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The Biggest Bank M&A Deal Since the Financial Crisis

Matthew Frankel, CFP, The Motley Fool

In this week's episode of Industry Focus: Financials, we start with Part 2 of host Jason Moser's interview with Ameris Bancorp (NASDAQ: ABCB) CEO Dennis Zember. Then, Jason and Fool.com contributor Matt Frankel, CFP, dive into the merger of BB&T (NYSE: BBT) and SunTrust (NYSE: STI), which will create the sixth largest U.S. bank when it is finalized later this year. Plus, you'll hear listeners' emails and Twitter questions and two stocks that are on our radar right now.

A full transcript follows the video.

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This video was recorded on Feb. 11, 2019.

Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, Feb. 11, and that means we're talking Financials. I'm your host, Jason Moser, and on today's show we're going to dig into the latest big bank merger. We'll answer a couple of listener emails. As always, we'll have One to Watch. 

We begin today with part two of our Between Two Fools interview with Ameris Bancorp CEO Dennis Zember. Our conversation picks up where we left off on last week's show. This week, Dennis talks more about the opportunities with Ameris' big merger with Fidelity, where he sees the company in the next five years, and even offers up a book recommendation for us as well.

You all are in a tough market, obviously, with some very big and very well-endowed competitors. Banking is a challenging space. Smaller banks have their fair share of challenges. But you also have your fair share of opportunities. I wondered if you could speak a little bit more to the opportunities and the challenges that you see as a smaller but clearly growing regional bank in today's economy.

Dennis Zember: Probably the biggest challenge at Ameris Bank, and I'd say it's probably been a challenge since I started Valentine's Day 2005, 14 years -- not that I brought the challenge with me -- the challenge of being a small bank but growing, being a small bank with a bigger vision, is you're always punching ahead of your class. If you're a $1 billion bank that's grown quickly to be a $5 billion bank, a lot of times, you still have $1 billion processes and $1 billion solutions. We'll tell you for 14 years, we have been almost with breakneck speed re-engineering pretty much everything we do, especially on the administrative side of the business to accommodate more assets, more revenues, more growth, more markets. Yesterday, we had credit administration that looked like this, but today, that's not going to be good enough. Really, two years ago, Jason, we were $7 billion. Today, we're staring at $16 billion. So we have to be serious. It's a challenge to constantly re-engineer solutions so that we're competitive and efficient. You can't just grow with the same processes. You have to grow with processes that are more scalable and leverageable so that the growth is incrementally more profitable.

You take that to the customer. When I first got here, our average loan size was $60,000. I was looking at credit committee today, and we've got some $50 million customers in there. The credit administration, the attention, the expertise that it requires... a customer that's borrowing $50 million requires a lender with a lot more expertise than one with $100,000. I'm not trying to be master of the obvious there. We have to constantly be tweaking what we're doing. We have to train our folks extremely hard to be ready for the next customer that they get in front of. 

I will say that, for a bank that's small -- I guess now, small is relative -- but for a bank that's small but growing or wanting to grow that's got a big vision, you've got to have a passion and a zeal to be able to re-engineer things. The opportunity I think that all that creates is -- again, I'm not in other businesses and other banks. I don't want to sound like the parent who's talking about how great their children is with no real perspective here. But I'm convinced that our company, as fast as we've grown and as many times as we changed things, I think we've got more apt people in this company that are not afraid of change, that don't panic when change comes about. I think that helps us stay nimble and light on our feet. It helps us not want to get into too much of a routine. It helps us stay creative, not just for what we're doing in our company, our processes, but honestly stay creative for the customer. 

Moser: Well, there's no question that's important. We say, yes, you're a small but growing bank, you guys are getting ready to get a little bit bigger here. The Fidelity deal which you announced about a month ago, you're going to be acquiring Fidelity Bank and rolling that into your operations. It gives you more exposure to bigger markets -- Atlanta, Orlando, Jacksonville, you mentioned Charleston. Can you speak a little bit more to the deal and why you think investors should be excited about this?

Zember: To say I'm excited about this is an understatement. This opportunity for Ameris Bank, really Ameris Bank and Fidelity, the two of us, this is an opportunity to create the kind of franchise that most community banks don't get to look at. The opportunity to be this material, to be this noticeable, to be this accessible in a market as large as Atlanta, generally requires so much investment that community banks just avoid that. They don't try to build a franchise that would take in an entire market like Atlanta. 

With what we already had in Atlanta and what Fidelity has, when we combine, we're going to be a real alternative to super-regionals in Atlanta. We're going to drive an image that puts us out there as the alternative for businesses and consumers. Again, being from Atlanta, it's been 20 years or more since there was a community bank with that much reach all across the city, in all of the markets and all of the counties, that would be willing to customize a solution for customers in a way that the market notices. When you combine our footprint and our attitude and our willingness to fight for the business that we want, I'm just convinced that we're going to surprise and impress some folks in Atlanta.

I'll repeat what I said earlier. Just being big in Atlanta or really any market like Atlanta, that's not what drives franchise value. That isn't what impresses investors, and I don't think that's what holds investors in the stock. Doing that is important, but doing that while being a bank that's got passion for top-quartile results, return on assets, return on tangible capital, being focused on efficiency, having strong capital, strong credit results, all of that's just as important a part of the formula.

Moser: OK, piggybacking a little bit on that. That's a great answer. I tell you, after going through y'all's call and the release and all this stuff, you convinced me. I think this is a good deal. Really, you did a good job of making the case in being able to just look two years down the road and say, "Listen, this may seem like a big deal right now. It could present its fair share of challenges. But in two years, this thing is going to not only be accretive, but it's going to take you guys to a new level." So it got me thinking. I mentioned, we invest a little bit differently here at The Motley Fool than your typical Wall Street firm. We take a much longer timeline. Think Warren Buffett-style investing. We love to find those businesses that we can invest in for three to five years, or in some cases, even indefinitely. That's one of the things, frankly, that attracted me to Ameris, was the size and the opportunity to be a part of something that had a very long runway of growth.

For you, thinking three to five years and even beyond, let's just use five years. Where do you see Ameris Bancorp five years from now?

Zember: Let me answer that question without saying anything about how big we'll be, $20 billion or $30 billion. I have no idea what's ahead of us there. I will tell you, we will have impressed people on the investor side. The reason I believe that is because of the passion around here, how serious we are about investor returns. We will keep looking at opportunities. We are going to grow organically and we are going to continue doing M&A. We've done 35 or 40 deals, we've lost count. We have a real passion. We are experts at M&A. We've figured out organic growth as well. I know all of those things are going to continue if the market's right.

I think we'll combine all that with our level of creativity for the customer and the investor. We'll continue to do all that in a way that produces a shareholder return. If you ask me where we'd be three to five years from now, I think you and I may be on the call here again, recapping what I said. In three to five years from now, we want to have impressed investors, impressed customers, and maybe repeat what we've done in the last three to five years, which I don't think is happenstance. I don't think that we just were successful with the last three to five years from growth and profitability. I know we were more purposeful about producing those results. We'll just keep doing what we've become accustomed to doing, and I think we'll be happy where we end up in five years.

I will tell you that each member of our executive team has virtually all of their net worth invested in Ameris. 

Moser: Interesting!

Zember: Again, we're not doing it for our personal benefit. But when you're in that situation, and you think like an owner, you tend to make different decisions.

Moser: I think you hit the nail on the head there: think like an owner. That's something we espouse here at The Motley Fool so often. It really does create unique incentives, and it does help guide good decision-making. I'm glad that you didn't shy away from that word, "expert," when it came to M&A. When the Fidelity deal was announced, I'm sure you noticed, Wall Street took a tone of caution immediately. The stock sold off around 10% that day. That's pretty common. Normally, you see the acquirer's stock sells down, the stock of the company being acquired is usually up based on the value of the offer. The market's saying, "Hey, we get that you want to do this, but the burden of proof is on you." I was telling our investors, "You need to have your eyes on this one here because they have a long track record of M&A. They've done a lot of this stuff. They're good at it. I have no reason to believe they're not going to be able to pull this one off as well." We feel like that really opened a window for investors there. Clearly, the market is starting to come around since that initial sell-off.

Zember: I agree.

Moser: I'm excited about it. I know our investors are, too. One more question for you. I want to wrap this up and let you get back to work. Our listeners, our members, me, we're all big-time readers here. We love reading, anything and everything. I'd be remiss if I did not ask you if you had any book recommendations for our listeners, anything you've read recently, anything, any topic, it can be something that you just enjoyed. Anything out there that you think our listeners should check out?

Zember: I recently put down what I was reading. I was at a mortgage conference, actually a Fidelity mortgage conference, just meeting their people, part of our integration efforts. They were handing out a book called Real Leadership by John Addison. John was a co-president at Primerica back in the day. I was just flipping through it, and just a couple of pages in, I noticed that John Addison's mother was from Moultrie, Georgia, so it had me hooked.

Moser: [laughs] Understandable!

Zember: So, I've just been reading the whole thing. I'll tell you, it's just good, practical stuff that leaders should read and remember. I really related to one of these comments and it kept me in the book, when he says a good leadership principle is to try to make your parents proud. 

Moser: I like that!

Zember: Be making leadership decisions or just general decisions that would make your parents proud. That's something that I think of quite a bit.

Moser: That's very relatable, as a parent, as a son. That's very relatable, indeed. Thanks so much! Dennis Zember, I appreciate you taking the time out of your busy schedule to talk with us today, to tell our listeners more about Ameris Bancorp and where you all are headed. This is an exciting story and it's a stock that I'll continue to cover. I look forward to the opportunity to get to speak with you again sometime in the near future.

Zember: Jason, thank you!

Moser: Joining me now in the studio via Skype is Certified Financial Planner Mr. Matt Frankel. Matt, how's it going? 

Matt Frankel: Great! How are you guys?

Moser: Doing very well! You have a good weekend down there in hopefully sunny South Carolina?

Frankel: It was nice and warm over the weekend. It's cold now, but at least we had a couple of nice days. 

Moser: Did you guys have a school delay today?

Frankel: No, it's not that cold.

Moser: [laughs] We had a school delay today. It was chilly. We had some snow last night, some ice. I guess they just, rather be safe than sorry up here in Fairfax County. It's a huge county, so it's a lot of kids to account for. 

Frankel: It's in the 40s here, which we think it's cold. [laughs] 

Moser: [laughs] Having grown up in South Carolina, I can vouch for that. I co-sign. 

Let's get this started this week. We want to talk about the big news that came out last week in the world of banking, there's a big merger that's going to be taking place here. BB&T is going to be acquiring SunTrust. They're going to be buying SunTrust for $28.2 billion. It's going to create the country's sixth largest bank after all is said and done. Matt, you've had a chance to go through the mechanics of this deal, the implications. Tell us a little bit about your thoughts on this announcement.

Frankel: For the most part, I think it's definitely a good move. Now, take this with a grain of salt because I'm always suspicious when companies justify mergers with the term "synergies." As in, "This is going to create over $1 billion in annual cost savings after this merger is completed." And that's exactly what we're hearing here. But, in this case, I think it might actually be true. The main reason, BB&T and SunTrust are both generally southeast-based bank companies. There's a lot of overlap between their branch networks. Let's say if one town has a BB&T and a SunTrust branch right next to each other, they could consolidate that into one and actually save a good bit of money. There is substantial cost-saving that should be realized here.

The other thing, they're moving their headquarters to Charlotte. Right now, one's in Winston-Salem and one's in Atlanta. I can't remember which is which off the top of my head. They're moving to Charlotte, which is a big banking hub. Bank of America is based there. Wells Fargo's East Coast operations are pretty much based there. So there's a huge talent pool of great banking talent there. I love the move to Charlotte. Not only are they going to be the sixth largest bank in America, but this should make them a dominant force in the southeast. I'd say about half of my friends down here bank with either BB&T or SunTrust, so this will combine their forces and give them a really good market share in their core area.

On the other hand, there are some downsides. You mentioned this is going to be the sixth largest bank. Combined, they're going to have about $440 billion in assets. 

That puts them over the key $250 billion mark to become a systemically important financial institution, or SIFI. The bigger you are in banking, the tighter you're regulated. Not as big of a concern right now, given the current administration. But after 2020, if the other party gets some power, they might crack down on banking regulations, and they're not going after the small ones. That's my biggest concern about the deal, is that this could increase regulatory pressure on them. I think it'll be more than offset by the cost-saving that I just mentioned, and just the market share advantage. Definitely a good move. It's nice to see some mergers happening in the banking world again. We've had a ton in other sectors, but not much in banking lately.

Moser: For sure. And speaking of mergers, as the interview with Ameris' CEO there, Dennis Zember, noted, and we talked about on the show here briefly a time ago, is this acquisition with Ameris Bancorp and Fidelity. Let's be clear -- that's a tiny deal. That's bringing together essentially a $1.5 billion market cap bank with a $750 million market cap bank. They're going to have total assets somewhere in the neighborhood of $17 billion. That's apples and oranges. But I want to go back to something that Dennis was talking about in our interview. I feel like this was perfect timing, having his interview lining up with the news on this merger. We get an understanding of the challenges and opportunities for both organizations there. Dennis said in that interview that the deal with Fidelity gives them the opportunity to drive an identity as a real alternative in the super regionals sector in big markets like Atlanta, Orlando, Jacksonville, Charleston, I'm sure North Carolina will come into play there as well. 

We talk about scale, and how this BB&T and SunTrust deal is going to create the sixth largest bank. Dennis made the point there that just being big these days in the banking industry isn't enough. It comes down to not only footprint, but he feels like their advantage at Ameris, that attitude and willingness to fight for the business they want, he feels like they're going to be able to surprise some people because of the culture they have with the company, and perhaps the advantage there in being a bit smaller, and being a bit nimbler, and maybe not necessarily on regulators' radar like these bigger banks are going to be.

Frankel: Yeah, definitely. It's not always great to be big, especially in a heavily regulated industry. Banking being probably the most heavily regulated industry in the world.

Moser: Understandably. 

Frankel: Sure. But, especially the ones at the top, you see how much Wells Fargo is in the news. There have been small banks that have acted just as badly as Wells Fargo, but you don't hear about them because they're not as scrutinized and as in-the-spotlight. This is definitely going to put them in the spotlight. I'm curious as to what the new name is going to be. Any thoughts on that?

Moser: You just jumped in it! We were just talking about that before taping. Chris and Abi were leaving the studio from taping today's MarketFoolery. We started kicking around some ideas. You have to figure, the nature of this deal, they probably just brand everything to BB&T, right? Combining those two names is going to probably be pretty difficult. My observation, SunTrust sounds too much like a soda, right? If you try to combine the two, maybe the best-case scenario, you get something like SunnyB? I don't know. 

All I'm saying is, it's probably easiest to go with one or the other as opposed to making some new-fangled name that no one has any real understanding of from a brand perspective, right?

Frankel: That could actually be one of the potential risks of the deal, that no one knows what this brand is that they're going to create. They've already said they're not going to keep either of the names, they're going to go with something new. "Hey, everybody! Cut back with SunnyB! We've got a great offer there for interest rates, and we'll make you smile with our name. Put you in a good mood." I don't know, man!

Frankel: Which one do you think has better national recognition, BB&T or SunTrust?

Moser: I tend to lean toward BB&T. Being from the Southeast, I feel like I've had exposure to both of them. I'm sure there are people out there that would say they're more familiar with SunTrust as well. That's going to be a big challenge for them, coming up with a new name that resonates with consumers. 

Frankel: Yeah. It's been done before and surprised me in the past. We'll have to see what they come up with. 

Moser: Yep, we shall see! Matt, let's jump in really quick to tweets and emails and whatnot. I'm going to start off here with a tweet from a loyal listener. This is actually in regard to a show we did last week, not a show that you and I did. I taped the Tuesday episode of Industry Focus with Asit Sharma. We talked about the Consumer Goods sector and Beyond Meat, an IPO that's coming down the pike here soon. Warren has just chimed in, he said, "Industry Focus is officially my favorite podcast series. They have the best hosts taking some deep dives into business trends, keeping listeners a step ahead of Wall Street." Warren, thank you so much for those kind words! We really enjoy what we do. Glad it's helpful, always happy to help! You know where we are.

Matt, first question here. This was a question we got from last week's YouTube Live show that we did, Chris and Andy and I sat in and did this show. There was a question that was posed from a viewer. This sounded like it was right up your alley. "What do you think about Realty Income (NYSE: O), ticker O, for a new investor? Is it a good idea?"

Frankel: Well, it's my single largest stock position. 

Moser: So you're saying it's a good idea?

Frankel: So I'm saying it's a good idea. Here's why. If you haven't heard of this stock -- like you said, ticker symbol O, Realty Income -- it's a real estate investment trust that specializes in freestanding retail properties. A lot of investors are hesitant to get involved with anything involving physical retail, but you shouldn't be in this case. Here's two main reasons why. One: Realty Income focuses on businesses that are not threatened by e-commerce or recessions. Think of discount-oriented retailers like warehouse clubs like Costco, Sam's Club, things like that. Also non-discretionary businesses, things that people need like pharmacies, gas stations. And, businesses that have a service component, like a movie theater or a restaurant, things that people have to physically go to that don't have an e-commerce equivalent. That's No. 1.

No. 2 is their lease structure. They're on what are called triple net leases, which is a long-term lease structure. Realty Income's typical tenant signs a 15-year lease or more. Minimal turnover. The triple net lease means that they're responsible for paying property taxes, building insurance, maintenance expenses. It pretty much shifts all of the variable costs of property ownership to the tenant. Rent naturally goes up every year, it's called an escalator. 

It's a perfect business model for consistent, steady income. Realty Income pays a great dividend, right around 4% right now. They've increased it over 90 times since it's been listed in 1994 on the NYSE. They pay monthly dividends. They're coming up on their 500th dividend payment, consecutive. It's just like clockwork. Very low-risk business. Valuation's a little high, but you get what you pay for. I don't see their streak of dividend increases ending anytime soon. It's my dividend stock that I plan on holding until I retire.

Moser: We're very transparent about our holdings and we try to make sure people understand that the companies we talk about that we like, a lot of times, we own those businesses because we feel that they are good investments. We're not trying to push anybody in any direction where they shouldn't feel comfortable. Matt, you have a lot of experience in that real estate industry. Obviously, you're going to be helping with our new real estate service here coming up, too. Take that with a grain of salt there, too. I'm putting that ticker at the top of my watch list. I don't know that I have any exposure to REITs, but now that I know this is your biggest holding, I'm going to have to at least keep it on my radar. 

We have one more email here from Carl. Carl asks, "Can you please talk about the bulge bracket investment banks and why they're so important, what their influence is on the market, and as a small-time investor, what do I need to watch for in?" Matt, I think this is more of a terminology thing than anything else. It's this bulge bracket investment bank terminology that perhaps he wants a little bit more clarification on. Can you shed any light?

Frankel: I wasn't actually familiar with that term until you sent me the article.

Moser: Nor was I.

Frankel: Generally, it just means the big investment banks. Goldman Sachs and Morgan Stanley qualify based on the definition in the article I was reading. Goldman, as you know, is one of my favorite bank stocks. Morgan Stanley is also one of my favorites, but for different reasons. As a rule, I don't invest in banks that are not based in America just because I don't fully understand all the regulations. Like I said, it's a very complex industry. It would take way too much to understand the banking regulations in every single foreign market. And I understand the American banking regulations really well, that's why, for my money, I tend to stick with the American investment banks. Our of those, Goldman is my favorite right now. But, yeah, I learned a new term.

Moser: [laughs] Yeah, me too. Hopefully our listeners did as well. 

Before we get into One to Watch for the coming week, I do want to remind listeners that we have another save-the-date for you. If you remember, last week we talked about a YouTube Live show we were giving a try. We're going to give it a try again this coming week on this Wednesday, February 13th. We're going to be doing another YouTube Live market show where Chris Hill, Ron Gross and I are going to be talking stocks and we're going to be taking your questions. How do you find the show? It's pretty easy, actually. Just go to The Motley Fool's YouTube channel. You can go to youtube.com/themotleyfool. Hit subscribe and we can see you on Wednesday, Feb. 13. Still ironing out the time. It's going to be in the 03:00 to 03:30 PM range. Again, just go to that Motley Fool YouTube channel, click subscribe, and then you'll be able to get in touch with us on Wednesday. Hopefully we'll be able to answer a few more questions for listeners about what's going on in the markets today. Earnings season in full gear here. It's a great time to be doing what we do for a living, Matt. 

All right, jumping into One to Watch for the coming week. What's the stock that you've got on your radar, Matt? What's your one you're watching? 

Frankel: Mine is Tanger Factory Outlets (NYSE: SKT), ticker SKT. Since we already talked about Realty Income and the good kind of retail, I wanted to push that a little bit further. This is another one that I own, not quite to the magnitude that I own Realty Income. Tanger is a great dividend stock, pays about 6.3% right now. It's also a kind of retail that's not terribly vulnerable to e-commerce. The nature of outlet retail is very experiential. I don't know about you, but the reason that my wife and I go to the outlets from time to time is to find stuff that we can't find anywhere else. It's got the experiential component, it's got a discount component, which keeps people physically going to those properties instead of browsing online equivalents.

They release their earnings today. By the time you're hearing this, their year-end will probably be out. Pay attention to their occupancy rate. Pay attention to any concessions they're making to tenants to keep them around. More importantly, pay attention to their future plans of how they're planning to adjust to the new retail environment. They've been gradually adding more dining options and other experiential components to their properties to further insulate them from e-commerce headwinds. Like I said, great dividend payer, 6.3%. Good coverage ratio. That's not in danger anytime soon. If that one dips, I may just add to my position in that.

Moser: Well, there you go. I like outlet shopping. You know what I find really helpful, an example of one brand that's done a good job of incorporating the outlet shopping into their app is Under Armour. A lot of times, I'll just open that app and go straight to the outlets section. You find all of this stuff that they have on sale or closeout or whatever. They're not the only ones doing it, but yeah, outlet shopping, you can always find some good stuff at some good prices. 

I'm going to go with a company a lot of folks recognize here, Ellie Mae (NYSE: ELLI), ticker ELLI. Earnings are out on Thursday. This one is interesting to me. Ellie Mae has had a great year thus far. It's up something like 30%, and this is on the tail of a tough 2018. It got to the point here where the housing market was becoming a little bit tricky, tighter housing inventory, rising interest rates, was all fueling low home affordability, so they were getting dinged on the purchase side and the refinance side. As rates go up, people tend to refinance less. That's all really what Ellie Mae does with their lending platform. So, the language on last quarter's call wasn't all that exciting. They were kind of dull, a little down in the dumps maybe. I'll be interested to see how they feel about things going into this call and the rest of the year, especially because we've heard talk about even potentially rates coming back down a little bit. A lot of people out there projecting that the Fed's not going to do anything else to rates for the rest of the year. Who knows! It's going to be interesting to me to see how their attitude is on the call. Either way, still one I like. Still own shares myself. 

Speaking of One to Watch and shares we own ourselves, Matt, you bought into my One to Watch from last week, didn't you?

Frankel: [laughs] I did. I bought Markel shortly after earnings, when it dipped. Just over $1,000, I got a couple of more shares. I was very excited! I was glad Jason put that on my radar last week.

Moser: [laughs] Well, I think you and I feel the same way about that company. I'm glad you were able to add a few more shares to your portfolio. 

Matt, listen, it's been great talking to you! I appreciate you joining in this week!

Frankel: Always good to be here!

Moser: Folks, as always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show is produced by Dan the man Boyd. We're out there wishing or guy Austin Morgan, hoping he's feeling better there. He had surgery last week on his shoulder. Austin, hoping you're resting and recovering. For Matt Frankel, for Dennis Zember of Ameris Bancorp, I'm Jason Moser. Thanks for listening, and we'll see you next week!

Jason Moser owns shares of Ellie Mae, Markel, Under Armour (A Shares), and Under Armour (C Shares). Matthew Frankel, CFP owns shares of Bank of America, Markel, Realty Income, and Tanger Factory Outlet Centers. The Motley Fool owns shares of and recommends Ellie Mae, Markel, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool recommends Costco Wholesale and Tanger Factory Outlet Centers. The Motley Fool has a disclosure policy.