By Evan Sparks
Heated competition for bank funding is an increasingly important focus for community bank leaders, according to an annual survey released today by the Federal Reserve, the FDIC and the Conference of State Bank Supervisors. Cost of funds was most frequently cited as the biggest influence on profitability over the next year, with 35% of bankers agreeing. Thirty-two percent cited loan demand; just 4% said regulatory costs would be the biggest driver.
Nearly 23% said core deposit growth was their biggest challenge, followed by regulation (16.4%) and competition (15.4%). Almost 92% of bankers said competition for core deposits was an important or very important factor in building their deposit base. While just 2% said they had an online-only division to gather deposits or loans, an additional 17% said they were considering it or planning to launch one. Three in 10 bankers said that local area depopulation was an important or very important factor in their ability to grow core deposits.
On the lending side, residential mortgage and small-dollar consumer lending saw greater out-of-market competition. About a quarter of community banks reported that their greatest source of competition for mortgages was institutions with no physical presence in their market. Nearly one in five said the same for small-dollar loans, compared to just 14% for ag loans and 4% for commercial real estate and small business loans.
Community bank tech investments
With respect to technology, most bankers (72%) agreed that adopting new or emerging technologies was important or very important. About 39 percent of banks said they are currently offering online loan applications, while an additional 27 percent said they do not currently offer them but plan to do so within the next 12 months. Technologies with widespread adoption among community banks were mobile banking (92%), electronic bill payment (83%) and remote deposit capture (79%). For online loan closings, automated loan underwriting and interactive teller machines, 7 in 10 banks do not offer them and do not plan to in the next year.
Among transactional and advisory services, most community banks offered cash management (63%). Smaller shares of community banks offered personal financial management (38%), prepaid cards (31%), remittances (19%) or payroll cards (9%)—although 12% said they planned to add PFM tools in the next year. About 37% of community banks offer wealth management.
M&A accelerates
The survey showed accelerating M&A activity among community banks, with 14% of banks receiving an acquisition offer (up from 11% in 2017) and 25% making an offer in the past year (up from 20% in 2017). Among the reasons rated important or very important for entertaining an offer to sell were the cost of regulations (71%), struggles with economies of scale (67%) and succession planning (46). Among acquirers, factors rated important or very important in making offers were achieving economies of scale (76%), new market entry (69%) and in-market expansion (56%).
Indeed, despite the reduction in community bank compliance costs seen in last year’s survey, costs rose modestly in 2018 to $4.9 billion—still down 9% from 2016. Compliance costs as a share of overall expenses rose for personnel, data processing, legal services and accounting and auditing, although they fell for consulting and advisory services. Half of bankers expected regulatory burden to hold steady in the next year, while 43% expected it to get heavier.
Risk perspective
Top risk concerns among community bankers are cybersecurity (96% rating it important or very important), credit risk (84%), market risk (70%), consumer compliance risk (64%) and Bank Secrecy Act compliance risk (63%). More than 7 in 10 said cybersecurity was very important—outpacing the next very important risk factor by 25 percentage points.
Community banks did not have extensive exposure to the London Interbank Offered Rate, which is not expected to be available after 2021. Less than 29% said they had limited exposure to Libor-referencing loans, and only 8% said they had moderate or significant exposure. Of banks with Libor exposure, 27% have a plan to replace the benchmark in their loans and an additional 58% said they are in the planning stage.
Likewise, community banks are making progress on implementing the Current Expected Credit Loss standard for loan loss accounting. Only 3% have not yet started, while 24% are in the planning stage, 40% are collecting and analyzing data, 26% have selected a methodology and are testing and 7% can reasonably estimate the financial effects of the switch. Nearly a quarter said CECL implementation will require them to add additional staff, and 22% said their banks will need to acquire external data.
