Small banks welcome PPP relief but fear it may not be enough

Small banks that have ballooned in size during the coronavirus pandemic breathed a sigh of relief last week when federal regulators gave them a reprieve from tougher supervisory rules that kick in at certain asset thresholds.

But a grateful industry is also concerned about the potential impact of the upswing in COVID-19 cases and the growing possibility of additional emergency lending. Some banking officials and policy experts are already wondering if there will be enough time for lenders to shrink back to normal size by the deadline in 2022.

“If things go south next year we may be singing a different story,” said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America. “If you had another [Paycheck Protection Program] round, you may very well need an extension.”

Banks will be able to rely on their asset sizes as of Dec. 31, 2019, for regulatory purposes under the rule issued Nov. 20 by the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency.

The relief applies to a series of regulatory requirements that kick in at various stages of a bank’s growth, including when assets reach $100 million, $500 million, $3 billion, $5 billion and $10 billion. The stricter supervisory rules involve capital levels, caps on debit interchange fees, financial reporting, frequency of exams and other matters.

The agencies estimate that around 44 holding companies and 582 community banks crossed at least one of those regulatory thresholds in the first half of the year.

Smaller banks have accounted for most of the PPP lending since the program launched in April, and their growth accelerated as a result. For example, nine banks passed $10 billion in assets from the end of last year to June 30, and their combined asset sizes increased more than 30% over that time to nearly $100 billion total, according to data provided by the FDIC.

Banks will have until 2022 to shrink back below any of these thresholds before the new rules would take effect.

Steve Scurlock, director of government relations and public policy, at the Independent Bankers Association of Texas, said while the rule change is not a “game changer” compared with some of the other measures taken during the pandemic, it will “mollify some of the concerns of our community banks who have crossed certain asset thresholds unexpectedly.”

“An extension to the end of 2021 will allow much of the asset growth from the PPP, various stimulus and liquidity programs and the ‘flight to safety’ to return to whatever normal will be going forward,” Scurlock said. “If these issues linger into late next year, we are hopeful the regulatory authorities will consider an extension of the grace period.”

Crossing these thresholds too suddenly can catch a bank off guard as an analysis of the costs “should begin well before the milestone is approached,” according to guidance from the consultancy firm Crowe Horwath.

Banks have previously estimated that the compliance costs alone for crossing $10 billion in assets can range between $2 million and $6 million each year, not including revenue lost from caps on interchange debit card fees.

The burden could be tougher for even smaller banks.

The parent company of Paragon Bank in Memphis, Tenn. reported $497 million in assets as of June 30 and expects to remain below the $500 million threshold, said co-founder and CEO Robert Shaw. Still, the company already conducts audits similar to the ones that would be required of bigger firms, giving them insight on how burdensome the costs can be for the unprepared.

“Audit’s are not cheap for sure,” Shaw said.

Banks that would grow past $3 billion in assets could be subject to exams every 12 months, which would be a noteworthy cost to banks compared to a cycle of once every 18 months.

“That could be quite significant,” Cole at ICBA said.

The rule is common sense to Martin Birmingham, president and CEO of Financial Institutions in Warsaw, N.Y.

The $5 billion-asset parent company of Five Star Bank made 1,736 PPP loans totaling $271 million through the end of September, according to a regulatory filing. The bank’s average PPP loan amount was about $150,000.

“The banking system by design was a conduit in terms of flowing fiscal support through banks in the form of PPP loans and at the end of the day that ends up being a risk of the federal government,” Birmingham said. “So to penalize banks from a capital perspective … might be counter to the intended outcome of banks being in a position to provide support and relief to small businesses where it’s needed.”

The ICBA asked officials at the Consumer Financial Protection Bureau if similar relief could be given to banks that cross $10 billion in assets and suddenly find themselves automatically under the agency’s supervision, according to Cole. But it appears any exceptions to that rule are out of the hands of regulators and would require congressional action.

A spokeswoman for the CFPB did not comment on the possibility.

“I fear that this would fall under the purview of Congress, and while I’m remaining optimistic that there will be some movement on much-needed relief for small businesses, community banks and the American people, my optimism is waning as time passes,” Scurlock at IBAT said.

Allissa Kline contributed to this report.

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