BB&T Shows How to Cope with M&A's Rising Compliance Challenges
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It has become clear in recent months that regulators are more strictly scrutinizing consumer compliance during bank M&A reviews, but time has shown that responsive banks can successfully manage the process.
Sometimes a quick fix can solve any problems. Other times, banks have to spend years demonstrating that they have changed their behavior, and that they rapidly responded to any momentary lapses.
Usually banks are able to overcome any weaknesses in fair lending or community reinvestment within a few exam cycles if they work to address them, though community groups may still refer to past problems in protesting deals, said Chip MacDonald, a partner at the law firm Jones Day.
"I would tell any bank that has an issue to 'Get your house in order,' " MacDonald said. "You need to be proactive, take immediate steps to fix the problem and update your regulators on your progress. If addressed and resolved, these compliance issues shouldn't carry a long-term taint."
One of the main reasons behind the tougher reviews has been the creation of the Consumer Financial Protection Bureau, which pays more attention to how banks treat their customers, industry experts said. This has filtered into merger reviews as regulators and community groups have sharpened their focus on banks' Community Reinvestment Act ratings and plans and compliance with antidiscrimination laws.
BB&T in Winston-Salem, N.C., is one of the latest banks to be put under the microscope, and its ability to still get deals done shows that acquisitions are viable for large institutions that face criticism from outsiders.
Two smaller banks, Valley National Bancorp in Wayne, N.J., and Banc of California in Irvine, have drawn media attention for strengthening CRA commitments after public pressure in order to complete M&A transactions. BB&T has responded to similar pressures, too, though critics targeted its fair lending practices and were less public.
BB&T, which has $184.4 billion in assets, has recently gone on a buying spree it bought the Bank of Kentucky earlier this month and more than 40 branches in Texas from Citigroup in February. And still pending is a larger deal to acquire the $18.6 billion-asset Susquehanna Bancshares in Lititz, Pa.
During its acquisition of the Citi branches, a commenter criticized BB&T's lending record to low- and moderate-income neighborhoods and minorities and branch distribution in Dallas and Houston, Texas, according to the Federal Reserve's written approval of the Bank of Kentucky deal.
The Federal Deposit Insurance Corp. reviewed the complaint and approved the deal for the Citi branches, though it required BB&T to submit a strategic plan, which included "a semiannual review of [BB&T's] enterprise-wide branching strategy, lending distributions and marketing efforts," according to the Fed approval.
The Federal Reserve and the FDIC declined to comment for this story. BB&T declined to make an executive available for an interview, but spokesman Brian Davis said that the company was "pleased to have received regulatory approval" for the Texas and Kentucky deals and would continue to work with each regulator "on all aspects of future M&A opportunities."
This requirement could indicate that BB&T had some compliance problems, specifically the company was failing to reach out to low- and moderate-income areas, said Nicholas Ketcha Jr., emeritus executive managing director at the consulting firm FinPro.
Sometimes a regulator will ask a bank to review its loans from a certain period to see if there is a pattern, said Ketcha, who is a former director of supervision at the FDIC.
"There is always going to be some violations that happen because somebody didn't cross a t or dot an i," Ketcha said. "But what the regulators are looking for are incidents that aren't isolated."
This type of scrutiny has picked up in the last two years as bank regulators want to ensure that all customers will be served once a deal is completed, said John Stockamp, a senior manager for the banks and credit unions practice at the consulting firm West Monroe Partners. This is especially true of deals involving larger banks, such as BB&T, but smaller institutions also need to be aware of the heightened concerns, he said.
"They are trying to ascertain with the branching strategy whether anyone is going to be left out," he said. "This isn't new on the checklist, but it is just getting a little more attention. With the CFPB coming into existence, consumers have much more of an advocate."
BB&T has faced questions over its compliance with fair lending laws before, with accusations of racial discrimination in the 1990s, experts said. Examiners decided that there was probable cause that BB&T was discriminating and halted its mergers at that time, John Allison, a former chief executive and chairman of BB&T, wrote in his book, "The Financial Crisis and the Free Market Cure." The institution eventually settled those claims, though Allison adamantly argued in his book that the investigation was politically motivated and that discrimination was against the company's "fundamental culture."
More recently, the FDIC determined during its 2008 CRA performance evaluation that BB&T had violated the Equal Credit Opportunity Act and the Fair Housing Act on the basis of race.
Those violations were related to pricing and compliance matters, and since 2001 the FDIC has "consistently" rated BB&T as high satisfactory in lending, Davis said. Overall since 1990, the company has been assigned an overall satisfactory or outstanding rating in CRA, Davis added.
Despite these past issues, BB&T has been able to complete more than 50 bank deals since 1990. The recent requirement of submitting a plan to review its branching strategy is unlikely to interfere with future plans or delay the Susquehanna deal, experts said.
Kelly King, BB&T's CEO and chairman, said during a recent investor conference that he expects that deal to close in the third quarter.
"What we're always trying to do is blend with our acquisition strategy, so that we are expanding in rural markets, urban markets, slower growing, faster growing because you get the best combination of assets and liabilities and revenue and expenses in those combinations," Kelly said during the presentation.
For a bank to overcome consumer-compliance concerns, it must be proactive, experts said. Any bank that is looking to be a buyer needs to consider whether it is in good standing for consumer-compliance issues with regulators and the general community, said Jonathan Hightower, a partner at the law firm Bryan Cave. That does not necessarily mean directly engaging with activist groups, but it does need to include considering "how in general the communities view us," he said.
Sellers are also not exempt from these concerns. City National Bank in Los Angeles, which mostly caters to a wealthier clientele, worked with a California community group to develop a CRA plan ahead of its planned sale to Royal Bank of Canada.
"Banks can't make everyone in the world happy, but in general if they have a good reputation they will have a better time with this," Hightower said.