BB&T Corp., facing intense competition in core business lines and limited opportunities for bank acquisitions, is looking to its specialty finance arm as a growth engine.
The $121 billion-asset Winston-Salem, N.C., banking company has not set huge growth goals - it would like to boost the unit's contribution to interest income to 10%, from its current 8% - but said it sees potential in a segment that currently ranks as one of the smallest in BB&T's loan portfolio, accounting for 4.3% of the company's $83.6 billion of loans at yearend.
"We're growing nicely, with attractive margins, and these businesses are highly efficient compared to traditional lending," said Clarke R. Starnes 3rd, a senior executive vice president and the specialized lending manager. "We've had a compound average growth rate of around 20%," he said in an interview.
The line produced 8% of BB&T's $1.9 billion in interest income last year, and the company is looking to reach its new goal in five years. Five years ago specialty finance contributed 2% of its loans and 4% of its interest income. Growth could come both internally and through acquisitions in areas such as commercial mortgage banking and direct-consumer finance, Mr. Starnes said.
Specialty finance is one of several areas BB&T is focusing on as higher prices for banks make acquisitions tougher to pull off and weaker business fundamentals hamper profit. It has increased efforts to bring in lower-cost deposits and is opening more branches than in the past.
Mr. Starnes outlined several initiatives in specialty finance and sales finance, including an effort begun last year to increase its focus on marine and recreational-vehicle lending by becoming more aggressive in marketing those loans in its 11-state footprint.
Previously it offered marine and RV loans to existing clients through about a dozen dealerships. Eventually, it wants to develop ties to more than 400 dealers to find new clients for these kinds of loans.
BB&T also plans to open more offices for other specialty finance units. Late last year it opened an office in Los Angeles for the indirect-auto unit Regional Acceptance Corp., and it is to open another in northern California next year. More offices are also planned for the direct-consumer finance unit Lendmark Financial Services Inc., though most would be in markets where it already has branches.
The company also plans more cross-selling among its 500,000 specialty finance clients. "We felt like we've pretty much identified the spaces we want to play in," Mr. Starnes said.
Credit quality is holding up well, he said, with the only high-risk exposures occurring in nonprime auto and direct-consumer. "The biggest thing that would impact those businesses would be high unemployment," he said. "Right now we don't see any evidence that the problems in subprime mortgages would trickle down."
Specialized lending accounted for 14% of BB&T's nonaccrual loans at Dec. 31, up from 12.5% in the third quarter and 13.6% a year earlier. John A. Allison, BB&T's chairman and CEO, said during the company's Jan. 18 earnings call that the fourth-quarter increase was due to a decision to hold off on reselling repossessed vehicles until the first and second quarters, which are more favorable for such transactions.
Gary Townsend, an analyst at Friedman, Billings, Ramsey Group Inc, said the company's increased efforts in the sector make sense. "The performance in those businesses has been very good," he said in an interview. "The yield on those loans is exceptionally high, and losses have been surprisingly good. I'm not surprised that they're trying to expand it."
BB&T has been an active acquirer in specialty finance. In August it agreed to buy Afco Credit Corp., a New York insurance-premium company, from Mellon Financial Corp. BB&T has also made purchases in recent years to bolster Laureate Capital Corp., the commercial mortgage business it bought in 2000.
In future, Mr. Starnes said, the company will seek to expand internally the "smaller-ticket businesses," such as equipment leasing, and pursue acquisitions of larger businesses. "A number of opportunities" exist for acquisitions, but most targets are privately owned, making it "more difficult to execute a transaction," he said.
Preston Davenport, who manages BB&T's sales finance department, said marine and RV lending is primed for organic growth. These loans make up just 0.5% of BB&T's indirect-loan originations, but it would like to expand this share to 5% in the next few years. BB&T did not consider expansion until it received requests from customers, he said. "We soon realized this was an opportunity. About 25% of the national market for marine purchases takes place within our footprint."
Mr. Davenport said marine loans typically range from $75,000 to $150,000, though BB&T lends up to $2.5 million. Unlike the largely nonprime borrowers in indirect auto, marine clients tend to be affluent and therefore viable clients for wealth management and small-business products, he said. Underwriting standards for these loans are more rigorous, however, because of their size and the difficulty of reselling vessels in the event of default.
Competition is profuse. Mr. Davenport said BB&T competes against Charlotte's Bank of America Corp. and Wachovia Corp. as well as out-of-market names like Wells Fargo & Co. in San Francisco.