Chaska's KleinBank has reversed course and settled a federal discrimination lawsuit, after insisting that the U.S. Department of Justice could not force it to open a branch in Hennepin County.

Under the terms of an agreement announced Tuesday, the family-owned company must open a full-service brick-and-mortar office in Hennepin County by May 2019, plus set aside $300,000 in below-market loans to expand its presence in minority neighborhoods.

Doug Hile, president and chief executive of the community bank, said the new branch is likely to open in either Brooklyn Park or Brooklyn Center, where the bank already has a few customers.

"I'm not a great fan of the government telling me what to do, but at the same time, I see the need and I am grateful for the opportunity to be able to help," Hile said. "We're just disappointed this had to happen. We've never been sued by the government or any regulator in our entire history."

The case was watched closely by other banks, which hoped it would establish whether the government could force suburban banks to do business in inner cities. The Justice Department has filed a dozen similar lawsuits since 2002, but they all settled quickly, typically on far more costly terms for the financial institutions, according to a Star Tribune review of federal fair lending cases.

KleinBank officials, by contrast, vowed to fight government allegations that the bank was guilty of redlining, the illegal practice of denying mortgage loans to minority residents. Hile said the bank decided to settle because continuing the legal battle would cost millions of dollars.

"You have to ask yourself whether that is doing the community any good," Hile said. "We are a for-profit business, but we also try to do the right thing. … I'd much rather put that money into these communities."

According to the suit, a statistical analysis of KleinBank's loan applications revealed that the bank served residents of majority white areas "to a significantly greater extent" than residents in primarily minority areas. Of 5,837 residential loans examined by the government, just 62 applications — or slightly more than 1 percent of residential loans — involved property in census tracts where minorities accounted for most residents.

To avoid business in minority communities, the suit said, KleinBank created a C-shaped territory that includes the majority-white suburbs and avoids areas in the Twin Cities with a higher proportion of minority residents.

KleinBank officials said the company's growth strategy boils down to common sense, not racism. Since its founding in 1907, KleinBank has avoided big-city competition, buying up competitors in the western suburbs of Minneapolis.

The strategy, according to Hile, has been to establish dominance in the southwestern suburbs, leaving Minneapolis and St. Paul to the big banks. Hile said the bank has avoided opening a branch in Hennepin County because the bank's market share there is currently less than one-tenth of 1 percent.

Hile said the bank will make the most of the new opportunity. He said it is possible KleinBank could open additional branches if its push into Hennepin County is as successful as the bank's other expansions.

"I don't run my business to make people leave me alone," Hile said. "It's run to be successful, so if I see opportunity to build additional branches in those areas, we are going to evaluate it."

In addition to putting $300,000 into a loan subsidy fund for residents in minority neighborhoods, KleinBank also must spend another $300,000 on advertising and outreach efforts to improve the bank's visibility in Hennepin County. The bank also must employ a community-development officer to oversee its new lending program and oversee training on redlining for bank employees and officers.

By comparison, other banks have been forced to set aside as much as $25 million in below-market loans for minority borrowers in other communities, federal records show. Most of those banks also had to open at least two new branches to settle claims of discrimination.

Joe Witt, president of the Minnesota Bankers Association, said the other striking part of the KleinBank settlement is the fact that the bank is required to pay no fines.

"The vast majority of these DOJ settlements include significant fines and penalties," Witt said. "The lack of that could be a sign that the federal government was eager to settle the case."

Witt said some bankers will be disappointed that KleinBank didn't continue its fight to limit the government's authority.

"The case was obviously very significant," he said. "But our members also understand that the bank was in a very difficult position of fighting against the federal government.'