Costs are high and competition is fierce. But catalysts are mounting as community banks prepare for 2018: Low unemployment, economic growth, rising consumer and small-business confidence, and notably, the prospect of corporate tax cuts.
U.S. employers added 228,000 jobs in November, according to the Labor Department. Robust hiring pushed the jobless rate down to 4.1% the past two months and put the economy on pace for roughly 3% growth in the fourth quarter, Atlanta Federal Reserve forecasts show. That would mark three consecutive quarters of GDP expansion at or near 3%, a feat not seen since prior to the 2008 financial crisis.
The Conference Board's consumer confidence index rose in November and produced its loftiest reading in 17 years. The National Federation of Independent Business' monthly survey of small business optimism in November hit its highest level since the 1980s.
The "indicators clearly anticipate further upticks in economic growth," NFIB Chief Economist William Dunkelberg said in releasing the results this week.
Though the long-term effects of a looming corporate tax cut remain to be seen, Dunkelberg, who is also chairman of Liberty Bell Bank in New Jersey, joins other bankers in anticipating that lower taxes would spur higher near-term levels of investment in business expansion. That could lead to more borrowing to finance growth.
"You throw a big tax cut on top of an already solid economy, and it's going to stimulate things," Randall Chesler, president and CEO of Montana-based Glacier Bancorp Inc., said in an interview this week. "It could be a substantial benefit" in the form of more business activity.
Final details of the tax package have not yet been formally released, and legislation has not reached the White House. But on the corporate front, plans have focused on lowering the tax rate from 35% to close to 20%.
In addition to benefiting their customers, that change would have a big effect on many community banks' bottom lines. An S&P Global analysis found, for example, that the median effective tax rate for publicly traded banks and thrifts in the range of $1 billion to $5 billion in assets was 31.9% at the end of 2016.
Matthew Deines, finance chief at Seattle-based Sound Financial Bancorp Inc., said the impact of lowering the tax rate to around 20% could result in a more than 20% boost to bottom-line income, along with potentially similar bumps to earnings per share, return on average assets and return on equity.
"That could really help this industry build capital more quickly," Deines said in an interview this week. "And we will see a larger amount of income flow through to shareholders" in the form of greater dividends and share repurchases.
Economic catalysts are important because, for many community banks, commercial clients were leery of borrowing in 2017. That, along with stiff competition from larger lenders, left small banks struggling to grow bread-and-butter commercial-and-industrial loan books. A recent S&P Global analysis found that banks between $1 billion and $10 billion in assets grew C&I loans just 0.5% during the third quarter, while growth of such loans at banks between $100 million and $1 billion in assets was flat.
That developed at a time when costs are high, largely because of regulatory requirements that mounted in the years after the crisis.
An upshift in business loan demand would enable community banks to fully capitalize on rising interest rates. Greater volume would mean more new loans at higher rates following three Federal Reserve rate increases in 2017 — the latest announced this week. That could make up for high costs and help fortify earnings.
Greater interest income is also vital now because banks are starting to face pressure to pay higher rates on deposits. After the first two rate hikes, the banking industry's cost of interest-bearing deposits rose to 0.46% through the first nine months of 2017 from 0.36% in the same period a year earlier, an S&P Global analysis found.
Notably, Fed policymakers this week professed confidence in the economy's health and signaled that they could raise rates three more times in 2018.
Glacier's Chesler said most banks have positioned their businesses to benefit more from higher rates on loans than they would be hurt by rising funding costs. He said that, along with more economic activity, helps set up conditions favorably for next year.
"There is plenty of confidence going into 2018," Chesler said.