These banks are nearing $100B of assets. What did they learn from NYCB?

April 11, 2024 7:37 PM

As several regional banks draw near $100 billion of assets, New York Community Bancorp's flirtation with disaster earlier this year can serve as a cautionary tale of passing that major regulatory threshold.

The Long Island bank's assets grew from $63 billion to $124 billion in under a year through two acquisitions. That rapid expansion subjected it to higher capital, liquidity and reporting requirements, which then led to a staggering fourth-quarter loan-loss reserve and sharp dividend reduction. Shareholders were caught off guard, and a tumultuous six weeks followed in which the bank's stock price tumbled some 80% before it was rescued in a $1 billion capital infusion last month.

New York Community was the first to become a so-called Category IV bank since the Federal Reserve rolled out stricter rules in 2019 for banks that pass $100 billion of assets. Six regional banks are closing in on that milestone, but they're taking time to prepare for what comes with it, said Jefferies analyst Casey Haire.

"If you look forward to the next in line, they're in much better shape for a variety of factors, and they have time before they get there," Haire said. "And, given what happened [with New York Community], they're going to take it a lot more seriously."

Haire said banks aren't likely to take steps to avoid hitting $100 billion, but they have a few years to prepare since overall economic growth has slowed.

Banks that hit $100 billion of assets, per pending Fed proposals, would be required to issue more long-term debt, which is costly in the current interest rate environment, Haire said. Smaller banks would also have to build their reserves to meet higher standards, although the regional institutions' loans are often less risky than the larger banks that lean more heavily on consumer debt.

As banks report first-quarter earnings over the next few weeks, Haire thinks that the companies nearing $100 billion of assets will have to answer questions about their preparations, including merger-and-acquisition plans and operational strategies.

Here's what six banks have recently said about approaching $100 billion of assets:

Zions Bancorp. ($87.2 billion of assets)

Zions President and Chief Operating Officer Scott McClean said at a conference in early March that the Salt Lake City company is in a "pretty different position" than New York Community's. Zions began ramping up investments in its stress testing, liquidity management and reporting to comply with regulations following the 2008 financial crisis. McClean added that the bank maintained those enhancements, though it didn't have to comply in recent years, so expenses to prepare for additional regulations would be minimal.

The bigger difference, McClean said, would be the long-term debt requirements. Chief Financial Officer Paul Burdiss said at a November conference that the bank estimates it would have to issue about $3.5 billion in long-term debt, although there's uncertainty around how it would be structured.

While Zions' capital ratio is slightly below the average for Category IV banks and its peers, Chairman and CEO Harris Simmons said the bank has about four years before it will organically pass $100 billion of assets. He added that unrealized losses, which could bring down capital, should "bleed off" and be a "relative nonissue" by the time Zions qualifies for tougher capital requirements.

Burdiss said the bank is at least 90% prepared for the increased regulation when it grows to that point.

"We're not a $100 billion bank yet, but we will be," Burdiss said.

Comerica Bank ($85.8 billion of assets)

Comerica Bank has been preparing to "gracefully" cross over into the Category IV requirements, said CFO Jim Herzog at a March conference. The Dallas company won't adjust its strategy to stall asset growth, nor will it attempt a deal just to increase assets, Herzog added.

"I've gotten more questions on [regulatory preparedness] than I've ever gotten over the last few months, for perhaps obvious reasons, as we approach $100 billion," Herzog said at the conference.

Herzog said Comerica currently meets many of the Category IV standards, or could meet them in the next one or two years, and that growing past $100 billion of assets would be a "nonevent" for the company.

CEO Curt Farmer said at a December conference that the bank is about halfway through its initiatives begun about two years ago to get ready for the higher standards. He added that the company expects to spend about $50 million on technology and infrastructure as part of its preparations. However, he said that the company likely won't cross the regulatory threshold for "at least the foreseeable next couple of years."

First Horizon Corp. ($81.7 billion of assets)

First Horizon expects the long-term debt issuance to be the biggest impact of passing $100 billion of assets. If the proposal is enacted, CFO Hope Dmuchowski expects it to cost around $75 million per year, not including investments in stress-testing infrastructure and hiring employees who do not generate revenue.

Dmuchowski added, though, that the Memphis, Tennessee, bank won't be changing its credit review process, loan verticals or operating markets in relation to growing into a new regulatory category. CEO Bryan Jordan added at a December conference that although he thinks passing the asset mark would be "fairly significant," the bank isn't feeling pressure to rush into any changes.

"I am excited that we've got two or three years of headroom just in terms of organic growth. … So we have plenty of room to run," Jordan said in March. "I think we will have greater clarity as time passes about what is the true and incremental cost of crossing that $100 billion threshold."

Webster Financial ($74.9 billion of assets)

Webster, based in Stamford, Connecticut, is adjusting three-year and five-year plans to ensure it's prepared for additional regulations, although CEO John Ciulla said last winter that the bank still has "a ways to go." He added there's time and "flexibility," so the bank doesn't need to taper its pace of growth to stall hitting $100 billion of assets.

He added the bank, which has been aggressive in its acquisition strategy over the past several years, is using integration initiatives to drive efficiency in preparation for more regulatory requirements.

"We're thinking about what [passing $100 billion] means for our future view on M&A," Ciulla said. "Do you want to crawl over $100 billion? Do you want to avoid it? Do you want to jump well over $100 billion? Those are the discussions we're having. And we're positioning ourselves, quite frankly because of the uncertainty in the market, to be able to take advantage of any one of those strategies if it's the right strategy at the time."

The bank had already begun enhancing its risk frameworks and expects to see increased costs for debt issuance and compliance. However, Ciulla added, "increased scale and earnings power" could help the bank absorb those financial burdens.

Western Alliance Bancorp ($70.9 billion of assets)

Western Alliance is still probably four or five years out from hitting $100 billion of assets, but CEO Kenneth Vecchione said last year that the bank was already trying to invest in its reporting infrastructure.

"Most banks in our size category will start to be treated like a $100 billion bank well before you get there, and you've got to build that framework in advance," Vecchione said on the third-quarter earnings call. "That framework begins to look and feel a little more sophisticated around capital stress testing, around liquidity stress testing, and the framework that kind of evolves around that."

He added the bank has also been working to elevate its common equity tier 1 capital ratio to at least 11%. Vecchione added that the bank isn't currently looking to pursue a merger or acquisition but could be open to a deal as it grows over the next several years.

Western Alliance's weak link might be its reserves, which are below peers and the average for Category IV banks, according to a recent note by Jefferies analysts. However, the Phoenix-based company is said to have offloaded some risk through credit-risk transfers and a focus on low-loss lending categories. The analysts anticipate regulators will still demand more reserves once the company hits $100 billion of assets.

East West Bancorp ($69.6 billion of assets)

East West, which is tracking to pass $100 billion of assets in 2027 or 2028, isn't looking to grow for the sake of growth, said CFO Christopher Del Moral-Niles.

"The reality is [CEO Dominic Ng is] pretty clear that bigger isn't necessarily better," Del Moral-Niles said at a March conference. "Better is better. And [Ng's] goal is to return better returns to shareholders than his universe of bank peers."

Del Moral-Niles also said the merger-and-acquisition opportunities for the bank are less optimal because of its target market, which has historically been focused on Asians and Asian-Americans in the country. He added that although the Pasadena, California-based company isn't operating everywhere it aspires to, combining with an institution that didn't share its focus "would dilute, to a certain extent, some of what makes East West special."