Northern Bank & Trust Co. may be at $1.7 billion in assets now, but it’s expanding every year. The Woburn, Mass.-based community bank works to grow the bank organically through banking partnerships.

Quick Stat


U.S. banks have crossed the $10 billion threshold since 2010

“We’ve got to start running ourselves like larger institutions,” says executive vice president Don Queenin, who also chairs ICBA’s Large Community Bank Council. “You need long-term strategic planning to ensure that you’re meeting all the needs of both your core customer base and the regulatory world.”

Banks with an eye on reaching $10 billion in assets need to plan for the costs of adhering to increased regulations, risk management, staffing and the greater threat of cybercrime. Tom Killian, the principal in the investment banking group at Sandler O’Neill and Partners, says that based on his research of banks crossing that threshold, the $5 billion mark is the time to prepare. “If you’re over $5 billion in assets and in active conversations with a couple of $2 billion banks, then you could be at [the $10 billion] threshold very quickly,” he says.

Since 2010, 37 U.S. banking institutions have crossed that threshold. According to Killian, 14 of the others breached $10 billion in one acquisition, 11 did so through multiple small acquisitions, and eight decided they couldn’t offset the extra cost of preparedness, so they decided to sell. Only four financial institutions did it through organic growth.

For banks to successfully cross this threshold, the main concern is increased regulation, but the ground is shifting. Starting in 2014, banks at $10 billion in assets became subject to Dodd-Frank Act stress test (DFAST) requirements to ensure smooth operation during economic stress. However, in February, President Donald Trump signed an executive order directing the Treasury Department to make recommendations on reducing financial regulations. Marty Mosby, director of bank and equity strategies at broker-dealer Vining Sparks, says he believes there is a lot
of support for raising the $10 billion threshold.

For now, it pays to plan ahead. “Understand what the larger banks are being required to do,” says Mosby, “so you can tailor your guidelines and methodologies to reflect or emulate what they are required to perform without having to duplicate the extensive back office and systems solutions for added regulatory requirements.”

Key regulations

At the $10 billion milestone, several federal regulations kick in, resulting in challenging levels of regulatory scrutiny. Every year, DFAST requires that a bank conduct stress tests to evaluate the potential impact on its financial operations of three scenarios: baseline, adverse and severe conditions. To comply, banks need increased human and technical resources, historical and centralized data, and analytical expertise. They also need enhanced coordination across many departments, such as IT, finance, treasury, risk, and credit, to comply with DFAST.

With Dodd-Frank came the creation of the Consumer Financial Protection Bureau (CFPB), which conducts on-site consumer examinations to ensure fair practices (see Risks & Rules, starting on page 77) at banks over $10 billion. Regulators may impose fines or penalties if they find an institution has committed “unfair, deceptive, or abusive acts and practices.”

And at $10 billion, the Volcker Rule moves from simplified to the standard level, which bans proprietary trading and participation in most hedge and private equity funds. Banks can also see dramatic drops in debit card interchange, or swipe fees, due to the Durbin Amendment.

It’s worth noting there’s no fast track to DFAST or other regulations: It takes a year or two of effort to prepare.
As part of its DFAST readiness, Northern Bank wanted to ensure its in-house stress-testing model remained strong, so it hired a third party to review its methodologies and assumptions. Queenin says the additional testing “proved the validity” of its model and was a useful tool for a growing bank preparing for increasing regulation. Also, the bank has found examiners to be valuable allies as it improves readiness to manage an increased level of regulation as it continues to grow.

“Examiners can start helping us in a consultant role about how we can better ourselves based on best practices they’ve seen at larger institutions that we can implement at our bank as we grow,” says Queenin.

In the first few years of DFA stress testing, community banks may need to increase their FTE rosters and hire consultants for guidance.

“It does require fairly robust budgeting and financial planning, and most banks as they cross over the $5 billion threshold will have that,” says Killian. “But if they don’t, they may need to bolster their staffing levels.”

Risk management

Since the economic crisis of 2007-2009, the federal government has emphasized the importance of ongoing risk-management practices that support a bank’s assessment of future risk and help prepare it to survive in future downturns. Since 2015, the Federal Reserve Board has also required publicly traded banks with total consolidated assets of $10 billion or more to establish enterprise-wide risk committees.

Mosby points out that some of the largest contributors to the last downturn were the expansion into subprime and securitization of mortgages, and excessive balance sheet leverage by many financial institutions. The key to not repeating that crisis is solid underwriting for any loan, whether it is a mortgage or one of the currently popular SBA loans, even when it appears to come with a government guarantee.

“Just because it works when times are good and the guarantee is being honored, when you get into a stressed period and rely on that guarantee, banks should understand that’s an operational risk,” says Mosby.

As it has grown, Northern Bank has implemented a strong enterprise risk-management program by hiring the right talent pool. Seven years ago, only one person was managing risk oversight. Today, there are six people charged with compliance, information security, corporate governance and overall risk oversight.

Management team who provide data on management reporting, trend analysis and portfolio analysis to the
board of directors senior management to manage credit and concentration risk. Increased staff at a relatively
small community bank may add significant expense, but Queenin says that talent is essential for any bank to prosper and grow.

“It’s a sign that we’re moving forward with this whole risk oversight management model to better the bank,” he says. He adds that the bank president and board of directors are advocates of continuing to enhance areas of the bank, both in talent and technology, to manage risk oversight, even though it is still far from the $10 billion mark.

Growth planning

Community banks approaching or planning for the $10 billion mark should envision a variety of growth scenarios. “Do the analysis, because the more proactive you are and the more alternatives you evaluate, then the better prepared you are when that right fit comes along,” says Killian.

He advises regional and community banks to estimate the hard dollar costs of crossing the $10 billion threshold, especially in these four areas: higher FDIC assessment costs; foregone debit card fee income due to the Durbin Amendment, which restricts how much banks above $10 billion can collect; the cost of complying with DFAST; and the cost of complying with enhanced supervisory standards and internal audits.

“You need long-term strategic planning to ensure that you’re meeting all the needs of … the regulatory world.”
—Don Queenin, Northern Bank & Trust Co.

Next, assess how to offset those costs. Killian says banks should ask if they can do more to organically grow loans and deposits, and if the staff is in place for the next level. In addition, they should assess the potential for a single large acquisition or multiple small acquisitions in their market(s). “The fundamentals of the market that you operate in will strongly influence which strategies make the most sense as you pursue going above $10 billion,” he says.

For banks rising in asset size, Mosby says it’s a balancing act between growth and profitability, where they need to continue to offer attractive products at reasonable prices while managing their risk.

“You don’t want to get where the only way you can create growth is being a low-cost provider,” he says. “You want people to say, ‘Wow, have you seen that mobile app they have?’ or ‘What great service the bank provides!’”

What about culture?

Create a work environment within the context of your market and culture that allows employees to see they can be an integral part of the bank’s growth.

“Take people who are performing well and allow them to work up into opportunities,” Mosby advises. “That’s the easiest way to keep people happy—when they understand things are growing and they’re able to help your bank continue to grow while also expanding their own responsibilities along with the bank’s growth.”

Northern Bank, which has about 180 FTEs, recently hired a training coordinator to groom and develop employees and attract talented people.

“Understand what the larger banks are being required to do so you can tailor your guidelines and methodologies to reflect or emulate [that].”
—Marty Mosby, Vining Sparks

“We’re trying to get talented people in the bank so they can grow within and hopefully develop a passion for the bank,” says Queenin.

Whether banks are preparing for cultural changes or increased compliance, many of the preparedness activities to grow to $10 billion are wise improvements to make at any size.

“It boils down to the cost benefit,” Killian concludes. “If you’re able to put in place some of the systems in a very cost-effective way, then it’s almost always better to pursue best practices to position the bank for growth.”

Case study: Chemical Financial Corporation

Chemical Bank, based in Midland, Mich., was hovering just below the $10 billion line when it sprinted across it to become a $16 billion-plus bank, all in one merger. Fortunately, it had done its homework.

Before the 2016 merger with Talmer Bancorp, Chemical talked with regulators about preparedness, worked with consultants to beef up its risk and regulatory departments, attended seminars, and met with banks that had already crossed the threshold to learn about their experiences.

It focused on DFAST, because David B. Ramaker, CEO and president, was told no matter how daunting those regulations appear, the reality is heightened.

“Each bank went about it differently,” he says. “So trying to pull out the tidbits that were right for our situation and our company was part of the challenge.”

One advantage in partnering with a $6.6 billion-asset bank was that both had high levels of preparedness and talent to effectively navigate their new size together. Also, Chemical had acquired several smaller banks before this merger, so Ramaker knew firsthand the importance of finding a like-minded company.

“We had very similar cultures as it relates to treating customers and credit culture and how to grow the organization from an organic standpoint,” he says.

Ramaker believes banks can “never prepare enough,” so Chemical, now one of the largest community banks in the Midwest, is continuing to develop its game plan for future mergers.