Home > First Issue 2022 > A Message from Governor Bowman

A Message from Governor Bowman
by Governor Michelle W. Bowman


Since this is the first Community Banking Connections issue of 2022, I wanted to share with you a few thoughts on the state of the overall economy and the community banking sector. As I write this letter in February, I am pleased to note that community banks entered the pandemic in sound condition, played an important role in channeling emergency lending to keep local businesses open, and have remained well capitalized and able to maintain lending to their customers during the recovery. That recovery has continued despite the recent Omicron-related surge in infections. While there are still risks and lingering uncertainty, indications are that we will have another year of strong economic growth. Even with strong growth, I expect some bumps along the path to normal economic activity and public policy. These bumps include the ongoing and likely longer-term effects of bottlenecks on supply chains, which could limit economic activity and push prices higher.

Inflation is a significant problem for families and businesses. As of February, reports showed the highest U.S. inflation readings in 40 years. These reports reflect, in part, supply chain disruptions associated with the economic effects of the pandemic. Unfortunately, supply-side issues cannot be effectively addressed by monetary policy. But strong demand and a very tight labor market have also contributed to inflation pressures, and the Federal Reserve can help alleviate those pressures by removing extraordinary monetary policy accommodation that is no longer needed. In the Board’s January monetary policy statement, we indicated that “with inflation well above 2 percent and a strong labor market,” we expected that it would “soon be appropriate to raise the target range for the federal funds rate.” I fully supported that assessment, and the data we have seen since then have only highlighted the need to move forward with the process of normalizing our interest rate stance and significantly reducing the size of the Federal Reserve’s balance sheet. Elevated inflation is eroding living standards for many individuals and threatening the durability (i.e., long-term viability) of this economic expansion.

One bright spot is that employment continues to grow, and many industries are experiencing one of the best job markets we have seen in several decades. Unemployment, at 3.8 percent, is very low, and the ratio between job openings and the number of people looking for work is at a record high. The economy continues to add jobs at a pace of more than 500,000 a month. And while inflation is currently outpacing wage gains, the tight labor market will sustain wage increases at historic levels for some time.

Turning to banking, most community banks were in sound financial condition prior to the pandemic. Ninety-six percent of community banks were profitable, and nonperforming assets remain at historic lows. Many community banks entered the pandemic with well-performing loan portfolios. In addition to developing more effective risk management practices, community banks had fewer credit concentrations in construction and commercial real estate prior to the start of the pandemic in comparison to the last financial crisis. Over this same period, community banks have also maintained stronger capital and liquidity positions.

The strong economic conditions as well as ongoing government support during the pandemic contributed to the resilience and sound financial condition of community banks. Recent examination results have further demonstrated that the overwhelming majority of state member community banks remain in satisfactory condition.

Although their profit margins are still low, community banks have higher aggregate net interest margins, non-interest income to average assets, and average earning assets to average assets than larger banks. More than 99 percent of the community banks have capital ratios above well-capitalized minimums. In terms of liquidity, community banks’ metrics generally remain positive. However, many community bankers note challenges with deploying excess liquidity. With limited investment opportunities, community banks are investing in liquid securities or holding higher levels of cash and balances due from depository institutions (including balances due from the Federal Reserve).

Community banks are generally demonstrating sound asset quality based on traditional metrics. Total problem loan rates continued to decrease for these institutions, as well as for most larger firms. The problem loan rates for commercial real estate, residential real estate, and other loans were lower or relatively flat. Overall, community banks are reporting favorable credit conditions, with no significant credit issues, low delinquency levels, and manageable credit quality concerns. However, they still report increased loan competition and, as a result, are offering loan terms with extended amortizations and longer-term fixed rates.

While there are still risks and lingering uncertainty in the economy, I remain confident that community banks will continue to play a vital role in advancing the current economic expansion. Over the next few months, I look forward to further discussions with community bankers about their business challenges and views on our supervisory and regulatory framework. These discussions provide valuable information as I assess the implications of any regulatory and supervisory policy changes on community banks.

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