Dodd-Frank Overkill—Community Bank M&A Deals Must Not Pose a Risk to U.S. Financial Stability

Manatt, Phelps & Phillips, LLP

Why it matters

With their recent approvals of BB&T’s acquisition of a $2 billion community bank, the Federal Reserve Board of Governors (Federal Reserve) and the Federal Deposit Insurance Corporation (FDIC) were required to consider a new factor added to the Bank Merger Act (BMA) by Dodd-Frank. In all bank mergers and related holding company applications, the “responsible agency” (the FDIC, Federal Reserve, etc.) “shall take into consideration … the risk to the stability of the United States banking or financial system.” (12 U.S.C. 1828(c)(5)). This added a review-and-approval step for the agencies that became a new application requirement that technically applies to even the smallest community bank deals. The Federal Reserve set a presumption size to exempt smaller transactions (less than $2 billion in acquired assets) in a 2012 acquisition approval (Capital One Financial Corporation, FRB Order 2012-2 (Feb. 14, 2012)) to satisfy this Dodd-Frank add-on to the required BMA approval factors. However, the Federal Reserve generally requires all applicants to address the factor by demonstrating or affirming that the proposed acquisition and bank merger would not result in a significant increase in interconnectedness, complexity, cross-border activities or other risk factors. Such factors are rarely if ever present in community bank M&A deals. By contrast, the FDIC generally considers the factor as satisfied in its community bank merger approvals without mention.

Detailed discussion

Following in the footsteps of the FDIC, the Federal Reserve granted approval for the purchase of The Bank of Kentucky by BB&T for $363 million in cash and stock. Set to close June 19, the Federal Reserve’s order approving the deal considered several relevant factors including Community Reinvestment Act (CRA) ratings, competitive considerations and financial stability. The FDIC has similarly approved the bank-to-bank merger in the deal. The Fed noted that the smaller size of The Bank of Kentucky—$1.9 billion in assets—worked in its favor. “The Board generally presumes that a proposal that involves an acquisition of less than $2 billion in assets will not pose significant risks to the financial stability of the United States absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities, or other risks factors,” the Federal Reserve wrote in the order. Once the sale is complete, BB&T’s assets will rise to around $191 billion.

In September 2014, North Carolina-based BB&T Corporation announced its purchase of The Bank of Kentucky for $363 million. Bank of Kentucky shareholders would receive $9.40 in cash and 1.0126 shares of BB&T for each Bank of Kentucky share owned.

The FDIC gave its blessing to the deal in February, and the Federal Reserve recently followed suit.

As the 18th largest insured depository institution in the United States, BB&T controls approximately $129 billion in consolidated deposits, or approximately 1.1 percent of the total amount of deposits of insured depository institutions in the country. The Bank of Kentucky Financial Corporation ranks much lower as the 395th largest depository organization, controlling $1.6 billion in deposits, or less than 1 percent of nationwide deposits.

Consummation of the deal would leave BB&T in the 18th spot, the Federal Reserve noted, with consolidated assets of $188.7 billion and control of total deposits of approximately $130.7 billion. BB&T would rise in the ranks in the state of Kentucky, however, becoming the second-largest depository institution in the state. Because BB&T and The Bank of Kentucky do not compete directly in any banking market, the Fed said the merger “would not have a significantly adverse effect on competition or on the concentration of resources in any relevant banking market.”

Evaluating the financial and managerial supervisory concerns, the Federal Reserve considered the financial condition of the organizations (on a parent-only and subsidiary depository institution basis, as well as the organizations’ significant nonbanking operations) as well as the future prospects of the organizations in light of the business plan.

The parent and subsidiary institutions are all well managed and well capitalized, and BB&T has “a demonstrated record” of successfully integrating organizations into its operations and risk-management systems following acquisitions, the Fed noted, with positive CRA ratings.

These ratings overcame one commenter’s objection to the sale on the basis of the banks’ records of lending to low- and moderate-income neighborhoods and minority borrowers, as well as branch distribution. While Home Mortgage Disclosure Act data and Multi-State Metropolitan Statistical Area assessment areas can raise such concerns, the Fed found that BB&T’s and The Bank of Kentucky’s lending records passed muster.

The communities to be served by the combined organization would benefit from an increased number of products and services, as BB&T offers deposit products designed for youth and senior citizens, prepaid accounts with debit cards, and online loan applications, for example, that are unavailable through The Bank of Kentucky.

Finally, the Fed turned to financial stability, as required by Section 3 of the Bank Holding Company Act as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“To assess the likely effect of a proposed transaction on the stability of the U.S. banking or financial system, the Board considers a variety of metrics that capture the systemic ‘footprint’ of the resulting firm and incremental effect of the transaction on the systemic footprint of the acquiring firm,” the Fed explained.

Relevant metrics include the size of the resulting firm, the interconnectedness of the resulting firm with the banking or financial system, and the extent to which the resulting firm contributes to the complexity of the financial system. Qualitative factors such as the opaqueness and complexity of an institution’s internal organization are also considered.

“The Board has considered information relevant to risks to the stability of the U.S. banking or financial system,” according to the order. “The proposal involves the acquisition of approximately $1.9 billion in total assets. Upon consummation, BB&T would have $188.7 billion in total assets and would not be likely to pose systemic risks. The Board generally presumes that a proposal that involves an acquisition of less than $2 billion in assets, or that results in a firm with less than $25 billion in consolidated assets, will not pose significant risks to the financial stability of the United States absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities, or other risk factors. Such additional risk factors are not present in this transaction.”

Considering these factors, the Fed granted its approval.

“In light of all the facts and circumstances, this transaction would not appear to result in meaningfully greater or more concentrated risks to the stability of the U.S. banking or financial system,” the Federal Reserve concluded. “Based on these and all other facts of record, the Board determines that considerations relating to financial stability are consistent with approval.”

With the application approved, the parties set a closing date of June 19.

To read the Federal Reserve’s order approving the acquisition, click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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