The right size

Last updated on May 13th, 2019 at 02:33 pm

The Federal Deposit Insurance Corp. (FDIC) might change the way it defines small banks under the Community Reinvestment Act later this year. The FDIC is considering changing the definition of "small institution" from banks with less than $250 million in assets to banks with less than $1 billion in assets. Banks considered "small" have less stringent CRA reporting requirements.
The CRA requires banks to document: the amounts of loans they provide to low- and middle-income families and organizations in their communities; the investments made in housing projects in their community; and services provided in their community.
Several executives with small banks in southeastern Wisconsin are glad for the threshold reconsideration, saying there are major differences between how banks with less than $1 billion in assets operate and much larger banks.
"One of the primary reasons is that when the CRA was initiated, the dollar amount has stayed fixed with the inflated amount of money," said John Matter, president and chief executive officer of Wauwatosa-based Equitable Bank, which has about $486 million in assets.
Banks with more than $1 billion in assets tend to operate in different ways, Matter said, serving a much bigger pool of clients than those with fewer assets, which tend to be community banks.
"Most smaller banks are defined as community banks or thrifts," he said. "They are primarily local service institutions, their clients are not spread real far. And it’s more rational to have them judged with their peers than the same way as a $100 billion bank. Our resources that we can put into play are miniscule compared to a really large bank."
The current reporting requirements impose a heavy burden on many smaller community banks, according to Tom Farrell, chair of the Wisconsin Bankers Association and chief executive officer of Peoples State Bank in Prairie du Chien, which has about $255 million in assets.
"It’s a huge burden that all banks have to live with," he said. "It doesn’t sound expensive on an individual basis, but (smaller banks) have to spend a lot of time and money and personnel to comply with these regulations."
About half a full-time position is occupied with documentation pertaining to the CRA, Farrell said.
The FDIC could change the definition in the next six months, Farrell said.
The number of deposits in Wisconsin that would be covered under the CRA would only change by about 3 percent, he said. The rule currently covers about 92 percent of deposits, and if the definition change is made, it would apply to about 89 percent of them.
"The origins of the CRA go back to banks that were accused of taking deposits out of certain communities and not making loans back to them," Farrell said. "By and large, but we can’t say 100 percent, the banks in the communities (in Wisconsin) are fulfilling their missions as community banks. Otherwise they wouldn’t be community banks."
Conrad Kaminski, president of Milwaukee-based Lincoln State Bank, which has about $469 million in assets, said the redefinition of small institutions would give his bank relief from many of the documentation requirements it currently needs to meet.
Lincoln State Bank is part of Community Financial Group, a network of community banks and financial service companies that serve clients in Wisconsin, Iowa and Minnesota.
"We’re treated as a large bank under this now, and it makes it very difficult," he said. "We’ve got to do everything that the big guy has to do, but we don’t have the same resources. I wouldn’t want to try to start a bank now. Funds aren’t a problem, but the regulations and red tape and everything else are. And you have to have audits to make sure of it and verify everything. It’s a little bit of a three ring circus."
However, even if it receives regulatory relief, Lincoln State Bank will probably not change the way it documents its loans and community involvement.
"That’s the funny part," Kaminski said. "Now that we’re into it, I don’t know if we wouldn’t continue to do it. It might make a difference going forward of what we would take on. The future is what concerns me rather than the present and what we’ve got handled."
Even if the CRA rules are changed, Lincoln State Bank will continue its strong service in the community, Kaminski said.
"We’re not going to change significantly," he said. "We will continue doing what we need to do, but at least we will not be under someone else’s strict scrutiny. When you have to constantly do examinations, it does take up a lot of your time. We do more than our fair share of community activity, and none of that will change. We just don’t want to be under the thumb. People are always asking us to prove (our involvement). The proof is in the pudding."
Port Washington State Bank’s activity in its community made the bank’s recent transition to increased documentation easy, said Steven Schowalter, president and CEO. The bank recently reached the $250 million in asset threshold, which means increased CRA documentation rules apply.
"I haven’t seen it to be a problem in our institution," Schowalter said. "I need to credit my staff. Our compliance director (vice president Melanie Spencer) has been very proactive on trying to continually keep track of this, instead of needing to backtrack and find things that speak to compliance."
By doing its job of being a community-focused bank, Port Washington State Bank is at the same time meeting the goals of the CRA program, Schowalter said.
"A lot of it is using state programs that provide the ability to get lower financing, creates jobs and it helps the bank," he said. "And if it gives us profits that we can use for our charitable programs, so much the better. In our institution, we’re not seeing that it’s going to be a huge burden."

July 8, 2005, Small Business Times, Milwaukee, WI

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