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Merger mania

Banking mergers and acquisitions are picking back up again after the slowest year in recent history, and Virginia is no exception.

Last year marked a modern low in merger and acquisition activity, with only 98 deals completed nationwide. That’s not just the lowest level of activity since the pandemic — it’s the slowest year since 2004. Industry analysts with Morgan Stanley Research predicted the trend would reverse in 2024, forecasting a potential 50% increase in mergers and acquisitions.

The banking industry has steadily trended toward consolidation since the 1994 passage of a federal law that allowed banks to branch across state lines. Increasingly tighter margins, new regulations and the need to adjust to changing technology has pushed banks to become more efficient, with larger banks able to tap into economies of scale not available to smaller operations.

“Virginia’s mirrored a lot of the national trend line on M&A activity,” says Matthew Bruning, executive vice president of government and member relations for the Virginia Bankers Association.

After a pandemic slowdown for banking mergers and acquisitions, activity picked up a little in 2023, “but it was still anemic,” Bruning says. “I’ve seen prognosticators talking about ’24 picking up, and rightfully so. The dynamic hasn’t changed as far as the drivers on that, with compliance costs and the burden on that side of things, [and] the need for economies of scale for banks of all sizes. What’s different over the last decade is the lack of new bank formation.”

The most recent batch of Virginia bank mergers and acquisitions varies by deal, but a common factor has seen banks seeking to grow in new markets, especially in metro areas.

These banks see an opportunity to “look at markets they’re not in, and to build scale and invest in technology to reach customers, while still having commitment to their legacy markets,” Bruning says.

That applies not only to large banks, but smaller ones as well. Since 2012, there have been 48 mergers among community banks in Virginia alone, says Virginia Association of Community Banks President and CEO Steve Yeakel.

Banks of all sizes are affected by the “challenges of scale and the regulatory environment,” Yeakel says. “It’s fair to say this trend will continue in some way or another to the foreseeable future.”

Credit card combo

Virginia already has seen deal activity increase among banks and credit unions over the last year.

The biggest, by far, is McLean-based Capital One Financial’s blockbuster proposed purchase of Discover Financial Services for $35.3 billion. If federal regulators sign off on the all-stock deal, it would be Capital One’s largest ever acquisition and would make it the nation’s biggest credit card lender.

“We believe strongly that this merger will increase competition among banks and credit card issuers and payment networks, and provide significant benefits for consumers, merchants and the communities that we serve,” Capital One founder, Chairman and CEO Richard Fairbank said during the bank’s first quarter earnings call in April. “We believe the facts will show that this transaction is both pro-competitive and pro-consumer, bringing our best-in-class products and services to a broader set of consumers and small businesses and greatly enhancing opportunities and benefits for merchants.”

The proposed deal has received pushback from both Democratic and Republican U.S. senators. President Joe Biden also has taken a wary approach to large mergers, fighting an airline consolidation and issuing an executive order calling on the Federal Reserve, the Federal Deposit Insurance Corp. and other agencies to update their guidelines “to provide more robust scrutiny” of banking mergers.

The Capital One-Discover transaction is expected to close in late 2024 or early 2025. At close, Capital One shareholders will own about 60% of the combined company and Discover shareholders will hold the remaining approximately 40%.

“It’s a really big deal,” says Matt Schulz, chief credit analyst at LendingTree. “Those are two giant companies and two really significant players. The credit card space is already so thoroughly dominated by a relatively small number of financial institutions that I understand people’s concern about further consolidation. But I also think that one of the things that is really interesting about this is the payment network aspect of this.”

The deal grants Capital One access to Discover’s payment processing services. The combined company’s sheer size would give it the potential to significantly influence the industry’s payment systems, a fact that’s attracting the attention of many others in the industry.

“We’re not concerned about direct impacts,” says Yeakel with the Virginia Association of Community Banks, but “we’re watching, thinking closely about what that merger would do in the payment system.”

Schulz explains: “With most credit cards, you have the payment network who provides the infrastructure that lets the transactions happen. Visa and Mastercard are the giant gorilla behemoths of the space. American Express is its own thing, both card issuer and network. There’s already been a [big] push to inject more competition against Visa and Mastercard through legislation, but the possibility of a giant issuer like Capital One having a payment network of their own really presents the possibility of having another payment network that’s an even more serious competitor.”

Despite the enormity of the deal, Schulz speculates it probably won’t affect consumers all that much.

“Personally, I think it may not have that much of an impact, especially if they let the Discover brand of credit card stand, because the space is already dominated by relatively small group of players,” Schulz says. “I don’t know that this is going to change things all that much.”

Industry change

The Capital One-Discover deal stands out as a Virginia mega-deal, but it’s far from the only banking M&A activity in the commonwealth playing out this year.

Richmond-based Atlantic Union Bank completed its $407 million merger with Danville-based American National Bank in May. That deal was first announced in June 2023 and approved by the Federal Reserve’s Board of Governors in February 2024.

The merger, Atlantic Union President and CEO John C. Asbury says, was the culmination of a 40-year relationship between the banks.

“For better or for worse, consolidation is a reality in this industry,” Asbury says. “The need to invest in technology, increased regulatory requirements and changing customer expectations have driven a lot of change in the industry. It means a lot of investment needs to occur. From American National Bank’s standpoint, they really had two choices: to make change happen on their own over time, which is expensive, or to join with a friendly party that they knew quite well.”

The consolidation will mean expanded lending capacity and a more robust wealth management and trust business for the newly merged bank, Asbury says. Atlantic Union also picked up American National’s branches, which expanded its reach in Southern Virginia, Roanoke and North Carolina.

“If you look at the map, it’s a hand-in-glove fit,” Asbury says. “It’s perfect infill.”

The merger cements Atlantic Union’s ascendance as a growing, mid-sized bank. Atlantic Union started as a community bank, but although it still considers itself a community bank compared with the nationals, it’s larger than the Virginia Association of Community Banks’ definition, which caps its membership at $10 billion in assets. The combined Atlantic Union has total assets of $23.7 billion.

Another ongoing Virginia merger, though, remains firmly within the narrower definition of “community bank.”

Bigger footprints

Strasburg-based First National is in the process of acquiring Prince George-based Touchstone Bankshares in an all-stock transaction worth roughly $47 million. First Bank will combine with Touchstone to form what will be the ninth largest community bank in Virginia, with 32 branches and expected total assets of about $2.1 billion.

The deal comes on the heels of First Bank’s 2021 acquisition of the Bank of Fincastle, which expanded its footprint from the Shenandoah Valley and Central Virginia into the Roanoke metro area. The Touchstone deal would take it into Southern Virginia, parts of North Carolina, and the lucrative Richmond region. If approved, the merger would be implemented in early 2025.

Scott Harvard is CEO of Strasburg’s First National, which is acquiring Prince George-based Touchstone Bankshares in an all-stock transaction worth approximately $47 million. Photo by Will Schermerhorn

CEO Scott Harvard arrived at First Bank in 2011. Four years later, it acquired six branches from Bank of America when the national bank withdrew from smaller communities. Places like Staunton, Waynesboro and Woodstock have become First Bank’s bread and butter. With the Touchstone deal, it’s expanding its footprint with seven new branches in the Richmond metro area.

“Even though they’ve got metro Richmond, they’re on the fringes of it and serve smaller communities — which are culturally very similar to the Shenandoah Valley,” Harvard says. “They’re community-oriented, which is what we like. That’s who we are as a community banking company.”

Banks in general operate under increasingly tight margins that particularly squeeze smaller banks, Harvard says. That’s been further exacerbated during the last couple of years when short-term interest rates have exceeded long-term rates, creating an inverted yield curve that makes it challenging for banks to attain viable margins.

That dynamic has further pushed banks to scale up, all but ensuring a continuation of the industry trend toward mergers.

“In 1994, we had 164 banks in Virginia, but every 10 years since, the number of banks headquartered here has dropped by about 25% to 30%,” says Harvard at First National. “In 2014, it was down to 91 banks. In 2024, there are 60 or 61 banks in Virginia. It’s likely you’ll continue to see consolidation at a similar-type pace. You see it across the country as well. I don’t know it’ll cascade or be a huge waterfall, but it will continue to happen over time.”

Another deal occurred in May, when Alexandria-based Burke & Herbert completed its acquisition of West Virginia-based Summit Financial Group. The all-stock deal, valued at $371.5 million, creates a bank with $8.3 billion in assets. As with the Atlantic Union and First Bank deals, this merger expands Burke & Herbert’s reach, essentially tripling its footprint, growing it from its current presence in Richmond, Fredericksburg and Northern Virginia to include Delaware, Kentucky, West Virginia and Maryland’s Eastern Shore.

“This alliance doesn’t just extend our influence; it strategically positions us for future growth,” bank President Charles Maddy III said in a statement. “It also lays the foundation for cultivating richer relationships and underscores our aspiration to become the most sought-after community bank in our markets.”

Credit unions consolidate too

It’s not just Virginia banks that are consolidating; Virginia credit unions are merging as well.

In June, Apple Federal Credit Union and NextMark Credit Union, both based in Fairfax County, announced plans to merge, with the deal slated to close in November. Founded in 1956, Apple has $4.4 billion in assets and 245,000 members, and will integrate the much smaller NextMark into its operations. Post-merger, Apple will have nearly $5 billion in assets and about 260,000 members.

An even bigger credit union deal was announced in January, as Richmond-based Virginia Credit Union announced it would merge with Roanoke-based Member One to create the third largest credit union in Virginia. If the deal is approved, the newly merged credit union will have $6.8 billion in assets, 37 branches and nearly 500,000 members.

Virginia Credit Union is the larger of the two operations, with 22 branches, mostly in the Richmond area, compared with Member One’s 15 branches across Roanoke, Lynchburg and the New River Valley.

According to Deb Wreden of the Virginia Credit Union, the deal has received initial approval from the National Credit Union Administration. Pending a positive vote by Member One’s membership, the merger is planned to take effect on Aug. 1.

Virginia Credit Union spokesman Lewis Wood cited “the costs, challenges and requirements associated with regulatory compliance, cybersecurity, technology, fraud and the realities of today’s economy” as factors in the merger.

Credit union mergers look different from bank mergers due to their ownership by members instead of stockholders. But credit unions also have been consolidating on a steady clip, from 263 mergers in 2014 to 146 in 2023, with the decrease due in part to the shrinking number of credit unions overall. Virginia has effectively mirrored that national trend, with several mergers each year.

“The rate of mergers has been fairly steady,” says J.T. Blau, chief advocacy officer of the Virginia Credit Union League. “Mergers happen for different reasons. One of the reasons is that compliance burden, the regulatory burden that all credit unions face. Compliance costs continue to rise and are difficult for small credit unions. A lot of regulations are one-size-fits-all and can weigh heavily on smaller credit unions.”

Those macro trends continue to pressure banks and credit unions to consolidate. The process can be alarming for customers, but banks are handing it well, says Bruning of the Virginia Bankers Association.

“We’ve seen it every time there’s a merger announcement: There are certainly questions from customers, but banks do a great job explaining what’s going on through the entire process,” Bruning says. “Be patient and check in with your bank if it’s going through that process. It usually ends up being able to offer more products and services in the end.” 

Capital One, Walmart end credit card agreement

McLean-based Capital One Financial is no longer the exclusive issuer of Walmart consumer credit cards.

The two Fortune Global 500 companies announced Friday that they had ended their consumer card agreement. The announcement follows problems first uncovered in late 2022 and early 2023, according to Reuters reporting.

Capital One became the exclusive issuer of Walmart’s private label and co-branded credit card program in the U.S. on Aug. 1, 2019, after the bank and retail giant announced the partnership in 2018. Their agreement followed the end of Arkansas-based Walmart’s nearly 20-year partnership with Synchrony Financial.

In April 2023, Walmart filed a lawsuit in the U.S. District Court for the Southern District of New York to end the partnership. The retailer said the bank failed to deliver customer replacement cards within five days and to promptly update transaction and payment information in customer accounts. A federal judge ruled in March that Walmart could end the credit card partnership with Capital One.

Cardholders, though, can continue to earn and redeem rewards, and until informed otherwise, can continue to use their Capital One Walmart Rewards cards wherever Mastercard is accepted, according to a news release.

Capital One retains ownership and servicing of the credit card portfolio, which, according to a Securities and Exchange Commission filing, totals approximately $8.5 billion in loans. The company expects to convert eligible customers into Capital One-branded cards.

The end of the agreement also terminates the companies’ revenue-sharing and loss-sharing agreements.

Capital One is in the process of buying Discover Financial Services in a $35.3 billion all-stock deal, but the deal has come under federal scrutiny.

As of March 31, Capital One and its subsidiaries had $351 billion in deposits and $481.7 billion in total assets. Capital One ranked No. 106 on Fortune magazine’s 2023 Fortune 1000 list and No. 386 on its 2023 Global 500 list.

Capital One-Discover deal faces federal scrutiny

McLean-based Capital One Financial announced plans in February to buy Discover Financial Services for $35.3 billion in an all-stock deal that would mark Capital One’s largest ever acquisition and make it the nation’s biggest credit card lender.

The transaction is expected to close in late 2024 or early 2025, according to the banks. At close, Capital One shareholders would own about 60% of the combined company, and Discover shareholders would hold approximately 40%.

However, the deal must receive federal regulatory approval to move forward, and the Biden White House has fought consolidation of large corporations, including the proposed $3.8 billion merger of JetBlue Airways and Spirit Airlines, which was called off in March after the airlines lost an antitrust lawsuit. Although it’s the first bank merger of this size proposed during President Joe Biden’s term, he enacted an executive order in 2021 encouraging federal agencies with authority over banks, including the Federal Reserve and the Federal Deposit Insurance Corp., to update their guidelines on banking mergers “to provide more robust scrutiny.”

U.S. Sen. Sherrod Brown, chairman of the Senate Banking Committee, said in a statement following the Capital One-Discover announcement that “a rubber-stamped merger that makes powerful financial companies even bigger and more powerful will do nothing for families.” From both sides of the aisle, U.S. Sen. Elizabeth Warren, D-Massachusetts, and U.S. Sen. Josh Hawley, R-Missouri, urged the Biden administration to block the deal, with Hawley charging it would grant Capital One “unprecedented powers to extort American consumers.”

If the merger goes through, Capital One would use Discover’s credit card payment network to process transactions, instead of relying on Visa and Mastercard platforms. Also, with Discover’s banking business included, Capital One would have more than $450 billion in deposits.

“From Capital One’s founding days, we set out to build a payments and banking company powered by modern technology. Our acquisition of Discover is a singular opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and payments companies,” Capital One Chairman, CEO and founder Richard Fairbank said in a statement.

Illinois-based Discover has a market value of about $27.6 billion. Capital One has a market capitalization of about $52.2 billion and reported $34.25 billion in 2022 revenue.  

Deputy Editor Kate Andrews contributed to this story.

Top Five April 2024

The top five most-read daily news stories on VirginiaBusiness.com from Feb. 14 to March 13 were led by news that Danish toymaker Lego will delay production at its Chesterfield County facility until 2027.

1   |   Lego delays Chesterfield production start to 2027

Lego Group will begin production at its $1 billion manufacturing facility at Meadowville Technology Park at least a year later than originally announced. (Feb. 15)

2   |   Capital One to buy Discover in $35.3 billion deal

McLean-based Capital One Financial plans to acquire Discover Financial Services in an all-stock deal that would make Capital One the nation’s biggest credit card lender. (Feb. 19)

3   |   Dominion to sell 50% interest in Virginia Beach offshore wind farm for $3 billion

Dominion Energy reached an agreement to sell a 50% noncontrolling stake in its Coastal Virginia Offshore Wind project to investment firm Stonepeak. (Feb. 22)

4   |   Liberty University fined $14 million for underreporting campus crime

The U.S. Department of Education levied a record fine against Liberty in a settlement of alleged Clery Act violations by the Lynchburg-based Christian university. (March 5)

5   |   Norfolk looks to renovate Scope, Chrysler Hall instead of building arena

Norfolk is considering renovating the older city-owned venues rather than building anew arena at the former Military Circle Mall site. (Feb. 22)

Dominion Energy is selling a 50% noncontrolling stake in its $9.8 billion Virginia Beach offshore wind farm to Stonepeak. Photo by Mark Rhodes

Capital One to buy Discover in $35.3B deal

UPDATED 8:35 P.M. Feb. 19

McLean-based Capital One Financial is buying Discover Financial Services for $35.3 billion in an all-stock deal that marks Capital One’s largest ever acquisition, the two credit card giants announced Monday evening.

Under the terms of the acquisition agreement, Discover shareholders will receive 1.0192 Capital One shares for each share of Discover, representing a premium of 26.6% based on a Feb. 16 closing price of $110.49 for Discover shares.

The transaction is expected to close in late 2024 or early 2025, according to a news release. At close, Capital One shareholders will own about 60% of the combined company, and Discover shareholders will hold the remaining approximately 40%. Upon closing, three Discover board members will join Capital One’s board.

“From Capital One’s founding days, we set out to build a payments and banking company powered by modern technology. Our acquisition of Discover is a singular opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and payments companies,” said Capital One Chairman, CEO and founder Richard Fairbank in a statement. “Through this combination, we’re creating a company that is exceptionally well-positioned to create significant value for consumers, small businesses, merchants and shareholders as technology continues to transform the payments and banking marketplace.”

“The transaction with Capital One brings together two strong brands with enhanced ability to accelerate growth and maximizes value for our shareholders, enabling them to participate in the tremendous upside of the combined company,” said Discover President and CEO Michael Rhodes in a statement. “This agreement underscores the strength of our business and is a testament to the hard work of Discover employees. We look forward to a bright future as part of the Capital One family and to providing expanded opportunities for our loyal customers.”

Ahead of the official announcement, news of the deal had been reported earlier Monday by Bloomberg and The Wall Street Journal. Illinois-based Discover has a market value of about $27.6 billion. Capital One has a market capitalization of about $52.2 billion. It reported $34.25 billion in 2022 revenue.

In August 2023, Roger Hochschild stepped down as Discover’s CEO and from its board, following the company’s July 2023 disclosure of a regulatory review of misclassified credit card accounts and pause of share buybacks. John Owen, a member of the board of directors, served as interim CEO until Discover appointed Rhodes as its CEO and a board member in December 2023.

In November 2023, Discover announced it was exploring the sale of its Discover Student Loans portfolio and would stop accepting new loan applications on Feb. 1, 2024.

The credit card network and issuer, which was No. 273 on the 2023 Fortune 500, had a revenue of $15.2 billion for fiscal 2022, according to Fortune, putting it below American Express — almost $55.63 billion, according to Fortune — as well as Visa ($29 billion) and Mastercard ($22 billion).

Discover reported a net income of $4.39 billion in 2022 and reported a net income of $388 million for the fourth quarter of 2023, down from the $1.025 billion it reported in the fourth quarter of 2022.

Capital One ranked No. 106 on Fortune magazine’s 2023 Fortune 1000 list and No. 386 on its 2023 Global 500 list.

Surge of credit card defaults ahead?

Americans owe an all-time high of nearly $1 trillion on their credit cards, setting the stage for a possible surge in consumer delinquencies and defaults.

“There are nascent signs of trouble brewing,” investment firm Glenmede Trust Co. warned in an April research note. “An ever–larger share of credit balances have transitioned to early stages of delinquency, consistent with past periods of recession.”

Lenders are feeling the losses, including McLean-based Capital One Financial Corp. The credit card giant reported a 60% drop in profits to $960 million in the first quarter from the same period a year ago, largely due to customers defaulting on their credit cards and car loan debts.

Like other large banks, Capital One is pumping up provisions for credit losses, as it set aside $2.8 billion in the first quarter, up from $677 million in the year-earlier period.

Not only are more customers at least 30 days late on their payments (at Capital One, 3.66% of total U.S. card holders in the first quarter were late, up from 2.32% a year ago), but companies are racking up more for write-offs — debts they never expect to collect (4.04% of total loans in the first quarter, up from 2.12% a year ago at Capital One).    

Capital One CEO Richard Fairbank told analysts in April that he “feels very good about the business,” given that defaults remain low by historic standards. However, he stated, profits could take another hit this year as rising delinquencies segue into actual losses.

Americans are piling on debt in the face of high inflation and rising interest rates.

Total credit card debt surged $61 billion at the end of last year to a record $986 billion and stayed at that level through the first quarter of this year, surpassing the pre-pandemic high of $927 billion, according to the Federal Reserve Bank of New York. Auto loan balances increased by $10 billion in the first quarter. 

Consumers typically pay down debt in January after the holidays, but not this year.

“Rising living costs and stagnating wages caused savings to decline, creating excess demand for credit card debt,” financial analyst Harrison Schwartz writes in a March report on financial news site “Seeking Alpha.”

“Initially, this situation was great for Capital One as demand for its products rose,” Schwartz continues. “However, the rapid decline in consumer sentiment and savings over the past year has caused default rates and expected loan losses to increase.”

In all, 46% of U.S. cardholders carry balances from month to month, up from 39% last year, according to January data, the most recent, from financial information provider Bankrate.com.

The average credit card balance per consumer this year is $5,733, up 14.4% from a year earlier, according to credit reporting agency TransUnion.

“We’re seeing three big trends with respect to credit card debt,” says Ted Rossman, senior industry analyst with Bankrate.com. “More people are carrying more debt and that debt costs more than ever (an average APR of 20.37%), the highest since we started measuring in 1985.”

Also, it’s the first time in the central bank’s 20-year report on household debt that credit balances failed to fall during the first quarter, which “could foreshadow trouble for later in the year,” Rossman says.

Interest rates likely will remain high for the foreseeable future, he adds, saying, “My top tip would be to sign up for a 0% balance transfer credit card (still widely available).”

The economic story facing consumers is straightforward, Schwartz says. “Rising living costs and excessive consumer spending on credit have caused many households to suffer significant declines in stability.”