BB&T CEO King Enjoys Luxury of Being a Selective Acquirer

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Kelly King is coming into his own in early 2012.

When he became chief executive of BB&T Corp. two years ago, he inherited it from the popular and successful John Allison, who had kept the Winston-Salem, N.C., bank profitable through the financial crisis.

King, who became the chairman last year, started off cautiously. BB&T bought the failed Colonial Bank from the Federal Deposit Insurance Corp. in August 2010, and it has remained open to a combination of acquisitions and organic growth.

In recent months, though, King has made bigger moves. In a wide-ranging interview Friday, the 40-year banking veteran confirmed that BB&T pursued BankUnited Inc., detailed how the $175 billion-asset company landed the BankAtlantic deal and discussed plans to open dozens of branches this year in states such as Florida, Maryland and Texas.

The following is an edited transcript.

How would you assess the health of regional banks?

KELLY KING: The overall health of the regional players is very good. They never had the challenges of the Wall Street banks in terms of heavy dependence on investment banking and trading, a lot of which has been volatile and attacked under the Dodd-Frank Act. Regional banks were kind of immune to that. On the other hand, regional banks were much more asset focused, so you get a good bit of variation in terms of how they are doing today. Some have certainly had greater credit challenges than others, but even those have substantially weathered it. I don't see any large regional banks not making it. Instead, it is a matter of how do they get to normalized profit levels and good returns for shareholders.

Could we see mergers among regional banks or will new regulation discourage it?

Regionals are already under enormous regulatory scrutiny. The challenge is going to be how to generate optimum profitability with substantial increases in regulatory and technological costs. … I think the regionals as a class are going to be fairly big winners over the next two years or so, but I wouldn't be surprised to see big combinations among the regionals as they begin to think about those economies of scale issues.

Would BB&T pursue such a deal?

We clearly believe scale is important. We want to grow organically as fast as we can but we believe acquisitions are going to be an important part of developing the kind of company going forward that will have the scale to have optimum profitability. We've always been aggressive with acquisitions - we'll look at anything that moves that makes common sense - but we'll be very conservative.

We're very selective. I've been very clear about our criteria: it has to be strategically attractive, we have to control the asset quality issues and it has to be economically attractive to our existing shareholders. Otherwise, why do it? Sizes will be a matter of circumstance. The target zone would be $3-15 billion [in assets]. Below $3 billion is hardly large enough to be worth the effort, and there just aren't a lot of deals above $15 billion if you think about it.

How did the BankAtlantic deal develop?

They presented the deal [as a carve out] with the holding company retaining the challenging assets. They wanted to sell a high-quality good bank. We looked at it. Strategically it is very attractive. It moves us to sixth in the Miami market. Asset quality issues were handled … and it is economically attractive based on the price. It is a classic good deal for us.

Was BB&T the only bidder?

It was a process. There were other people interested.

BankAtlantic is facing legal issues. Are there concerns that the deal falls through?

You always have regulatory approval and now you have litigation. So there would be a question. But our contract is directly with the holding company and all this other stuff that's going on is around the holding company. We hope and intend to close the deal but what the courts and regulators do is certainly beyond our control.

Did BB&T make a bid for BankUnited?

We were involved in the process, and we remained disciplined in terms of our three criteria looking at acquisitions.

How often do you see a company put itself in play and then change its mind?

It is very unusual. Typically, a company will do enough work with its advisors to where they have a really good feel for what it would sell for. When the world becomes aware that you're trying to sell and then you don't … when you do that you can never get those words back. Think about the employees and the clients.

Does it provide an opportunity for BB&T?

Anytime any company is undergoing any aspect of the merger process, even if they do it really well, it creates opportunities for the other good competitors. To the degree that they have glitches in the process, it creates even more opportunities.

What are you looking at in terms of organic growth?

From an organic perspective we'll be adding 30 or so new branches this year. They will predominantly be in places like Texas, Florida and Maryland, where we have less dense coverage. One of our long-term strategies has been to be top five market share in places we do business. We have a little bit of work to do in Maryland. We have a long way to go in Texas. You'll see us sprinkling consistently in Texas and constantly refreshing in Florida.

BB&T reported earnings Thursday, making $1.3 billion in 2011. How would you assess last year?

Relative to the economic and industry challenges it was an outstanding year. If you look at the performance, it was broad-based. The bottom line was good. The underlying strength was more encouraging long term. Loan growth was really good relative to the environment. We had 10.1% growth excluding ADC and covered loan run off, so it was very strong. Our C&I book grew at about 11% which is really encouraging. Corporate banking and specialized lending are growth well. Retail lending is growing after about 30 months of decline. Deposit growth was about 23%, so there was really good growth there. If you look at the balance sheet, it behaved very nicely. And our fee businesses are doing really well.

How do you feel about 2012?

I'm more optimistic for our company that I am for the entire industry. I think the economy is going to be kind of sluggish growing at 2.5% or so. The economy in general isn't going to take off until business people receive some degree of certainty coming out of Washington, so that takes us to the election.

For us, I'm more bullish because of the unique opportunities we have in energy lending and all the new markets that we're in. We have specialized lending, which is doing well, and our wealth management strategy is coming into its own. Our small-business micro strategy is really improving. There are lot of things that are hitting on all cylinders.

BB&T took its time to purge bad assets. Why?

We had a staged process. If you go back a year and a half we took at substantial portion of our more challenged commercial loans and put them in held for sale, then we methodically worked through it. This quarter it went down to zero. [In October] we said we would be much more aggressive on OREO. The book was coming down but it was still about $900 million. We reduced it by about $500 million in the fourth quarter.

It has been an art rather than a science. We're very committed from a long term point of view to doing everything we can to help our clients through the challenging times. So we held onto challenged assets longer than some companies because it was just the right thing to do. Some banks kicked [the client] off the bus the first time they sneezed.

After a while, we realized that it was the time to dispose of [the assets]. Then we had to assess the appetite of investors. In the last year, there has been an increased level of appetite for investors to acquire challenged bank assets. And we thought we had the capacity to deal with it.

What is your view of real estate valuations?

My view is that we are approaching a bottom but it is hard to generalize. It is spotted and depends on the product and the market. The Gulf Coast of Florida has hit the bottom and is starting to come back. The Miami area is struggling to come back [because] there's a lot condominiums. In general, condominiums are struggling still. If you look at single family it has pretty well bottomed and is beginning to come back. Multifamily is booming. I think it is inappropriate to think there is a huge downside left in real estate. On the other end I don't think you're going to see some big ramp up.

What about the regulatory environment?

It is very challenging today. That's not necessarily a negative comment toward the regulators. Congress put into place the Dodd-Frank Act with 2,300 pages which requires 350 or so rules. That alone leaves the regulators with this monstrous challenge to take the rules and interpret and execute. Then you've got huge challenge of the US working with all the other countries with Basel. And you've got the issue of trying to bring some total stability to the financial system and rebuild confidence.

It is a tough regulatory environment on the regulators. I just got off the Fed board, where I had served for three years, and I have some empathy. They are good people. They are hard-working people. They do a good job. I view the regulators as our partners but it is a really tough time for them and for us. I see this year as a particularly challenging year as a lot of new regulations are unfolded. As the [Consumer Financial Protection Bureau] gets its feet on the ground, how are they going to really behave? What does a new administration, and maybe Congress, do if we get a change in Washington? Regulatory challenges are substantial now and will be for the next few years.

What are your plans for the future? Are you still enjoying banking?

I've been here 40 years now. The last three years have been really challenging. It has been challenging for the world, for our country, our industry and our company. But it has been rewarding to be a part of a team that I think has done extraordinarily well in working through really challenging obstacles. It has been hard work. It has been tiring and frustrating. But it has been rewarding. And I'm kind of exhilarated working with a team that is as strong as ours is. I am having fun. If somebody asked me about retirement, I would tell them that I'm too young to think about retiring. I've only been CEO for [two] years so I'm just getting started.

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