BB&T’s goal of Top 5 market share takes drive, discipline

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The BB&T headquarters building in Winston-Salem. (David Rolfe/Winston-Salem Journal)

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WINSTON-SALEM, N.C. — BB&T Corp.’s drive for Top 5 market share in its 12-state network has required a balanced, disciplined approach that will be tested as it tries to plant deeper roots in Texas, according to the Winston-Salem Journal.

The strategy has been pivotal to BB&T Corp.’s stunning 20-year growth spurt and its rise among the nation’s largest banks with nearly $190 billion in total assets.

According to the June 2013 summary of deposits from the Federal Deposit Insurance Corp. – the latest available – BB&T has a Top 5 share in West Virginia (No. 1), North Carolina (No. 2), South Carolina (No. 3), Alabama, Kentucky and Virginia (No. 4), and Georgia (No. 5).

It is No. 6 in Florida and Tennessee and No. 7 in Maryland and Washington, D.C. BB&T officials said last week they believe the bank has climbed to fifth in Florida in the past year.

BB&T projects to be between 11th and 13th in Texas once its acquisition of another 41 Citibank branches and $2.3 billion in deposits is completed in the first quarter. That deal was announced last week. The bank also has a token two-branch presence in Indiana, acquired via a bank deal focused on Louisville, Ky.

BB&T has gained such prominent stakes since 1994 by buying or acquiring 34 banks, 79 insurance companies, 21 specialty financial companies and 10 securities and investment deals.

Still, however, top executives John Allison and Kelly King have not allowed growth to dominate management’s priorities. Bank purchases, when done, are with a prominent return on investment, reasonable buying price and key growth markets and customer demographics as the focus.

In some instances, BB&T has gotten a better bang-for-the-buck through large insurer acquisitions.

“Any merger and acquisition must contain acceptable risk and have a willing bank partner,” said Ricky Brown, the recently promoted president of BB&T.

BB&T traditionally has said its sweet spot for bank deals fit within 5 percent and 15 percent of its total assets, currently $9.5 billion to $28.5 billion.

Expectations are mounting among analysts and investors for the next major BB&T bank deal since the August 2009 takeover of a failing Colonial Bank. BB&T has become a preferred buyer in the Southeast in an industry in which banks choose to be sold rather than bought through an unsolicited bid.

King, BB&T’s chairman and chief executive, was not available for comment for this article.

King has stressed to analysts, investors and the media that BB&T will remain patient in filling in market-share gaps within its territory, particularly in the non-Top 5 states.

BB&T turned down or stopped pursuing several bank deals, the most prominent being RBC Centura in the Southeast and Sterling Bancshares Inc. of Houston. It exited either because the asking prices were too high, there was too much branch overlap or uncertainty lingered about the target’s loan portfolio performances.

King told Bloomberg News last week that “all of the banks today are rethinking their strategies given … new capital requirements, new liquidity requirements and huge changes in complexity of regulation.”

“Banks are concluding today that they will probably only end up doing things they are big in and can do really well.”

Arnold Danielson, chairman of Danielson Associates in Bethesda, Md., said BB&T likely will be “at the head of the buyer list, along with Comerica and PNC Financial, when the $5 billion to $20 billion banks give up and sell.”

Danielson said two of the Big Four national banks – Citigroup and Bank of America Corp. – are selling branches to concentrate on large urban areas. He also listed JPMorgan Chase & Co. and Wells Fargo & CO. as “being out of the buying business for many reasons.”

“The next group, BB&T included, are big enough to meet the technological challenge, and too big to be bought with the Big Four not buying,” Danielson said. “Cyber security will be the big problem and challenge for the smaller mid-tier banks.”

Biding its time

For the past six years, many large, regional and community banks have been leery about acquisitions until they had more clarity on the target’s loan portfolio, particularly residential and commercial loans.

Conversely, as the economy improves and banks experience fewer late loan payments, the asking prices have risen, particularly in Texas where the energy-driven economy has outperformed most of the country.

“More of the unknowns are becoming known,” King told shareholders at the bank’s annual meeting in April.

As a result, King said the bank is more likely to pursue buying branches in key markets from domestic and international banks that want to reduce their U.S. expenses and exposure.

According to FDIC data, getting to Top 5 market share in Florida would take gaining $2.34 billion in deposits, along with $1.8 billion in Maryland, $1.4 billion in Tennessee and $1.9 billion in Washington, D.C.

All of which signifies that BB&T could be one prominent deal from mission accomplished in those states.

“We like all of those marketplaces, but it is more likely we will grind it out organically to get into the Top 5,” Brown said. “We would consider a merger and acquisition if it makes sense.”

Brown said BB&T’s Tennessee market share is skewed in part because it is concentrated in Chattanooga, Knoxville and the eastern part of the state “where we have Top 1-2 share.” It has three branches in Nashville and none in Memphis. Brown said that concentration is a byproduct of where BB&T has bought banks in the state.

“We like the growth potential in Nashville, but there are no current plans for Memphis,” Brown said.

BB&T has opened 55 branches in Florida in the past 18 months, concentrating on Fort Lauderdale, Jacksonville, Miami, Orlando, St. Petersburg, Tampa and West Palm Beach. “We are appropriately sized in the right Florida markets,” Brown said.

When asked about expanding into border states to its territory – Arkansas, Louisiana and Mississippi – Brown said, “We feel like we could do well in those markets as we have in Kentucky, West Virginia and Eastern North Carolina. But we have nothing going on now.”

Texas is different

Texas is a whole different story in terms of achieving Top 5 status.

BB&T entered the market in 2009 through the Colonial acquisition and 19 branches. With the additional 41 Citibank branches, it would have $5.3 billion in deposits and 123 branches.

Yet, it would need at least another $30 billion to surpass Wells Fargo & Co. as the fifth-leading bank.

King said his short-term goal is getting to $15 billion in Texas deposits by 2024.

“Texas is still the caboose on this train, but it is a pretty darn important part of future growth,” said Chris Marinac, an analyst with FIG Partners of Atlanta. “The economic output in Texas is superior to any other area within BB&T’s footprint.”

Tony Plath, a finance professor at UNC Charlotte, said BB&T can make “big gains” in Texas “by leveraging the new branches it is buying from Citibank.

“BB&T’s sales platform is so much more effective than Citi’s for the sort of middle-market companies that comprise a big part of the Texas market,” Plath said.

Brown said BB&T is developing relationships with smaller banks based in Texas so that BB&T will be top of mind if their boards choose to sell.

Brown said BB&T likely will pursue a 50-50 strategy with getting to $15 billion in Texas deposits – about $5 billion coming from its existing network in the state and $5 billion from a bank deal.

“We recognize $15 billion won’t get us to Top 5 in Texas, but if we can go from zero in 2009 to $15 billion (by 2024), we would feel really good about that,” Brown said.

King said BB&T remains content to open branches in Texas – 38 since 2009 – or cherry-pick more branches, not only in Texas but in other key growth states.

The cost of building a branch can run from $1 million to $4 million, depending on location. But it gives the bank the option of strategically placing its presence.

Whetting the appetite

Plath said he believes a big reason why the BB&T board allowed King to work past the previous retirement age of 65 is “for the specific purpose of completing the bank’s acquisition of major market share in Texas.”

“That’s a tall order since there’s just no one or two large banks in Texas available for purchase to accomplish the bank’s goal of a Top-5 position.”

“Granted, Kelly’s paying a bit of a deposit premium to acquire an additional 41 offices at a time when all banks are flush with deposits, but that’s not the point here,” Plath said. “Just look at what he’s getting in return for the 5 percent deposit premium.”

Christopher Mutascio, an analyst with Keefe Bruyette and Woods, said he believes the new Citibank branches will only whet BB&T’s hunger to expand in Texas.

“BB&T’s presence in Texas doesn’t move the needle yet, so how do you get to the size that does move it?” Mutascio asked.

“A whole bank deal in Texas is not going to come cheap because of how the economy is faring. They could cobble together a number of smaller bank deals in key markets to gain market share, which is more of its historic knitting.”

Mutascio said he’s confident King will not allow BB&T to become fixated on Texas.

“BB&T finds significant value in filling in market share in Maryland, Florida, Tennessee and Georgia – states that provide economic diversity for good and bad times,” he said.

Plath said he expects there are a “few good acquisition targets that BB&T will consider in Maryland and Tennessee. Kelly can afford to be patient and choose his targets in those two markets carefully.”

“There just aren’t any mid-size banks available for sale, especially at reasonable prices, in Texas.

“Thus, the only way to build share in that particular market is by buying and building branches, which is a less efficient way to gain share in the market.

“But it’s the only choice Kelly has in Texas.”

Brown said BB&T ultimately has to set growth priorities, with Texas at the top.

“If something popped with merger and acquisition opportunities in each of the (non-Top 5) states at one time, we likely couldn’t do all of them at once,” Brown said.

“It all goes back to being disciplined and holding to our overall growth strategy. By doing that, the right order of bank mergers and acquisitions will settle itself out.”

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