Kelly King wants BB&T Corp. (BBT:US) to be bigger in Texas. While he would “absolutely love” to buy a rival bank there, settling for pieces of other firms means he can avoid regulatory snares.
“There really are a lot of issues around mergers, and a number of acquisitions have run into trouble,” King, chief executive officer of BB&T, said in an interview. In December he agreed to buy 21 Texas branches from Citigroup Inc. (C:US) “When you can do a branch acquisition like what we just did with Citi, you don’t get any of those entanglements.”
King isn’t alone. U.S. regional banks, spooked by crisis-era deals gone awry and a regulatory review holding up M&T Bank Corp.’s (MTB:US) merger with Hudson City Bancorp Inc. (HCBK:US), are buying pieces of rivals to sidestep pitfalls of acquiring whole firms. The strategy limits options for closely held banks looking to sell and deters takeover sprees that built today’s biggest lenders.
Large regional banks “want to acquire,” said Tod Perkins, a managing director and head of depository institutions at Barclays Plc’s investment-banking unit. “The big concerns are how you avoid acquiring another institution’s problems. As a result of that, increased focus is being placed on how to mitigate compliance risk.”
Buyers see reason to be wary of swallowing banks. Since the financial crisis, the two biggest U.S. lenders, Bank of America Corp. (BAC:US) and JPMorgan Chase & Co. (BAC:US), have allocated more than $88 billion to cover legal expenses and resolve government probes and investor claims. Much of that stemmed from mortgage-related liabilities they inherited when Bank of America bought Countrywide Financial Corp., and JPMorgan purchased Bear Stearns Cos. and Washington Mutual Inc.’s bank operations.
Another cautionary tale arose in August 2012, as regulators began reviewing M&T’s proposed $3.7 billion purchase of Hudson City, now the biggest pending U.S. bank merger. Its completion has been delayed twice as the Federal Reserve examines M&T’s money-laundering controls. The firms’ costs are mounting.
Heightened regulatory scrutiny may slow the creation of additional too-big-to-fail lenders. Mid-sized banks flush with cash can increase their size at a pace that doesn’t threaten to undermine the economy, according to Mark Williams, a former Fed examiner and executive-in-residence at Boston University.
“There is an understanding that you do have to grow and you need that growth to offset the cost structure which has developed post-2008,” Williams said. “Smaller, below-the-radar deals get those banks to where they need to be without the regulatory headaches.”
Of 61 transactions involving large regional banks in the past two years, 69 percent were partial deals, according to data compiled by Bloomberg. That includes minority purchases, asset sales and joint ventures in which dollar figures were released. Before the crisis, 41 percent of the 152 deals in 2006 and 2007 were fractional takeovers, the data show.
Opportunities abound as large banks dispose of branches, assets and teams to cut costs, improve profitability and bolster capital after the financial crisis. The largest U.S. lenders are increasingly divesting businesses as they seek “to make more efficient use of their capital,” said Bill Isaac, a former FDIC chairman. “It’s very difficult to move forward on deals with any regulatory cloud over you at all.”
Regional banks’ focus on partial deals is pushing owners of some closely held firms to explore other exit strategies. OneWest Bank FSB, backed by billionaires John Paulson and George Soros, will file for an initial public offering if it can’t find a buyer, people familiar with the situation said in January. OneWest held unsuccessful talks last year with U.S. Bancorp (STL:US), UnionBancal Corp. and New York Community Bancorp Inc.
U.S. Bancorp, the nation’s largest regional bank, is driving the pickup in piecemeal deals. Purchases disclosed by the Minneapolis-based firm since September include 94 Chicago branches from RBS Citizens Group, a Dublin-based hedge-fund administration unit and the rest of Syncada, a payments-processing network joint venture, from Visa Inc.
“I also don’t see us doing a full-bank transaction,” Richard Davis, CEO of U.S. Bancorp, told analysts on a Jan. 22 conference call. Risks include “picking up the problems and the legacy issues that you may not ever be able to know at due diligence and you simply can’t price for,” he said.
BB&T’s King, 65, pushed into Texas by acquiring Colonial Bank as it failed in 2009. He opened 30 offices in the state last year before adding Citigroup’s branches. BB&T, based in Winston-Salem, North Carolina, ranks among Texas’s top 38 lenders by deposit market share, according to Federal Deposit Insurance Corp. data. King said he wants to be in the top five.
Deals by King and Davis, 55, contrast with those from the 1980s and 1990s. New York-based JPMorgan formed through a string of combinations of firms including Chemical Banking Corp., First Chicago Corp., Banc One Corp. and the Chase Manhattan Corp. In 2008, it completed its rise to the nation’s largest lender with the Bear Stearns and Washington Mutual deals.
“Those days are over,” said Jeff Davis, managing director for the financial-institutions group at advisory firm Mercer Capital in Nashville, Tennessee. Now, M&T’s combination with Paramus, New Jersey-based Hudson City may be as large as whole-bank deals get, he said. “Bank M&A is really about community and small regional banks combining. Not big banks,” he said.
Spending on personnel and technology to address the Fed’s concerns contributed to a 12 percent increase in fourth-quarter expenses at Buffalo, New York-based M&T. The costs, which the bank forecast may remain elevated this year, added to a 17 decline in fourth-quarter profit.
“This is a big deal, and it’s costing M&T a lot of money,” said Brian Klock, an analyst at Keefe, Bruyette & Woods Inc.
M&T’s experience has made other bankers reconsider their takeover strategy, said BankUnited Inc. CEO John Kanas, who transformed his company from a failing mortgage lender in 2009 into a profitable firm with about $15 billion in assets. While he wouldn’t rule out buying another bank, more attractive opportunities include poaching employees from competitors or taking over niche businesses, like lease financing, he said.
“To see M&T struggling like this with an acquisition certainly gives people pause,” Kanas, 67, said in an interview. Whole takeovers now require at least five months to be approved and “markets change during those kinds of lengthy time periods, which adds more business risks,” he said. Partial deal announcements will probably pick up later this year after the Fed completes annual stress tests and rules for capital-to-assets ratios, according to Marty Mosby, an analyst at Guggenheim Securities LLC. Banks are limited by the Fed in how much cash they can return to shareholders.
“The super-regional banks have excess capital and the clarity around their capital is improving,” Mosby said in a telephone interview. “If they shy away from bank deals, that means it’s portfolios, maybe some business-line opportunities or branch acquisitions they’re looking at.”
Regional banks also are seeking to expand in areas including health-care payments, corporate trust or shareholder services, according to Barclays’s Perkins. KeyCorp, based in Cleveland, bought commercial mortgage servicing rights from Bank of America in May, amassing a collection of those assets that ranks among the nation’s three largest. Fifth Third Bancorp (FITB:US), based in Cincinnati, bought cardholder services from Quad City Bank & Trust in January 2013 to expand its payments products.
For consumers, Regional banks are helping fill a gap as larger firms exit certain geographies. BB&T made its move four months after Citigroup CEO Michael Corbat, looking to cut costs and focus only on the world’s top 150 cities, put Texas branches up for sale in August.
“You will see more of that going forward,” BB&T’s King said in the Jan. 13 interview, referring generally to purchases by regional banks. At his firm, “there will be other opportunities, and when they occur we will certainly be willing to take a positive look at them,” he said.
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