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Thursday, April 18, 2024

Four years after a merger of two mighty banks, Truist is still working to gain its edge

By David Mildenberg and Edward Martin

BB&T got very big when it decided to merge with SunTrust to create the nation’s sixth-largest bank in February 2019. The verdict is out on whether the combined Truist Financial got better.

Chief Financial Officer Mike Maguire stresses that the premise underlying the merger is intact four years later: Truist has a powerful, 17-state franchise rooted in many fast-growing Sun Belt markets. With more than $550 billion in assets, 53,000 employees and a solid capital base, it has the resources to compete effectively with the four U.S. megabanks and thousands of smaller institutions, ranging from community banks to regional lenders like Regions or Fifth Third.

“After navigating a global pandemic and the recent headwinds in the banking industry, we feel quite good about our financial strength and the power of our franchise,” Maguire says.

UNC Chapel Hill graduate William Rogers joined Trust Company of Georgia in 1980. East Carolina University alum Kelly King started at BB&T in 1972.

The deal has been a benefit for Charlotte, where CEOs William Rogers of SunTrust and Kelly King of BB&T agreed to place the headquarters in a 47-story downtown tower topped by a massive Truist sign. Eschewing Atlanta and Winston-Salem, Rogers and King chose the Queen City as its anchor and favored a new brand, epitomizing a “merger of equals” in which the best of both banks would emerge to create a stronger institution.

Like most big mergers, however, this one has been tougher than expected. Maguire acknowledges that, citing the pandemic and various other factors. “The merger took a heckuva longer than anyone thought it would. Heck, they were still talking about it during the last quarterly conference call,” says John Norris, head of investments at Birmingham, Alabama-based Oakworth Capital Bank. It does not own Truist shares.

Particularly for investors, the deal has been a disappointment. As of mid-August, Truist stock had declined more than 40% since the deal’s disclosure. That’s among the worst performances of the big U.S. banks, and compares with a 63% increase in the S&P 500 Index in that same period. That’s stung the BB&T shareholders that controlled 57% of the combined shares when the transaction closed. 

Analysts blame unfulfilled pledges for increased growth and cost-cutting that were made by King and Rogers in 2019. More recently, fears of pending losses from commercial real estate loans and investments bought and loans made before interest rates shot up have pressured bank stocks. 

Unfortunately for Truist, the environment didn’t get any easier this summer. Lenders face additional pressure from ratings agencies as regulators consider boosting capital standards for banks with assets of more than $100 billion. The goal is to make them better prepared for shocks such as the March collapse of the $210 billion Silicon Valley Bank, the third-largest bank failure in U.S. history. Forcing banks to hold more reserves can lead to curtailed lending, reduced profitability and delayed dividend increases or stock buybacks. That is happening at Truist, experts say.

In August, Moody’s Investor Services and Fitch Ratings cut ratings or warned of possible downgrades of a wide variety of banks, citing likely stricter regulation and weaker economic prospects. The ratings agencies, which were panned for underestimating the banking industry crisis of 2008-10, don’t want to make the same mistake again

Moody’s cut the ratings of 10 mid-sized lenders and said it is closely reviewing 21 others, including Truist, Minneapolis-based U.S. Bancorp and Pittsburgh-based PNC. Each has big N.C. operations and make up the second tier of U.S. banking with assets of more than $500 billion, but less than the trillions controlled by the four megabanks.

Combining BB&T and SunTrust created a bank with staying power, one less likely to get picked off by a larger entity. That appealed to Rogers and King, both highly respected CEOs who’d spent their entire careers at their respective banks and weren’t anxious to hand over the reins.

But getting bigger put Truist in something of a “no mans land” that makes it a hybrid amid national powers and more locally-oriented competitors, says Norris of Oakworth Capital Bank. “Are they going to compete for institutional business and probably get crushed by JPMorgan and Bank of America? Or compete on a retail level and probably be too monolithic without the ability to offer personal services?”

Norris cites the analogy of a merger of his alma mater, Wake Forest University, and Georgia Tech. “People would be wondering, `Why can’t they still beat Alabama,” he says, referring to the college football powerhouse.

ALIVE AND WELL

How Truist can start reporting stronger revenue and profit growth divides the investment community. Veteran Wells Fargo analyst Mike Mayo, known for his acerbic views, questions Truist leadership including its board, which has had no additions since the merger. They seem “overly complacent, tone-deaf to concerns of investors and lacking candor,” he wrote in July. He called the company “primed” for an activist investor push for major changes. “Truist needs a major reset soon.”

After taking $5 billion in merger-related charges between 2019 and 2023, Truist’s efficiency ratio — a key barometer for banks— is barely changed than before the combination, Mayo wrote. While it trimmed staff by 10% and cut about 900 branches since 2019, Truist’s expenses per site grew at double the pace of its peers, he noted. It now has about 2,000 branches.

Such concerns explain why investors have turned so harshly on Truist, but they miss the bigger picture, says Chris Marinac, an analyst with Janney in Atlanta who has studied Southern banks for 31 years. Truist contends it met its targets for merger-related expense cuts, he says, but higher inflation and particularly pandemic-era wage increases forced it to spend more than anticipated to spur revenue growth.

“Truist is alive and well and has all kinds of opportunities,” he says. “Like these other banks that the rating agencies are downgrading, they are making  money and they have a lot of cash flow.” Over the past two years, Truist averaged an annual profit of about $6 billion. In 2018, BB&T and SunTrust earned a combined $5.9 billion.

Rogers, speaking to analysts after a disappointing earnings report in July, said Truist is taking prompt action. “We too must shift and make tough decisions to fit the realities of today’s economic environment and tomorrow’s regulatory requirements,” he said. “This means being more disciplined about where we choose to compete and deploy our capital, whether businesses, clients or products, and looking deeper and at more structural cost opportunities that exist for Truist.”

Truist leaders are restricting spending on many initiatives, according to people familiar with the company who spoke on the condition of anonymity. Truist has estimated expense growth of 7% this year, the highest of its peers, Mayo noted in his report.

Truist benefits from having less than 10% of its total loans tied to commercial real estate loans, a major worry for bank investors. It has charged off $1.2 billion in soured loans over the past four quarters, a small fraction of its $326 billion portfolio.

Even if demand for office space craters, the losses will be taken over a couple of years, not in a single swoop, Marinac notes. The same is true for securities that are now valued at a loss because of interest rate changes, a metric that looks more troublesome for Truist than many peers.

Fear of losses from “underwater securities” caused the liquidity crisis at Silicon Valley Bank, where $40 billion of deposits were withdrawn within 10 hours. Truist’s deposits are stable and it has plenty of capital to weather a storm, Marinac says.

“The big difference from 2007-08 is that banks then weren’t taking action fast enough. Truist has learned their lessons. They are taking action,” citing decisions to build capital and not raise the dividend payout or buy back shares.

Making customers happier is also important for Truist. It ranked near the bottom among its peers for overall retail banking satisfaction in the Southeast and mid-Atlantic in an October 2022 survey by market research firm J.D. Power. But retail customers now score Truist’s digital services at strong pre-merger levels, Rogers said in July. He expects investments in innovation to spark continued improvement.

UNCOMMONLY GOOD

For long-time BB&T observers, the deal defied the company’s independent approach that had contrasted with its larger N.C. peers. The bank has deep roots in eastern North Carolina, just as SunTrust is famous for its Deep South history. Trust Company of Georgia helped underwrite the IPO of Coca-Cola in 1919 and its vault held the soft drink’s formula from 1925 until 2011. A 1985 merger with Orlando-based SunBanks created SunTrust.

Branch Banking and Trust, started by Alpheus Branch and Thomas Hadley in Wilson County in 1872, would help North Carolina rebuild after the Civil War by lending farmers money for seed. Its growth accelerated through the 1995 merger of Lumberton-based Southern National and Wilson-based BB&T, prompting a headquarters move to Winston-Salem.

As much as any large U.S. bank, BB&T relied on internal promotions and became known for a tight-knit top management team formed in the late ’70s and early ’80s. When Daryl Bible became BB&T’s chief financial officer in 2008, he was the first senior manager hired from outside the bank in a dozen years.

Over a 32-year stretch, starting in 1989, BB&T had two CEOs: John Allison and King, who stepped down as Truist’s leader in September 2021. He remains a director.

Competing against First Union, Wachovia and Bank of America, BB&T’s focus on small and mid-sized businesses paid off with decades of market share gains, solid stock market performance and limited internal drama. It grew from the 36th biggest U.S. bank in 1995 to ninth in 2018. Over that period, 15 of the 25 largest banks merged or failed, including First Union and Wachovia. A $45 billion government loan helped Bank America survive in 2008-09.

In its 2019 annual report, King’s shareholder letter featured a chart showing BB&T’s stock decline of 10% in 2018, noting it was the best performance of 12 peer banks. SunTrust shares fell 19% that year. Chief Operating Officer Chris Henson, who joined BB&T in 1985, appeared poised to succeed King.

“I’ve been saying for the last 20 years or so just how uncommonly good the leadership and management group at BB&T actually was,” says Tony Plath, a retired finance professor at UNC Charlotte. “BB&T never missed its earnings targets, and almost never missed a dividend increase, and never announced big credit losses, even in the height of the mortgage crisis back in 2009.”

Plath adds that BB&T may have been “prone to a little Christian proselytizing and objectivist moralizing,” referring to King’s frequent references to faith in speeches, and John Allison’s focus on libertarian-leaning character traits. “But it was always competent, predictable, transparent, and proficient at delivering results for its shareholders.”

Then, the confidence by King and the BB&T board in a go-alone strategy changed. “BB&T must disrupt itself to continue to thrive,” King wrote to shareholders in the 2019 annual report. The combination with SunTrust would allow “substantially more” investment in technology to enhance customer trust and confidence.

He also noted that BB&T would adhere to “our long-held values, while simultaneously making fundamental changes in the way we deliver products and services.”

Four years later, it’s widely agreed that Rogers and other legacy SunTrust executives are largely in charge. That isn’t surprising because the merger was set up with King leading for two years, followed by the former SunTrust CEO, Marinac says. King is 74, while Rogers is in his mid-60s. Most “mergers of equals” end up with one side in charge, such as the First Union-Wachovia and AmSouth-Regions Bank combos, Norris notes.

With fewer seats at the table, mergers lead to executive shifts. Henson left in 2021 and now chairs the High Point University board of trustees. Departures last year included Daryl Bible and Brant Standridge, a former BB&T executive viewed as a potential CEO. Bible is CFO at Buffalo-based M&T Bank, while Standridge is president of consumer and regional banking at Columbus, Ohio-based Huntington Bank.

Some former SunTrust veterans also left, including Vice Chair Mark Chancy, who wasn’t part of the merged bank’s initial leadership team. He became a director at Wells Fargo in 2020. CFO Allison Dukes, who was slated to be a top Truist exec, left before the merger.

Maguire, a UNC Chapel Hill graduate who joined SunTrust in 2001, sums up the merger succinctly: “It’s been challenging, but certainly worth it. We’re still very excited about the potential our company has ahead of us.”

David Mildenberg
David Mildenberg
David Mildenberg is editor of Business North Carolina. Reach him at dmildenberg@businessnc.com.

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