The rising costs of technology and increasing regulatory demands are becoming bigger concerns for community bank executives, according to the Conference of State Bank Supervisors’ (CSBS) 2024 community bank survey.
Additionally, community banks have felt the squeeze of the higher-for-longer interest rate environment, with close to 90% of surveyed bankers saying cost of funds is a crucial external risk to their bank,
Banks have grappled with higher costs as competition for deposits intensified. That’s affected banks large and small, but community banks have fewer lines of business than do Wall Street lenders. Margin pressures have hampered bank earnings, which, in turn, has affected hiring and branch expansion.
The majority of the banks that weighed in are state-chartered lenders and have between $100 million and $1 billion in assets, the CSBS said; all banks polled have less than $10 billion in assets.
Roughly 367 community bankers across 38 states participated in the survey between April and July.
About 89% of community bank respondents called regulation a top external risk. That’s up from 81% last year and 77% in 2022.
Surveyed bank executives noted rising competition from fintechs and nonbanks offering payment and banking-type services through mobile apps.
Concerns around the cost of technology are rising, too: A bigger share of those surveyed named it a crucial external risk this year than last year. The largest portion of respondents (49%) view future technological innovation in banking as both a threat and an opportunity, pointing to tech’s double-edged-sword nature for smaller banks.
Almost all of those surveyed said adopting new and emerging technologies is crucial, but costs and implementation are the biggest barrier to doing so, with slightly more community bankers expressing that this year (46%) than last (44%), according to the CSBS. As community banks have sought to grow their online banking services, these lenders are prioritizing remote deposit capture, online bill pay and e-signature verification.
Cybersecurity remains the biggest internal risk in community bankers’ eyes. Although a lesser concern, liquidity is also a top risk for this category of banks.
Brokered deposits, commercial real estate credit quality, FedNow adoption and bank consolidation were also noted in the survey.
More than half of respondents said they are using or plan to use brokered deposits at or near current levels as a wholesale funding source, the survey said, which was up five percentage points from 2023. About one-quarter said there’s a high level of stigma surrounding brokered deposits.
The FDIC in July proposed a measure that would raise banks’ standards for accepting brokered deposits, or “hot money.” Some have concerns that at-risk banks can use brokered deposits to bolster their books when longer-term customers pull their deposits.
More community bank respondents than last year expect commercial real estate credit quality to worsen, with a dimmer outlook over the next 12 months for office and retail than for multifamily CRE loans.
About one-quarter of community bank respondents told the CSBS they’re now receiving instant payments through the Federal Reserve’s instant payments service FedNow, and 44% plan to add the capability in the next 12 months. The send function is still less popular, however: Only 9% of respondents offer that service, although 39% plan to add it in the next year.
About 6% of community bank respondents said they received and seriously considered accepting an acquisition offer in the past year — the same figure as 2023. About 12% said they had made an offer to scoop up or merge with another bank in the past 12 months, also the same as 2023.