CEO Roger Ferguson is hedging his bet that regulators will go along with his plan to turn TIAA into a financial supermarket.
When the retirement-services giant – which Ferguson has run since 2008 – struck a takeover agreement this week for EverBank Financial Corp., it included an escape clause that means TIAA can nix the deal if it meets stiff resistance from the Federal Reserve or Office of the Comptroller of the Currency.
Ferguson, a former vice chairman of the Fed, could terminate the $2.5 billion deal if regulators make demands that would hinder TIAA’s sprawling insurance, retirement, and other non-banking businesses, according to regulatory filings, as well as people involved in the negotiations, who asked not to be identified because they weren’t authorized to discuss the transaction publicly.
TIAA asked for the clause to address concerns that regulators may be skittish about letting a company that has only dabbled in banking buy a large, federally insured depository, the people said. It also wants to protect against regulators placing impositions on its various non-banking activities as a condition of buying EverBank, they said.
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Large insurers and asset managers have been retreating from banking in recent years as watchdogs increased scrutiny of deposit-gathering institutions.
EverBank agreed to the get-out clause because it’s confident Ferguson has the management experience and credibility to address any regulatory challenges, another person said.
Representatives for EverBank and TIAA declined to comment.
Bank merger agreements don’t typically cite undue regulatory burden as grounds for termination, though they often require clear, no-strings-attached clearance from watchdogs as a condition for closing. The distinction matters, experts say, because in this case it may allow TIAA to end the deal without slogging through a long approval process.
“It could allow the parties to terminate earlier,” said Chip MacDonald, an Atlanta-based partner at law firm Jones Day, who specializes in bank mergers and wasn’t involved in this transaction.
The termination clause in this deal is “just a prudent thing to do,” he said, given the heightened scrutiny of bank mergers since the financial crisis, alongside TIAA’s minimal experience in banking.
TIAA is involved in a broad range of other financial services such as real estate investing, life insurance, and online banking.
“This is going to be a big deal for the regulators to look at,” MacDonald said. “Because it is sort of a cross-industry acquisition, I suspect they’ll look at it even more carefully than normally.”
The transaction is slated to close in the first half of 2017, pending approval by the Fed and the OCC, with a final termination date set for November 2017, according to regulatory filings.
Ferguson said TIAA works with state overseers who supervise its insurance businesses, and has been in regular contact with banking watchdogs.
“We already have a number of the same regulators involved because we have a small bank already,” Ferguson said Monday in a phone interview after the deal was announced.
The specific grounds giving TIAA the right to end the purchase are outlined in a lengthy merger agreement filed this week with the U.S. Securities and Exchange Commission. It states that TIAA can terminate if regulatory approvals include a “materially burdensome regulatory condition.” That’s defined as anything that might force TIAA or its non-banking subsidiaries to “divest, restrict, or be subject to any limit on any lawful business or activity,” among other things.
EverBank must pay a $93.2 million breakup fee if certain conditions aren’t met, while the merger agreement doesn’t call for TIAA to pay a termination fee.
TIAA, with $889 billion of assets under management as of June 30, is one of the country’s largest financial-services firms, managing the retirement savings of millions of teachers, college administrators and other employees of non-profit organizations.
It’s buying EverBank to expand the online bank it started in 2012 – TIAA Direct – and to deepen its reach into home and business lending. The mechanics of the deal involve merging EverBank with TIAA-CREF Trust Co. FSB, a St. Louis-based savings bank with about $4 billion in assets.
EverBank is the largest bank based in Florida based on deposits, according to regulatory data. The Jacksonville-based lender is primarily an online bank, with just 12 branches and $27.4 billion in assets, according to its most recent earnings report.