Community banks' growth will be less restricted under two recent proposals from the Federal Deposit Insurance Corp.
Under two recent rule proposals from the FDIC unveiled on July 15, community banks will have more runway for asset and branch footprint growth as the proposed changes remove regulatory hurdles and reduce costs.
"There is a trend line that runs through all of those proposals," Cliff Stanford, partner at Alston & Bird LLP advising banks and more, said in an interview. "It's a refresh and a change in approach where the agency has some ability to maneuver to remove regulatory burden."
Tailoring thresholds
After going unchanged for nearly 30 years, various asset thresholds related to audits, internal controls and audit committees are set to be raised. The proposal, which the FDIC estimates will impact about 1,500 community banks, has institutions like Bluffton, Ohio-based Citizens National Bank of Bluffton breathing a sigh of relief.
Citizens National Bank of Bluffton surpassed $1 billion in assets in December 2023, subjecting it to requirements under the FDIC Improvement Act (FDICIA) related to external audits and more. Though the bank, which has $1.07 billion in assets, prepared in advance, complying with the new regulatory requirements turned out to be more grueling than expected, President and CEO Eric Faulkner told Market Intelligence.
"We were well prepared," he said. "And yet, not only was the cost just extremely significant, but the stress, and the additional workload on staff, was more than I had anticipated."
The regulatory requirement added more layers to the bank's internal processes and controls, requiring it to have another internal person and an external auditor check behind work already done by one person and checked by another, Faulkner said. These processes "weren't perfect, but they certainly weren't broken, and that kind of stress was very hard on the staff," he said, adding he could not "overstate" the impact of it on his bank, which has 165 employees.
Under the proposal, the threshold for compliance with the FDICIA will be raised to $5 billion, which Faulkner called "a massive deal."
No longer having to bring in outside auditors will be "a massive cost savings for the bank," Faulkner said. "It would allow us some time to breathe and really focus on other things at the bank and make our efficiencies improve."
Banks could also save costs by cutting staff, Alston & Bird's Stanford said. In some cases, banks could keep that staff but redeploy that talent to different projects, said Jonathan Hightower, a partner at Fenimore Kay Harrison LLP.
The FDIC described the proposal as "the first of a multi-phase effort" to update thresholds. Some asset thresholds would require an act of Congress to change them, such as the $10 billion Durbin amendment threshold, but others are controlled by regulators.
While the small bank holding company threshold has been updated regularly, banks would likely welcome more upward revisions to it, Hightower said. The threshold is $3 billion and last updated in 2018.
"I know community banks would love to see that number move up because it just gives them more capital flexibility," he said. "That's certainly the one that we deal with on, really, an everyday basis."
Easier expansion
Under the branch application proposal, banks will be able to more quickly and easily secure approval for branch expansions and relocations, and save money.
One major proposed change is the elimination of the public comment period. While public comments are more common on whole-bank deals, they can still be submitted and hold up branch applications.
"It is a good thing if a bank is willing to spend the money and devote the resources to having an additional branch," Hightower said. "We don't need the public to comment on this. If the bank is healthy, we also don't need to spend weeks analyzing it."
The proposal also intends to expand the types of applications and institutions that would qualify for expedited processing, allowing more applications to be approved within three days.
The rule would also no longer require banks to publish proposed branch changes in a local newspaper for public notice. This will save banks money, as newspaper ads can be costly, sources said.
"They charge unbelievably high fees that are not commensurate with today's practices. So the banks are going to save themselves some money by not having to do it," Joseph Lynyak, a partner advising banks and other financial services companies at Dorsey & Whitney LLP, said in an interview.
It would also modernize the industry to today's standards, when the public largely consumes news online.
"It boggles the mind as to why we do that ... when we would be much better served just by posting a notice online and can do that in a central place where everybody can see it," Hightower said.
