BB&T merger (copy)

BB&T headquarters in Winston-Salem. The bank announced that it will merge with Atlanta-based SunTrust.

Minimizing disruption for customers could be the biggest challenge facing BB&T Corp. and SunTrust Banks Inc. in their $66 billion megadeal to form the sixth largest U.S. bank.

The banks have said they expect to serve more than 10 million households in what would become a 17-state Southeast and mid-Atlantic territory anchored by Florida, Georgia, North Carolina and Virginia.

The deal requires regulatory and shareholder approvals, and it must overcome what is likely to be stiff opposition from some congressional leaders and advocacy groups for surging into too-big-to-fail territory with a combined $442 billion in total assets.

The banks project closing the deal as early as September or during the fourth quarter.

However, it likely will take another 12 to 24 months to close what could be as many as 740 branches — nearly 25 percent of the combined network — and to integrate the remaining branch- and information-technology systems.

Kelly King, BB&T’s chairman and chief executive, stressed that the banks “will tackle methodically which deposit system, which loan system.”

“We will start immediately focusing on the branch closure. We won’t be closing them, of course, immediately. We can’t do anything until the actual closure. But you can do a lot of work.

“We’ve learned over the years with all of the mergers we’ve done that you can do almost all of the planning work pre-closing so that when you actually close, you go into immediate execution.”

There could be several challenges for consumers given that the banks committed as much as possible to a “merger of equals” while determining the best traditional and online products and services and cyber-security platforms.

The most basic of bank mergers can create administrative headaches for consumers in the short term.

Bankrate.com said routing and account numbers can change, which can complicate direct deposits and automatic bill payments. Credit-card holders may need to visit a different website to pay their monthly bills. Back-office systems, such as customer support, will likely change.

Bankrate.com analyst Greg McBride cautioned that such concerns are “quite a ways off and not something consumers should lose any sleep over at this point.”

“Some of that tends to happen at a more glacial pace,” such as branch closings.

“But there’s always a possibility for a hiccup or snafu at each point,” he said.

McBride said the combination of BB&T and SunTrust means one less peer rival in the Triad and the markets in which the two banks overlap.

“With less competition in the local market, consumers could see less attractive rates on checking and savings accounts and even mortgages, despite increased competition from online-only banks,” McBride said.

“Until consumers and businesses get smarter about where they’re keeping their money, most banks are not going to compete on price.”

Branch overlap

Existing BB&T customers will likely feel at home when it comes to the retail services of the combined bank: Legacy BB&T would operate the Community Banking retail division, based in Winston-Salem, and the U by BB&T digital format is considered one of the best in the industry.

“Clearly the most important work stream over the coming months and years will be integrating these two iconic institutions,” said Daryl Bible, BB&T’s chief financial officer who would have the same role with the combined bank.

“While the effort required will be significant, we believe there will be a number of factors that should give you comfort in our ability to do this.”

Tony Plath, a retired finance professor at UNC Charlotte, said that despite improvements in the branch and software-conversion process, “they are always complicated and nerve-wracking in the industry, and it’s even more difficult for larger, merger-of-equals combinations.”

“The general public simply has no idea how complex bank IT systems are today, how many of these systems are at work in a modern financial institution, and how difficult it is to migrate from one platform to another.”

Citing the First Union-Wachovia integration, Plath said ‘there were literally millions of different little items that needed attention to combine legacy systems, and each line had to be verified, tested, and implemented in the conversion process.”

Plath said the general public today “is much less forgiving of IT problems that disrupt normal banking activity than they used to be, and they turn almost immediately to social media to complain.

“So any sort of IT glitch that’s traceable to a merger-conversion problem is going to be immediately attacked by customers, right at the point where the newly-combined banks are most vulnerable to customer run-off.”

Allison Dukes, SunTrust’s chief financial officer, said the branch consolidation of the overlapping 740 branches “creates significant opportunity to reshape and modernize our brick-and-mortar footprint.”

“Despite this branch overlap, we expect a low level of deposit divestitures. As we rationalize our branch network, we will maintain the same level of analytical rigor and discipline we have individually shown, which has driven very strong deposit-retention rates for both of us.”

Bartlett Naylor, financial policy advocate for Public Citizen’s Congress Watch Division, said the BB&T-SunTrust mergers “should be scrutinized by regulators and Congress” given a banking environment in which “four banks already control nearly half of all Americans’ checking accounts.”

“If the business case for this merger is premised on expanding market share to raise fees and rates, that harms consumers,” Naylor said.

“The last thing the nation needs is another bank that is too big to fail.

“Meanwhile, employees can expect pink slips, as the firms announced they expect to save $1.6 billion through what they euphemistically call synergies.”

When the merger was announced, King told analysts, “if you are a client-facing associate, and doing a good job, then your job is assured.” King said he was also speaking on behalf of William Rogers Jr., SunTrust’s chairman and chief executive.

Technology component

CFRA Research analyst Harrison Webster said BB&T and SunTrust “are uniquely positioned relative to other banks” when it comes to integration opportunities.

“Smaller community banks have an advantage in their customer loyalty, local market penetration and relationship banking models, while larger banks already have the scale to invest and implement robust digital platforms to enhance their respective banking experiences,” Webster said.

“The technology component is a key strategic driver of this acquisition. Operationally, both banks would be facing the challenges of transitioning legacy banking systems to digital platforms individually. The merger provides the scale necessary to outlay the capital for a robust digital platform.”

“However, the merger could create administrative challenges for transitioning customers, namely potential for change in accounting and routing numbers and transitions in online bill-pay platforms and customer-support systems,” Webster said.

“But, strictly from the digital banking perspective, it is expected that the user experience will only be improved once administrative hurdles are cleared.”

Bible said that the two banks combined have completed more than 100 bank purchases since 1984, “so we both have deep experience successfully integrating acquisitions.”

“Second, we will have a very deliberate, diligent and highly governed process to ensure all work streams move forward in an organized and structured fashion. Third, we understand each other’s business, footprint and competitors very well.

“Lastly and most importantly, we have a strong cultural alignment ... and we both have very similar and conservative risk cultures.”

Merger experience

The local and best example of how to merge two banks with significant infrastructure and branch overlap is the 2001-03 integration of Wachovia Corp. into First Union Corp.

The integration involved 440 legacy Wachovia and First Union branches.

Although there was significant concern about the smoothness of the transition over a week in May 2003, it came off as mostly a back office non-event similar to the non-existent Y2K crisis.

First Union and Wachovia rolled out their branch and systems conversions over several months, concluding with the Carolinas.

As a result, the banks evoked a baseball theme of no runs (on the bank) by customers, no hits (on its reputation) and no major errors (in its network system).

It was a pivotal decision, showing that First Union learned from its heavily criticized 1997 purchase of CoreStates Financial Corp. of Philadelphia for $20 billion.

Analysts said First Union lost 20 percent of CoreStates’ customers because it decided to make significant short-term cost savings by firing branch managers and cutting face-to-face customer services in favor of automated tellers, phone banks and Internet sites.

Analysts said that First Union’s reputation was stained enough by those merger mistakes that it agreed to take Wachovia’s name to obtain a fresh start for the bank even though it was the buyer in the merger.

Five years later, the shocking collapse of Wachovia at the start of the Great Recession of 2008-11 led to what became the banking industry’s largest integration initiative with acquirer Wells Fargo.

Wells Fargo took nearly two years and 10 separate events to complete the integration, leaving 1.2 million N.C. households and 317 Wachovia branches for last in October 2011.

That branch and software switch-over went smoothly in large part because there was very little overlap between the banks in North Carolina.

In both integrations, there were several mock conversions before officials flipped the switches.

Competitors ready

In the typical bank deal, the acquiring bank loses between 5 percent and 15 percent of its deposits as customers remove their accounts, primarily because they either prefer a locally based financial institution or a smaller bank.

“We are calling our top shareholders, our top clients,” King said.

“We are in motion, making sure everybody understands that this is positive for everybody. This is great for our clients. It is fantastic. There is no other institution that can go to one of our clients and offer something as good as what we are offering.

“We will have other prospects calling us, and we will be seeing other prospects and growing our business,” he said.

The stunning announcement was barely 48 hours old when competitors large and small began making marketing pitches to lure BB&T and SunTrust customers.

For example, Piedmont Federal Savings Bank has run a series of ads with the hashtags #LiveLocal #BankLocal.

Analysts say large banks are most vulnerable to customer losses during the initial announcement of a merger and then the actual branch conversion.

Even a temporary glitch on account availability might be enough to persuade customers to take their business elsewhere.

That’s particularly true as BB&T and SunTrust choose which IT and customer-account systems they will use to retain and attract tech-savvy consumers, particularly millennials.

A smooth digital banking portal is not a given, as both BB&T and Wells Fargo & Co. have learned in recent months as their respective systems went down for days at a time.

“The larger the conversion, the more potential there is for incorrect account numbers, mishandled direct deposits and technology shutdowns,” Plath said.

“Those are the kinds of mistakes that can spoil a bank merger because banks can’t afford to spook customers already leery of change. They are also the kinds of mistakes that competitors are ready to pounce on.”

Plath said that banks large and small from Pennsylvania to Miami are creating strategies to reach out to BB&T and SunTrust customers.

He said First Citizens Bancshares Inc. and F.N.B. Corp. “will happily chase BB&T’s middle market business all over the Carolinas, while community banks will target small family-owned businesses that operates out of owner-occupied commercial real estate.”

“JPMorgan Chase & Co. and Merrill Lynch are gonna go whole-hog after SunTrust’s well-heeled trust customers.

“You only get this kind of opportunity to shake loose part of a customer book this attractive and large in the Southeast once or twice in a decade.

“Nobody’s gonna waste the chance to make a pitch for any customers that are feeling a little disenfranchised and neglected by the new combination today.”

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rcraver@wsjournal.com 336-727-7376 @rcraverWSJ

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