We discovered a strategic opportunity early in the growth process. In the late 1980s, the S&L industry was in serious trouble. S&Ls had been making long-term, fixed-rate mortgages for many years and financing those mortgages with short-term savings deposits and certificates of deposit. When the Federal Reserve rapidly and radically raised interest rates in the early 1980s, many S&Ls failed because of the interest rate risk in their portfolios. Many of the surviving institutes began to invest in higher-risk commercial mortgages because they could earn variable interest rates, thereby reducing their interest rate risk. However, commercial real estate lending can be very risky from a credit risk perspective, especially if your institution does not have expertise in this area, which most S&Ls did not.
In the late 1980s and early 1990s there was a second shakeout in the thrift industry. An economic correction driven by errors by the Federal Reserve and changes in tax policy, accelerated by excessive optimism in commercial real estate lending, led to major credit losses in the industry and many S&L failures.
Because of the visibility of many failures in the thrift industry, the negative publicity about the industry was deafening. This publicity significantly damaged the reputation of even well-managed, healthy S&Ls. At the time banks could not acquire S&Ls due to an archaic law that forced the separation of the banks and thrifts. However, it seemed to us to be inevitable that the law would be repealed, as additional capital would have to be attracted to the S&Ls. The best place for this capital to come from was banks. We announced the first acquisition in the country of a stock-owned thrift by a bank before the law even changed, and we were able to consummate the deal after banks were allowed to buy S&Ls.
BB&T carefully targeted the healthy thrifts, which were a subset of the industry. We focused on mergers in our current market area where we could increase market share and thereby improve efficiency. BB&T was the most successful S&L acquirer in the country. Before my tenure as CEO, we were somewhat late to the acquisition game, so the thrift acquisition program was essential to creating an efficient franchise on which to expand the rest of our business.
Many banks were unsuccessful in their thrift acquisitions and lost most of the customer relationships post-acquisition. BB&T was the most successful acquirer because we purchased healthy companies and because we intensely focused on making the acquisition a success for the employees of the thrift. Many bankers viewed thrift employees as second class. Our experience was that the average thrift employee was equal to the average bank employee in terms of talents and abilities. However, they may not have been properly trained relative to bank-level products. We focused on training the thrift employees to make them successful.
One fun story relates to an early healthy thrift acquisition. Burney [Warren] and I called on the CEO of a large, old-fashioned thrift that, despite the company's strength, was losing business due to the extremely negative publicity about the industry.
The CEO was an old, grizzled veteran. When we sat down in his office, the first thing he did was pull out a large pistol and place it on his desk pointing out how he had chased a robber out of the bank the week before. Subtle message.
We then discussed the potential benefits to all his constituents clients, employees, board members, and community from a merger with BB&T. Objectively, the benefits were very positive. However, after we were about halfway through our discussion, he stood up and sort of grabbed me by the collar and led us out of his office. Yet he must have seen the benefits because two weeks later he called, and we made a deal in a short time. Even though he really did not want to sell the company where he had worked for many years, upon reflection he realized that it was clearly in the best interest of the people he cared about to make an agreement with BB&T.
In addition to bank and thrift acquisitions, BB&T was extraordinarily successful in insurance brokerage mergers. At the time we started growing our insurance business, banks in general were prohibited from being in the industry due to antiquated regulations designed to protect insurance agents from bank competition.
BB&T was a state-chartered bank, and we were grandfathered because we had acquired an insurance agency in the 1920s as the result of a loan default. In the late 1980s we still had this small agency located in an eastern North Carolina farm town. Because the agency was so small, we planned to sell it, but before doing so decided to analyze the market situation. Our analysis indicated that the insurance agency business should be consolidated because the current structure was extremely inefficient. Also, potential insurance clients were willing to purchase insurance from a bank. Furthermore, because we had strong, publicly traded stock, we could potentially offer a better economic package to possible sellers. In addition, this fit with our overall strategy of increasing fee income, thereby diversifying our income stream.
Strategically, we decided to try to purchase the best agencies in growth markets in the BB&T banking footprint. An early acquisition was one of the most highly regarded and largest agencies in our market area. The leaders of this agency were well known for their opposition to banks being in the insurance business.
When we objectively outlined the benefits of the merger, however, they decided to sell to BB&T. This was a thunderbolt in the insurance brokerage business because of the high-quality reputation of the company and that agency's past opposition to banks being in the business.
Our executional strategy was to work hard and support with contracts the retention of the entire sales force. The owners typically were salespeople and they could keep their current sales roles, often with increased time for selling. They could take a private company public in a tax-free transaction, creating liquidity for their family, and capture substantial additional dividend income from BB&T stock ownership.
John Allison is the president and CEO of the Cato Institute and a former chairman and CEO of BB&T. This article is adapted from his latest book, "The Leadership Crisis and the Free Market Cure: Why the Future of Business Depends on the Return of Life, Liberty and the Pursuit of Happiness."