By Evan Sparks
While small business lending remains the core of the community banking business — with 98 percent of banks with less than $10 billion in assets offering small business loans — larger banks edged their smaller peers in total origination volume, according to a survey released last week by the Federal Reserve and the Conference of State Bank Supervisors. Small business lending at community banks fell by 2.2 percent to $269 billion in 2016. Banks with more than $10 billion in assets saw their small business lending grow by 5.1 percent from 2015 to 2016, reaching $284 billion. In previous years, community banks had higher overall origination volumes.
Small business loans also declined as a percentage of community banks’ portfolios, dipping from 16.6 percent to 15.9 percent. Meanwhile, community banks saw growth in commercial real estate dramatically outpace increases in small business commercial and industrial loans. Banks participating in the survey reported that CRE loan volume was up 17 percent from 2015, with construction loans up 20 percent.
Community banks most commonly identified fellow community banks as their biggest competitor for small business loans. However, 10 percent expect credit unions to be major competitors in the future, while 7 percent said the same about nonbank fintech firms. In response to competitive pressure, 61 percent of community banks reported lowering interest rates at least half the time. However, fewer banks reported lowering fees in response to pressure, and they rarely or never eased collateral requirements or extended loan maturities in order to win business.
Small business loans drove adoption of other products with community banks. Nearly 95 percent of community banks always or usually provided deposit services to small business borrowers, while 38 percent provided cash management. However, bankers rarely leveraged their lending relationships to provide value-added consulting or advice. For example, just 12 percent usually or always offered succession planning advice, and 11 percent provided wealth management advice.
Consumer lending and financial services
On the consumer loan front, 83 percent of community banks continue to offer single-family fixed-rate mortgages, although three percent said they plan to exit the business. More than nine in 10 offer auto loans, 79 percent offer home equity lines of credit and 82 percent offer small-dollar unsecured loans. However, reflective of greater regulatory strictures on these loans, 3.2 percent said they would exit the small-dollar business. Just 60 percent of community banks offer credit cards, and less than 6 percent offer either reverse mortgages or student loans. The TILA-RESPA integrated disclosures continued to weigh down mortgage lending in 2016; more than 40 percent said they were seeing a slower pace of business or delayed closings as a result of the rule.
Mobile banking, electronic bill pay and remote deposit capture are becoming near-universal at community banks, with 94 percent, 91 percent and 87 percent, respectively, saying they currently offer or plan to offer the service soon. Online loan applications are likely to continue surging among community banks, with 24 percent saying they plan to join the 33 percent currently offering the service. Likewise for personal financial management, with nearly 10 percent saying they expect to implement the service, bringing the total of community banks offering PFM in the future to nearly 50 percent. (ABA endorses Geezeo for PFM.)
Compliance costs drive business decisions
Compliance costs continue to grow dramatically at community banks. Compliance accounted for a greater share of personnel, data processing, legal, accounting and consulting costs in 2016. The total implied dollar cost of compliance for all community banks rose 8.7 percent to $5.4 billion — representing nearly a quarter of community banks’ net income. Compliance costs were up more than 20 percent in the two-year period from 2014 to 2016. Key drivers of compliance costs were the Bank Secrecy Act, accounting for 22 percent of compliance expenses, and TRID, accounting for 21 percent.
Compliance costs are often a factor in community banks’ ability to achieve economies of scale — which in turn drove M&A activity in 2016. Nearly nine in 10 community banks that made a bid for another institution in 2017 said that economies of scale were important or very important, and seven in 10 banks that considered an offer cited their own inability to maintain economies of scale. Getting a grip on growing regulatory costs was specifically cited by 85 percent of banks considering an offer as important or very important.
Entering new markets was important or very important to two-thirds of banks making bids, but handling succession planning or acquiring talent was not. And while succession planning was generally not a factor at banks considering offers, for a quarter of them it was very important — a sign that when succession options are unclear, the attractiveness of an M&A offer rises.
