BBT BB and T Corporation

By Rachel Louise Ensign 

The biggest U.S. banks have been locked out of the recent merger boom, but smaller banks are starting to go shopping.

Through Tuesday, U.S. banks have announced $24.3 billion in mergers this year, according to data provider Dealogic. That is up 63% from the pace a year ago and is also the highest figure for this point of the year since 2009.

The sector's deal activity got its latest boost Monday night when BB&T Corp. said it was buying National Penn Bancshares Inc. for $1.8 billion in cash and stock. The announced deal was BB&T's third in less than a year.

Kelly King, chief executive of Winton-Salem, N.C.-based BB&T, said the bank is doing deals to grow in an environment in which low interest rates have weighed on profits. For a bank to successfully navigate these hurdles "the only answer is scale," Mr. King said.

In other words, BB&T aims to boost revenue through the deal over time without significantly adding to costs that generally keep bank CEOs up at night, such as regulatory compliance costs to technology and cybersecurity budgets.

Deal making has been challenging for banks since the financial crisis largely because regulators are giving greater scrutiny to the largest banks. But midsize regional lenders are finally gaining confidence because some deals have been approved, including CIT Group Inc.'s $3.4 billion purchase of the parent company of OneWest Bank NA, approved in July.

Investment bankers broadly specializing in financial companies are optimistic about the pickup in deals.

"It's very active, and we expect there to be more," said Thomas Michaud, president and chief executive of Keefe, Bruyette & Woods, an investment bank specializing in financial services. "You're starting to see more of the bigger banks show up as buyers."

Still, one high-profile regional bank deal--M&T Bank Corp.'s announced purchase of Hudson City Bancorp Inc.--has gotten stuck because of regulatory concerns, discouraging more activity.

Mr. King said BB&T is now likely to take a break from buying other banks for at least six months because it wants to focus on closing the National Penn purchase and integrating its purchases of Bank of Kentucky Financial Corp. and Susquehanna Bancshares Inc., both of which closed this summer.

BB&T's purchase of Allentown, Pa.-based National Penn brings the number of total bank deals announced so far this year to 219, which remains below 250 figure for the same period in 2014 despite the higher total volume.

Mr. King said National Penn's sale is an example of an institution seeking a deal as a way of grappling with costly new regulations that kick in when they hit a certain size, a trend experts expect to continue. Representatives of National Penn didn't return calls for comment.

National Penn, with $9.6 billion in assets, was right under the $10 billion threshold at which banks must start conducting annual stress tests under the 2010 Dodd-Frank financial law.

"They were hovering at $9.6 [billion] ... They knew they had to go over a lot or not go over at all" in order to not be overwhelmed by new compliance costs, Mr. King said.

"The economics of selling just overwhelm [those of] staying put" and risking that the banks asset would go over the mark slightly, he added.

Deals are cropping up around a number of these thresholds set by Dodd-Frank, said Mr. Michaud.

"You have these size thresholds at $10 billion and $50 billion where management teams and boards of directors have to figure out which way they're going to go," he said. "They're between the options of a sale and growing organically." Banks with $50 billion or more in assets are considered "systemically important" by bank regulators and are subject to more rigorous Federal Reserve stress testing process.

The biggest bank deal of 2014 was driven by similar concerns: CIT's purchase of the parent company of OneWest Bank was motivated by CIT's desire to do a deal could would allow it to jump over the $50 billion asset level by enough that it would have sufficient revenue to cover the added compliance costs.

"If we had grown to just $52 billion we would be in the worst spot," said CIT Chief Executive John Thain last year. "We'd have had all the expense of going over $50 billion but only $2 billion more of assets to cover the expense base."

For instance, Zions Bancorp spent $20 million preparing for the 2015 round of Federal Reserve stress tests. That would represent about 1.25% of the $1.6 billion in noninterest expenses that the bank has said it would like to stay below in 2015 and 2016.

Even BB&T, which estimates it will have about $220 billion in assets after the National Penn deal closes, says it now has to keep an eye on a different regulatory threshold in future deals: $250 billion in assets. Banks beyond this threshold are subject to complex additional requirements under the law.

"You wouldn't just want to go from $249 [billion] to $251 [billion]," Mr. King said. "All of a sudden you turn into a pumpkin when you hit 251 and you don't have the scale to manage it."

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(END) Dow Jones Newswires

August 18, 2015 19:32 ET (23:32 GMT)

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