Temporary relief from $10B asset threshold creates regulatory gray area

Some community banks that jumped over $10 billion in total assets during 2020 appear to be in Consumer Financial Protection Bureau purgatory.

In November 2020, the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency offered some temporary relief from crossing the $10 billion threshold, but the rule did not include exemption from CFPB supervision. Crossing the $10 billion threshold brings a litany of regulatory changes, including CFPB oversight and application of the Durbin amendment, which limits banks' interchange fee income. While bankers are grateful for the Durbin amendment delay, some said they are uncertain when the CFPB will join their consumer compliance exams.

"[The FDIC] indicated to me that the CFPB would be involved in our consumer compliance exams going forward. So the next time the FDIC comes in, they said the CFPB would probably be with them," said Mark McVay, chief risk officer at ServisFirst Bancshares Inc., which crossed the $10 billion threshold in the second quarter of 2020.

"We have not heard directly from [the CFPB]. And to be quite honest, I'm not going to call them," McVay said in an interview.

The CFPB publishes a quarterly list of banks under its supervision, and the latest version did not include several banks that had crossed the threshold earlier in the year. Of the 12 banks that crossed $10 billion in total assets during 2020, only two were on the CFPB's list based on Sept. 30, 2020, call report data: Provident Financial Services Inc. and Sandy Spring Bancorp Inc. A CFPB spokesperson declined to comment.

Since banks tend to prepare for the additional regulatory burden before actually crossing the threshold, bankers said they are ready for the CFPB supervision. They just have yet to hear from the agency. OceanFirst Financial Corp. crossed the threshold on Jan. 1, 2020, but the bank was not on the CFPB' 2020 third-quarter list. By contrast, Sandy Spring crossed the threshold in the 2020 second quarter and was on the 2020 third-quarter list.

OceanFirst Chairman and CEO Christopher Maher said the exclusion of any mention of the CFPB in the interim final rule makes it unambiguous that banks will be subject to CFPB oversight.

"That's a bright line, and that was not the subject of the Fed guidance about the $10 billion threshold," he said. "We expect to be subject to CFPB oversight, and we're prepared for that."

ServisFirst had $11.93 billion in total assets at Dec. 31, 2020, 33.4% higher than the year-ago period. The bank crossed $10 billion in total assets during the second quarter of 2020 as a result of the Small Business Administration's Paycheck Protection Program and the influx of liquidity into the banking system, McVay said.

ServisFirst has already experienced increased supervision from the FDIC, McVay said. During the week ended March 12, the FDIC notified ServisFirst that three new examiners were assigned to the bank starting in April, according to McVay.

"We really didn't see any relief as it relates to the supervision by the regulators. And that's the part that's real disappointing," McVay said, estimating the amount of time spent with examiners has tripled over the last year.

First Busey Corp. reported $10.54 billion in total assets at Dec. 31, 2020. In an interview, Chairman, President and CEO Van Dukeman said he is also unsure if CFPB supervision would come into effect this year but that the bank is prepared for additional regulatory scrutiny, including from the CFPB.

To offset the impacts of crossing the critical threshold, some banks turn to M&A to gain scale and defray the costs over a larger asset base. In January, First Busey announced its acquisition of Cummins-American Corp. The combined companies will have about $11.9 billion in total assets, which will help the company absorb the impact of less interchange fee income.

"The combination of the delay that the regulatory bodies gave us, coupled with this announcement for the Cummins merger, those both gave us the time and then the size to be able to offset those expenses," Dukeman said.

The costs and hassle associated with the $10 billion asset threshold have not derailed the growth plans for some community banks. Farmers & Merchants Bank of Long Beach ended the fourth quarter of 2020 with $9.87 billion in total assets, up 29.8% from the year-ago period. The bank plans to keep up the momentum and continue to grow organically, Chairman and CEO Daniel Walker said in an interview.

"We anticipated that [we would cross $10 billion] in 2023 or 2024. So to arrive there in 2020 threw us into excitement and then some new long-term planning," Walker said. "Farmers & Merchants Bank does not want to give up its momentum in the market by any means."

The bank planned to get to $10.7 billion by Dec. 31, but now it may hit that mark by June 30, Walker said. The bank has already crossed $10.5 billion during the first quarter. "I've already really predicted that we'll hit $11 billion before December 31," Walker said.