By Evan Sparks
AAmid the COVID-19 recession, business conditions were most often called the biggest challenge community banks face, according to one annual survey released yesterday by the Conference of State Bank Supervisors. More than a third of banks cited business conditions, followed at a distance by regulation (16%), competition (11%) and core deposit growth (9%). In comparison, the growth of base deposits was the most cited challenge in the more harmonious economic times in 2019.
In response to these difficult business conditions amid COVID-19, 79% of community banks have increased their loans to small businesses and farms. This was visible in the inflated balance sheets of community banks reported during the administration of the survey in June, with lending to small businesses up 40% year over year. After joining the Small Business Administration’s Program 7 (a) for Paycheck Protection Program Loans, 77% of community banks said they would stay in the program.
The growth in commercial loans was accompanied by a 33% increase in transaction deposits, easing concerns of previous years about the growth of core deposits. Just over 45% of banks rated liquidity risk as important or very important, down more than 12 points from last year, and banks were less likely to prioritize deposit growth over growth. loan growth. Long-term demographic trends continued to worry banks, with 28% saying market depopulation was a big or very big barrier to attracting and retaining core deposits. While only 2% said they had an online division only to collect deposits or loans, An additional 19% said they are considering or considering launching one.
COVID-19 drives technological and operational changes
Beyond loans, community banks have taken other steps in response to COVID-19. Seven in 10 have implemented a work-from-home policy for staff whose jobs allow it, and 47% have increased their offers of paid and unpaid sick and family leave. Only 5% of community banks reduced their staff and 3% added staff. Almost all community banks (98%) have restricted access to the lobby and 23% have closed at least one branch for some time. About a third of banks have reduced or eliminated late penalties on loans and fees on deposit accounts.
The need to improve remote working and banking capabilities has led to greater implementation of technology in community banks. The availability of online loan closing increased in 2020; the share that offered them rose from 6% to 20%, while the share that plans to offer them in the next 12 months fell from 21% to 29%. Despite the rise, the number of online loan applications is still lower than online loan applications, with around 40% of banks currently offering them and a further 29% plan to do so in the next 12 months.
The share of banks offering remote deposit capture increased by eight points to 87%. Other technologies widely adopted by community banks were mobile banking (95%) and electronic bill payment (81%). Among transactional and advisory services, most community banks offered cash management (69%). Smaller shares of community banks offered personal money management (39%), prepaid cards (28%), remittances (22%) or payroll cards (8%), although 13% said they were ‘they planned to add PFM tools next year. About 36% of community banks offer wealth management.
Banks dissatisfied with base costs, flexibility and innovation
With community banks relying on main processors to deliver new technology, the survey for the first time asked about satisfaction with the treatment of cores. More than four in ten community banks said they were dissatisfied or very dissatisfied with the cost of their basic treatment, compared to only 27% who said they were satisfied. Likewise, almost half were dissatisfied or very dissatisfied with the flexibility of their hearts, compared to only 20% who were satisfied. Cores were rated slightly higher on the speed of innovation (35% satisfied / very satisfied versus 39% dissatisfied / very dissatisfied) and the ability to deploy new products and services (33% satisfied / very satisfied versus 37% dissatisfied /Very unsatisfied) .
While 57% of banks relied solely on their primary vendor for digital banking products, 30% rely on third parties in addition to the primary and 12% are looking for other non-primary vendors. About as many community banks said they were dissatisfied with the third-party compatibility of their cores as they said they were satisfied, but banks were three times more likely to be very dissatisfied than very satisfied. Four in 10 banks said their core contracts were barriers to fintech partnerships, either due to a lack of API access, contractual exclusivity arrangements, or both. Almost 78% said that it would be useful to get more information about the main suppliers from the bank branches that oversee them, a policy priority that Federal Reserve Governor Miki Bowman delivered remarks at an ABA event earlier this year.
Mergers and acquisitions are slowing; compliance costs remain stable
The survey showed a decline in M&A activity among community banks, with 10% of banks receiving an takeover offer (up from 14% in 2019) and 13% making an offer last year (up from 25%). % in 2018). Among acquirers, the factors considered to be important or very important in making offers were achieving economies of scale (77%), expanding into the market (65%) and exploiting underutilized potential (55 %). Reasons considered important or very important for receiving an offer to sell included challenges with economies of scale (67%), regulatory costs (61%), and costs of doing business (50%).
The share of banks citing compliance costs as a reason to sell fell 10 points from a year ago. With several regulatory relief provisions focusing on community banks entered into force In recent years, compliance costs as a share of total spending have declined or remained stable across various categories. Fifty-five percent of banks said the bank secrecy law risk was a significant or very significant risk, with 63% of banks citing the charges associated with reporting warrants as the most concerning issue.