BB&T Gets Payoff, Not Runoff, from Colonial Acquisition

Sporting stronger margins and other tangible benefits, BB&T Corp. has quieted the murmurs heard a year ago when it took over the failed Colonial Bank.

When BB&T swooped in to acquire $20 billion of deposits and $22 billion of assets from Colonial — the biggest failure of 2009 and the fifth-largest ever — some questioned whether the company was rusty at integration. It had largely avoided acquisitions in recent years.

Though generally supportive of the purchase, analysts also expressed misgivings at the time about BB&T's ability to retain deposits, run a much bigger branch network and maintain focus on credit during the tail end of the recession.

Most of those doubts have now been shelved.

"The Colonial transaction was a home run for BB&T," said Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets.

"The integration is on track and going smoothly," Cassidy said. "We expect that to continue. Over time, as the company navigates through the economic downtown and a slow recovery, we believe the transaction will prove even better than it is today."

As part of the purchase, BB&T, a $155.1 billion-asset company based in Winston-Salem, N.C., entered into a loss-sharing agreement with the Federal Deposit Insurance Corp. for $15 billion of Colonial's assets.

A year later even BB&T officials sound pleasantly surprised by the results. Daryl Bible, BB&T's chief financial officer, said in an interview Wednesday that it expects to generate at least 20 cents a share in annual earnings from the acquisition "over the next two to three years," benefiting from a stronger balance sheet, revenue opportunities and a Colonial loan portfolio that continues to beat targets. Based on shares outstanding shortly before the deal, that would equal $130 million each year.

"This deal has exceeded our expectations," Bible said of the takeover that took place Aug. 14, 2009. The only major risk, he said, would be if the economy falls back into a recession.

BB&T's net interest margin has expanded 56 basis points in the year since the takeover, reaching 4.12% at June 30, largely as a function of higher loan yields and a lower cost for deposits.

"We still believe that deposits are the lifeblood of the industry and add franchise value over time," said Christopher Marinac, an analyst at FIG Partners LLC.

Kelly King, BB&T's chairman and chief executive, told analysts in July that the old Colonial's balance sheet continues to perform well. King said during the company's second-quarter conference call that deposits have grown in the past year, which he said is "very atypical" for FDIC-assisted deals. Colonial branches had originated $600 million in loans as customers "are extremely receptive to our brand offerings."

Trabo Reed, the deputy superintendent of banks for Alabama, said regulators overall were "happy with the way things turned out" because last year's takeover replaced the struggling Colonial, which was based in Montgomery, with a company that "could really function as a bank." He said BB&T "is not hamstrung and is out there doing business."

BB&T was able to exceed its target of cutting annual expenses by $170 million. The acquisition also made BB&T one of the five-biggest banks in Florida and gave it a toehold in Dallas, providing opportunities for growth once the economy recovers.

Bible said BB&T is beginning to allocate more resources to revenue initiatives. BB&T in the past year "rightsized" Colonial's mortgage warehouse business, which makes short-term loans to mortgage originators, by purging large and risky relationships. He said the business has $1.5 billion in commitments, with about 50% funded, returning to levels that existed at Colonial before the takeover.

"This happened faster than we thought it would," Bible said, though the warehouse business is more diversified and more conservative than Colonial's. (National Mortgage News ranks BB&T as the fourth-biggest warehouse lender.)

BB&T also wants to expand Colonial's practice of providing banking services to homeowners associations. Bible said it is planning to offer such services across all of its markets. "We're hopeful that 2011 will be a good year," he said.

Bible remained optimistic that the marks BB&T took against Colonial's loan portfolio are holding up. The average mark taken against those loans was 37%, ranging from 18% for mortgages to 67% for construction loans. A year later, only three of the 41 tranches of loans are performing worse than those marks, and none of those involve real estate, he said.

That is important because BB&T is able to record income because of "accretable yield," or the difference between the actual money expected to flow into the bank compared with the value of the loans. Big gains could come as BB&T collects on Colonial's loans. Bible estimated BB&T still has $3 billion of such yield that has not yet been converted into earnings.

Cassidy said BB&T is fortunate to have income from Colonial to offset continued credit costs as it purges bad loans. "It is going to help them move through their credit issues more effectively and more efficiently," he said.

Marinac said such benefits could motivate BB&T to get more aggressive with collections efforts. "There is a financial incentive to doing that," he said.

The biggest challenge remains the economy. Another recession could pressure even the conservative marks on the Colonial portfolio. BB&T also will be unable to fully tap into the purchase's potential until loan demand returns. "You still got the economy weighing on everything and dampening banking," Reed said.