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$10 billion becoming familiar tale for banks, regulators

Almostsix years into the Dodd-Frank Act, banks crossing the $10 billion assetthreshold are increasingly well prepared, thanks to well laid-out expectationsfrom the OCC.

Thatis not to say that the process has become any cheaper or less rigorous since thepassage of the monumental finance reform law in 2010, but the process hasbecome a more familiar and standard narrative for those in the industry and forthe regulators assisting them with the transition.

BillHaas, deputy comptroller for mid-sized bank supervision, told S&P GlobalMarket Intelligence that the OCC has early conversations with mid-sizedcommunity banks about strategy and growth and considerations to capitalplanning, operational risk and stress testing. For banks closer to the $10 billionasset threshold, regulators also outline the OCC's heightened risk managementexpectations for banks.

"Fromour mindset, crossing the $10 billion threshold isn't and shouldn't be all thatdaunting," he said. "Part of that engagement is to reduce the anxietylevel and provide clarity and transparency over what the expectations would be,but again it's the planning ahead and thinking ahead [for institutions] that isreally critical."

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A big deal

Strategicplanning for $10 billion remains pivotal for growing community banks, giventhat mergers and acquisitions remain a popular method for banks seeking tocross it. There are currently five banks that will exceed $10 billion in assetswith the assistance of a pending deal, according to S&P Global MarketIntelligence.

Twoof the deals are being touted by management as mergers of equals. Management ofTroy, Mich.-based Talmer BancorpInc. did not shop the bank around for a better price or differentpartner before agreeing to merge with Midland, Mich.-based , according toPresident and CEO David Provost, speaking on the Jan. 26 merger conferencecall. The deal willhurdle Chemical, which had $9.19 billion at the end of 2015, across thethreshold to more than $15 billion at the pro-forma company. But it also sparesTalmer, which had $6.60 billion at the end of 2015, the trouble of facing itsown $10 billion dilemma if it had remained independent. The pro forma companyexpects to incurpretax Durbin costs of $5 million in 2017 and $10 million in 2018 associatedwith the legislative reduction of interchange income from debit cards at bankswith more than $10 billion. The pro forma company also expects annual pretaxincremental cost of $2 million in compliance costs related to advancedsupervisory requirements, mainly the FDIC insurance and stress testing.Chemical Financial reported $13.90 million in credit card and bank cardinterchange fees in 2015 while Talmer reported $5.81 million in interchangefees, based on data filed in the Form Y-9C with regulators.

Koreanbanks BBCN BancorpInc. and WilshireBancorp Inc. are also leveraging the MOE structure to cross $10billion. BBCN Chairman, President and CEO Kevin Kim said the will require the banks toenhance their existing infrastructure and create a more comprehensive anddefined risk management framework and process, according to the bank'sDecember 2015 callannouncing the deal. He also said the banks would begin planning theirregulatory road map "immediately." The pro forma company is expectedto have a projected loss in revenue of about $1.5 million, said BBCN CFO DouglasGoddard; he attributed the lower figure to low penetration of debit cardproducts in BBCN's deposit base. BBCNBancorp and Wilshire Bancorp did not disclose total interchange fees in theirForm Y-9Cs for 2015. Banks only have to report the metric if it comprises ahigh enough threshold of noninterest income.

embodiesanother approach, stringing together the acquisitions of and in the latterpart of 2015 to heartily jump over the $10 billion threshold in the firstquarter. The bank finished 2015 with assets of $9.88 billion, delaying theimpact of Durbin until July 2017, said Chairman and CEO George Gleason duringthe fourth-quarter2015 earnings call. The bank expects to lose $5.35 million annuallybecause of Durbin; management also expects annualized additional compliancecosts to increase by about $3.4 million in 2016 and $1.9 million in 2017.Bank of the Ozarks did not disclose total interchange fees in 2015. Banks onlyhave to report the metric if it comprises a high enough threshold ofnoninterest income. Community & Southern Holdings reported $248,000 incredit card and bank card interchange fees in 2015 while C1 Financial reported$1.262 million in interchange fees in 2015, based on data filed in the FormY-9C with regulators.

A long, costly road

Someexecutives at banks approaching $10 billion in assets have publicly said thatthey have been planning for the threshold for years, in an attempt tobake in expenses and show regulators that they are prepared for heightenedregulatory scrutiny. Evansville, Ind.-based Old National Bancorp assembled a "$10 billionreadiness" project in 2012 to highlight internal areas where operationsneeded to be strengthened or improved; it breached the threshold when itrecorded $10.39 billion in assets in the second quarter of 2014. The bank had$11.99 billion in assets at the end of 2015 and has a pending deal with Madison, Wis.-based ,which had $2.25 billion in assets at the end of 2015.

Old National'sChief Risk Officer Candice Rickard said the bank focused on governance,staffing and systems at the beginning of its preparations, including thecreation of a risk appetite statement. Over the quarters, changes included thebank's DFAST submission process, shifting methodologies that the bank used tocalculate its allowance for loan and lease losses, and upgrading itsasset-liability management software. It also hired staff that had a strongstatistics background in the banking space. It also focused on enhancingits BSA-AML, HMDA and fair lending compliance. Old National's bankcard and credit card interchange fee income was $24.2 million for 2014,according to S&P Global Market Intelligence; in 2015, its interchange feessank to $19.7 million.

"It's expensive. You have to beprepared to deal with that," said CFO Chris Wolking.

The regulators

Crossing$10 billion in assets denotes a shift in a bank's relationship with itsregulators, including the notable additions of the Consumer Financial ProtectionBureau as a direct examiner and the Dodd-Frank Stress Tests. The OCC currentlyoffers voluntary submission into the heightened supervision standards toinstitutions near or just over the threshold, in advance of a formal filing; itwas offered to six national banks and thrifts in 2016, with four accepting theopportunity and two deferring until next year, Haas said.

OldNational participated in the unofficial voluntary submission in March 2015,which allowed it to interface with the OCC and ensure it was making appropriateprogress toward its official DFAST submission due in July. Even though the bankwas not fully ready for the process, the OCC gave the bank feedback thatcontained areas that could potentially become "Matters Requiring Attention"in an official filing, Old National's Rickard said.

Sheadded that the bank has had only limited interactions with the CFPB, includinga cursory overview of the bank, but that they will be conducting an on-sitevisit later. That seems in line with standard protocol,according to emailed comments from Samuel Gilford, CFPB spokesperson. He saidgenerally the regional CFPB manager will reach out to an institution severalmonths before the institution would fall under the bureau's supervisoryjurisdiction, with talks focusing on the examination process, risk-basedprioritization and expectations around and importance of "robust"compliance management systems, among other things. He said there is no standardfor when the CFPB will conduct its first exam at institutions that haverecently fallen under its jurisdiction.

"Weprioritize our exams based on our risk assessments, looking across both bankand nonbank markets. To that end, we also review banks to get a baseline lookat their compliance management systems and other major product areas," hewrote, adding that the regulator looks at product line based on potential tocause consumer harm, the size of the product market, the entity's market shareand risks that are inherent in its operations and offerings. "We prioritizerelatively larger players with a more dominant presence given their ability toimpact more consumers than relatively small players."

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Click here to view a template that highlights the financial performance of banks & thrifts.

To view a video training session on CCAR and DFAST, click here.

Charts were compiled using data exported from the Regulated Depositories perspective of the Data Wizard in SNL Office.