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BB&T may have big choice

It could be a candidate to take over a troubled Alabama bank

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BB&T isn’t known as a big risk-taker, but if FDIC involvement is heavy, some people say that a deal to buy Colonial BancGroup could happen.

By Richard Craver | Journal Reporter

Published: August 12, 2009

BB&T Corp. could be facing the biggest risk-reward opportunity in its 137-year existence, potentially as soon as today.

The bank has emerged as a potential candidate to take over a troubled Alabama bank, Colonial BancGroup Inc., based in Montgomery, according to analysts.

The deal would be by far the biggest ever for BB&T. Colonial has about $26 billion in total assets -- 17 percent of BB&T's $152.4 billion on June 30.

If Colonial fails, it would represent the third-largest bank failure -- in total assets -- of the current banking crisis, surpassed only by Washington Mutual ($307 billion) and IndyMac Bank ($30.1 billion).

BB&T officials yesterday cited a policy of not commenting on speculation regarding purchases.

□ The risk for BB&T: Colonial could become as dicey a takeover target for BB&T as Golden West Financial Corp. proved to be for Wachovia Corp. Golden West's toxic exotic mortgages weighed so hard on Wachovia's financial health that it ultimately cost the bank its independence last year.

The Alabama State Banking Board is expected to ask Colonial's management today for permission to allow the Federal Deposit Insurance Corp. to take over the bank if deemed necessary. If the bank fails, the FDIC would find a new owner for it as quickly as possible.

Colonial is facing a criminal investigation into its lending and accounting practices by the U.S. Justice Department and the Securities and Exchange Commission. It also lost $606 million in the second quarter.

□ The reward for BB&T: Colonial has the No. 4 deposits market share in Alabama, where BB&T has a token presence, and the No. 6 market share in Florida, where BB&T is 17th, according to the latest FDIC data. Colonial also has branches in Georgia and Texas and is selling its 21 branches in Nevada.

BB&T has a stated goal of wanting at least a top-five market share in each of the 11 states where it competes.

"If the price is right, this could be a very good move for BB&T," said Marc Fusaro, an assistant economics professor at Arkansas Tech University.

"However, BB&T needs to be very wary of the Justice Department inquiry and the SEC inquiry," Fusaro said. "I would make sure I knew everything I could about those before assuming liability for those."

Analysts said that BB&T would likely receive a very lucrative deal from the FDIC, with the agency taking over most of the risk from Colonial's loan portfolio.

"Banks are attracted to acquiring the deposits of banks in receivership because it represents a cleansing process," said David Barr, a spokesman for the FDIC. "All the headaches are left behind for the FDIC to handle, such as litigation and lawsuits."

Albert Savastano, an analyst with Fox-Pitt Kelton Cochran Caronia Waller, said that BB&T should get about an 8 percent increase in its earnings through the deal.

Analysts said that BB&T emerged as a top candidate because of its strength in the financial crisis. The bank, after being a reluctant participant in the capital-purchase program, was one of the first 10 banks in the country to get permission to pay back the money.

BB&T has participated once with the FDIC in a much smaller way, taking over Haven Trust Bank of Duluth, Ga., in December. BB&T paid $112,000 to assume $515 million in deposits. It also bought $55 million in cash and marketable securities from the FDIC.

Tony Plath, a finance professor at UNC Charlotte, rated as 50-50 the chances of BB&T taking over Colonial through the FDIC receivership. He said that SunTrust Banks Inc. is another candidate.

"Colonial is the perfect acquisition candidate for BB&T," Plath said. "But I think it's going to be a real stretch convincing Kelly King to take the massive amount of risk that would be needed to do this deal in this particular market environment."

BB&T's largest deal came in 2003 when it spent $3.4 billion to buy First Virginia Banks Inc. That deal caused BB&T so much integration "indigestion," according to John Allison, its chairman and former chief executive, that it took a bank-buying moratorium for 2½ years and has bought just four since.

Under Allison, BB&T's acquisition targets were banks between $5 billion and $15 billion in asset size. An asset range under King, who took over as chief executive in January, has not been made public.

King has said that BB&T will likely remain on the acquisition sideline in 2009, particularly if there is any asset or dilution risk to a deal. But he also said that BB&T would be a major participant in industry consolidation within its territory as the asking price for community banks declines.

"BB&T's culture and infrastructure is exactly what Colonial needs to build a better bank," Plath said. "BB&T could create shareholder value out of the acquisition better than any other potential merger partner in the market."

Plath said that Colonial carries such a poor real-estate loan portfolio in Florida that BB&T would not participate "without some sort of mammoth risk-sharing arrangement with the FDIC."

"Still, if the price is right, and the risk-sharing arrangement with the FDIC is sufficiently ironclad, you can manage the integration risk," he said.

Plath said that the potential deal-breaker would be whether the Office of the Comptroller of the Currency makes as part of the deal the $500 million that Colonial was supposed to get from the capital-purchase program.

"Given Kelly's attitude toward TARP money, I don't think he'd want to have anything to do with accepting more equity from the government," Plath said, referring to the Troubled Asset Relief Program.

■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.