BB&T Beefing Up for Next Level of Competition

When industry observers think of North Carolina banking titans, BB&T Corp. chairman John A. Allison 4th is not the first name that comes to mind. Or even the second.

But as the man atop a $27 billion-asset organization that is growing rapidly, Mr. Allison is moving BB&T into position to become a major player.

The Winston-Salem company has a good start: It claims the largest deposit market share-18.9%-in the home state of industry goliaths NationsBank Corp. and First Union Corp.

Now with an aggressive acquisition strategy for Virginia and other southeastern states, BB&T is moving into a new category of size and strength.

"Size matters. BB&T knows that," said R. Harold Schroeder, an analyst at Keefe, Bruyette & Woods Inc. "If you want to be a long-term player, bigger is definitely better because you can drive costs down more than you can at a smaller size." Under Mr. Allison's lead, BB&T has added about $8.2 billion of assets, or 40%, to its base in the last 21 months, including its pending deal to acquire $1.5 billion-asset Life Bancorp of Norfolk, Va.

Mr. Allison, 49, is soft-spoken when it comes to strategy. But he recently declared that BB&T will start going after acquisition candidates of up to $10 billion of assets. In doing so, the company is trying to sustain itself through the consolidation wars-or to command a hefty price if the organization is swallowed up.

"The shareholders are in a win-win situation," said David C. Stumpf, an analyst at A.G. Edwards & Sons Inc. Mr. Stumpf recently listed BB&T among his three favorite regional bank stocks, citing the company's double-digit annual revenue growth, yearly 20% fee income gains, tight rein on expenses, and "impeccable" credit quality.

Many analysts like the company's performance of late. With a five-year annual compound return to shareholders of 29.5% and stock appreciation of more than 200% in the last three years, investors have not been complaining.

"I'm inclined to believe that BB&T is going to grow as opposed to being acquired," said Darren Short, an analyst at Robinson-Humphrey Co. "But that is not to say they're not attractive. They're a hell of a franchise."

As the successor organization to a 1995 merger-of-equals between BB&T and Southern National Corp., BB&T is deeply rooted in the Southeast. It was founded in 1872 in Wilson, N.C., and claims to be the oldest banking company in the Carolinas. Southern National began business in 1897 in Lumberton, N.C. Both started as eastern North Carolina farm banks.

Including its July 1 acquisition of $4.5 billion-asset United Carolina Bancshares, Whiteville, N.C., BB&T now has 486 branches. It has 359 offices in North Carolina, 98 in South Carolina, and 29 in Virginia.

Like many bankers these days, Mr. Allison finds Virginia to be his shopping ground of choice as he pursues continued growth through acquisitions.

BB&T's Oct. 31 deal to buy Life Bancorp would give it one of the larger branch networks in the southeastern section of the state.

Once the Life deal is completed, BB&T would have about $3.5 billion of Virginia assets, and a good start on the $8 billion Mr. Allison wants in the state within three years.

BB&T had wanted to buy Jefferson Bankshares in Charlottesville, Va., but Wachovia Corp. won the deal with a $542 million bid in June. But Mr. Allison said he expects to pick up deposits through the turmoil that will surely come when both Wachovia and First Union close their recently announced Virginia deals.

In addition to Jefferson, Wachovia said in June it would buy $10.6 billion-asset Central Fidelity Banks Inc. for $2.3 billion. In July, First Union said it would pay $3.25 billion for $12 billion-asset Signet Banking Corp. of Richmond.

"We expect a fair level of upset from those acquisitions," Mr. Allison said.

BB&T is also interested in Tennessee, Alabama, and West Virginia. Mr. Allison said he would like to buy banks that operate in markets similar to those it serves in the Carolinas. But the attractiveness of acquisitions depends primarily on two things: The investment must return at least 15% to BB&T annually, and it must add to earnings within three years.

Even as BB&T shops for more banks to buy, it is also on the lookout for companies to add to its growing insurance agency arsenal. With premium volume expected to hit $270 million this year, up 50% from 1996, BB&T's array of life and health insurance products, property and casualty, and title insurance makes up the largest independent insurance agency system in the Carolinas. It also has moved into the ranks of the 25 largest agencies in the country.

The strategy is to buy strong agencies, keep the salespeople, consolidate all back-office functions, and use the network to negotiate more favorable terms with insurance providers. After losing money for five years, BB&T's insurance operations have finally turned a profit and are proving to be not only a source of revenue but also an impressive referral system, Mr. Allison said.

"It works very well for us," he said. "We think we've got a nonreplicable model."

Now the company is trying to build a statewide agency system in Virginia, even as it scouts for more agencies to buy in the Carolinas.

BB&T is pursuing revenue growth on many other fronts as well. On Oct. 1, it closed its acquisition of Craigie Inc., a Richmondbased investment banking house. Also this year, BB&T bought a national commercial credit business and a factoring company.

"We see those deals as opportunities to learn," Mr. Allison said, "and as internal growth vehicles."

As the company seeks to diversify revenues, it is also pushing to generate more sales from bread-and-butter business lines like mortgages and small-business lending.

The company is the largest originator of home mortgages in the Carolinas. It expects originations in 1997 to reach $2.7 billion and its servicing portfolio to reach $11.5 billion.

After being frustrated with a series of sales management systems in recent years, BB&T is now putting its money into a new system called "BB&T Decathalon."

Three times a week sales goals are set, evaluated, and tallied so that every Monday morning, sales results for every branch are sitting on the president's desk.

"They have captured what a lot of banks are trying to do with their sales organizations. It is the born-on-Monday, die-on-Friday approach," said Mr. Schroeder, the Keefe Bruyette analyst.

Since adopting the system, the company has nearly doubled productivity in loan volume and teller transactions, Mr. Allison said. Outbound calls made each day have also more than doubled, and the company's percentage of market households with five or more services-a BB&T benchmark-has grown from 8% to 23%.

Operating under the belief that branches are going to remain the delivery system that customers prefer for the next decade at least, BB&T has been less aggressive than many of its peers in developing alternatives. But it has opened a call center, introduced PC banking, and set up automated teller machines in nonbank locations such as fast-food restaurants and convenience stores. BB&T is also addressing customer profitability issues aggressively.

A First Manhattan Consulting Group study completed last spring showed that 20% of BB&T's customers accounted for most of its profits, matching results for other banks its size.

BB&T is trying to improve service quality for its best clients by building a network of personal bankers who will handle all levels of customer needs-even check cashing-from private offices.

"A lot of people talk about having personal bankers, but they have 2,000 clients per banker," said Mr. Allison.

BB&T is also rebundling and repricing products to generate more profits from more of its customers.

"We're doing this very carefully because some of our bigger competitors are consciously running some of these types of customers off. We don't want to do that," Mr. Allison said.

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