In addition to the economic uncertainty created by the COVID-19 pandemic, some U.S. community banks are facing the possibility of crossing the critical $10 billion threshold.

Some community banks approached or surpassed $10 billion in total assets due to participation in the Small Business Administration's Paycheck Protection Program and excess liquidity in the market. Once banks cross the asset threshold, they become subject to increased regulations and interchange fee income can drop by half. Banking industry groups are hoping to relieve the stress of potentially crossing $10 billion by advocating for PPP loans to be excluded from threshold calculations.

"The situation is an anomaly. We didn't expect to originate this many loans this year, pre-COVID and pre-PPP," a company spokesperson for Fort Lee, N.J.-based Cross River Bank said in an interview. "Once PPP came about and we recognized our ability to provide service, then we were obviously ready, willing and able regardless of the threshold. It wasn't a part of our plan but I don't think the pandemic was a part of anyone's plan."

Cross River Bank originated $6.27 billion in PPP loans as of June 30, increasing its total assets to $9.91 billion for the second quarter from $2.53 billion in the first quarter. Through general organic growth and expanding its loan origination and business activities, the company expected to be around $3.5 billion in total assets by the end of 2021, according to the spokesperson.

"As the [PPP loan] forgiveness process gets up and running, a lot of that will be alleviated and the numbers should start to come back down to where we expected them to be at this point. But that process is still ongoing," the spokesperson said.

The Independent Community Bankers of America is advocating for legislation to be passed that would exclude PPP loans from bank and bank holding company asset threshold calculations. The Durbin amendment, a provision of the Dodd-Frank Act, kicks in at $10 billion in assets and limits the interchange fees a financial institution can collect. At this size companies must also begin complying with examinations and oversight from the Consumer Financial Protection Bureau.

Banks with less than $10 billion in assets made $231 billion in PPP loans, or 44% of net dollars, as of June 30, according to SBA data. The increase to some community banks' balance sheets could discourage them from participating in any future pandemic response lending programs, the ICBA's letter said.

"Some banks are concerned that their unexpected asset size growth will inadvertently push them over regulatory thresholds and subject them to additional supervision, regulations and costs at a time when they need to dedicate their resources to coping with a historic economic downturn," the trade group's president and CEO, Rebeca Rainey, wrote in the letter.

The American Bankers Association, another industry trade group, will work with Congress and regulators to ensure that banks can have flexibility, according to a statement from an ABA spokesperson.

"Unfortunately, by helping to absorb the economic shock of the pandemic, some banks will cross one or more of nearly a dozen arbitrary asset thresholds that trigger additional scrutiny, cost, and legal obligations," the spokesperson wrote. "ABA has long believed that inflexible asset thresholds come with unintended consequences that can harm banks and their customers, and the current situation brings these concerns back into focus."

A 'flood of cash'

While PPP was the main driver for the jump in total assets for some community banks, others attribute the increase to the sudden liquidity surge in the market.

"You had this flood of cash out of the equity markets that made its way into the banking system and pushed our balance sheet up on the liabilities side," Eagle Bancorp Inc. CFO Charles Levingston said in an interview.

Levingston does not expect PPP loan forgiveness to greatly impact the bank's total assets. "I would not expect retreat with PPP forgiveness in terms of asset size," he said.

Bethesda, Md.-based Eagle Bancorp reported $9.80 billion in assets at June 30. The bank is not actively working to stay below $10 billion at year end because the Durbin amendment would not have a significant impact on revenue, according to Levingston. "We have the intent and the leadership team in place to bring us to over $10 billion," he said.

Durant, Okla.-based Spend Life Wisely Co. Inc. reported $9.95 billion in assets at June 30, putting it about nine months ahead of its plan for asset growth due to the pandemic. The bank is hoping to stay below $10 billion at year-end, CEO Gregory Massey said in an interview. If it is above that threshold, it would lose about $6 million in interchange fees per year.

"We're a little bit concerned about it," Massey said in a Sept. 10 interview. "We're at $10.1 billion today. We're right over so we hope to be able to keep right below the threshold and then we know we'll go over next year."