BB&T Sees Texas-Size Upside in New Branches Instead of M&A

M&A a no-go? Then go de novo.

BB&T's (BBT) decision to spend more than $40 million to open 30 branches in Texas underscores the dismal M&A prospects for big interstate banks cobbled together during the merger booms of the 1990s and 2000s.

The Winston-Salem, N.C., company – historically one of country's most acquisitive banks – is in a strategic bind. Its risk-averse chief executive, Kelly King, has the money to go on the offense in Texas, a growth market BB&T entered with its purchase of the failed Colonial Bank in 2009. But he is wary of upsetting people on Wall Street and in Washington. Lawmakers want big banks to get smaller, and investors punish buyers that strike pricey deals for other depositories.

King endured a drawn-out court fight to avoid overpaying for the bulk of BankAtlantic of Fort Lauderdale, Fla., which it acquired in July. Texas banks are the most expensive in the country.

When it comes to returns on investment, King sees more upside in opening branches than whole-bank acquisitions.

Texas "is like a magnet right now because of the way that economy is performing," says Marty Mosby, an analyst with Guggenheim Securities who covers BB&T. "You can't really go in and buy the smaller banks at a discount because there is so much demand in that market."

Texas banks – like banks everywhere – are seeking to lower their brick-and-mortar expenses as transactional banking goes online. So why would BB&T need more branches?

It is seeking to bank small and midsize businesses in Texas, not consumers. While typical consumers only visit a branch to open accounts or apply for loans, business banking is still very much a face-to-face affair.

And commercial real estate is cheap. BB&T aims to lease and make over existing bank branches in Houston, Dallas, Austin and San Antonio. It has already identified "well over 30" open spaces in those cities and has begun recruiting the 150 people it intends to hire in 2013 to staff them, says Kay St. John, BB&T's Texas president.

The "existing spaces" it is looking to lease are "cheaper than buying land and buildings," she says. "It is much more economical."

BB&T may still consider acquisitions in Texas, she says.

Success in de novo banking hinges on recruiting good people.

BB&T has proven its recruiting acumen in Texas, St. John says. It acquired 19 Texas branches and 80 employees from Colonial Bank. Today it has 27 branches and more than 200 employees, including commercial real estate and energy bankers.

"We have been calling on clients every day," she says. "We have grown to $1.6 billion in outstanding loans."

St. John was an executive in New Orleans for Capital One Financial (COF) before joining BB&T three years ago. It intends to staff the new locations by recruiting locally and with internal job candidates interested in moving to Texas. She helps recruit upper management. Her pitch to job candidates is that BB&T is a strong bank with a deft local touch.

"We talk about BB&T's community bank model," she says. "We talk about the fact that Bloomberg just wrote us up as being one of the world's top 20 strongest banks."

BB&T is among a handful of large regional banks pursuing branch openings over acquisitions, Mosby says.

Huntington Bancshares (HBAN) of Columbus, Ohio, has been opening stand-alone spots in Michigan and supermarket branches in Ohio, while PNC Financial Services Group (PNC) of Pittsburgh has been branching into Chicago.

He characterizes de novo expansion by midsize players in Texas and elsewhere as the "last third of the consolidation battle" among the 20 largest banks that began decades ago.

If the last stage was about out-buying the other bank, this one involves knocking out your rival in pursuit of loans and deposits, he says.

"This is a good thing for the industry," Mosby says. "You have to be better."