Community Banking Connections

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View from the District: How Community Banks Are Responding to COVID-19
by Carl D. White II, Senior Vice President, Supervision, Credit, Community Development and Learning Innovation Division, Federal Reserve Bank of St. Louis

When I assumed the position as head of bank supervision and regulation for the Federal Reserve Bank of St. Louis at the start of this year, the national economy was strong, with steady growth and low unemployment. Across the United States, and in the Federal Reserve’s Eighth District, the banking industry was healthy — capital levels and liquidity were, for the most part, high and nonperforming assets were low. Community banks were profitable and thriving, despite low interest rates that put pressure on net interest margins. Over the past seven years, just 44 depository institutions had failed, compared with nearly 500 during the 2008–2013 period. The Deposit Insurance Fund stood at $110 billion at year-end 2019, an all-time high; the ratio of fund reserves to insured deposits was 1.41 percent, the highest level since 1999.

What a difference a couple of months makes.

As I write this, I am working from home, like the vast majority of St. Louis Fed employees and many of you reading this article. Fortunately, the Federal Reserve was prepared for an extensive period of operating offsite, having conducted at least annual contingency exercises for the past decade or so. Of course, it’s almost impossible to prepare for every possibility, and this health crisis and the resulting economic turmoil have thrown all of us some curveballs and will, no doubt, continue to do so.

Responding to the pandemic and its economic aftermath has required an “all hands on deck” approach involving federal, state, and local governments; federal and state banking regulators; and banks themselves. While a number of their actions are novel to this crisis, many are drawn from what worked during the financial crisis of 2008–2009.

Federal Reserve Actions

To understand the challenges faced by financial institutions, businesses, and consumers as a result of the pandemic, I thought that it would be helpful to provide a summary of Federal Reserve actions. Beginning in early March, the Federal Reserve Board took a number of monetary policy and other actions to provide liquidity and ease financial strains on households, businesses, and the overall economy. These actions included:

• Lowering the target for the federal funds rate
• Lowering the discount rate and lengthening the duration of discount window loans
• Eliminating reserve requirements
• Purchasing government bonds and mortgage-backed securities
• Establishing emergency lending facilities to support households, businesses, and state and local governments

The Board rolled out all of these actions in the span of just a few weeks, and many of them were similar to the steps the Federal Reserve took during the financial crisis and subsequent Great Recession.¹ The Federal Reserve’s experience with the facilities for commercial paper and money market mutual funds was pivotal in renewing these programs quickly and launching new ones to support other markets and entities.

Actions by Bank Supervisors

Since the presidential declaration of a national emergency in mid-March, the Federal Reserve — either alone or in concert with the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and state bank supervisors — has strived to relieve some of the regulatory burdens on banks while facilitating the enactment of monetary and fiscal stimulus programs. Some of these actions have been in the form of guidance or more informal communications with financial institutions; others have been the result of legislative or supervisory decisions.

As detailed in a March 22, 2020, interagency statement, banks have been urged to work with their customers who have been affected by COVID-19 and may need loan modifications.² Such loan modifications will not automatically be considered troubled debt restructurings (TDRs). On March 26, 2020, the Federal Reserve, the FDIC, the OCC, the Consumer Financial Protection Bureau, and the National Credit Union Administration issued a joint statement noting that examiners will not discourage banks from offering responsible small-dollar loans to consumers facing temporary cash flow problems, unexpected expenses, or income shortfalls.³ The agencies suggested that open-end lines of credit, closed-end installment loans, and single payment loans were all appropriate in these situations.

More generally, the Federal Reserve conducted supervisory monitoring in lieu of traditional examinations and inspections of community banks during the first few months of the pandemic. Supervisory staff assessed the risks and challenges faced by bank customers and staff and kept tabs on banks’ operations and their financial condition. Any necessary examinations were conducted offsite to minimize disruption on a bank’s operations and in light of the public health concerns with the pandemic. The Federal Reserve also extended the time period to respond to supervisory findings by 90 days. With the lifting of the pause in examinations on June 15, 2020, the Federal Reserve is continuing to conduct its community bank examinations offsite.⁴

The federal banking agencies have also enhanced their communications with banks. The St. Louis Fed, for example, has increased the frequency of its Eighth District teleconference series Conversations with the St. Louis Fed to weekly since the start of the pandemic. The St. Louis Fed, in concert with Federal Reserve Board staff, has also hosted a number of national Ask the Fed and Ask the Regulators webinars on pandemic-related issues and programs, such as the Paycheck Protection Program Liquidity Facility (PPPLF) and the Main Street Lending Program (MSLP).

The CARES Act

I also wanted to provide a brief overview of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law in late March 2020. There are several provisions that community bankers will find of interest, as the CARES Act contains several bank-related provisions that are designed to ease regulatory burden and to encourage the extension of credit to bank customers. These provisions include:

• Temporary community bank leverage ratio (CBLR). The CARES Act required the CBLR to be temporarily set at 8 percent (rather than the 9 percent standard) and provides a “reasonable” grace period for qualifying banks to come into compliance. The interim final rule issued by the agencies expires December 31, 2020, or upon the termination of the national emergency declaration, whichever comes first.
• Suspension of current expected credit loss (CECL). The federal banking agencies are not permitted to require financial institutions to comply with the Financial Accounting Standards Board’s Accounting Standards Update No. 2016-12 — including CECL reserving methodology — until December 31, 2020, or the termination of the national emergency declaration, whichever comes first.
• Temporary relief from TDRs. Financial institutions can suspend TDR accounting requirements for loan modifications related to COVID-19 for loans that were no more than 30 days past due as of year-end 2019. Banks need to keep records on the volume of loans affected by this provision, and the banking agencies are permitted to collect these data. This relief expires December 31, 2020, or 60 days after termination of the national emergency declaration, whichever comes first.
• Extra time to file regulatory reports. Bank holding companies with assets of less than $5 billion received an extra 30 days to file their March 2020 Y-9C and Y-11 reports; banks received a 30-day extension to file call reports.

What Community Banks Are Doing

Many community bankers have been working around the clock to serve their customers, often taking on different roles than they are used to. Besides extending credit and working with borrowers through the Paycheck Protection Program (PPP) or other means, bankers have provided financial and other forms of assistance to their communities.

Paycheck Protection Program

I was very pleased to see that community bankers have served a vital role in the PPP. Armed with significant experience extending Small Business Administration (SBA) loans, community banks took the lead in getting PPP loans approved. According to the Department of the Treasury and the SBA, banks with assets of $10 billion or less approved approximately 60 percent of PPP loans during the program’s first round (see Table). The nation’s smallest community banks — those with assets of $1 billion or less — really punched above their weight, approving roughly 20 percent of loan dollars while accounting for just 6 percent of all U.S. banking assets.⁵

Table: Paycheck Protection Program by the Numbers

	PPP Round 1	PPP Round 2 (as of 5/8/2020)
Total Available	$350 billion	$310 billion
Total Approved	$350 billion	$189 billion
Start Date	4/3/2020	4/27/2020
End Date (when all funds were exhausted)	4/16/2020	Program extended through 8/8/2020
# Loans	1.7 million	2.6 million
# Lenders	4,975	5,463
Average Loan Size	$206,000	$73,000
Lender Size <$10 Billion: Lender Count	N/A	5,229
Lender Size <$1 Billion and Nonbanks: Lender Count	N/A	4,475
Lender Size <$1 Billion and Nonbanks: Number of Loans	N/A	570,723
Lender Size <$1 Billion and Nonbanks: Dollars of Loans	N/A	$29.9 billion

Source: Small Business Administration

Community banks used their existing strengths and community connections to make the most of the PPP when it launched.

• Community bankers are experienced SBA lenders. Roughly one-quarter of the nation’s top 20 SBA lenders are community banks. The national leader in SBA loans is a $4.8 billion community bank.
• Community banks made PPP loans a priority. A community bank in Arkansas moved roughly one-third of its staff to its PPP lending function, while a Missouri community bank created a webinar for its customers giving them step-by-step training on how to participate in the PPP program.
• Community bankers reached out to their communities. An Eighth District community development financial institution (CDFI) aggressively reached out to its customers during the program’s first round. The CDFI president credits the PPP program and the bank’s strong outreach to its customers as key to ensuring that businesses in low- and moderate-income communities received vital funding.
• Community bankers moved quickly. Community banks from across the Eighth District were ready to make PPP loans as soon as the program launched in April 2020. They were able to disburse their first loans only hours after the SBA’s loan portal opened.

Other Actions

I also witnessed community banks stepping up in other ways to aid their communities as the pandemic spread.

• A community bank in southern Illinois put together its own COVID-19 relief program, before the PPP launched, and offered its customers no-interest overdraft lines to be repaid with $1,200 stimulus checks.
• A community bank in southern Missouri quickly built a “walk-up” teller window so that it could increase the number of customers it could serve at once while its lobby was closed to walk-in traffic.
• An Arkansas community bank extended and strengthened its Wi-Fi hotspots in some branches and encouraged families without home Wi-Fi to come to these branches so that students could do homework and parents could conduct business in the bank parking lots.

What’s Next

Because of the rarity of this situation and the tremendous uncertainty that currently exists around the economy, the time and path of recovery are really unknowable. What is clear is that significant resources from both the public and private sectors will be called upon for crisis assistance for the foreseeable future. The Federal Reserve is one such resource and, as during the financial crisis of the past decade, stands ready to provide continuing and transparent support to the U.S. financial infrastructure, promote financial stability, and serve as a partner to the federal government. The sheer breadth and depth of the tools and programs that the Federal Reserve has supplied thus far speaks to the creativity, expertise, and agility of its employees who work throughout the Federal Reserve System.

The public will also have the opportunity to see the strength of the community bank business model and how banks’ close ties to their communities enable them to help their communities be resilient in the face of a global health crisis. We continue to hear stories from across the country about the many ways community bankers have stepped up, whether through staying up all night to be sure their customers’ PPP applications were among the first submitted, providing food and personal protective equipment to first responders, or simply boosting their Wi-Fi signal so that kids could do their homework.

The road ahead will not be smooth. But the independent and joint efforts thus far of the public sector — including the Federal Reserve — and the private sector — especially community banks — indicate that we have the tools and the will to help communities large and small get back on their feet.