In their quest to compete with the biggest banks in the U.S., regional banks may no longer view crossing $50 billion in assets as a threshold to avoid.
Instead, they may be looking more closely at mergers that vault them above that size, partly because surpassing that asset mark carries fewer regulatory requirements than it did just two years ago.
The key driver behind those mergers will likely be reaping the benefits of scale, given that bigger regional banks can more easily rival the major technology investments that megabanks are making. That rationale played a major role in the proposed merger between First Horizon National Corp. and IBERIABANK Corp., which announced last month they would combine into a company with roughly $75 billion in assets.
But the overall easing of rules for regional banks will also influence the expected uptick in M&A activity, as the new regulatory environment has made those talks easier and opened up channels with new potential partners, analysts say.
The $50 billion asset threshold was a "dampener on M&A that's been taken away" due to recent regulatory changes, said Jason Langan, a partner at Deloitte & Touche LLP who advises banks on mergers. Last year, Congress passed a law paring back the postcrisis Dodd-Frank Act and generally loosening rules on banks with less than $250 billion in assets, including their liquidity and stress-testing requirements.
Langan said his phone has been "ringing a lot more" since those changes.
"I think folks who lived in hibernation from deal mode are starting to wake up and wipe the dust off their playbooks, if you will, just because they felt like the environment has shifted," Langan said, though he noted that it takes time to find "the right dance partner."
The pace of dealmaking has been slow thus far, even after a blockbuster merger between BB&T Corp. and SunTrust Banks Inc. that will put the combined company at roughly $464 billion in assets, according to an S&P Global Market Intelligence analysis.
The deal sparked chatter of a potential flurry of major mergers among regional banks, but the industry has seen only one such deal announcement since: the proposed union of First Horizon and IBERIABANK.
Other regional bank executives will likely consider mergers "more seriously" in the next few months, said Stephen Scouten, managing director at Sandler O'Neill & Partners LP.
For starters, they will look to get ahead of the 2020 election, which could result in a Democrat in the White House who will re-emphasize heightened bank regulation.
Furthermore, bank executives may realize that their earnings likely peaked in the last two years now that the Federal Reserve has stopped its interest rate increases and started to cut rates, putting pressure on banks' net interest incomes, Scouten said.
The challenging revenue environment will likely be the key driver of regional bank M&A, Scouten said, noting that banks are able to cut costs when they merge and invest more in technology that will boost revenue later on. Although regulatory changes are not necessarily a primary driver of bank M&A, they make merger conversations "a little easier to have," he added.
That is partly because banks will no longer have to absorb the costs of several regulatory reporting requirements that previously kicked in once they surpassed $50 billion in assets, said Bain Rumohr, senior director of North American Banks at Fitch Ratings.
Banks with less than $100 billion are generally no longer subject to regulatory stress tests, and they no longer have to comply with the liquidity coverage ratio. The LCR ensures large banks have enough cash or cash-like assets to stay afloat during a hypothetical stress scenario, though smaller banks are subject to other liquidity standards. Banks between $100 billion and $250 billion are also generally not subject to the LCR anymore, and the Fed has switched them to a two-year supervisory stress test cycle instead of their prior annual schedule.
Those rules require banks to invest heavily in compliance programs that let them track key figures internally and report them to regulators.
"The general risk infrastructure that was required even as you approached $50 billion in assets was very costly," Rumohr said. "With that now seemingly gone, it certainly is playing a role in the number of deals that are being made and probably will be made going forward."
But banks will still be cautious about surpassing any asset thresholds that trigger heightened regulatory scrutiny, particularly the $250 billion asset barrier, Rumohr said. At that point, they would have to undergo annual regulatory stress tests, meet the LCR liquidity standards and be subject to a potential countercyclical capital buffer that raises their capital cushions during good times, among other things.
The $250 billion asset threshold is "not a line that a bank is going to cross lightly," Rumohr said.