Cybersecurity, regulation, and technology and funding costs are community bankers’ most pressing current concerns, according to an annual survey that covers the economic, regulatory, competitive and operational challenges they face.
The findings are part of the 2024 Conference of State Bank Supervisors (CSBS) Annual Survey of Community Banks. The survey, conducted by CSBS and state bank regulators, aims to take the pulse of the nation’s community banks — institutions with less than $10 billion in assets. This year, nearly 370 community bankers from 38 states participated; about two-thirds of participants represented banks with assets between $100 million and $1 billion. The report also contains wide-ranging comments on survey topics from five selected community bankers. Click to read the 2024 CSBS Annual Survey of Community Banks.
Key Challenges for Banks
As in last year’s survey, cybersecurity was the top challenge for surveyed community bankers, with 96% of respondents naming it as an “extremely important” or “very important” risk; that share was up slightly from 93% in the 2023 survey. Funding costs and regulation followed with 89% of respondents reporting them “extremely important” or “very important.” The funding costs percentage was similar to last year’s total, but regulation rose from 81% in the previous year’s survey. Net interest margins and core deposit growth were other top risks linked to the high-interest rate environment of the last two years.
Technology implementation and costs were cited as high risks by 80% of bankers. Liquidity still ranked as a top risk with 78% of respondents indicating that it was either an “extremely important” or “very important” risk, but that was down from 84% in 2023. Still, liquidity was considered a top risk by just 35% of respondents in 2022, evidence that the economic environment weighs prominently in perceptions of risk.
Trends in Technology, Competition and Funding
The 2024 survey revealed that community banks are more frequently partnering with fintech firms to provide services to their customers. In 2023, 59% of respondents reported they had no relationship with a fintech firm, but in 2024, that proportion had declined by nearly half to 32%. Bank-fintech partnerships are most common for services such as mobile banking support, loan origination and underwriting, and other process improvements, including fintech hubs.
Although community banks were largely able to keep deposit balances stable in 2024 after a turbulent 2023, stiff competition meant the costs of those deposits — both transaction and non-transaction — spiked. Bankers reported that other community banks are still their primary competitors for transaction (e.g., checking accounts) and non-transaction accounts, but regional and national banks and credit unions have made inroads in competing for transaction accounts.
Bankers have relied more on wholesale funding, such as brokered deposits, Federal Home Loan Bank advances, other borrowings and reciprocal deposits, as deposit competition has accelerated and its associated costs have risen over the past 18 months. Stimulus-related deposits from the COVID-19 era are long depleted, and the historical balance between core (mostly deposits) and noncore (largely funding from external sources) has resumed for the community banking industry.
In the survey, bankers were asked about the stigma associated with using various external sources of funding. While 40% of respondents said that use of the Federal Reserve’s emergency facilities, such as last year’s Bank Term Funding Program, carried a “high” or “very high” stigma, that percentage dropped to 25% for the Fed’s discount window advances. The Fed has made a number of changes to discount window operations over the past 20 years to lessen stigma, and the federal financial institution regulatory agencies have updated guidance encouraging depository institutions to incorporate the window as part of their contingency plans. Click to view the updated guidance for contingency plans.
What’s Ahead
The CSBS Annual Survey of Community Banks provides valuable insights into the opportunities and challenges facing the nation’s community banks — insights that are valuable to bankers, their regulators, and the business and academic communities. In addition to the survey, CSBS produces the quarterly Community Bank Sentiment Index, which tracks community bankers’ outlook on the economy. While the results for the third quarter of 2024 marked the first positive reading since the fourth quarter of 2021, the industry faces several headwinds that will keep regulators closely monitoring credit quality, liquidity and overall profitability in the months to come.
This article is part of a series titled “Supervising Our Nation’s Financial Institutions.” Click to view the other articles in the series.
