THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Sunday, January 8, 1995 TAG: 9501070184
SECTION: BUSINESS PAGE: D2 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Long : 175 lines
For years, they went head-to-head competing for bank acquisitions in North and South Carolina.
In the process, BB&T Financial Corp. of Wilson, N.C., and Southern National Corp. of Lumberton, N.C., grew rapidly by buying thrifts and small banks throughout the two states.
By last spring, their battleground had shifted to Virginia.
In late June, BB&T Financial announced an agreement to acquire Commerce Bank in Virginia Beach. The Hampton Roads community bank, it said, would become its springboard for building a BB&T presence throughout the commonwealth.
Within days of that announcement, BB&T chairman and chief executive John A. Allison IV received a phone call from his counterpart at Southern National, L. Glenn Orr Jr.
``Glenn probably had Commerce on his list of acquisition candidates,'' Allison surmised last week. ``In early July, he called me about a regular business matter and brought up the topic of a merger.''
On July 15, the two CEOs met at a hotel in Richmond to discuss a BB&T-Southern National combination.
Within two weeks, the companies' boards of directors had unanimously approved a merger agreement, one that will create the sixth-largest bank holding company in the Southeast and the 35th-largest in the country.
The BB&T-Southern National combination will have slightly more than $19 billion of assets and $1.48 billion of shareholders' equity when the two companies merge, probably in late February.
The surviving company will adopt the Southern National name, while its bank subsidiaries in the Carolinas will take the name of BB&T's banks, Branch Banking and Trust Co. BB&T is going ahead with its acquisition of Commerce Bank, which is scheduled to close Monday. But plans for further expansion into Virginia have been put on hold.
With BB&T's agreement to merge with Southern National, ``we are basically committed to making no material acquisitions for 18 months,'' Allison said. MERGING SAVES MONEY
The justification for most bank mergers is the reduction of the two companies' operating costs and an improvement in their efficiency. BB&T and Southern National have predicted that their consolidation will cut annual expenses by $63 million within two years.
To do that, the companies expect to cut their combined work force of 8,500 by about 1,000 positions, or almost 12 percent.
``We will be able to accomplish a large percentage of this with normal attrition and an early-retirement program,'' Allison said.
More than 300 employees already have departed through attrition, and 250 more have accepted early-retirement offers. Still, between 250 and 300 employees may eventually have to be laid off, he said.
As part of their cost-cutting effort, BB&T and Southern National are closing or selling several overlapping branches. To allay antitrust concerns about their merger, the two companies also are selling deposits and branches in markets where they have a heavy concentration of deposits.
By the date of the merger, the combined company will still have more than 400 branches and more than $14 billion of deposits in the two Carolinas. $1.65 MILLION A YEAR
Allison, like many others at BB&T and Southern National, has to wrestle with the mechanics of melding the two organizations. But the process, he said, has moved quickly because he and Southern National's Orr decided early in their merger discussions that the 46-year-old Allison would become chairman and chief executive of the surviving company.
Allison, a Charlotte native and a Phi Beta Kappa graduate of the University of North Carolina, ascended to BB&T's chief executive post five years ago after spending the early part of his career in farm and small-business lending.
When two banking companies of approximately equal size merge, ``one of the great problems is to have the older CEO stay on for three years and then be succeeded by the younger one,'' Allison said. ``In the interim, nobody knows who to follow, and the cultures of the two companies never get integrated.''
BB&T and Southern National avoided that problem. But in the process of settling the leadership issue, the two companies agreed to a lucrative compensation package for Southern National's chairman and chief executive.
The 54-year-old Orr, who will retire after the merger, is scheduled to receive annual payments of $1.65 million for life. As part of his compensation package, Orr agreed not to compete with the new company for 15 years and to provide consulting services to the company.
At separate meetings in mid-December, BB&T and Southern National shareholders voted in favor of the merger - but not before some shareholders complained about the multimillion-dollar amount that Orr will receive.
Allison, however, defended the arrangement as more favorable to shareholders than Southern National's obligation under a 1989 contract with Orr.
``We hired two executive-compensation consulting firms, Mercer and Hay, to value his contract,'' he said. ``They said the settlement we entered into was less costly than the contract he had in place.'' EAT OR BE EATEN
What prompted BB&T's marriage with Southern National was the heightened competition from nonbank financial service companies and the rapid consolidation of banks nationwide, Allison said.
BB&T, he said, ``has grown from $4.7 billion of assets to $10 billion in a five-year period, and we didn't think that pace of growth could continue.''
Meanwhile, banking companies of BB&T's size had become especially vulnerable to nonbank lenders, which have been taking away some of the banking industry's best customers, he said.
A decade from now, ``there will be some community banks with less than $1 billion of assets, but I don't think there are going to be a lot of banks of $1 billion to $10 billion in asset size,'' Allison said. ``Banks of that size are going to have a real tough row to hoe.''
The pressure on BB&T and Southern National to expand increased last summer when the North Carolina legislature immediately opened the state to nationwide bank mergers. A three-year period that BB&T had expected before the arrival of full interstate banking disappeared with the legislature's action, Allison said.
Among securities analysts who follow the two companies, the BB&T-Southern National combination has been well-received. The surviving institutions of some mergers have disappointed investors by failing to accomplish the cost savings projected before their mergers.
That probably won't be the case with the BB&T-Southern National combination, predicted Vernon Plack, an analyst with the securities firm Scott & Stringfellow Inc. in Richmond.
``With any merger there are problems to be addressed, such as who gets to do what,'' Plack said. ``I have no doubt that this one will work out. These are well-run, quality organizations.''
One important aspect of a BB&T-Southern National combination is the appeal that the combination might have to an expansion-minded banking company based elsewhere in the country.
``The greater size and the combined franchise will make it a more attractive acquisition,'' something that could materialize in two or three years, said Kathryn Bissette, an analyst in Atlanta with the securities brokerage firm Sterne, Agee & Leach.
BB&T's Allison does not rule out an eventual sale of BB&T-Southern National. Even after their merger, ``we won't be so big that we can't be acquired,'' he said.
But becoming larger and more efficient, he said, ``gives us a much stronger negotiating position. We will be able to get a better deal, not only for shareholders but for employees.'' NEW HORIZONS
Organized in 1872, BB&T's Branch Banking and Trust Co. subsidiary is the oldest bank in North Carolina. From its rural, post-Civil War roots, the bank has evolved into the third-largest banking company with its headquarters in North Carolina.
BB&T also is the third major banking company to enter Virginia from North Carolina. The first, Charlotte-based NationsBank Corp., entered in 1991 through the merger of its predecessor, NCNB Corp., with C&S/Sovran Corp., whose subsidiaries included Richmond-based Sovran Bank.
In early 1993, NationsBank archrival First Union Corp. came into Virginia by acquiring the faltering Dominion Bankshares Corp. in Roanoke. Charlotte-based First Union expanded its presence in Virginia three months later by acquiring First American Bank of Virginia, another troubled bank.
Both NationsBank and First Union have attracted attention in banking circles for their aggressive pursuit of activities outside commercial banking, such as securities underwriting and the distribution of investment products.
BB&T and Southern National have stuck closer to conventional lines of business. That isn't likely to change when the two complete their merger, Allison said. ``I don't know that we will get into any esoteric businesses,'' he said.
However, the BB&T-Southern National combination will build on Southern National's equipment-leasing subsidiary and on BB&T's insurance agency and trust operations, he said.
Once the new Southern National has wrapped up the consolidation, it will resume BB&T's effort to build a presence to the north. That, in turn, could accelerate the wave of consolidations already under way in Virginia.
``Most of the Virginia market looks like the Carolinas,'' Allison said. ``There are a number of good community banks and a few thrifts left that are good acquisition candidates.'' ILLUSTRATION: Graphic
JOHN EARLE/Staff
BANKING ON THE CAROLINAS AND VIRGINIA
SOURCE: The banks
[For complete graphic, please see microfilm]
by CNB