By Debra CopeEvery year, growth propels numerous community banks past asset thresholds that have significant supervisory implications. As banks approach two key thresholds—$500 million and especially $1 billion — they must begin preparing for new risks and regulatory expectations, according to Richard Kloch Jr., a partner in Crowe’s financial services consulting practice.
At $1 billion, FDICIA raises the compliance bar further. At this threshold, banks must have a completely independent audit committee, adhere to expanded management reporting requirements, and document and test controls.
Preparation for the $1 billion stage is particularly demanding, Kloch says, and banks that don’t give themselves enough time to get ready could find themselves in a scramble and at risk of non-compliance.
Kloch says that once a bank’s assets surpass $800 million, it may be appropriate to start preparing for increased regulatory expectations. Exactly when to get plans underway depends on the individual bank’s growth trajectory, he explained, but 18 to 24 months ahead of time is typically about right. The implications of reaching $1 billion are significant enough that some banks deliberately restrain growth when they see that milestone coming, he added.
As of March 31, 2022, 112 banks were on the cusp of $1 billion, with assets between $900 million and $999 million. A further 108 had assets between $800 million and $899 million, according to FDIC data. Additionally, 321 banks had assets between $400 million and $499 million, putting them on the verge of having to comply with FDICIA’s annual independent audit threshold.
Kloch says the key steps for banks nearing $1 billion include:
- Document internal controls for financial reporting. When a bank exceeds $1 billion in total assets, the CEO and CFO must formally assert that the bank has effective internal controls over financial reporting, based on a recognized internal control framework. In addition, the bank must provide extensive documentation and testing of the controls. The independent auditor’s report must include an attestation regarding the effectiveness of such controls.
- Develop a robust, enterprise risk management function. Another consideration when reaching the $1 billion threshold is the need for enterprise risk management, Kloch says. “ERM used to be a very big bank issue, but over the years it has moved its way down.” While there is not a specific requirement to enhance ERM at $1 billion, “it becomes a bigger issue, and it is a cultural shift.” Banks in this asset zone should be ensuring that first-line managers have effective internal controls and building out compliance and risk oversight, he said.
- Invest in data. Larger banks typically invest in advanced data science tools in order to enhance reporting and understand customer behavior. “As the $1 billion threshold approaches, this effort takes on greater urgency,” Kloch says. Even if the bank isn’t yet ready to launch sophisticated tools, “it will almost certainly need to implement them within the next few years to remain competitive.”
- Reevaluate critical infrastructure. “A core system designed to meet the needs of a $500 million bank in a cost-effective manner generally will not have the level of sophistication that a bank needs at the $1 billion level—and will become even more inadequate as growth continues,” Kloch advises.
- Benchmark and manage vendor expenses. Taking a disciplined look at costs across the entire organization and looking for ways to centralize procurement can help banks reduce their expenses.