By: Corinne Spencer
Many legal analysts and business reporters anticipated a wave of bank mergers in the near future,[1] and when BB&T and SunTrust announced plans to merge in February 2019, these analysts believed their predictions finally began to materialize.[2] The BB&T and SunTrust merger is recognized as the “largest bank merger in more than a decade.”[3] Politicians voiced concern about this new “megabank” and its potential impact on the nation’s financial system.[4] Because analysts predicted an uptick in bank mergers for more than three years,[5] this recent merger raises the question of whether this deal supports a larger trend or if it is a one-time outlier.
If the BB&T and SunTrust merger is successful, the bank would claim the spot of the sixth largest bank in the nation.[6] As to the details of the merger, BB&T will consume SunTrust in an all-stock exchange, offering SunTrust shareholders 1.295 share of BB&T common stock of each share of SunTrust common stock owned.[7] Both banks refer to the deal as “a merger of equals”.[8] Collectively, the companies have over 55,000 employees in 17 states.[9] BB&T and SunTrust will likely profit from some of the same benefits that analysts emphasized to support their prediction of a trend towards more deals. For example, consolidation offers the benefit of efficiency.[10] In particular, a merging of businesses allows for streamlined support services such as human resources, accounting, and point of sale software. Moreover, consolidation provides the opportunity to invest in new services for customers and more efficient processes for employees.
As of July 2019, the total value of national bank mergers was $40 billion, exceeding the $39.9 billion total for 2018.[11] This increase in value can be largely attributed to the BB&T and SunTrust deal valued at more than $28 billion.[12] Of the 20 largest bank mergers since 2018, this is the only deal valued above $5 billion, supporting its impressive size and shocking distinctiveness to the industry norm. [13]
The BB&T and SunTrust merger caught the attention of the U.S. House Committee on Financial Services due to its size. This is abnormal, for the Committee usually does not supply input into such matters, as it has no authority to respond to the merger.[14] Of the last 1,812 mergers, dating back to the Great Recession, this was the first committee hearing held regarding a merger.[15] In July 2019, the Committee held a hearing to question the CEOs of the merging banks to address concerns relating to competition, employee status, and community impact.[16] Chairwoman Maxine Waters referred to the merger as a potential “megabank” in her opening statements, before questioning the timing– as regulations have been rolled back– and the merger’s potential negative impact on employees and consumers.[17] It is the Federal Reserve which must approve the merger, in addition to the N.C. Banking Commission which already approved.[18]
Financial industry analysts predicted an increase in bank mergers as early as in 2016.[19] Each year, they anticipated banks expanding from local to regional or from regional to national size institutions in the next year. At first, it seemed that the BB&T and SunTrust merger was evidence that these predictions were finally coming to fruition, as it outshined every merger of the last few years. [20] However, since the announcement in February, and as we enter the fourth quarter of 2019, no merger has come close to comparing in merger value. Ultimately, it seems that the BB&T and SunTrust merger is not an indicator of new wave of mergers and simply the BB&T and SunTrust merger is an outlier.[21]
The unique status of the BB&T and SunTrust merger is contrary to the widely held prediction that the number of mergers and acquisitions (M&A) would increase in 2019. In fact, there are a variety of regulatory components which support a potential flurry of M&As. Recent deregulation of the banking industry allows for consolidation and acquisitions to be more easily accomplished.[22] For example, Congress enacted the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) in 2018, in part to ease regulatory requirements on the financial industry[23].
Nonetheless, this seemingly opportune moment for M&As may soon expire due to the unclear, future political climate and the potential for re-regulation.[24] While the Committee on Financial Services noted that the “Federal Reserve approved 95% of bank merger applications last year,” [25] that was under the current leadership and before the Committee placed the spotlight on the current merger.
However, contrary to the predictions which anticipate an increase of M&As, deregulation may actually leave banks more comfortable at their current size. The specific regulatory changes which may dissuade banks from consolidation include elevating thresholds for compliance and reporting requirements and the reduction of required company-run analysis like stress-testing.[26] Banks with assets between $10 billion and $50 billion benefit from an elevated threshold for establishing and running risk committees and stress testing.[27] Banks above $50 billion in assets but below the $100 billion threshold benefit from- contingent capital, resolution plan, credit exposure reports, enhanced public disclosures, and short-term debt requirements and limitations- now applying only to institution with greater than $100 billion in assets.[28] Deregulation offers banks major breaks if their asset values fall below these increased thresholds; lowering their compliance requirements and costs; and enticing them to stay at their current size, rather than seeing deregulation as an opportunity to expand.
In addition to the regulatory incentives not to consolidate, other current economic concerns may slow down M&A interest. The fear of recession may make consummating a long-term deal seem risky in an industry that feels the effects of a downturn so drastically.[29] Additionally, industry changes may account for banks lack of interest to grow their physical national footprint. Millennial bankers are the consumer market banks are looking to please currently, supporting a focus on technology and online services. [30]
It
may not be surprising to see analysts still recommending and predicting mergers
for the end of 2019.[31]
While this is arguably as good a time as
any to do so, it seems unlikely that more banks, of any size, will take this
advice. Rather, banks of all sizes will
likely continue to work to understand their new regulatory freedoms and find
advantage through that avenue.
[1] See, e.g., Brian Cheung, Why 2019 Could be the Year of the Big Bank Merger, Yahoo Finance (Dec. 14, 2018), https://finance.yahoo.com/news/why-2019-could-big-bank-145105506.html.
[2]Thomas Franck, Regional Banks Ready to Join Forces to Battle JP Morgan in Anticipated Merger Wave, CNBC (Mar. 23, 2019, 10:00 AM), https://www.cnbc.com/2019/03/22/regional-banks-to-forgo-big-merger-premiums-to-battle-banking-giants.html.
[3] FSC Majority Staff, 116th Cong., Memorandum on July 24, 2019, “The Next Megabank? Examining the Proposed Merger of SunTrust and BB&T” 1 (2019); see also Hannah Levitt, BB&T to Buy SunTrust in Biggest Bank Merger in a Decade, Bloomberg (Feb. 7, 2019),
https://www.bloomberg.com/news/articles/2019-02-07/bb-t-and-suntrust-banks-agree-to-combine (noting the decrease in large mergers in the finance and banking industry since 2008).
[4] The Next Megabank? Examining the Proposed Merger of SunTrust and BB&T: Hearing Before the H. Comm. on Fin. Serv., 116th Cong. (2019) (statement of Maxine Waters, Chairwoman, H. Comm. on Fin. Serv.).
[5] See Bryan Borzyknowski, The 4 Biggest Trends in Mergers and Acquisitions for 2017, Forbes (January 13, 2017), https://www.forbes.com/sites/suntrust/2017/01/13/the-4-biggest-trends-in-mergers-and-acquisitions-for-2017/#759315a430de (predicting an increase in bank M&A in 2017); see also Ben McLannahan, US has more than 5,600 Banks. Consolidation is Coming, Financial Times (May 23, 2018) https://www.ft.com/content/41af5986-5e05-11e8-9334-2218e7146b04 (expecting consolidation to begin in 2018 of small U.S. banks).
[6] Press Release, SunTrust Bank Inc., BB&T and SunTrust to Combine in Merger of Equals to Create the Premier Fin. Inst. (Feb. 7, 2019) (“[SunTrust and BB&T agree] to combine in an all-stock merger of equals valued at approximately $66 billion. The combined company will be the sixth-largest U.S. bank based on assets and deposits.”)
[7] Agreement and Plan of Merger By and Between SunTrust Banks, Inc. and BB&T Corporation 2 (2019).
[8] Id. at 62.
[9] FSC Majority Staff, supra note 3, at 5.
[10] Michael Deely, The Benefits (And Dangers) Of Bank Mergers and Acquisitions, Big Sky Associates, https://www.bigskyassociates.com/blog/the-benefits-and-dangers-of-bank-mergers-and-acquisitions.
[11] See Zuhaib Gull & Syed F. Javaid, Bank M&A 2019 Deal Tracker: Prosperity/LegacyTexas merger boosts June Deal Value, S&P Global (July 16, 2019), https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/49407558.
[12] Id.
[13] Id.
[14] See FSC Majority Staff, supra note 3; see also Richard Carver, BB&T-SunTrust Merger Approved by N.C Banking commissioner; U.S. House Hearing on Deal Set for Wednesday, Winston-Salem Journal (July 18, 2019) https://www.journalnow.com/business/bb-t-suntrust-merger-approved-by-n-c-banking-commissioner/article_201f8880-a493-5577-84ea-5a0af950d7b0.html.
[15] Hearing, supra note 4 (statement of Patrick McHenry, Ranking Member, H. Comm. on Fin. Serv.). The Federal Reserve approved 95% of mergers last year. Most institutions likely to be rejected withdraw before the Federal Reserve have the opportunity to formally reject. There is no requirement or expectation that the Federal Reserve defer to or consider the opinion of the Committee on Financial Service in approving or rejecting merger applications.
[16] FSC Majority Staff, supra note 3.
[17] Hearing, supra note 4.
[18] N.C. Gen. Stat. § 53-224.18 (2018); Carver, supra note 14.
[19] See, e.g., Kurt R. Mattson, Experts Say Small and Midsize Bank Consolidation Will Continue, BSA/AML Update, Mar. 15, 2016, LexisNexis 12-6BSA/AML Update 08 (2016); see also McLannahan, supra note 5 (predicting M&A activity would be revived by the Fifth Third Bancorp acquiring MB financial in 2018).
[20] Gull & Javaid, supra note 11.
[21] Id.
[22] See Economic Growth, Regulatory Relief, and Consumer Protection Act, Pub. L. No. 115-174, 132 Stat. 1296 (2018); see also David Dayen, Elizabeth Warren was Right: New Law if Already Making Banks Bigger, Intercept (Feb. 8, 2019, 11:15 AM), https://theintercept.com/2019/02/08/elizabeth-warren-was-right-new-law-is-already-making-banks-bigger/.
[23] Board of Governors of the Federal Reserve, Statement regarding the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) (July 6, 2018).
[24] Like much of the deregulation came with the Trump administration, re-regulation could be looming if a new President was to take office in 2021. Felice Maranz, ‘Merge Now,’ Ahead of 2020 Elections, Mike Mayo Tells Banks, Bloomberg Law (May 16, 2019, 1:49 PM), https://www.bloomberglaw.com/document/XBD8SBO000000?bc=W1siU2VhcmNoIFJlc3VsdHMiLCIvc2VhcmNoL3Jlc3VsdHMvMTU0ZGJkOTM1YjdjYjNjNWY4M2IwMWEzYTQ5OTIxMjYiXV0–ee12b2504ba3cbfa238e0ae5b4e72762c7fa6565&guid=cb3da3ef-081f-44ae-a5cd-c7cd7a6cb9c3&search32=R2cidwc10FzfFTuNXwkNNg%3D%3DfjcbSOm82_fDtOQSnxD9i9ahAw7AnZhPudtUryJ8ZoBXZNKDj90fqr6jU7wHB1AtpUUSrSANXA_v65WCuRJwmy6NNQuBgLtRDyTnQngd-K7WpbYORsujrx_Nl76eKv9ASnPfEnSKi1gs_Q6lNxmcdA%3D%3D.
[25] FSC Majority Staff, supra note 3, at 3.
[26] Board of Governors of the Federal Reserve, supra note 24. Bank holding assessments were collected from all banks with over $50 billion in assets, this threshold will increase to $100 billion. This same change was implemented for prudential standards.
[27] 12 U.S.C. § 5365(h)(2) (2018). Prior to the EGRRCPA, banks with assets over $10 billion had to follow regulations regarding these requirements put in place by the Board of Governors of the Federal Reserve.
[28] Id. § 5365(a)–(g).
[29] Cf. Bob Saada, M&A Poised to Remain Steady in 2019 Despite Recession Fears, Chief Executive (Jan. 7, 2019),
M&A Poised To Remain Steady In 2019 Despite Recession Fears(noting that overall M&A is steady in 2019 with the fear of recession across all industries).
[30] FICO, Millennial Banking Insights and Opportunities (2014).
[31] Maranz, supra note 24.
