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Friday, 23 October 2015 10:48

Chemical Bank preps for higher compliance costs as it nears $10 billion asset threshold

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Chemical Bank Chairman, President and CEO David Ramaker Chemical Bank Chairman, President and CEO David Ramaker PHOTO: Katy Batdorff

As Chemical Financial Corp. continues to scout for its next acquisition, executives are preparing for a time when the bank surpasses $10 billion in assets and will incur the increased regulatory compliance that comes with it.

The Midland-based Chemical Financial (Nasdaq: CFCH), which has made three acquisitions in the last year and wants to do more and larger deals, expects to reach and exceed $10 billion in assets in 2017 through organic growth.

However, that milestone could come sooner through further M&A.

Chairman, President and CEO David Ramaker told analysts this week that the plan is to “significantly cross that buffer line,” given the increased costs and regulatory focus that come with surpassing $10 billion in assets.

“We need to be in that $12 billion to $13 billion (asset) range when we cross,” he said. “So our focus probably, and I think from a strategic perspective, will be on a larger transaction in order to cross.”

The corporation not only seeks additional deals but plans “to deliberately execute strategic initiatives that we believe will drive our asset base strongly across that threshold,” Ramaker said.

The corporation, as of Sept. 30, had assets of $9.26 billion.

Executives already have been meeting with counterparts at other banks that recently surpassed $10 billion in assets to see how they managed it, and they’ve started the process to retain consultants for the higher stress test requirements in the federal Dodd-Frank Act.

“So from that standpoint, I think we’ve got a good plan in place,” Ramaker said during a conference call to discuss quarterly results. “We’re gathering the data. We are pushing forward, but I would characterize to some extent, especially on the compliance and the operational side, that really this is business as usual as we ramp up for a larger organization, and the challenge obviously is to just continue to manage it appropriately.

New stress test requirements would cost $1.5 million to $2.0 million, said Chief Financial Officer Lori Gwizdala said. A “little bit of that” would occur in 2016 with some consulting fees, “but certainly not a lion’s share of that,” Gwizdala said.

Chemical Financial also would pay a little more than $1 million additionally in its annual FDIC assessment, plus see a $7 million decrease in interchange fee revenue on debit card transactions, the result from a cap on fees for banks with $10 billion or more in assets.

All that equates to up to $10 million hit, or 17 cents per share, Gwizdala said.

As Chemical Financial nears $10 billion in assets, the corporation wants to make larger acquisitions that would put it well above threshold, Ramaker said. The ongoing acquisition strategy to drive growth is based on a belief that “further opportunities remain, not only in Michigan, but also in some of our neighboring Midwestern states,” he said.

Recent acquisitions by Chemical Financial include:

• The $187.4 million cash-and-stock deal for Lake Michigan Financial Corp. that closed May 31. The integration of the banks is targeted for completion in mid-November

• The $27.2 million acquisition of Monarch Community Bancorp Inc. in Marshall last April

• The October 2014 deal for Northwestern Bancorp Inc. in Traverse City for 121 million in cash.

The three deals combined added about $3 billion in assets to Chemical Financial, which now has 187 branches in 47 counties of the Lower Peninsula.

To handle the higher costs that go with surpassing $10 billion in assets, Chemical Financial is also looking internally, Ramaker said.

“I would characterize that we continue to look at ways to improve our business to make ourselves more efficient either through the use of technology or quite frankly just revealing the processes that we have and making them more efficient from that perspective,” he said. “I continue to believe that we will see improvements in our efficiency ratio and continue to see expense management being a strong focus for us as we go forward.”

Chemical Financial this week reported net income for the third quarter of $24.6 million, or 24 cents diluted share.

Read 4581 times Last modified on Monday, 26 October 2015 16:36

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