Larger community banks that are eyeing acquisitions might want to consult the chief executives of Prosperity Bancshares and Hancock Holding before crossing the $10 billion-asset threshold.
While Prosperity's David Zalman and Hancock's Carl Chaney said they knew that their banks would lose significant interchange income when they hit the $10 billion mark, they were not quite ready for the increased regulatory scrutiny that came with that growth.
Speaking at an industry conference in Boston Wednesday, Zalman said that crossing the $10 billion-asset threshold has increased the Houston company's expenses by an estimated $25 million a year. Chaney, the co-CEO at Gulfport, Miss.-based Hancock, said that his bank has gone through such growing pains since its acquisition of Whitney Bank in 2011 that he sometimes wishes his bank were a credit union.
"I wouldn't have to pay taxes and I would have a fraction of the oversight," he said at the RBC Capital Markets conference, where he sat on a panel with Zalman, Ed Wehmer, the CEO at Wintrust Financial in Rosemont, Ill., and Randy Sims, the CEO of Home Bancshares in Conway, Ark.
The Dodd-Frank Act created delineations between asset sizes, with specific things like the capping of interchange fees kicking in at $10 billion and the designation as a systemically important financial institution going into effect at $50 billion.
With a few years passing since the law was enacted, executives at banks approaching those thresholds have adopted the reasoning that they can more or less quantify the costs of things like the interchange income loss and can therefore make smart acquisitions to offset it.
Prosperity, for example, had estimated it would lose between $8 million and $10 million annually from the interchange cap, which is known as the Durbin amendment. So it embarked on an aggressive acquisition spree, buying banks in Texas and Oklahoma looking to offset it.
Similarly, Bob Jones, chief executive of the $9.6 billion-asset Old National in Evansville, Ind., quantified the Durbin offset in June as he discussed the company's agreement to acquire LSB Financial, one of several deals the company has announced it would buy in the last year.
The recent deals give "you a range of 17 cents to 19 cents of accumulated accretion," Jones said. "Durbin, on a full-year impact, after tax, is 4 cents to 7 cents, so you can see the 17 cents to 19 cents, even on a full-year basis, is more than covered."
While Jones and other bankers anticipated there would be additional scrutiny, some, like Zalman, still seem shell-shocked by the cost of it as regulators required banks to constantly revise their models. Banks with $10 billion of assets or more are also subject to regular exams from the Consumer Financial Protection Bureau.
"It's like someone [taking] a baseball bat and hitting you between the eyes," Zalman said about the additional regulation he encountered as Prosperity grew from $9.5 billion of assets in mid-2011 to $21 billion at June 30. "The burden is so great."
At the same panel last year, Wehmer and Zalman advised fellow panelist John W. Allison, chairman of the $7 billion-asset Home Bancshares, to begin putting the controls in place to be a $10 billion institution because the regulators would essentially deem it one given its proximity to the threshold and its penchant for acquisitions. A year later, Zalman said that he is experiencing something similar now with the $50 billion-threshold even though his bank's assets are significantly less than that.
"Given all the money we've put in, we are in a good position to grow, but we are getting treated like a $50 billion bank," Zalman said. Chaney agreed.
Still, Wehmer said that regulatory burden isn't going away and that banks need to do their best to deal with it.
"When the biggest risk to your business plan is the regulators, you put money at it," Wehmer said. Quoting from the "The Godfather Part II", he added, "It is like when Hyman Roth tells Michael Corleone, 'This is the business we've chosen.'"