The Community Bank Board Guide to Crossing $10 Billion

Community banks that have weathered the economic extremes of the coronavirus pandemic and a rapidly changing interest rate environment may find themselves with another important looming deadline: the $10 billion asset threshold.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (often called Dodd-Frank) created a regulatory demarcation for banks above and below $10 billion in assets. In 2018, regulatory reform lessened one of the more-stringent expectations for $10 billion banks, but failed to eliminate many of the other regulatory burdens. Experts that have worked with banks to cross the divide since the law went into effect recommend that institutions around $5 billion begin preparing for the costs and expectations of being a larger bank.

“The list of changes when going from $9.9 billion to $10 billion isn’t long. It’s the significance of those changes that can create challenges if not appropriately planned for,” writes Brandon Koeser, financial services senior analyst with RSM US LLP, in an email. “Banks need to take a thorough look at their entire institution, including people, processes and risk oversight.”

The pandemic may have delayed or complicated the work of banks who are preparing to cross the threshold. Anna Kooi, a partner and national financial services industry leader at Wipfli, says she has clients at banks whose growth accelerated over the last two years and are approaching the $10 billion asset line faster than expected.

Bank Director has assembled a guide for boards that reviews some areas that are impacted by the threshold, along with questions directors can use to kick off conversations around preparation.

Lost Income
The Dodd-Frank Act’s Durbin Amendment capped the interchange fees on debit card transactions that banks above $10 billion can charge; interchange fees are not reduced for banks under $10 billion. The capped fees have cost card issuers nearly $106 billion in interchange revenue since 2012, including an estimated $15.2 billion in 2020, according to an Electronic Payments Association analysis in August 2021 using data from the Federal Reserve.

Banks preparing to cross $10 billion should analyze how big the reduction of debit interchange revenue could be, as well as alternatives to make up for that difference, Kooi says. The interchange cap impacts banks differently depending on the depositor base: commercial banks may not miss the income, while institutions with a larger retail base that use their debit cards may experience a significant hit. Banks that have more time to consider alternatives will be better positioned when the interchange cap goes into effect, she says.

Regulatory Expectations
Banks over $10 billion in assets gain a new regulator with a new round of exams: the Consumer Financial Protection Bureau. While other banking regulators tend to focus on prudential safety and soundness, the CFPB aims to promote “transparency and consumer choice and preventing abusive and deceptive financial practices” among markets for financial services and products, according to the agency’s mission statement. This exam shift means banks may want to reach out to consultants or other external partners that have familiarity with the CFPB to prepare for these exams.

“The focus is going to be more intense in certain areas,” says Adam Maier, partner and co-chair of Stinson’s banking and financial services division. “They’re going to bring in a different regulatory approach that is very unique, and at times, can be difficult.”

Expectations from other regulators may also increase, and increased scrutiny could lead to a higher risk that examiners discover something at a bank that needs to be addressed.

“A guaranteed place of focus from regulators will be over the bank’s risk program,” Koeser writes. “Undertaking an assessment of the risk management function, including the risk program, staffing levels and quality of talent will be key. In a new world above $10 billion, the old mantra of ‘If it isn’t broke, don’t fix it,’ won’t fly.”

While banks don’t have to participate in the annual Dodd Frank Act Stress Test, or DFAST, exercise until they are $100 billion, regulators may want to see evidence that the bank has some way to measure its credit and capital risk exposure.

“What I’ve heard [from] banks is the regulators, the OCC in particular, still want to talk about stress testing, even though [the banks] don’t have to do it,” Maier says. “I would follow the lead of your primary regulator; if they want you to still demonstrate something, you still have to demonstrate it.”

And importantly, the Dodd-Frank Act mandates that bank holding companies above $10 billion have a separate board-level risk committee. The committee must have at least one risk management expert who has large-company experience.

Staffing and Systems
Heightened regulatory expectations may require a bank to bring on new talent, whether it’s for the board or the executive team. Some titles Kooi says a bank may want to consider adding include a chief risk officer, chief compliance officer and a chief technology officer — all roles that would figure into a robust enterprise risk management framework. These specialty skill sets may be difficult to recruit locally; Kooi says that many community banks preparing for the threshold retain a recruiter and assemble relocation packages to bring on the right people. Oftentimes, banks seek to poach individuals who have worked at larger institutions and are familiar with the systems, capabilities and expectations the bank will encounter.

Additionally, boards will also want to revisit how a bank monitors its internal operational systems, as well as how those systems communicate with each other. Maier says that banks may need to bulk up their compliance staff, given the addition of the CFPB as a regulator.

M&A Opportunities
A number of banks have chosen to cross $10 billion through a transaction that immediately offsets the lost revenue and higher compliance expenses while adding earnings power and operational efficiency, writes Koeser. M&A should fit within the bank’s strategic and long-term plans, and shouldn’t just be a way to jump over an asset line.

Banks that are thinking about M&A, whether it’s a larger bank acquiring a smaller one or a merger of equals, need to balance a number of priorities: due diligence on appropriate partners and internal preparations for heightened regulatory expectations. They also need to make sure that their prospective target’s internal systems and compliance won’t set them back during integration.

Additionally, these banks may need to do this work earlier than peers that want to cross the threshold organically, without a deal. But the early investments could pay off: An $8 billion institution that is prepared to be an $11 billion bank after a deal may find it easier to secure regulatory approvals or address concerns about operations. The institution would also avoid what Maier calls “a fire drill” of resource allocation and staffing after the acquisition closes.

Questions Boards Should Ask

  • Do we have a strategy that helps us get up to, and sufficiently over, $10 billion? What is our timeline for crossing, based on current growth plans? What would accelerate or slow that timeline?
  • Will the bank need to gain scale to offset regulatory and compliance costs, once it’s over $10 billion?
  • What do we need to do between now and when we cross to be ready?
  • What role could mergers and acquisitions play in crossing $10 billion? Can this bank handle the demands of due diligence for a deal while it prepares to cross $10 billion?
  • Are there any C-level roles the bank should consider adding ahead of crossing? Where will we find that talent?
  • Do we have adequate staffing and training in our compliance areas? Are our current systems, processes, procedures and documentation practices adequate?
  • How often should the board check in with management about preparations to cross?
  • Have we reached out to banks we know that have crossed $10 billion since the Dodd-Frank Act? What can we learn from them?

How The Fed Changed The Game for Private Banks


stock-11-20-18.pngIn late August 2018, the Federal Reserve issued an interim final rule increasing the asset threshold from $1 billion to $3 billion under the Fed’s Small Bank Holding Company Policy Statement. The interim policy now covers almost 95 percent of the financial institutions in the U.S., significantly enhances the flexibility in capital structure, acquisitions, stock repurchases and ownership transfers, among other things, for institutions organized under a holding company structure.

No Consolidated Capital Treatment
The most significant benefit of small bank holding company status is that qualifying banks are not subject to consolidated capital rules. Instead, regulatory capital is evaluated only at the subsidiary bank level. As a result, small bank holding companies have the unique ability to issue debt at the holding company level and contribute the proceeds to its subsidiary bank as Tier 1 common equity without adversely impacting the regulatory capital condition of the holding company or the bank. Due to the expanded coverage of the new rule, banking organizations with up to $3 billion in assets can now take advantage of this benefit to support organic and acquisitive growth, stock repurchases and other corporate transactions.
Acquisition Leverage

Perhaps the most significant application of this benefit is in acquisitions by private institutions, whose equity may be less attractive or undesirable acquisition currency. For these institutions, an acquisition of any scale often requires additional capital, and, without access to public capital markets, utilizing leverage may represent the only viable option to fund the transaction.

Under the Small Bank Holding Company Policy Statement, an acquiring bank holding company may fund up to 75 percent of the purchase price of a target with debt, which equates to a maximum debt to equity ratio of 3-to-1, so long as the acquirer can reduce its debt to equity ratio to less than 0.3-to-1 within 12 years and fully repay the debt within 25 years. The enhanced ability to utilize debt in this context is designed to enable private holding companies to be more competitive with other institutions who have access to the public capital markets or who have a public currency to exchange.

Stock Repurchases
Ownership succession also remains a critical issue for many private holding companies, and the new rule extends the ability to use debt to enhance shareholder liquidity to an expanded group of organizations. In many cases, and especially for larger blocks of stock, a holding company represents the only prospective acquirer for privately-held shares. By using debt to fund stock repurchases, a small bank holding company can create liquidity to a selling shareholder, while providing a benefit to the remaining shareholders through the increase in their percentage ownership.

Moreover, stock repurchases often present themselves at times and in amounts that make equity offerings a less suitable alternative for funding. Finally, as discussed below, stock repurchases can be utilized to enhance shareholder value.

Attractiveness to Investors
While the new rule increases the operating flexibility of banking organizations by providing additional tools for corporate transactions, the use of leverage as part of an organization’s capital structure also results in a number of meaningful benefits to shareholders. First, holding company leverage, whether structured as senior or subordinated debt, generally carries a significantly lower cost of capital, as compared to equity instruments. The issuance of debt is non-dilutive to common shareholders, which means existing shareholders can realize the full benefit associated with corporate growth or stock repurchases funded through leverage without having to spread those benefits over a larger group of equity holders. In addition, unlike dividends, interest payments associated with holding company debt are tax deductible, which lowers the effective cost of the debt. Accordingly, funding growth or attractively priced stock repurchases through leverage can be immediately accretive to shareholders.

Final Thoughts
Funding growth, stock repurchases and other corporate transactions can be a challenge for banking organizations that do not have access to public capital markets or have a public currency. However, the revised Small Bank Holding Company Policy Statement provides management teams and boards of directors with additional tools to fund corporate activities and growth, manage regulatory capital, and enhance shareholder liquidity and value.

What Does the $10 Billion Asset Barrier Mean For Banks?


ThePurposefulBanker.jpgCrossing the $10 billion asset threshold has a big impact on a growing bank, due to enhanced regulations mandated by the Dodd-Frank Act. In March, Bank Director President & CEO Al Dominick sat down with Dallas Wells of PrecisionLender for “The Purposeful Banker” podcast, to explain the implications of crossing the $10 billion mark, and what banks should do to prepare for it.

  • Implications of Being a $10 Billion Asset Bank
  • M&A and Scale
  • Infrastructure and Talent
  • Technology

Transcript excerpt:

Dallas Wells: Welcome to another episode of “The Purposeful Banker,” a podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today’s best bankers. I’m Dallas Wells, and thank you for joining us.

Today, we’re talking about the $10 billion asset threshold and why it has become so critically important for banks. To help us with this conversation, I’m joined by one of the industry’s foremost experts on bank strategy, Al Dominick. Al is the president and CEO at Bank Director and has lots of commentary out there about how banks are handling this exact issue. Al, welcome and thank you so much for taking the time to do this.

Al Dominick: Yeah, my pleasure. Great to be a part of this.

Dallas Wells: Al, for anyone who might not be familiar, tell us a little bit about yourself and what you all do at Bank Director…

For a complete transcript of this “The Purposeful Banker” podcast, please view here.

Time to Develop an M&A Survival Strategy


Thirty years ago there were a record high 18,000+ banks in the United States. We’re now down to around 6,700 with all indications pointing to further consolidation. Meanwhile, new bank charters have dwindled to near non-existence with one new bank opened between the end of 2010 and 2013.

  20 years ago 10 years ago Today
 Total number of institutions 12,644 9,129 6,739
 Total number of banks $1 – $50B in assets 554 553 642
 Total number of banks $50B+ in assets 8 27 37
 Total number of banks less than $500MM in assets 11,688 8,022 5,382

Between the number of industry disrupters trying to win a slice of the traditional banking business and the plethora of investment opportunities in other industries with less regulation, it’s easy to imagine the number of banks falling by a full 50 percent in the next 20 years.

For better or worse, banking has become a scale business. The costs of regulatory compliance, necessary investments in new technology, physical and digital channels, and thinning industry margins mean banks will either need to be of a certain size or have a defensible niche built on knowledge rather than transactions.

For the better part of the past decade, the folks at Cornerstone have touted the $1 billion asset threshold as a marker of scale. Because of our friends in Washington and the dizzying pace with which technology has changed our industry, I think the new threshold to reach in the next five to seven years is more in the $5 billion asset neighborhood. If my prediction bears out, the vast majority of M&A activity and consolidation will take place in the midsize bank space ($1 – $50 billion), either with smaller midsize banks buying community banks or banks at the upper end acquiring $5 and $8 billion banks.

I have always been a proponent of having a solid organic growth strategy, but midsize banks will need to develop AND execute upon a solid M&A strategy to survive. Most banks lamely describe their M&A strategy as “opportunistic,” which is code word for: “waiting for the investment banker to call with a proposed deal.” This simply won’t cut it in the fast-consolidating, commoditized industry we call banking today. Here are some key areas your M&A strategy should address.

  • Define Your Value Proposition. Define in financial AND human terms what makes you an attractive acquirer. The list of possibilities are endless: opportunities for stock value gains, opportunities for employee growth at a larger bank, track record of performance, a willingness to negotiate system choices, or a holding company type business model that allows the acquired bank to maintain its brand and management team.
  • Identify M&A Partners. Define filters to narrow down what targets make the list including qualities like geography, asset size, branch network, balance sheet mix, capital levels and niche businesses. Tools like the Federal Deposit Insurance Corp. website or SNL Financial can easily help you produce your target list. Stack rank your target list starting with the most attractive to the least by assigning weighted values to your filters.
  • Cultivate the Courtship. If you are the acquirer, you need an active outreach program that includes management, directors and shareholders, with the mix changing depending on the target. Your outreach program needs to involve a consistent manner of communicating your value to your targets. Get creative. Courtship could involve providing shared services for a common core platform, inviting select management and directors to your strategic planning session, or offering to outsource from your niche expertise like trust and wealth management platforms.
  • Define the Merger Value. Once you find a receptive bank, you will need to paint a clear picture of the value a merger will bring to shareholders and management of the target bank that goes beyond the pro forma financial model. The target bank will want to know about management team composition, board seats, branch closures, surviving systems and products, efficiency targets, headcount reductions, and branding, to name a few.
  • Conduct Due Diligence and Begin Negotiations. If you’ve made it this far, the M&A strategy and framework you have laid out is obviously working. Now, the formal process begins.

At the end of the day, midsize banks have two choices: rely on a decades-old organic growth strategy combined with opportunistic M&A, or get in the game and execute upon a carefully defined M&A strategy. The risk of being left behind as other midsize banks scale up is not one I would want to take with my bank.