Community Bankers Describe a Year of Challenges and Opportunities

This post is part of a series titled “Supervising Our Nation’s Financial Institutions."

The nation’s community bankers are emerging from the COVID-19 pandemic a little battered but somewhat buoyed by operational changes that have turned into newfound efficiencies. That’s one of the main themes of this year’s Conference of State Bank Supervisors’ (CSBS) National Survey of Community Banks. The survey is conducted annually by CSBS and state banking regulators. Nearly 500 bankers answered questions about the challenges and opportunities they face in the industry.

Challenges Old and New

Not surprisingly, the pandemic and its economic effects were top of mind for the bankers who responded to the survey. While “business conditions” were cited in last year’s survey as the predominant challenge, this year the pressure on net interest margins was noted by almost every respondent. The main culprit is weak loan demand.

Banks have plenty of low-cost deposits but are struggling to deploy them in a still-recovering economy teeming with more competitors for loans than ever. The Paycheck Protection Program provided a much-needed boost in fee revenue, but it was temporary. While some bankers reported an increase in demand for small business and commercial real estate loans, they will need to resist the temptation to loosen standards to land those borrowers, which would increase credit risk.

In light of the margin squeeze, community bankers are looking to cut costs where they can and to increase noninterest revenue, such as fees. But those offsets are risky. As one banker noted, “most cost-cutting measures will reduce customer service and give customers fewer compelling reasons to bank with a community bank.”

Bankers answered several questions about the operational risks they face. Dominating all the queried risks was cybersecurity. More than 80% of respondents deemed cybersecurity a “very important risk,” with malware, social engineering and data manipulation topping their cybersecurity concerns. Staffing—which has challenged banks as it has other businesses throughout the pandemic—also remains a top concern, as does succession planning.

Turning Lemons into Lemonade

While bankers who participated in the survey were not shy about cataloguing all the challenges they face—pandemic-related or not—they were also willing to acknowledge that some of these challenges have turned into benefits or opportunities. Many of these newfound benefits are technology related. Whether out of necessity because of pandemic shutdowns or due to a conscious attempt to cut costs, community bankers and their customers have accelerated the adoption and use of online account openings, internet banking, mobile banking and mobile deposits.

Roughly one-third of surveyed bankers reported that online services increased by at least 50% as a result of the pandemic, and most expect that technological innovations will become even more important to the community bank business model. More than one-third of bankers view existing and future technology as more of an opportunity than a threat; very few believe the converse. Regardless of their views, however, the cost of new and future technologies remains a concern.

About half of surveyed bankers noted that the pandemic led to increased efficiency and 40% said it improved customer service; among those who noted improvements in both, most bankers believed these changes are permanent. And despite current concerns about loan demand, the majority of surveyed bankers believe long-term small-business lending prospects improved as a result of closer customer relationships fostered during the pandemic.

The Road Ahead

Despite the many challenges that preceded or sprang from the pandemic, community bankers remain warily optimistic about the future of their industry. If anything, the pandemic reinforced the bond that many community banks have with their customers and local economies, and that bond is what differentiates them from their nonbank and larger bank peers.

The pressure on net interest margins is a long-term, secular trend that will not entirely go away once the economy recovers fully and interest rates rise. The survey has deepened our understanding on a number of issues, but this year, more than any other, it shows how resilient our country’s community banks are in the face of economic challenges.