SNL Financial: Banks approaching $10b threshold with caution

Four years of Dodd-Frank Act implementation have made banks within striking distance of $10 billion in assets very choosy about when and how they will cross that threshold.

(January 15, 2015) — Dodd-Frank introduced the Durbin amendment, new stress tests and a new regulator for banks with more than $10 billion in assets. Banks approaching that threshold have spent years preparing in order to avoid any surprises after they cross it, but they are in no hurry to get there, according to conversations with several bankers. That has caused them to focus on growth that maximizes balance sheets while ensuring they are ready for opportune acquisitions that would vault them over the line.

One company nearing the $10 billion mark is Itasca, Ill.-based First Midwest Bancorp Inc. President and CEO Michael Scudder told SNL that the bank, which had $9.10 billion in assets as of Sept. 30, 2014, has a great deal of flexibility in determining when it will cross $10 billion.

The bank is now closer to $9.5 billion in assets, given that the acquisition of Matteson, Ill.-based Great Lakes Financial Resources Inc. closed in December 2014. Still, Scudder said First Midwest has enough liquidity to shift its balance sheet from lower-yielding securities into higher-yielding loans. The bank had a loan-to-deposit ratio of 85.60% at the end of the third quarter in 2014, and Scudder believes it can increase to between 90% and 95% at its current rate.

“Absent what I would call a larger strategic acquisition, I don’t see us crossing the $10 billion threshold in 2015,” he said.

The timing of an acquisition that would push a bank above $10 billion in assets is a delicate matter. Opportunities are unpredictable, and Scudder said banks must be in a position to take advantage of them when they do arise. Banks with more than $10 billion in assets by the year-end assessment deadline are hit with the cap on interchange income in July of the following year. Based on when a deal closes, it could send a bank above $10 billion many quarters before management anticipates, or allow it to rapidly gain scale while delaying the Durbin impact. The Durbin amendment will cost First Midwest between $7 million and $9 million pretax annually, assuming the bank takes no action to mitigate it. But Scudder thinks the bank can still hit $15 billion in assets in the next several years given its current growth rate.

“Obviously, to the extent we can time [an acquisition] so it doesn’t cross over a calendar year in terms of flexibility … we would certainly do that,” he said. “But we would not forgo an opportunity just to make that timing happen — that would be the tail wagging the dog, in my view.”

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