Bank tellers

Talk is cheap — even if prices aren't — about possible deals
affecting the state's largest financial institutions.
By Irwin Speizer

Bank of America Chairman and CEO Ken Lewis once summed up his philosophy of banking in two words: Size matters. But as the Charlotte-based financial giant gobbled up bank after bank and rumors ran rampant about what would be its next meal, a new question emerged: How big is too big? BofA now has an answer, courtesy of the federal government.

On June 30, BofA said it would pay about $35 billion for Wilmington, Del.-based MBNA, one of the nation’s largest credit-card issuers. The deal would bestow that distinction on BofA, but MBNA also held about $30 billion in customer deposits, potentially enough to tip BofA over a federal limit. No bank is allowed to attain more than 10% of total U.S. deposits through acquisition, and BofA may have to shed some to complete the deal.

That would put BofA, arguably the most aggressive bank buyer in the nation during the last two decades, out of the game, at least domestically, unless Congress raises the cap. Having used bank takeovers to create a network that stretches from New England to California, BofA now must grow by adding branches rather than buying banks if it wants to continue expanding its retail banking business in the U.S. It already has started buying into foreign banks. In September, BofA bought a 9% stake in China Construction Bank, with a five-year option to increase its stake to 19.9%, for $3 billion.

A regulatory roadblock might have been the only way to slow BofA, which has long dwarfed its in-state rivals. It sits atop The Financial 100, Business North Carolina’s ranking of the largest financial institutions with headquarters in the state, as it or its predecessor has since the magazine began ranking banks annually in 1989. Moreover, it brings in more revenue, has more assets and makes more money than the rest of the Financial 100 combined.

For all other Tar Heel banks, the domestic cap is of little concern. For many, profits have been high, which gives them extra cash to spend on acquisitions, and stock prices have stayed up, too, which can provide leverage in deals. Already, there have been a few big buys this year. And there’s no shortage of speculation about what’s to come.

Wachovia, the second-largest bank in the state, has been among the busiest during the past few months. In September — though still integrating Birmingham, Ala.-based SouthTrust, which it bought for $14.3 billion last year — it agreed to buy Irvine, Calif.-based Westcorp, including its auto-finance subsidiary, WFS Financial, for $3.9 billion. The stock deal is expected to close early next year and make Wachovia the nation’s ninth-largest originator of car loans. Less than two weeks later, it announced it would buy the international banking business of San Francisco-based UnionBanCal for $245 million and San Diego-based mortgage originator AmNet Mortgage for $83 million. Both are cash deals.

Acquirers, even if they’re just rumored to be in the market, often see their stock price stagnate or dip. Investors tend to bid down the stock of acquiring companies on the theory that takeovers are costly and can dilute earnings, at least in the short term. Wachovia was no exception. Its stock had been hovering at about $50 since March — down from a 52-week high of $56.28 — when it announced the Westcorp deal. Two weeks and two deals later, its shares were trading for less than $48.

It might not be finished buying. Wachovia, the nation’s fourth-largest bank in assets, will keep looking for expansion opportunities in the West, Southwest and Northeast. It would love to grab a bigger chunk of the California market. In addition to the auto-loan business, Westcorp has 19 bank branches there, opening the door for other West Coast acquisitions.

A rumored merger of Wachovia and San Francisco-based Wells Fargo & Co., the nation’s fifth-largest bank with $435 billion in assets, while attractive on paper, doesn’t seem likely. One reason: Wells Fargo has often said it isn’t interested in another big merger, particularly if Wachovia insists on keeping the headquarters in Charlotte. “Wachovia is still very hungry as far as building a national franchise,” says Anthony Polini, an analyst at Advest, part of New York-based AXA Financial. “They are probably more interested in a merger of equals than Wells Fargo.”

Apart from Wells Fargo, California no longer offers merger partners that could quickly give Wachovia a major banking presence there. One option sometimes mentioned: Minneapolis-based U.S. Bancorp. It’s the nation’s 7th-largest bank with $204 billion in assets and has 237 branches in California. Another possibility is Comerica, a Detroit-based financial company with $55 billion in assets and 44 California branches. Wachovia spokesperson Mary Eshet says the bank still wants to grow — through acquisition if the price is right. “But there is no imperative need to create a coast-to-coast franchise.”

Even if no suitable deals come along, Wachovia plans to keep opening branches, mainly in Texas and the New York metropolitan area. It opened its first Manhattan branch in 2003 and had 13 by the end of September, with plans to open as many as a dozen more by 2007. In Texas, Wachovia began opening branches earlier this year and had 20 by September. It planned to add 30 more and convert 60 SouthTrust branches by year-end.

Winston-Salem-based BB&T, the third-largest bank in the state by revenue, has been taking a breather from buying since early 2004. BB&T has grown mainly by purchasing small community banks and insurance brokerages. But it broke with tradition in January 2003 by agreeing to buy Falls Church, Va.-based First Virginia Banks for $3.4 billion. It hadn’t finished integrating that purchase when it snapped up St. Petersburg, Fla.-based Republic Bancshares for $436 million in April 2004. BB&T hasn’t bought a bank since then because it had to work through difficult logistical problems integrating them and wringing out promised cost savings.

Now, BB&T, the nation’s 12th-largest bank in assets, is ready to start shopping again, especially for banks in markets in or near its footprint, which stretches from Baltimore to Florida. Burney S. Warren, BB&T’s executive vice president for mergers and acquisitions, says the bank is interested in small community banks but also in deals as large as $15 billion. “We are beginning to have conversations, and we look forward to making some acquisitions in 2006.”

On the other hand, BB&T also might find itself a takeover target. “BB&T could go either way,” Polini says. Wells Fargo, for example, might decide to move East and snatch it up, he says. Or a Midwestern bank might try a merger of equals. Takeover of a large North Carolina-based bank wouldn’t be unprecedented. In 2001, Royal Bank of Canada bought Rocky Mount-based Centura Banks, then the state’s sixth-largest bank, to form RBC Centura, which recently moved to Raleigh. Last year, Atlanta-based SunTrust Banks bought Memphis, Tenn.-based National Commerce Financial, which had bought Durham-based CCB Financial, the state’s seventh-largest bank, in 2000.

But Tony Plath, associate professor of finance at UNC Charlotte, doesn’t see BB&T as a takeover target, mainly because its financial performance has improved since its Florida and Virginia purchases. “Their point of vulnerability was after First Virginia, when they were having trouble integrating. They are not having trouble any more.”

The most logical expansion route for BB&T, he says, is through the Ohio River Valley region, extending its franchise from West Virginia to Ohio and perhaps on toward Chicago, where it would compete with its North Carolina neighbor, BofA. BB&T might be strong enough to come out on top of a merger with one of the big Midwestern banks. Among those on his list: Cincinnati-based Fifth Third Bancorp, the nation’s 14th-largest bank and Cleveland-based KeyCorp, the 16th. Cleveland-based National City is another possibility, but it’s larger than BB&T, ranking ninth nationally.

BB&T’s Warren insists that those sorts of deals aren’t high on the priority list. Economic and population growth in the Ohio valley aren’t strong enough to make BB&T jump, Warren says. And it wants to concentrate on increasing its share in its existing and nearby markets before venturing farther afield. “We don’t see expanding into markets in the Ohio valley, the West, Mississippi, Louisiana, Texas,” Warren says.

Since BB&T already has plenty of market share in North Carolina, that leaves Maryland, Tennessee or Florida as the most likely spots for acquisitions. Florida, though, will prove difficult. So many banks there have already merged and those that remain carry a high price tag because Florida, with its growing population and healthy economy, is a coveted territory.

Banks smaller than BB&T aren’t just talking about buying, they’re doing it. Asheboro-based FNB, the state’s 16th-largest financial institution by revenue, is buying two banks. It agreed in May to buy Graham-based United Financial, owner of Alamance Bank, the 74th-largest in the state, for $25 million and struck a deal in September to buy Hickory-based Integrity Financial, No. 28, for $124 million. FNB stock had been trading above $20 but rarely sold for that much in the two months after announcing the United Financial deal. It had inched up to $21 by mid-September, but the second deal knocked it back below $20 during the week after.

Raleigh-based Capital Bank, the state’s 19th-largest financial institution, said in June that it would buy Burlington-based 1st State Bancorp, the 42nd-largest, for $115 million. Capital Bank’s stock dipped below $15 for a week; 1st State’s stock rose about $1 to about $36.

The FNB deals follow a strategy that Plath says shows promise. FNB is trying to establish a banking network that tracks two interstates, 40 and 85, that connect many industrial centers in North Carolina and South Carolina. Many of those industrial centers are served either by local community banks or by North Carolina’s biggest banks. That leaves room for a midsize bank that caters to the business needs of the industries along the two highway corridors, he says. And the most likely way for that to happen is through mergers. “A couple of $1 billion banks will become $4 billion or $5 billion banks.”

But Buddy Howard, president of Raleigh-based Equity Research Services, which tracks Tar Heel community banks, says most of the mergers here probably will involve smaller banks with assets in the $100 million-to-$250 million range. Howard sees no need for the billion-dollar banks to merge with each other. What’s more likely is that there will be lots of competition for smaller North Carolina banks as the billion-dollar banks shop for smaller takeover targets while community banks contemplate merging with one another to gain size and market share.

So in the next few years, The Financial 100 could look very different. Maybe not in the top 10. Barring a megamerger, there’s likely to be little change there. But farther down, where the revenue numbers cluster tightly, a few mergers could reshuffle the rankings.

And there are more banks starting and growing to take the place of acquired banks, thanks to a spurt of bank creation that began in 2003. In early October, the N.C. Commissioner of Banks, which doesn’t include federally chartered banks such as BofA, counted 97 institutions, including 15 savings banks or savings and loans, based in the state. That includes 12 with charters issued in 2004 and two in 2005. Seven bank wannabes were organizing.

Plath sees more to come in 2006 and 2007. Most will be in smaller urban areas such as Asheville or Statesville. So far, “There seems to be no shortage of capital.”