BB&T's Next CEO Eyes Return to Old M&A Ways

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BB&T Corp. is poised to resume its acquisition strategy, perhaps as early as next spring, according to the executive selected to succeed John A. Allison as its chief executive.

Kelly King, the $136 billion-asset Winston-Salem, N.C., company's chief operating officer, who will take the reins Jan. 1, said his immediate focus would be navigating a difficult credit environment. But he quickly shifted to the future, outlining plans to expand in Baltimore, Atlanta, and eventually Florida.

"Most likely we'll be turning our attention back to growth by mid-2009," he said in an interview. "We believe there will be a significant consolidation period, and in the next two to three years we clearly want to expand in our existing footprint."

Small acquisitions will likely be enough to meet BB&T's goals for the two cities he cited, but Mr. King said it might take a "substantial-size acquisition" to reach the top five in deposit share in the Sunshine State. "Florida is a difficult market right now, but long term, it is very attractive."

BB&T is willing to buy a failed bank if it is invited by the Federal Deposit Insurance Corp., he said. "As a general rule, we wouldn't be interested in buying a poor-quality institution, but if done correctly, you can get deposits at a good value and help the FDIC and the other bank's clients."

In another interview, Mr. Allison said it is unlikely that Mr. King, who has been closely involved in strategic planning, would choose to take the company in a different direction. "There is no reason to change course."

Mr. King agreed.

"One should not expect many changes in terms of culture, philosophy, and strategic direction," he said. "On the other hand, strategic decisions have to be made all the time in terms of a changing environment. Right now we're focused on sound organic growth and getting through this turbulent environment."

Christopher Marinac, an analyst at FIG Partners LLC, said that he was surprised by Mr. Allison's retirement plan, and that he figured the longtime CEO would cap his BB&T career with a merger of equals. "I expected a transformational transaction first," he said.

Mr. Allison, 60, said BB&T remains open to a merger of equals but he said it has not found a suitable pairing. "There are no MOEs that we are practically willing to do, though conceptually we'd be interested if our culture survived."

BB&T's chairman and CEO since 1989, Mr. Allison will remain chairman through next year, when he expects to transfer that title to Mr. King. Mr. Allison said he expects the company to select a member of its executive management team as its next operating chief within "a year or so."

The new CEO will turn 60 next month but expects to remain at the helm for five years. (BB&T's mandatory retirement age is 65.) Mr. King joined BB&T in 1972 and has been a member of its executive management team since 1983. He was named COO in 2004.

Jeff Davis, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp., said Mr. Allison positioned BB&T well for a handover, even without the big acquisition many expected.

"He is going out largely on his terms," Mr. Davis said. "BB&T is going to come out on top" when the economy rebounds and acquisition activity returns. "They have a greater margin to work with, and they have the capital, which creates more flexibility."

BB&T has avoided negative amortization mortgages, collateralized debt obligations, and subordinated debt or preferred stock in Fannie Mae or Freddie Mac.

"We'll have problems, but we won't have to make any excuses for our businesses," Mr. Allison said.

Potential problems include $8.6 billion of residential development and construction loans, or about 9% of its loan total, though more than a third of that book is in North Carolina, compared with about 19% in Georgia and 10% in Florida. BB&T also dabbled in alternative-A mortgages, and it has a subprime auto lending unit, though it has said that losses have remained manageable.

Credit costs took a bite out of second-quarter earnings, which were flat from the first quarter and fell 6.6% from a year earlier, to $428 million. The loan-loss provision rose 48% from the first quarter and 275% from a year earlier, to $330 million. Nonperforming assets rose 31.5% from the first quarter and more than tripled from a year earlier, to $1.3 billion.

BB&T's overall performance remains better than other regional banking companies with $50 billion to $200 billion of assets, according to SNL Financial LP in Charlottesville, Va. As of June 30 its nonperforming asset ratio was 0.95% of total assets, versus a median of 1.13% for regionals its size. The net chargeoff rate was 0.72%, versus a median of 0.85%.

This year BB&T's shares have dropped just 8%, while the KBW Bank Index has dropped 29%.

"BB&T may have a quarter out there that is notably subpar due to a reserve build, but it looks like they're going to dodge the more material bullets," Mr. Davis said.

According to Mr. King, "we're pretty much where we need to be" in terms of credit. "As markets continue to deteriorate, we will likely have more nonperforming loans and likely be provisioning at a higher-than-normal rate. We think the course we're on is appropriate and reasonable."

Mr. Allison said BB&T's more traditional banking strategy appears to have been validated by the current cycle but still creates "a deeper issue of what do you do on the other side." He said it should be able to grow organically if good deals do not materialize.

According to Mr. Marinac, BB&T is "in the same spot that they've always been in, where they're not interested in going outside the footprint and there is nothing available within it."

Mr. Allison's legacy is closely linked to BB&T's healthy appetite for dealmaking. During his tenure it acquired 60 banking and thrift companies, including Southern National Corp. in a 1995 merger of equals and First Virginia Banks Inc. of Great Falls in 2003.

Analysts criticized the $3 billion First Virginia purchase, citing concerns that, despite the acquisitions, BB&T was not generating the same rate of growth as rivals.

In late 2003, BB&T said it would not buy another banking company for two years. Though it re-emerged as a buyer in December 2005, it did not resume the frantic pace of previous years, buying just three companies since then and none since May of last year. However, one of those acquisitions was Main Street Banks Inc. in Atlanta, which has been BB&T's worst market for loan losses.

The self-imposed acquisition ban may have saved BB&T considerable pain, analysts said. It was largely inactive in 2006, when other companies made large deals that have been challenging, if not disastrous. It also avoided aggressive growth in Florida, where bankers are struggling.

Greg Ketron, a Citigroup Inc. analyst, upgraded BB&T's stock Monday to "buy," from "hold," after analyzing its exposure to Florida. He touted BB&T's strong capital position; in June it said it would raise its dividend by a penny a share, bucking an industrywide trend of cuts.

During an earnings conference call last month, Mr. Allison said Florida is BB&T's largest source of nonaccruing loans, though the impact had been muted by operations in stronger markets such as North Carolina.

Mr. Allison said Wednesday that BB&T had been planning his retirement for the last five years, after realizing that every member of the core management team was in their mid-50s.

BB&T also learned from its past; his two immediate predecessors died unexpectedly while serving as CEO.

"Developing people has been the most enjoyable part of my career," he said. "There are a number of large companies that don't have management succession planned … which we feel is important to the long-term viability of the organization."

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