Not long ago, crossing the $10 billion-asset threshold for a bank was merely a big round-number achievement. Now, however, banks surpassing $10 billion in assets face additional costs, fee restrictions and new layers of regulatory oversight.
The changes, wrought in response to the 2008 financial meltdown, flow from the Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010 and its amendments.
The 2011 Durbin Amendment alone means a sizable revenue loss for $10 billion-plus banks. The amendment caps swipe fees — debit card interchange fees charged to merchants — at 21 cents plus 0.05 percent.
“That will be about a $5.35 million revenue loss to us each year,” said George Gleason, chairman and CEO of Bank of the Ozarks.
Bank of the Ozarks’ pending acquisitions of Community & Southern Bank of Atlanta and C1 Bank of St. Petersburg, Florida, will push the company from $9.3 billion to $15 billion in assets.
“Obviously, there’s some thought given to delaying when that occurs,” Gleason said of the milestone. “We’ve been planning for this for several years.”
Arvest Bank of Fayetteville, with $15.6 billion in assets, is the only Arkansas member among the 108 lenders in the $10 billion-plus club as of Sept. 30.
Centennial Bank of Conway at $8.5 billion and Simmons First National Bank of Pine Bluff at $7.5 million are themselves just an acquisition or two away from joining Arvest and Bank of the Ozarks in the $10 billion-plus realm.
Gleason views $10 billion as a milestone that should be traveled past in a hurry. “The regulatory responsibilities and obligations increase, and there are costs associated with that,” he said.
During the next three years, Gleason expects Bank of the Ozarks will incur $6 million in additional expenses to fulfill the heightened requirements of a $10 billion-asset lender: $3.7 million more this year, $1.7 million more in 2017 and $600,000 more in 2018.
“Those are relatively manageable numbers,” he said. “Our ability to absorb those costs is better than average.”
Most of the money will be spent to hire more people to beef up the bank’s regulatory compliance staff and to further develop and enhance the company’s models for capital and liquidity stress testing.
Bank of the Ozarks has already been doing stress testing in preparation for meeting the requirements of a $10 billion-plus financial institution. The tests are envisioned to measure the fiscal vitality of a bank encountering an economic downturn.
The Federal Reserve Bank and Federal Deposit Insurance Corp. give $10 billion-plus banks annual stress-test scenarios on Nov. 15. Banks are required to plug their numbers into the scenarios and report the outcomes to the regulators.
Newcomers start the official, regulatory-supervised testing the year after surpassing $10 billion in total assets.
“Increased regulatory scrutiny, increased stress testing and oversight by a new regulatory body [the Consumer Financial Protection Bureau] — the overall impact of that may sound more ominous than it really is,” Gleason said. “As a bank gets bigger, inherently it becomes necessary to do more comprehensive business continuity planning and risk management.
“The things that are required for banks over $10 billion are largely nothing more than what you would expect to encounter as a bank grows. It’s just a cost of doing business.”
The increased regulatory burden on banks as a whole has significantly changed the shape of the industry.
Gleason noted that 30 years ago, banks below $10 billion controlled 72.5 percent of assets. Today, the number is more than inverted to 18.6 percent. The ongoing evolution of banking is causing a divide between those who can’t or won’t roll with the changes and those who can and will.
“We’re looking at this very philosophically,” he said. “Regulatory requirements that exist today are actually encouraging consolidation. For those of us that are proven consolidators and acquirers, that is creating a tremendous amount of opportunity.
“The benefits to us exceed any additional costs we think we’ll occur. There’s a positive side to all of this, which we believe is a big positive for us.”
‘A Different Dynamic’
Arvest Bank was already north of $10 billion when that figure took on magnified relevance with the passage of Dodd-Frank. Arvest broke the $10 billion-asset threshold in the fourth quarter of 2008, ending the year at $10.2 billion.
The Arvest compliance staff numbered six or so in March 2013 when Cara James was hired as senior vice president and director of group compliance. The headcount is now 32 plus the support of a dedicated contractor.
“It’s a very different dynamic,” James said. “I’ve been in compliance for 23 years, and I’ve grown up with it. The new regs require a more robust and sophisticated compliance management system.
“The thing that impacts me nearly every day is the creation of the Consumer Financial Protection Bureau. The CFPB is the new sheriff in town.”
The bureau is charged with monitoring how banks deal with customers and is empowered to levy financial penalties for practices or acts deemed unfair, deceptive or abusive.
During 2014, the CFPB launched 50 enforcement actions and levied more than $2.5 billion in penalties and restitution for inappropriate billing, false product claims, hidden fees and the like.
“Consumer protection is so much more front-and-center than it has ever been,” James said. “Consumers have never been better protected and considered more than they have today.”
James works out of Arvest’s Tulsa office and makes an annual circuit of the 16 local advisory boards in Arvest’s four-state footprint to make reports and provide training. Monthly reports to the corporate board of directors are also part of her routine.
“The quantity and quality of assessment of work being done, the bar keeps getting raised,” she said. “I do have sympathy for those smaller banks that have a hard time competing for that talent. The pace of change is difficult.”
James noted that an industry shortage of experienced compliance personnel is causing a spike in salaries as banks compete for talent.
The ideal candidate is a detail-oriented person with a business or banking background capable of reading and interpreting regulations involving business practices. That person should also have an aptitude for communication and leadership and be able to relate technical information so that non-technical people can understand.
Statisticians and mathematicians are also in demand for the stress-test modeling required of $10 billion-asset lenders.
Centennial Bank, Simmons First and their parent companies, Home BancShares Inc. and Simmons First National Corp., are also gearing up for the transition.
Johnny Allison, chairman of Home BancShares, estimates that meeting the new requirements will add $12 million to $14 million in annual expenses.
“That’s taking money out of our shareholders’ pocket,” Allison said. “But it is what it is. A banker friend of mine who has been dealing with the changes told me it’s the biggest waste of time and money he’s seen yet. But we’re getting our arms around it.”
The Durbin Amendment, which caps swipe fees, was envisioned as a break for consumers if merchants pass the savings along. However, Allison and others are skeptical.
“Do you believe that’s going to happen?” he asked rhetorically. “The new regulator, the Consumer Financial Protection Bureau, that makes me nervous. But we all fear the unknown, and we’re plowing new ground.”
Allison believes that one way or another Centennial might breach the $10 billion mark by June 2017.
“By acquisition or organic growth, it’s inevitable we’ll pass $10 billion,” he said. “Would I like to do a trade to take me to $13 billion in advance of crossing over? That makes sense.”
Having as much money-making capacity as possible reduces the financial sting of the crossover costs.
“That’s why you hear a lot of people say, ‘We’re not going to step over it. We’re going to jump over it,’” said George Makris, chairman and CEO of Simmons First.
He said the revenue loss from the Durbin Amendment would cost Simmons between $4 million and $6 million based on today’s numbers.
Simmons is venturing into the world of stress-testing models and enhanced compliance mandates in advance of topping $10 billion.
“We spend a lot more time talking about ‘Are we prepared for the regulatory changes at $10 billion?’ than we do with our regular exams,” Makris said.
“We’ve already begun that process. We think we’re on top of that. If you wait, you’re behind the curve.”
Arkansas Banks Approaching & Beyond $10 Billion
*As of Sept. 30, 2015
| Total Assets | |
| Arvest Bank, Fayetteville | $15.6 billion |
| Bank of the Ozarks, Little Rock | $9.3 billion |
| Centennial Bank, Conway | $8.5 billion |
| Simmons First National Bank, Pine Bluff | $7.5 billion |
| 2010** | 2011** | 2012** | 2013** | 2014** | |
 |
$11,516,509 | $12,527,568 | $13,199,987 | $14,081,085 | $14,944,176 |
 |
$3,273,271 | $3,841,651 | $4,040,207 | $4,791,170 | $6,766,499 |
 |
$3,762,646 | $3,604,117 | $4,242,130 | $6,811,861 | $7,384,532 |
 |
$3,316,432 | $3,320,129 | $3,527,489 | $4,383,100 | $4,643,354 |
**In thousands