A customer uses an automatic teller machine (ATM) at a SunTrust. Photographer: Eve Edelheit/Bloomberg© 2019 Bloomberg Finance LP
A decade ago, the suburbs of Atlanta and real estate developments from North Carolina all the way down to Florida were considered by many to be the epicenter of the housing and commercial building bust. Ten years on, however, these coastal and sunbelt regions are far more than boom-and-bust locales. They’re among the fastest-growing and most dynamic economies in the United States. Atlanta keeps drawing in corporate heavyweights from Mercedes-Benz to Norfolk Southern , as does Charlotte, which recently welcomed Honeywell. Large universities anchor cities all the way down the Atlantic coast, yielding a torrent of skilled workers and promising startups. Further down the coast, President Trump’s tax law has made Florida a promised land for wealthy transplants.
The $66 billion all-stock merger of southeastern banking giants BB&T and SunTrust is an indication of this economic reality. The Atlantic coast and Southeast now have a new national banking champion to reflect rising circumstances. When combined, the merged BB&T and SunTrust will hold $442 billion in assets and $324 billion in deposits, making it the sixth-largest bank holding company in the United States, surpassed only by JPMorgan, Bank of America , Wells Fargo , Citigroup and U.S. Bank . That financial might is a bit shy of Charlotte-based Wachovia’s standing as the nation’s fourth-largest lender before it failed during the financial crisis and was absorbed by Wells, but it creates a new lender the “Big Four” will be paying close attention to.
Kelly King, CEO of Winston-Salem, North Carolina-based BB&T, will lead the combined company, which will shift its corporate headquarters to neighboring Charlotte and come up with a new name. According to King, the deal will create what he calls the “premier financial institution of the future,“ with the scale “to compete and win in the rapidly evolving world of financial services.” Put differently, he aims to use increased financial might to offer a scope of services and technological prowess on par with larger rivals.
In fact, they may be playing catch-up soon. The combined mega bank from Thursday’s deal will have the top deposit market share of any bank in Georgia and Virginia, a #2 rank in North Carolina and Maryland, and a #3 rank in Florida, Tennessee and South Carolina. By merging, BB&T and SunTrust mostly are scaling in markets where they already hold a large presence, instead of pushing far into new geographies (as Wells did with Wachovia). With good reason—this footprint is home to some of the nation’s best demographics. According to a presentation to shareholders, within the combined company’s geographic reach, population growth is expected to rise at a 5.3% clip from 2019-2024, while nominal gross domestic product will grow 4% annually, outpacing all other large banks.
“This combination puts together not only a very attractive footprint when you look at demographics, but it also creates a more competitive franchise to compete against much bigger banks,” says Brian Klock, an analyst with Keefe, Bruyette & Woods. “Population growth really matters if you are a long-term bank investor,” adds Andrew Boord, a portfolio manager at the $2.9 billion Fenimore Asset Management Small Cap Fund, which counts bank investments as a specialty. “This bank is well positioned.”
BB&T and SunTrust shares spiked on the merger, with the former rising nearly 3% and the latter 8% in early afternoon trading. Both companies expect the merger to add up to double digits of earnings per share by 2021 and yield $1.6 billion in net cost savings the following year. Technically a merger of equals, SunTrust shareholders will receive 1.295 shares of BB&T for each share they own. Therefore BB&T shareholders will own 57% of the new company and SunTrust holders will own the remaining 43%. While BB&T’s King will lead the merged company after the deal’s close—expected in the fourth quarter of 2019—SunTrust CEO William Rogers Jr. will act as chief operating officer. Then in 2021, King expects to turn over the reins as CEO to Rogers and become chairman.
“This is truly a merger of equals,” says King, in a statement unveiling the deal. Adds Rogers, “With our geographic position, enhanced scale and leading financial profile, these two companies will achieve substantially more for clients, teammates, associates, communities, and shareholders than we could alone.” Though the new headquarters will be in Charlotte, and not Atlanta where SunTust is based or Winston-Salem, they’ve committed to “maintaining significant operations and investment” in both cities.
The logic of the merger is clear in the near term, but Fenimore’s Boord is uncertain of the benefits in the years beyond BB&T and SunTrust’s guidance. “Mergers of equals have a long, mixed history in banking,” he warns. Boord doesn’t own either BB&T or SunTrust, instead favoring Buffalo-based M&T Bank , Nashville’s Pinnacle Financial Partners and SouthState in Columbia, South Carolina. In addition to potential integration issues and the challenges of creating a new corporate headquarters, the merged company will also have to come up with a new name to present to customers. Its board will begin split evenly with BB&T and SunTrust appointees, but history is littered with examples of power grabs and turmoil in similar situations.
But there seems to be plenty of impetus to act now.
Aside from favorable demographics and the allure of nationally important scale, Thursday’s deal may capitalize on the current favorable regulatory environment for banks under the Trump administration. Current legislation is under way to create room for a tier of banks from $250 billion in assets to $750 billion in assets to grow, before hitting against the most stringent oversight. With pro forma assets of of $442 billion, the new bank will have plenty of room to grow. And of course, the expected close of the deal in late 2019 could get codified just before a new political cycle, when the policy pendulum may shift against banks once more.
Bottom Line: Fallow speculative real estate developments across the Southeast felled Charlotte-based Wachovia during the bust a decade ago. Now a new mega-lender is expected to rise in Charlotte, and the boom-and-bust times of the Atlantic coast and the Southeast may be a thing of the past.