Community bankers seem to expect a lump of coal for the holidays.

The industry has a lot going for it. National unemployment is low, hovering around 4% in October, according to the Bureau of Labor Statistics. Third-quarter banking profits rose more than 5% from a year earlier, based on data from the Federal Deposit Insurance Corp. Bank stocks are up by double digits this year.

Still, bankers have a grim outlook for 2018. Several factors are at work, ranging from concerns over lackluster loan demand and low yields, rising deposit prices and competition and persistent regulatory burden.

In short, bankers are finally adjusting to the industry’s new normal.

“Even though the economy seems a little bit better there’s still a lot of issues out there in the market,” said Tim Scholten, founder of Visible Progress, a consulting firm. “I don’t think things are necessarily as great as what sometimes it feels like it should be. It’s a different world than what we’re used to.”

For the first time in its nearly three-year history, a banker confidence index from Promontory Interfinancial Network remained below 50 for two straight quarters, indicating pessimism among respondents. The index, which is based on a scale of up to 100 points, tracks views on access to capital, loan demand, funding costs and deposit competition.

“Why aren’t bankers more confident?” said Paul Weinstein, a Promontory senior adviser. “We’re trying to figure that out. There are lots of potential possibilities. It could just be the initial exuberance that some had with what they thought would happen in Washington has faded.”

Muted enthusiasm is likely being influenced by customers’ reactions, said Jon Winick, CEO of Clark Street Capital. For instance, many banks are chasing commercial-and-industrial credits at a time when borrower demand is below many bankers’ expectations.

Total C&I loans on Sept. 30 were flat on a linked-quarter basis, according to FDIC data.

Almost 51% of the bankers surveyed by Promontory said current loan demand had moderately or significantly improved from a year earlier. About the same percentage expected demand to rise in the next 12 months.

Bankers often assert that businesses are waiting for certainty, such as last year’s presidential election or tax reform, before deciding to borrow and make investments.

Winick questioned that logic, postulating that potential borrowers may have become more debt-averse since the financial crisis. Others may simply have enough cash on hand to fund their operations.

“I don’t buy that a trucking company in suburban Chicago is holding off on buying new trucks because it is waiting to see what Washington does,” he said.

Concerns over regulatory issues could also be forcing some banks to pass on certain loans, said Trent Fleming at Trent Fleming Consulting. Overall, “a downward creep” in regulation makes lending more difficult for banks, he said.

“I’m little bit pessimistic myself just from the regulatory burden,” Fleming said. “In our industry, the burden of regulation is the single biggest drag on what’s going on. Bankers have been hoping for relief.”

Deposit competition and the possibility of higher funding costs was another concern. About 64% of respondents to the Promontory survey said deposit competition had increased over the past 12 months. About 57% of bankers felt that way in the second quarter.

Nearly 90% of the survey’s participants expect funding costs to rise.

“The price for deposits has gone up, while the loan pricing hasn’t changed all that much,” Scholten said. “It is creating added pressures on margins.”

Deposit competition is on the rise as banks with at least $50 billion in assets look to comply with rules tied to their liquidity coverage ratios, said Ciaran McMullan, president and CEO of Suncrest Bank in Visalia, Calif.

While optimistic about his $529 million-asset bank’s operations, McMullen said he understands why other may have a gloomier outlook.

“I think bankers have always been a bit pessimistic,” McMullan said. “There are plenty of bankers that remember staring at the ceiling at night wondering how they would get out of the fix they were in during the crisis. … It’s hard to shake that.”

The survey, which was conducted during the first half of October, took place before some important developments for banks. Tax reform has since progressed in Congress, and Richard Cordray stepped down as director of the Consumer Financial Protection Bureau.

“If tax reform happens that will probably change the needle a lot,” Winick said. “After the election things haven’t happened as fast as people had wanted. But there are a lot of very encouraging changes, so this [pessimism] could be short term in nature.”

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Jackie Stewart

Jackie Stewart covers community banks and mergers and acquisitions for American Banker.