Noticeably absent from the bank merger and acquisition market in recent years has been the large bank buyers that historically have driven the industry’s consolidation over the past three decades. There is a good reason for that. The 2007-2009 financial crisis had a truly profound impact on both the substance and philosophy of how the banking industry was regulated, and very large institutions are now viewed much more critically (if not suspiciously) by the bank regulatory agencies in Washington.
The landmark Dodd-Frank Act of 2010 established an important $50 billion threshold above which all bank holding companies must comply with tougher capital, liquidity and leverage requirements than banks below the limit. Members of the $50 billion-plus club also must undergo annual stress tests that are either self-administered under strict regulatory guidelines, or in the case of much larger banks that have been designated by the Federal Reserve Board as Systemically Important Financial Institutions – or SIFIs – are administered by the Fed itself. Eight very large U.S. banks have been designated as SIFIs and they also have to meet an even tougher set of capital, liquidity and leverage requirements than the smaller members of the $50 billion-plus club.
Not only have the regulations themselves become more demanding for large banks, they have also been held on a much shorter leash by their supervisory agency. For years I been hearing stories of how since the crisis banks are expected to run all major strategic decisions by their primary regulator before enacting them, and this includes acquisitions. I think it’s fair to say that for those banks $50 billion and above, the regulators have wanted them to comply with the capital and liquidity requirements, and go through a couple of rounds of stress testing, before they started to green light acquisitions again.
Three of the four largest U.S. banks — JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. — are precluded from acquiring a domestic retail bank because they all have deposit market shares in excess of 10% and are prohibited by law from increasing that further through another acquisition. But I have the sense that virtually all banks above the $50 billion threshold have been discouraged if not prohibited from making acquisitions by their primary regulators. There have been a few deals since the end of the financial crisis where $50 billion-plus banks were the acquirers, but they have been an exception to the rule. Bank M&A activity in recent years has been characterized by small and midsized institutions acquiring each other rather than by very large banks devouring much smaller ones.
However, an exception to that exception is BB&T Corp., a $210 billion asset bank headquartered in Winston-Salem, North Carolina. Historically an active acquirer, BB&T has never been completely out of the M&A game, even during the financial crisis. It bought the remains of two banks that had been taken over by the Federal Deposit Insurance Corp. in 2008 and 2009, and some of the assets of a third bank that had fallen on hard times in 2010. Since September 2014, BB&T has done three healthy bank acquisitions deals in rapid succession, starting with $1.9 billion asset Bank of Kentucky Financial Corp. in Crestview Hills, Kentucky. In November of last year, BB&T also acquired $18.6 billion asset Susquehanna Bancshares in Lititz, Pennsylvania for $2.5 billion, and in August it bought $9.6 billion National Penn Bancshares in Allentown, Pennsylvania for $1.8 billion.
Long gone are the days when a CEO would place a courtesy call to the bank’s primary regulator and say it would be announcing a deal in the morning. Bank M&A is a very different ballgame nowadays — as we explained in Bank Director magazine’s first quarter issue — and the regulators expect their banks to consult with them on their M&A plans, including proposed acquisitions. So when a large bank like BB&T is able to do three deals — bang, bang, bang — in just under a year, you have to wonder what it knows that others don’t.
I would say that BB&T has several things going in its favor. First, at $210 billion it is not yet so large that it poses a systemic risk to the U.S. economy should it get into trouble, and these three acquisitions have been a fraction of its size. Second, the bank meets or exceeds all of the new capital requirements for large U.S. banks. Third, it obviously has a strong regulatory compliance track record — and we know this simply because it has been able to do these deals. Even well capitalized banks with a serious compliance issue won’t be allowed to acquire. Fourth, and this might be BB&T’s secret sauce, the bank has brought its primary regulator – the FDIC – into the sanctum of its deliberations on M&A strategy.
In an interview for the cover story of Bank Director’s first quarter issue, BB&T CEO Kelly King explained how they go about this. “We on at least a quarterly basis sit down with [the FDIC and] share with them what our plans are, long-term, short-term and talk to them about issues and challenges,” King said. “We have a full and complete dialogue that is non-transaction based. They know what our strategies are. They know what types of M&A plans we have. They know the kind of candidates that we’re considering. And so when [an acquisition] actually comes along it’s simply a matter of filling in the blanks.”
BB&T also places considerable emphasis on organic growth and it tends to look for smaller deals that give it more market share in specific locations rather than large transformational deals that entail much more risk. The Bank of Kentucky acquisition strengthens its position in the greater Cincinnati, Ohio market, while the two Pennsylvania deals now makes it the second largest bank in that state.
I would expect BB&T to pursue this strategy of relatively small and very targeted acquisitions for the foreseeable future. The fact that King works with BB&T’s regulators rather keeping them in the dark should give him an open road to keep doing deals.