Cost of funds will have the biggest influence on profitability for community banks over the next year, according to a recently released survey of 571 financial institutions.
That was the key takeaway from community banks surveyed by the Conference of State Bank Supervisors. The survey was presented at the Community Banking in the 21st Century research and policy conference hosted by the St. Louis Federal Reserve, CSBS and the Federal Deposit Insurance Corp.
About 35% of respondents said funding will have the largest impact on earnings over the next year.
A panel of community bankers at the conference said the main driver behind that threat to profitability is the competition for deposits from financial technology companies and online banks. Digital competitors like Ally Financial Inc., Synchrony Financial and Goldman Sachs Group Inc.'s Marcus have grown deposits at a rapid clip by paying high rates on savings accounts. Ally recorded year-over-year deposit growth of 17.6% as of June 30, according to recent Federal Deposit Insurance Corp. data.
Community banks must have a strategic funding plan in this technology-driven environment, said Jonathan Griffin, chief business development officer of Federal Home Loan Bank of Indianapolis.
"Your customers' last online experience is their new expectation and that's really tough for community banks," he said.
In order to compete, Bennington, Neb.-based Bank of Bennington, a subsidiary of Hilltop Bancshares Inc., is working to grow its deposit base by educating customers on the benefits of depositing with a community bank.
"We have spent a lot of time telling the community bank story and how deposits in community banks are reinvested into those communities and help with economic development. And it's been amazing the amount of deposits we've been able to attract. We've grown our deposits by about 15% this year," said CEO Leslie Andersen.
The concern regarding funding among community banks is a sharp contrast from past years, when regulatory costs ranked as the biggest concern among community banks surveyed by CSBS. This year, only 4% of respondents said regulatory costs will have the largest impact, compared to 60% in 2016.
"This is a real turnaround from previous years. Remember in 2013 … they were still rolling out all of the Dodd-Frank rules and there were a whole lot of rules to be written still. [There was] huge amounts of uncertainty," said Michael Stevens, senior executive vice president of CSBS, in discussing the results.
However, despite community banks' decreasing concern about regulatory costs and profitability, about 43% of respondents believe the regulatory burden on their banks will grow heavier over the next year.
