By Christopher Delporte
What a difference a year can make. We’re still fighting a global pandemic, but according to the Conference of State Bank Supervisors’ eighth annual national community bank survey, bankers’ concerns have changed since last year’s survey. In 2020, local business conditions were top of mind for community bankers. This year, the lingering effect of COVID-19 on local economies has created a new concern: historic levels of deposits and narrow net interest margins. As the pandemic continues, banks report significant liquidity. On the flip side, however, 52 percent of community banks described loan demand as a “very important” challenge with a decline in lending, particularly in the business, agricultural and commercial real estate categories.
“Bankers warily eyed shrinking net interest margins, which they listed as a top external challenge in this year’s survey,” wrote the survey authors, who surveyed 470 banks with less than $10 billion in assets. “They sought new sources of noninterest income, cut expenses and looked for ways to reduce the costs of and better use bloated deposits. One banker summarized the problem as being ‘flush with cash and no loan demand.’”
The Paycheck Protection Program initially bloated bank balance sheets, adding about $145 billion in loans at the end of 2020, according to the survey. The volume of PPP loans declined to $111 billion by June of this year. Lending outside the PPP, particularly in the commercial and industrial sector, was “less robust,” report authors noted. Non-PPP commercial and industrial lending declined by $30 billion, or 10 percent, from December 2019 to June 2021.
“This presumably reflects a preference of business borrowers for the PPP,” survey authors wrote. “But it also may reflect banker preferences. When it comes to extending traditional loans in this sector, where banks must assume the risk of nonpayment, many bankers said they have ‘lost their appetite.’”
The pandemic also created some positive long-lasting effects. More than 40 percent of community bankers said it led to increased efficiency, and more than 70 percent of respondents said prospects for long-term lending were improved by new or closer customer relationships.
“Community bank reputations will be enhanced due to their commitment to serving customers throughout the pandemic by remaining open, by taking aggressive action to protect staff and customers and by issuing loans,” a survey respondent said. “However, how the industry operates may be permanently changed as we’ve figured out how to have non-customer-facing work done at home, as well as non-transactional work done more electronically via email, online and other ways.”
Other important findings from this year’s survey include:
- Cybersecurity concerns are increasing, with 81 percent of respondents calling it a very important risk, which is more than double the rate of any other type of operational risk noted in the survey. This is up from 60 percent last year. The Bank Secrecy Act is an increasing concern to community bankers, the survey said. A total of 26 percent rated it as “very important,” compared to 20 percent last year. Almost 29 percent of bankers said they were contacted by law enforcement regarding suspicious activities.
- The COVID-19 pandemic has altered the nature of technological evolution. The cost of technology went from one of the least important issues two years ago to among the most important, with nearly 47 percent of bankers calling it a “very important” challenge. The pandemic created strong incentives for banks to adopt new technologies that meet the needs of their customers. Approximately one-third of respondents increased their online services by more than 50 percent. More than 34 percent said the adoption of new technologies is “very important,” compared to 23 percent last year and 8 percent the year before.
- Concern about the cost of funds is increasing, described as a “very important” risk by 22 percent of respondents compared to a year ago when, according to CSBC, “it barely registered as a challenge.” Greater concerns with the cost of funds are less obvious in an era of record low interest rates, according to the survey. This may reflect, as one banker said, a continuing effort “to look for low-cost deposits to get [the] cost of funds as low as possible.” It may also reflect concerns with the potential vulnerabilities from competition, according to the survey, which bankers named as their biggest impediment to attracting and maintaining core deposits. “We will continue to pay the lower rates until forced by competitors to increase the rates,” a banker said.
- Regulation risk is a continuing challenge, with nearly 50 percent calling it “very important.” About 25 percent of bankers considered consumer compliance and compliance generally to be “very important.” Both ranked higher than they did last year. Although the overall costs of compliance declined, the survey said respondents continued to report being “crushed” by “stifling” and increasing regulations. The survey authors, however, noted an attitude shift. Almost all bankers said regulatory guidance on loan modifications was important, at least to some extent, in helping their banks respond to the pandemic. A majority cited similar benefits for a reduced focus on examination activities and more flexible supervision.
