Breaking Through $10 Billion

By Kerry O’Leary

Banks approaching the $10 billion asset threshold face a daunting compliance challenge—not just a first examination with a higher level of scrutiny, and not just an entirely new supervisory agency (the Consumer Financial Protection Bureau), but also a necessary transformation of both personnel and operations. However, bankers whose $10 billion mark is now in the rearview mirror agree: when you manage the timing and the approach, crossing the threshold becomes less about growing pains and more about slow and steady gains.

Risk modeling
Bob Jones, president and CEO of Old National Bancorp, Evansville, Ind., began thinking about crossing the threshold right after Dodd-Frank took effect. The bank was on a natural progression toward $10 billion in assets, so its leaders knew they had to work a tactical approach into their strategic plan. Part of that plan included a new risk committee assigned to lay out a roadmap for crossing into $10 billion territory.

The road map—an extensive document the bank aptly titled its “10 Billion Readiness Plan”—was in place three years before the need for it became a reality. For Old National, that meant fee structures, predictive models and recommendations for managing the new compliance requirements and relationships with their regulator were at the ready when the bank hit $10 billion in the second quarter of 2014. (Old National today has $11.9 billion in assets.)

With the risk committee in place, the group covered a much broader agenda, rewriting its charter to more extensively cover regulatory issues and procedures. The committee had board oversight and quickly got the support of the directors. “Starting [the charter approval process] early was key,” Jones says. “And getting it right required deep commitment from our board.”

Within the bank, getting the right people in the right roles as Old National’s compliance function evolved both in weight and specificity became a priority. Specialized employees, which Jones calls the “best in their breeds” in areas like stress testing and other quantitative capacities became fixtures in the bank’s examination review team. This expertise came in the form of new hires and broad employee training.

In terms of procedures, stress testing preparation was the priority and Jones hired permanent staff in this area, too. “We had to ensure we raised the bar within the bank, as stress testing is an incredible tool.”

As for surprises when Old National crossed the threshold, “the surprises were small,” says Jones. “I give kudos to our board, who were able to view regulators as value add and support the systems needed to build on that value.”

The exam advantage
Flagstar Bancorp, Inc., in Troy, Mich., was already a $10 billion bank when Dodd-Frank was passed. “We were the only national thrift lender left standing,” recalls CEO Sandro DiNello, “so we were already born into the regulations.”

When the OCC arrived for Flagstar’s first examination, the exam staff pointed to documentation and processes that Flagstar previously hadn’t even had to consider. “And so it was a double whammy with operating expenses,” says DiNello. The best way to curb those expenses, he recalls, was to responsibly grow a capital base for the bank.

“We had to slow our growth and shrink in order to manage the regulations,” says DiNello. “We simply did not recognize the significance of the regulatory change that needed to happen. We had to build the runway before we flew the plane.”

As a result, Flagstar dipped below the threshold by the end of 2014, landing at near $9.5 billion from its $14 billion peak in 2012. No longer subject to CFPB oversight, the bank exercised what DiNello refers to as “cautious diversification.”

“We purposely put growth on the back burner, and refocused on building our three lines of defense,” he says. He encourages banks to remember to keep their sights set to the long run. “There will be a period of time where you’ll financially take a step back. People and systems are going to be an investment.”

Flagstar went through a “complete overhaul of staffing,” adding an entirely new operational risk team that started doing risk modeling. It also doubled its staff of compliance officers and beefed up the loan review team, which is independent of internal audit. The Dodd-Frank stress tests are “a really big deal, and we needed a few really good people to do that.”

Today, back over the threshold with $13.7 billion in assets, DiNello views the regulatory relationship differently than at the onset of the enhanced supervision: “Before, it was black and white. There weren’t the enforcement actions you have today. Now, it’s a different way of looking at things, but we understand the M.O.” Flagstar staff review enforcement actions by every regulator and scrutinizes them for any nuance that can be applied to similar issues at their bank.

The bottom line? “Ask yourself, ‘How can I do this the right way?’ not ‘How am I going to avoid a problem?’ Try to make it a competitive advantage by doing it the right way.”

Perspective matters
Paul Osborne, partner at Crowe Horwath—which ABA endorses for compliance and risk management services—suggests that banks make a hard shift in how they view the role of compliance on the heels of a new, often-intimidating $10 billion status. Osborne says the first step in navigating the uncharted territory of the $10 billion mark is simply to stay motivated. “The biggest piece of advice is: don’t be complacent,” explains Osborne.

Perspective is equally important, he adds. “It starts with being able to view compliance not as a ‘worthless cost center,’ as some have put it, but as a cost reduction center.”

Asset growth means more customers, more lines of business, and often even new branches or products being introduced—all changes the compliance program needs to encompass in order to pass an exam, Osborne reminds us. “Banks are keeping up with the Joneses, but often don’t think about the regulatory impact.”

Osborne recommends a “master guideline” that fully outlines the bank’s compliance program and can be handed to an examiner to proactively address questions or requests for information. “It should spell out, for the agency, all of your policies, charters, risk assessment, third-party requirements and due diligence.” He likens the documentation to your car’s owner’s manual—a self-service, one-stop handbook that comes with every auto. “It will help get your bank over the threshold with ease,” says Osborne.

And once you get there, perspective takes on an even deeper definition. Every line of business has to be involved with the bank’s compliance function, and all areas have to work together, Osborne stresses. “It’s one of collaboration, not a collaboration of one.”

This new perspective brings many challenges, and the key to getting buy-in across the bank? “It’s the tone at the top,” advises Osborne. He recommends CEOs and bank leaders convey to all areas of the bank the critical importance of compliance—and that they stick to prescribed language. “Compliance is important, and its reputation is important. It’s crucial to know that compliance changes and grows as your bank changes and grows, and that the perception really has to change. Compliance is here to assist—not impede.”

About Kerry O'Leary

Kerry O'Leary
Kerry O'Leary is a senior writer at the ABA Banking Journal.
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