Colonial Will Not Hurt BB&T

Tuesday BB&T Corp. (BBT) said expected losses in the loan portfolio acquired from Colonial BancGroup (CBCG) of $5 billion will not have a negative impact on its earnings because of its loss-sharing agreement with the Federal Deposit Insurance Corporation (FDIC).

Last Friday, BB&T took control of Colonial after it was seized by regulators. As a result, BB&T is exposed to losses connected with its purchase of Colonial assets for $21.8 billion.

The estimated cost of Colonial’s failure to the deposit insurance fund would be $2.8 billion. The FDIC and BB&T have signed an agreement to share losses on about $15 billion of Colonial’s loans and other assets.

The Colonial deal is the biggest acquisition in BB&T’s history, creating the nation’s eighth-largest financial holding company by deposits. BB&T is a dominant player in Southeastern U.S., where many closures have happened. Having taken over most of these failed banks, these bank failures have been beneficial for BB&T.

Unless losses exceed $5 billion, there will be no negative impact on BB&T’s earnings as FDIC is covering $14.3 billion of those assets in the loss-share agreement. The FDIC is assuming 80% of the losses between zero and $5 billion and 95% of the losses between $5 billion and $14.3 billion.

The worst-case scenario in terms of earnings for BB&T would be a pretax exposure of about $500 million if the entire portfolio of Colonial loans were to be charged off.

BB&T has already started the integration process and expects merger and integration costs to total about $245 million. It anticipates about $170 million annual pretax expense reductions.

Previously BB&T had only three branches in Alabama. As a result of the acquisition, BB&T will gain an additional 90 Colonial branches across the state. The company will also add 204 branches in Florida, where it currently has 107 offices.

We believe that a successful integration of Colonia will further strengthen BB&T’s already diversified revenue base, strong capital structure, and impressive loan and deposit growth. However, continued deterioration in the housing markets will keep the credit-related costs high throughout 2009.

Additionally, all the positives about the acquisition have already been factored into the price, leaving limited room for above-average gains. Therefore, we continue to maintain our Neutral recommendation on BB&T.

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