Back to balance sheet basics

Balance sheet management concerns—net interest margin, cost of funds, core deposit growth—dominate banker concerns in newest CSBS survey.

By Evan Sparks

The basics of balance sheet management have returned to the fore of bankers’ attention as interest rates have climbed, according to the Conference of State Bank Supervisors’ 2023 Survey of Community Banks. Nearly 89% of bankers said net interest margins were an extremely or very important external risk factor, followed by 87% for cost of funds and 84% for core deposit growth.

Above-target inflation drove concerns over costs of deposits, with nearly 64% saying inflation had an “extreme” impact on cost of funds. However, three-fourths of community bankers said that inflation—whether temporary or persistent—is manageable. Seven in 10 bankers expected inflation to persist, with nearly half projecting that year-on-year inflation would not decline to the Fed’s 2% target until 2025 at the earliest.

Balance sheet concerns trumped regulatory burden, which 81% rated as extremely or very important, and the cost of technology, at 74%. Just 14% said climate risk was an extremely or very important risk to the bank, with 31% saying it was slightly important and 29% saying it was not important at all.

When it came to operational risks, cybersecurity remained on top, consistent with trends over the past several years. More than 90% rated cyber as an extremely or very important risk. Other top-rated internal risks included liquidity (84% extremely or very important) and staff retention and technology implementation (tied at 77%).

Online banking enhancements are top product priority

Community banks continue to roll out new online banking tools. While 38% offer online loan applications, another 28% expect to do so in the next year. Likewise, 28% offer online account opening for both commercial and retail clients, and another 31% plan to do so in the next 12 months. Few banks reported plans to exit products and services in the next year, but about 5% of community bankers said they planned to stop making or limit Small Business Administration loans, and 5% also said they would stop or substantially limit unsecured small-dollar loans.

As might have been expected after the collapse of FTX and other crypto sector challenges, community bank interest in cryptocurrency waned in 2023. Eight percent said they planned to offer crypto services in the next 12 months, and 0.4 percent said they currently did, down from 11% and 1% in 2022, respectively. The share of bankers who said meeting consumers’ crypto needs was moderately, very or extremely important declined from 19% to 8%.

Challenges remain with core satisfaction

Top-priority technologies for banks were e-signature capability (66% calling it very or extremely important), remote deposit capture (also 66%), and integrated loan processing systems (57%). More than half of banks already offer e-signature verification, and consistent with prior years, 88% offer remote deposit capture.

Lower on the tech punch list were interactive teller machines (with just 15% calling them very or extremely important and 46% reporting they were not important at all), banking as a service partnerships (also 15%) and financial planning tools (19%). Looking to promising tech opportunities in the future, bankers were most likely to cite mobile banking expansion (81%), fully integrated loan processing systems (65%) and cloud-based core platforms (47%).

Bankers were generally satisfied or neutral with their technology in different areas of the bank, with the notable exception of core providers. While 10% were very satisfied with their cores and 45% were somewhat satisfied, 22% were somewhat dissatisfied and 5.4% were extremely dissatisfied. Digging down into various core services, bankers were least satisfied with cost (43%) somewhat or extremely dissatisfied), contract flexibility (39%) and ability to roll out new products and services (30%).

Consolidation slows

The survey confirmed market data showing that mergers and acquisitions have slowed among community banks. Just 5.7% of respondents received and seriously considered an acquisition offer, and 11.5% said they had made an offer to acquire another bank.

Among banks participating in M&A offers, the top reasons for entertaining an offer were costs of doing business (58% very or extremely important), regulatory compliance costs (50%) and inability to achieve economies of scale (50%). Among aspiring acquirers, the top reasons were achieving economies of scale (62%), entering a new market (60%) and expanding within an existing market (52%).

The survey featured participation from 462 community banks across 32 states.


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