest integrator."

Fitzsimmons said there is concern that BB&T may be rusty as an integrator, particularly a bank with Colonial's scale and geographic reach. "They haven't done a lot of big deals," he said. "It is hard to argue that they have a core competency for large, complex deals."

Since 2004, the company has only purchased four small banks with a total of 68 branches and $3.66 billion in deposits. Over that time, many key posts have turned over due to retirements, including CEO, chief financial officer, chief risk officer, and the head of mergers and acquisitions.

Patten said the break from large purchases should not hurt BB&T, and he believes King will approach the integration in much the same was as predecessor John Allison, who remains the company's chairman. "This isn't about rust," he said. "It is about rest, which should make them stronger and better. They are well rested, well capitalized, and well-positioned."

A final concern is the immediate costs of operating a much-larger branch network. The deal increases BB&T's existing 1,500-branch count by 23%. (BB&T had $102.2 billion in deposits at June 30.) Observers estimate that it can cost a bank up to $1 million annually to run a branch.

BB&T may have paid $3.1 billion to exit Tarp, but it still is battling deteriorating credit quality as the recession drags on. In the second quarter, nonperforming assets made of 2.19% of total assets at June 30, compared to 1.92% a quarter earlier.

Representatives of Colonial and BB&T did not return calls Friday afternoon.