What does the $10 billion asset barrier mean for banks? [Podcast]

Podcast Transcript

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 was 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.

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

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

Really simply, I’m the President and CEO of this privately held media and publishing company that for the last 25 years has focused on the strategically business issues that a CEO, C-suite executives, and members of a board really need to know about and be prepared to address. As an information resource to the financial community, we publish Bank Director Magazine, host conferences like Acquire or Be Acquired, do a lot of board-level research, and are working with a number of institutions across the U.S. to provide board education and training programs that can help strengthen their performance.

Great. With that exact level of folks in the bank, that $10 billion number in assets has kind of become the magic number.

Yeah.

Most of our listeners will be familiar with the why on that, but let’s do a quick recap just so we’re all on the same page. Why is there a distinction?

Sure, you know that bright line that exists at the $10 billion mark was triggered by the Dodd-Frank Act. Rather than simply being subject to certain regulations by a primary regulator, now you’ve got the CFPB involved once you hit that asset threshold. That examination in and of itself makes that $10 billion number meaningful for many.

What are the other specifics that came out of that threshold that Dodd-Frank … Some of the other pieces of that?

Numbers get thrown around in banking a lot. For a number of years, I kept hearing that $1 billion was the magic number that institutions and boards are really focused on. But now when you think about $10 billion, it’s hard not to then jump ahead to $50 billion, because you have like the Durbin Act come into play. But again, when you think about the $10 billion mark, you really are assuming new regulatory scrutiny that has specific and real costs to running a bank. Most banks feeling pressure to grow, you find that there’s some that are a bit apprehensive about crossing that threshold and others who are saying “If we’re going to do it, we’re going to do it in a big way.”

A lot of the discussion we hear about that is trying to put a real dollar figure on, what is the cost once we cross that magic number. Usually it comes back to the Durbin Amendment and the interchange income impact. Of course, that’ll be different depending on the make up of your bank and your customer base and all those kind of things.

But what are the wild guess, some of the numbers you’ve seen out there from some of the banks? What kind of ballpark are we talking about?

That’s a great question. I think by capping these interchange fees, especially for banks that are issuing debit cards on merchant transactions, you’re seeing overall … Actually this is probably more for the Durbin Amendment than it is for the $10 billion one. It’s costing the industry probably around $8 billion a year, but if you bring it down to the $10 billion threshold, it’s significant and can be costly for banks. I think there’s some where it could be anywhere from $8 to $12 million a year.

It’s a real dollar thing. It’s not just, “Boy, things are going to get more complicated.” There’s a real cost to it. You mentioned something kind of interesting there, which is banks strategically have to think about, do we tiptoe across this line? Or do we leapfrog across it, so we at least have some scale and some tailwinds behind us to help us absorb those expenses.

How are you seeing banks work their way through that? What are some of the things they’re thinking about and some of the options they have to make that happen?

Interesting you identify that. We have this big M&A conference at the beginning of the year. We’ve had an opportunity to be with acquirers and banks that are on both sides of the equation. I think that if you’re going to get over the line, you really want to jump the hurdle in a major way. You don’t want to just tiptoe across it.

I think when you consider the need to grow … We had a bank M&A survey that we did in advance of this conference where we basically polled bank executives and boards to say, “If you’re looking to scale your business, how aggressive to you want to be once you get close to that $10 billion mark?” I think roughly 80% said it’s not just getting to $10 billion, it’s really getting well above it so you can put your costs against a broader cost basis. You’re thinking about what are you trying to do when you vault over it? You don’t want to be that $10.1 billion bank. You really want to go $13, $14, $15 billion space so you have a little extra scale to spread the impact costs, which would be CFPB in particular, over.

We’re probably going to see more mergers and acquisitions down the road, kind of like the Chemical and Talmer, one that we just saw a few months ago. Two decent sized, kind of regional community banks, pairing up so that they jump way across that line and can combine their strength to make that work.

I think you saw that with CIT maybe 18 months ago when the deal was announced. Their then-CEO John Thain, one of the comments that really stuck out to me was, “We’re looking to grow this institution in a way where we can really spread the compliance cost over a much wider base.” I thought that was one of the first examples in the last few years of somebody saying, “I’m doing a deal in part because of the cost that it’s going to put on me to stay at a smaller size.”

As you see those banks starting to think about how they cross, it’s not just by the asset size. There’s some infrastructure type things that they have to put in place, so what do you hear about that C-level and director level? What kinds of things do banks have to be ready for to get ready for stress testing and CFPB? What kind of stuff does that take?

Yeah, great bank.

He was really preparing for years to make improvements to their processes, their systems, and their staff, so if the bank grew, they would be prepared for this. I don’t really think this is a different narrative from any other successful bank. At the same time, it’s an approach that’s strategic and something that Bank of the Ozarks has been able to do. While I know they’re probably a shade below the $10 billion mark, they’re certainly in a spot where if they wanted to grow, they have the people, processes, and platform in place to do so.

The interesting thing is, the systems are one thing, but the people that have some experience doing this, it’s a narrow expertise. Where can banks go to find that kind of expertise? Is that something that you hire for or is that something that they’re looking at outside third parties, consulting groups, that kind of stuff? Where do you go to even get prepped for stress testing and CFPB kind of stuff?

There’s so many different elements that you can consider. If it’s infrastructure, you would naturally think technology, think staff. You’d have to look at your risk management expectations.

When it comes to risk, obviously that’s been the major issue for most banks that are public and certainly the ones over $5 billion in asset size. Seems to be high on their radar, so having a dedicated Chief Risk Officer maybe looking at your infrastructure to determine how robust it is, how mature it could be. So that as you prep for the next level, you know you have the ability to go forward.

If you’re thinking about where you can go for resources, retaining a recruiter sometimes is a really valuable expense to assume. To have somebody who’s able to really look in at the team you have, understand the strategic direction you’re going and start to identify where there might be gaps in your talent pool. That’s something that I think banks are doing right now, but they should probably be doing it in greater ways going forward.

We talked about that on some prior podcasts. Where do banks go to find talent and just putting an ad in the local paper doesn’t really cut it anymore for the level of sophistication that banks are expected to have now. You’re talking about talent from outside the area and specialization and it’s a big thing for banks to process, “We don’t have that kind of local talent around here, so what do we do about that?” I think you’re right. At some point, you just have to realize it’s just part of the expense. You’re going to have to go find a recruiter and you’re going to have to help people relocate. You have to have the kind of culture and business that people want to come work at and make those kinds of career moves for, to be able to keep growing and thriving like this.

Absolutely. The other thing is, it’s really essential that you as a bank leader have a relationship with your regulator so that you understand what they’re going to be looking for. Because the regulators aren’t going to allow you to go over this threshold unless you have a strong structure already in place. They expect a strong and robust enterprise risk management system for large banks. There’s got to be really strong consumer compliance controls in place so that from the CFPB examinations perspective, you’re prepared.

You look at some of the better acquirers in the U.S. They have strong compliance track records. They know how to integrate two cultures. They do that really well. Then you’ve got to have a management team and a board that is realistically capable of managing, really overseeing or governing, for lack of a better term, a larger bank.

A lot of the stuff you mentioned there you see why that number becomes so important. There’s a lot of expense that starts to accumulate there. One of the other thought processes that we’ve been hearing is, “Okay, we’ve started tallying up the expenses. What, besides scale, can we do on the other side to try to generate some revenue?” I think that’s where we’re seeing more and more of those banks at that size look for ways they can diversify, and where can we get more fee income. How can we get that loan-to-deposit ratio up to really start earning at the level that we’re going to have to, to be able to absorb this stuff?

It’s interesting. I think that’s where the whole FinTech conversation starts to enter the equation. You look at, how do you find fee earning enterprises that are available? They might be on the margins right now when it comes to doing a M&A transaction, but you can look at the technology space as, in a sense, complementary to what’s going on with these banks. If you’re able to leverage some of the newer credit decision models that help you win some new customer business.

You start to think about how the larger banks position themselves with their accelerators and incubators to stand up this next generation of bank experience. Once you’re crossing that $10 billion mark, you’re essentially having to compete with what the super regionals and the biggest of the bigs are doing to win business. I think looking at the FinTech category really becomes a lot more valuable if you’re the CEO of a bank who’s saying, “We’re $7, $8 billion now. We have aspirations to get up to $14, $15, $16. We know there’s an organic path that we’re going to pursue. We know there’s acquisitions that are available to us.” But I wouldn’t sleep on what’s happening on the FinTech side of things.

Viewing FinTech not as this big, scary outside threat, but the way I think FinTech views itself, which is more of a partnership. How can we help banks get better at these things that we’re good at and we can focus on and then partner up with that infrastructure and plumbing of the system that the banks already have in place? Marry those two together.

I think the challenge to this point has been more cultural than people recognize. If you’re in a technology environment, you’re willing to take some calculated risks and you most likely feel like a 7 out of 10 hit rate is tremendously. Realistically, you get 2 out of 10 and you’re still feeling really good because those two projects that are going to scale really put you in a position to compete. You take that over to an institution, because the industry is so heavily regulated, margins are so tight.

Yeah, they don’t like that batting average, do they?

No, in fact I’ve talked to a few banks that have been acquired and I’ve asked their CEOs, for their perspective on the technology side. They have an interest, but they don’t necessarily know who’s a legitimate player. There’s a risk of bringing somebody in who’s not going to perform to the bank’s business expectations. The cost for taking that type of risk really requires a strong visionary type executive.

Most CEOs are great at setting strategy and inspiring a team, but to to step that far out of your comfort level to say, “We’re running a super efficient business, but now we’re going to potentially put ourselves in … We may not be able to go forward because we took this calculated risk and we missed on it.” It has been daunting for a lot of institutions, at least to this point.

Eastern Bank, out of Boston, kind of had that approach of … They had Eastern Labs, where let’s take some small, little bets here and see what works and let these guys that have done it before take some shots at this stuff in a manageable way.

I think if you look at Eastern, the way they set up their Eastern Lab, where you walk in their main headquarters in Boston, in their lobby is the lab. They’re very obvious in positioning what they’re doing for anyone who walks in.

You can look at some other banks. You’ve got Live Oak in Wilmington, who spun off nCino. Live Oak is a story of tremendous … Here’s a bank that has really focused on the SBA market and done a heck of a job. I think they’re second behind Wells Fargo right now. You look at what nCino’s doing as a technology company. Certainly they’re taking a cloud-based approach to making the entire loan application process easier to understand and position with your clients.

I think you’ve got pockets of inspiration that are out there. You can look out at the west coast at what Silicon Valley Bank has done. Really repositioned itself, I mean, talk about a bank that’s really jumped over that $10 billion mark in a meaningful and impressive way. They’ve certainly done that.

I think if you’re comfortable considering the possibilities that are available to you, and you can be more narrow in your focus and go really deep into an industry or deep into a business line, it seems like that’s where certain banks are finding to put their stake in the ground.

Al, we’ve gathered a few links that we think will be useful for folks. We’ll put those in the show notes. Any resources that you’d like to point people to? Places they can go think through even that $10 billion threshold or some of the FinTech options out there? Where can people go for help?

Bankdirector.com is the easiest place to find this information, at least from our standpoint. It’s a free resource. It has all the information that you would need if you’re on the board of a bank, if you’re the CEO of a bank, if you’re on the executive team. We recently produced or published our annual strategy issue, which is a digital version of Bank Director Magazine. Again, that’s a free download, easy to access. Next Monday, the 21st of March, we’ll have our annual bank risk survey coming out. I think that will touch on some of the compliance and regulatory expectations that need to be considered when you’re thinking about growing your business.

Okay, great. Al, I think that will wrap it up. Thank you so much for joining us today and doing this. Really appreciate the time.

Yeah, my pleasure.

Again, you can find Al on LinkedIn and Twitter and also at bankdirector.com. Some of the resources he mentioned there. We’ll put links to all that stuff in the show notes for this episodes as well as a few other goodies that we found out there. You can always find those things at precisionlender.com/podcast. If you like what you’ve been hearing, make sure to subscribe to the feed in iTunes, SoundCloud or Stitcher. We’d love to get feedback or rating on any of those platforms. Thanks for tuning in. Until next time, this has been Dallas Wells. You’ve been listening to The Purposeful Banker.