Funding costs top small banks’ list of concerns

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ST. LOUIS — Funding costs and loan demand will have the biggest influence on small-bank profits in the coming year.

That was the key takeaway from this year’s poll of 571 community bankers conducted by the Conference of State Bank Supervisors. The results, issued Tuesday, were presented as part of the annual community banking research and policy conference hosted by the Federal Reserve, the CSBS and the Federal Deposit Insurance Corp.

About 35% of respondents predicted that funding costs will have the most impact on earnings over the next 12 months. Nearly a third pointed to loan demand. Only 11% said loan rates would play a dominant role in profitability.


The survey, conducted between April and July, found that nearly a quarter of bankers believe deposit growth is their biggest challenge. Regulation was cited by 16% of respondents, while 15% said competition.

Bankers' focus on deposit pricing and liquidity is a major shift. In prior years, respondents pointed more toward regulation as their greatest concern.

“Liquidity risk is a major concern for bankers,” Andrew Meyer, a senior economist at the Federal Reserve Bank of St. Louis, said in presenting the survey’s findings. “That is a sharp contrast from 10 years ago when bankers wondered what they were going to do with all their liquidity.”

“There is a recognition that it will be increasingly difficult to attract core deposits over the next five years,” added Alisha Sears, a senior analyst at the CSBS.

About two-thirds of respondents had $100 million to $1 billion in assets.

More than half of the bankers ⁠surveyed said the greatest competition comes from banks that have branches in their market but are headquartered elsewhere. Only 10% of bankers said that banks without local branches were capturing market share in nontransaction accounts.

Attendees said they are seeing more competition from fintech.

"Liquidity is definitely something that is on the forefront for community banks," said James Black, president and CEO of the $458 million-asset Touchstone Bank in Prince George, Va. "Competition is coming from all sources — credit unions, fintech and the app world."

For now, community banks have been able to keep deposit levels steady.

The ratio of transaction deposits to total assets for banks with less than $500 million in assets was 29.5% in 2018, up from 26.5% in 2014. The ratio for banks with $500 million to $1 billion in assets edged up to 13.4% from 13% over that time.

Regulators are keeping an eye on liquidity but have not raised any red flags.

"Nothing at this time has me overly concerned about liquidity, especially with community banks," FDIC Chairman Jelena McWilliams said in an interview.

Still, McWilliams acknowledged the challenges smaller banks face.

"There is a war on deposits," she said. "It is a struggle for community banks when big banks can offer $300 to open an account. You also have credit unions. … When you have limited share of the market, and limited branches and geography, getting deposits is going to be a challenge."

Though liquidity tops bankers' list of concerns, they are still worried about regulation.

The survey found that in 2018 regulatory costs for state-charted community banks rose 4.2% from a year earlier to $4.9 billion. Those costs peaked at $5.4 billion in 2016.

More than 40% of respondents said they think regulatory burden will get heavier over the next 12 months, while 51% said they believed the pressure would remain the same.

Regulation “is a concern that, by no means, has passed,” Meyer said.

Meanwhile, community banks said they are slowly making progress in preparing for the Financial Accounting Standards Board’s Current Expected Loss Standard for loan losses.

About 40% are in the data collection and analysis phase. A quarter have selected an approach and are in the testing phase. Another 24% are still in the discussion and planning phase.

A quarter of the bankers said CECL will force them to employ a larger staff. But 60% said they have adequate internal data for the looming standard.

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Community banking Liquidity Deposits CECL Federal Reserve CSBS FDIC
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