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?

A Third Option for Banks Considering M&A

“When you come to a fork in the road, take it.” – Yogi Berra, American baseball legend

Clearly, Yogi Berra didn’t quite see the fork in the road as a binary choice. The industry has seen more than 250 bank acquisitions over the past few years, and experts predict M&A activity could ramp up in 2022 as deals that were put on hold due to the Covid-19 pandemic finally come to fruition. But rather than exploring paths that could lead banks to either be a buyer or seller in a transaction, what if there was another option? A door number three, like in “Let’s Make a Deal.”

Bankers could embrace Yogi’s wisdom; that is, they could take a pass on buying or selling while opting for continued independence as a high-performing bank. Without being naive nor blind to the imminent wave of M&A activity, there are an abundance of strategic options and partnerships banks can employ to maintain independence and fuel growth.

As anyone who has been on either side of the M&A equation knows, absorbing and combining banks is a messy business full of complexity, unforeseen challenges and risk. Institutions that expect to be involved in a transaction would be well advised to consider alternate service delivery models for some of their existing lines of business to reduce M&A friction.

At the same time, digital transformation continues to be a recurring theme for the industry. What is your bank’s digital strategy? Is your bank curating the right digital experience for your customers? Is your bank exploring strategic partnerships that can streamline the back office while leveraging the customer-facing tech?

Mortgage is an ideal candidate for this due to the level of complexity, compliance risk and volatility it inherently poses. Merging two mortgage operations into a cohesive unit or injecting mortgage operations into an institution where it did not previously exist can be massive undertakings that only add to the difficulty of completing a merger or acquisition.

Regardless of what side of the M&A transaction a bank is on, a mortgage offering helps banks find scale to drive technology or other investments, expand their geography, acquire new customers and grow revenue. Offering this foundational financial product cost-effectively through an outsourced fulfillment partner allows banks to progress on those goals by eliminating what could be a significant source of potential friction.

Outsourcing back-office mortgage operations also provides substantial benefits to both potential acquirers and acquirees. From an acquirer’s perspective, a fulfillment service maximizes their mortgage profitability and portability, enabling them to seamlessly extend their operations into the target bank without the hassle of integrating systems or solving for staffing issues. Acquirers can immediately enhance the franchise value of its acquisition by introducing mortgage services and begin generating an entirely new revenue stream without establishing new operational infrastructure.

On the flip side, partnering with a mortgage fulfillment provider can enhance the attractiveness of banks looking to sell. Outsourcing mortgage fulfillment enables banks to reduce the overhead and expenses required to maintain a full-fledged mortgage operation in-house, which can improve the liabilities side of the balance sheet, making them a more financially attractive acquisition target.

Outsourcing mortgage also enables banks to stabilize their staffing needs, avoiding the industry’s traditional “hire-and-fire cycle” of staffing up during high volume periods to keep up with demand and severely reduce staff when volume inevitably slows. Outsourcing the labor-intensive fulfillment portion of the mortgage process allows prospective sellers to redeploy their internal resources and ensure maximum staff retention post-M&A.

Improving scale, efficiency, profitability and stakeholder value are always the objectives for any bank, whether they engage in M&A or choose to stay independent. Regardless of strategy, outsourcing mortgage fulfillment using innovative technology can be a critical strategy for banks looking to grow their product offerings and revenue in the short term while setting themselves up for sustainable high performance.

It’s tempting to aim for the fences with a grand slam when it comes to digital transformation. But maximizing the profitability of a key product segment like mortgage could be a nice, achievable win.

Trends to Watch: Fintech M&A

Can we expect a lot of M&A activity in the fintech space in 2022?
The tailwinds are there for a big year, according to Geddes Johnson, managing director at Goldman Sachs Group. In this video, he explains the signals he’s seeing, along with his projections for special purpose acquisition companies, or SPACs. Johnson also predicts if this will be a strong year for strategic buyers, and whether banks will be active fintech acquirers.

Confronting M&A Headwinds & Tailwinds In 2022

Deal activity picked back up in 2021 — and 2022 promises a similar pace, including enhanced interest in scale-building mergers of equals, according to Bank Director’s 2022 Bank M&A Survey, sponsored by Crowe LLP. Rick Childs, a partner at the firm, explains what factors could drive and hinder deal volume. He also discusses external pressures on the banking space, and how potential buyers and sellers should incorporate environmental, social and governance (ESG) matters.

  • Expectations for Deals in 2022
  • What Buyers Want
  • Balancing the Regulatory Burden
  • Weaving ESG With M&A

The 2022 Bank M&A Survey examines current growth strategies, including expectations for acquirers and what might drive a bank to sell, and provides an outlook on economic and regulatory matters. The survey results are also explored in the 1st quarter 2022 issue of Bank Director magazine.

Surf’s Up on RIA Acquisitions — Are Banks Missing the Wave?

Last year’s record number of registered investment advisor, or RIA, transactions has already been eclipsed part way through 2021.

These acquisitions are at an all-time high, with the most diverse buyer universe to date; however, most banks are sitting on the beach, just watching. Since 2019, the percentage of bank buyers has dwindled by more than half, from 23% to 10% this year. Unlike the bank space, which is dominated by a handful of money center banks, the RIA universe is highly fragmented with no dominant leader for now. I predict at every spectrum of wealth management — mass affluent, high and ultra-high-net-worth — there will be an oligopoly of players could become ascendent. Could your bank wealth management platform be one of them?

The RIA industry is ripe for consolidation with 14,000 U.S. players and approximately 250 transactions per year, or about 2% of the space. Additional factors include the accelerating the pace of M&A, including a flood of sponsor capital, an aging bull market, increased costs of doing business, a lack of succession planning and increasing valuations. Banks have consistently worried about the increasing valuations and the fear of buying at the peak. But those that understand wealth management have remained active because when markets fall, the bank’s core deposit business grows as clients de-risk.

Whether it is a dollar deposited in the bank or in the stock market, sophisticated banks want to be the trusted advisor in the center of that decision. Banks succeeding in wealth management have boards and executives that are fluent in wealth, constantly reviewing their client offering to see how an acquisition might be complimentary. A few examples include Providence, Rhode Island-based Citizens Financial Group, which built an ultra-high-net-worth solution via the Clarfeld Financial Advisors acquisition; Chicago-based First Midwest Bancorp entering a new state via the Northern Oak Wealth Management acquisition in Wisconsin; and Goldman Sachs Group going downstream towards a more mass-affluent client base with the United Capital acquisition. Banks oriented toward the longer term are leaning in and continuing to build their wealth platforms, and will dollar-cost average rather than trying to time the markets.

Banks have experienced varying degrees of success in RIA acquisitions for a number of reasons. Those that are less successful view wealth management as an off-the-shelf product or more fee income to pad margins. Banks that overpromise and under-deliver on distribution or cross-pollination opportunities create poor long-term outcomes. Some banks fail to properly integrate an RIA and assume that changing the name is vital. However, separate brands are okay — and likely preferable — so as long internal organizational alignment exists. Cheaper valuations should not drive acquisition interest and could indicate a-more troubled RIA; banks may find it preferable to pay a premium for quality and growth. Banks should also leverage thoughtful deal structures that align the RIA’s interests with the institution and drive advisor and client retention; this can be a more effective approach than simply relying on restrictive non-competes or other legalese.

Many banks have several advantages over other strategic acquirers. First, they already have customers that trust the bank with their core business and could extend that to their deposits and wealth, compared to their local RIA. Second, banks tend to have stronger brand recognition and overall presence; there is minimal brand recognition even amongst the largest wealth managers and no appreciation of the vast service differential among the thousands of RIAs. Last and most important, banks have money. On the top of every RIA’s wish list is access to funding as long-term, patient capital.

Do’s of RIA M&A

  • Listen intently to RIA needs and pay attention to their pain points.
  • Educate your board well in advance on the M&A landscape; playing catch-up with an opportunity on your doorstep seldom works.
  • Be flexible and open with deal structures and compensation schemes; bank M&A and RIA M&A don’t directly translate.
  • Move thoughtfully yet expeditiously through an M&A process: this will differentiate you outside of price.
  • Look for and engage sound financial and legal advisors.

Don’ts of RIA M&A

  • Overpromise what your bank can deliver to an RIA.
  • Buy a troubled firm.
  • Leave an RIA on an island and not integrate it internally.
  • View wealth management as an isolated product — it’s a relationship.

Wealth management acquisitions are not for every bank. However, if they’re properly prepared and educated, all bank constituents — shareholders, customers and employees — can achieve success. Don’t be afraid to paddle out and try to find the perfect partner to ride the wealth management wave.

Contributions by: Ralph Puthota, Vice President, Raymond James Investment Banking

Trends in Corporate Leadership

In this episode of Looking Ahead, David Ingles and Stephen Amdur, partners at Pillsbury Winthrop Shaw Pittman, focus on the rapidly evolving financial industry. Some of this technological shift, they explain, has been propelled by declining development costs and greater access to capital —and they point out where private equity investors are seeing opportunities. They also explore how large regional and national banks have shifted their M&A strategies to acquiring technology platforms.

Midyear Update: Current Trends in Bank M&A


Bank mergers and acquisitions (M&A) in the first half of 2015 can be summed up with a single word: consistency. Each of the first seven months of the year has seen the announcement of approximately 25 deals per month with the exception of January, when only 20 deals were announced. The results have been a robust M&A market consistent with the one experienced in 2014.

How well 2015 turns out will depend on consistency in the remaining months. As shown below, 2014 deal volume was influenced substantially by the very strong fourth quarter. That quarter was fairly weak, though, until the last two weeks of December, when numerous unexpected deal announcements resulted in the strongest fourth quarter in years.

Based on the current pace for bank acquisitions, 2015 should end just slightly below 2014’s totals. To quantify that, the chart below shows the rate of consolidation based on the number of bank charters in use at the beginning of a period and then shows the number of announced bank deals for that period divided by the charters. The average rate of consolidation over time has been approximately 3.41 percent.

In 2014 and so far in 2015, the consolidation rate has been above 4.5 percent, which is another indication of how strong the bank M&A market is.

Credit Drives M&A Volume
So where is all of the consolidation coming from, and what are the drivers of the strong M&A volume?

Credit has been a significant driver, and last year saw credit improve enough at target banks to spur an increase in deal volume. The other drivers have been the size of the banks sold and an improvement in pricing.

Over the past five and a half years, deals have been dominated by smaller community banks (those with less than $250 million in assets), as shown below.

The median size of sellers has not fluctuated significantly over this time frame. What has changed are the levels of nonperforming assets and the profitability of the sellers. In 2010-2011 these deals were affected by high levels of nonperforming assets, which drove losses at many of the sellers. Nonperforming asset levels currently are down, and profits are up. As a result, the price/tangible book value realized increased from the lower levels of five-plus years ago and is spurring deal flow.

While deal pricing has improved, it’s interesting to look at the stratification of the number of deals in each band of price/tangible book value. Even with improved pricing, no clear pattern of where pricing is being clustered is emerging. Several bands at both the low and high ends of the pricing spectrum indicate that the deals are varied and include banks that still suffer from credit and earnings issues as well as banks in desirable markets with strong credit quality and strong earnings prospects.

All Regions Show Improvement
As shown below, all regions in the U.S. have fared well during the 18 months ending June 30, 2015. Compared to two years ago, the improvement is marked.

The highest deal volume occurred in the Midwest region, which is consistent with the fact that the Midwest has the most bank charters. However, the median size of the seller is the lowest, and this translated into the lowest price/tangible book value ratios of any region. After the initial impact of plummeting oil prices on deal volume and values, the Southwest rebounded to have the most robust pricing. The other two compelling regions are the Southeast and the West. Both regions were hit hard by declines in land values during the credit crisis and now, having weathered that storm, are experiencing strong activity and rising prices. New England continues to be strong, although the deal volume there is the lowest of any region.

Future for Bank M&A Is Consistent
2015 should shape up to be another strong year in bank M&A. The buyers are smaller in asset size than in the pre-crisis years, but they are active and looking to increase their franchise footprint. Many of the buyers are facing challenges to earnings growth, whether from a lack of organic growth in loans and deposits or because of the Federal Reserve’s prolonged low interest rates negatively affecting bank net interest margins. At the same time, many sellers have expressed concerns over the cost of regulatory burdens on their income statement, and some sellers are finding it difficult to replace retiring board members and upper management, leading them to look for a partner for the future. Whatever the impetus, the data clearly shows that bank M&A should remain consistent for some time into the future.