Slideshow Top Threats to Small Bank Profits

  • April 12 2016, 4:00pm EDT
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Long-term worries, short-term worries, the broader economy and more. Community bankers see lots of obstacles to earnings growth this year, according to a recent survey of 250 small-bank executives conducted by Vining Sparks.

Macro Mess

The economy got off to a rough start in 2016 and, though it has improved lately, community bankers' outlook for the rest of the year is far from rosy. Most of those surveyed said that the economy would either contract or continue at its current pace this year, and not one predicted substantial improvement.

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Too Much Regulation

More than 83% of bankers surveyed said that mounting regulation and the costs associated with complying with them could suppress earnings growth this year. The results varied by region. Just 64.3% of the banks surveyed from the Federal Reserve Bank of Richmond region cited regulation as a chief worry. In the Cleveland Fed region, it was 100%.

Increased Funding Costs

Banks are facing a host of challenges these days, but the cost of funding loans is not one of them. According to FDIC data, banks' average cost of funds fell from 3.47% in 2007 to 0.33% at Dec. 31. But that will change if the Federal Reserve begins to meaningfully raise interest rates. More than 39% of the bankers surveyed said they are now worried about funding costs eating into profits.

Unchanged Interest Rates

Interest rates can be a double-edged sword. Yes, low rates keep funding costs down, but they also suppress net interest income. Roughly 17% of bankers surveyed said that their profits could suffer if interest rates remain unchanged. Banks in the $1 billion- to $10 billion-asset class are the most worried. Nearly 38% of executives in that group cited unchanged rates as a top concern.

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Loan Troubles

Bankers are becoming increasingly worried about asset quality, with 22.4% saying that loan delinquencies or defaults could reduce profits this year. Banks in energy-dependent regions seem to be most vulnerable. Thirty-seven percent of bankers from the Kansas City region, 21% from Dallas and 33% from Minneapolis — a region that includes oil- and gas-rich North Dakota — cited weakening asset quality as a top concern. Anxiety is high in the Atlanta region as well, perhaps because it includes portions of Louisiana.

Shrinking Loan Portfolios

More than one in five bankers surveyed said that declines in total loans could weaken profits. While an increasing number of bankers cited inadequate capital as a potential impediment to loan growth, most -- 57% -- said that the greater threat is lack of demand. Lack of quality applicants — many of whom are turning to online lenders — and regulatory requirements could also suppress loan growth, they said.