Breakdown of “Community Banking in the 21st Century”

October 7, 2019 | Community Banking, Insights, News
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Cybersecurity Leads List of Concerns in Community Banking in the 21st Century survey.

During last week’s Fed-sponsored conference, new data emerged from the Community Banking in the 21st Century survey.

In the survey introduction, Bret Afdahl Chairman, Conference of State Bank Supervisors, wrote:

“For the first time in years, compliance costs are not the top financial concern for community banks. Instead, it is funding.”

And the risk they fear most?

Cybersecurity.

While last year’s survey showed community banks were embracing technology, the actual number of those offering digital and online services remains largely unchanged.

The reason: Cost.

These are key findings in this year’s Conference of State Bank Supervisors’ national survey of community banks.

And they underscore the value of this annual survey.

Breaking Down the Community Banking in the 21st Century Survey

By comparing responses over recent years, we can see a marked increase in concern over the cost of funding. This year, 36% of banks said funding was the most likely factor to influence future profitability, up from 11% in 2016. In contrast, only 4% of surveyed banks said that regulation was most likely to influence profitability, compared to the 60% of respondents who named it as a top concern in the 2016 survey.

While last year’s survey showed a remarkable 13% drop in compliance-related costs, this year’s results show a 4% increase, and bankers said they expect that trend to continue. Comparisons like these reveal the shifting focus of community banks. The information is important to understand more about community banking and helps inform both regulators and policymakers. Community banks are the lifeblood of rural America and the heart and soul of our small businesses and communities. We all need to pay attention to their changing needs and concerns. This survey can help to shape their future.”

The survey of bankers found that about 35% of survey respondents said the cost of funds was the factor most likely to influence future profitability.

This was higher than loan demand (32%), operating costs (13%), loan rates (11%) and regulatory costs (4%). Nearly one-third of bankers ranked either core deposit growth or the cost of funds as their greatest challenge. Other top concerns included regulation (16%), competition (15%) and loan demand (12%).

The survey also found that nearly 28% of respondents said they usually or always prioritize deposit growth over loan growth. Community bankers described “liquidity crunches” brought on by banks “running really ‘hot’ on the loan side” and “chasing deposits.”

Competition for core deposits has grown fierce.

Nearly 92% of respondents said it was a very important or important factor in their ability to attract and retain core deposits. Dominating competition for transaction deposits were institutions with local headquarters or branches. Less than 4% of respondents named nonlocal institutions as their greatest competitive threat. This suggests that convenience is an important factor in attracting and retaining transaction deposits.

Regarding lending competition, the survey noted that in 2019 “Community bankers typically describe the competition for loans as intense. Many of them question whether they will be able to meet the challenge of less regulated or more technologically capable competitors. Some are concerned about the transition to CECL; others, albeit fewer, are preoccupied with the transition from LIBOR.

For now, at least, community banks appear to be holding their own. In 2018, their overall loan portfolios grew by 6.5%, which was higher than the 4.5% growth rate experienced by larger banks. This may reflect advantages cited by some community bankers in accessing markets that larger banks ignore, those with less intense competition, or those populated with customers who value relationships more than the latest technologies.”

Tech spending still isn’t “there”

The much-vaunted technology spend is not happening at the level Fintech gurus are suggesting.

The number of banks offering services like banks offering remote deposit capture, automated loan underwriting, online lending and electronic bill paying stayed flat year over year. It simply costs too much for the smaller banks. That could mean we see them fall behind in the future and become sellers of their bank.

Speaking of selling banks the survey found that “Community bankers experienced an increase in merger and acquisition interest, with 15% of them receiving acquisition offers (versus 13% last year) and 25% making acquisition bids (versus 20% last year) Future activity could be influenced by bankers’ expectations for franchise values to increase.”

For more coverage of the community banking space, go here.

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