CSBS Survey Highlights Top Risks and Challenges

In the well-known competition show “The Amazing Race,” eleven duos travel the globe in a race against time to come out on top. Teams square off not only against each other, but also their own comfort zones and sometimes their own teammates, as the series of challenges on each episode test contestants’ knowledge, physical skills, bravery, and ability to think on their feet. While one team will ultimately win the $1MM prize, all of the contestants walk away from the show having truly tested their ability to perform physically and mentally during each leg of the race.While community banks likely won’t be serving staff fried bugs or having them roll heavy barrels up a hill, there are still metaphorical hurdles for their teams to overcome. What do they regard as the top challenges affecting their ability to boost profitability and manage risk? We review the results from the 2024 Conference of State Bank Supervisors’ (CSBS) Annual Survey of Community Banks. The survey highlights the views of 367 respondents across 38 states, from banks with less than $10B in total assets.External RisksRespondents to the survey see regulation and cost of funds as the joint top external risks facing their institutions. Increased federal regulatory and supervisory activity and the costs of compliance have likely contributed to the consistent increase in the percentage of community bankers listing regulation as an “extremely important” or “very important” issue (89% in 2024 compared to 81% in 2023 and 77% in 2022). Given the high interest rate environment, community bankers are also concerned about net interest margins and core deposit growth. Although the Fed cut the interest rate in September, the expected decline in deposit costs is likely to lag. What’s more, respondents see competition and economic uncertainty as the two most significant challenges to attracting and retaining core deposits. In terms of inflation, 43% expect it to return to the Fed’s 2% target rate in 2025, while 37% think this is only going to happen in 2026 or later. Encouragingly, just under three-quarters of survey respondents say that, regardless of whether inflation persists or is more temporary in nature, it will be manageable. Internal RisksWith community banks increasingly adopting new technologies and engaging in third-party partnerships, it’s unsurprising that cybersecurity continues to rank as a top internal risk. Almost all the survey respondents (96%) rate it as very or extremely important. Cybersecurity is also regarded as the most difficult challenge to manage in relation to implementing new technology over the next five years. Technology implementation costs are the second most highly rated internal challenge and the biggest impediment to adopting new technologies. However, despite the costs, banking technology is seen as more of an opportunity than a liability by half of the respondents, and as both an opportunity and a risk by 45%. The vast majority rated operational efficiency tools such as e-signatures, remote deposit capture, and integrated loan processing systems as the most important technologies for their banks. Also, liquidity has been a key issue for several years, following a sharp fall in deposits post-pandemic and increased regulatory pressure to maintain liquidity. That said, it’s dropped to third place this year in terms of being rated as either an “extremely important” or “very important” risk (78% in 2024 compared to 84% in 2023, but still considerably higher than the 35% in 2022). The survey highlights that CFIs are now more reliant on wholesale funding sources such as brokered deposits and advances from Federal Home Loan Banks. Use of these funding sources has more than doubled since the end of 2021. Looking AheadAccording to the survey, community bankers expect to see a worsening of credit quality in terms of individual loans (65%), commercial real estate (CRE) loans (62%), and commercial and industrial loans (54%) over the next year. Respondents suggest that office property loans pose the biggest credit quality risk for CRE portfolios.  Survey respondents were also asked about their plans to adopt the FedNow® Service. Over one-fifth already offer the ability to receive FedNow Service payments, and 44% plan to offer this in the next 12 months. Only 9% currently offer FedNow Service sending capabilities, but approximately 40% plan to offer this in the next 12 months. Just over 8 in 10 respondents say that expanding their mobile banking services will be the most promising opportunity for their bank over the next five years, followed by implementing a fully integrated loan processing system. As always, the CSBS survey provides an interesting snapshot of community banks’ main challenges and how these have changed compared to previous years. Carried out between April 15 and July 15, 2024, this was the 11th annual CSBS survey. The full report as well as the results from previous years can be accessed here.