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The pandemic has shifted the challenges facing community banks and business conditions have become bankers’ top concern, according to the Conference of State Bank Supervisors annual national survey.
The CSBS said 34 percent of community banks listed business conditions as their greatest challenge, a year after only 6 percent had listed it as their top concern. Business conditions outpaced the next top challenges: regulation, which was cited by 15.9 percent of community banks, and competition, a top challenge for 10.8 percent of banks.
Funding had been the top challenge in 2019 when it was cited by 23 percent of community banks. Only 9 percent of banks listed it as the top challenge in the 2020 survey, released by the CSBS last week.
“This year’s survey findings are presented not as an evolving analysis of banking industry trends but rather in the context of a banking world turned upside down by the COVID-19 pandemic,” the CSBS said in a report on the survey. “The crisis strained the community bank business model – underscored by one banker’s comment that ‘social distancing and shelter-in-place orders created a significant challenge for our customer-facing representatives’ – but also highlighted important aspects of the industry’s human touch.”
The national survey was conducted between April and June, though it was not distributed in every state. Nearly 400 banks participated, including between 10 and 20 percent of state-chartered Massachusetts banks, according to the CSBS. Overall participation was down about 32 percent compared to last year, and the CSBS noted the timing of the survey during the pandemic as a likely reason for the decline.
About two-thirds of the respondents were from banks with an asset size between $100 million and $1 billion.
The Paycheck Protection Program had a significant impact on community banks, which accounted for $196 billion in PPP loans, the CSBS said, about 37 percent of the program’s total funding.
Small business lending overall saw a year-over-year increase of 40 percent, the CSBS said, reversing a decline from earlier years. But lending in the consumer, agricultural, residential mortgage and commercial real estate sectors all declined nationwide, according to the CSBS, citing the tightening of lending standards and terms in the second quarter of 2020.
The survey also found that more than 40 percent of respondents saw supervisory expectations as an impediment to establishing new third-party relationships, while 63 percent of respondents cited the regulatory burden from the Bank Secrecy Act as a major concern.
The CSBS noted that some bankers said BSA and anti-money laundering regulations have created an environment that has become outdated. Complaints included transaction limits that have not changed recently and the lack of updates to BSA enforcement.
The CSBS also used data from FDIC Call Reports and found that community banks increased provisions for loan losses from $1.4 billion at the end of 2019 to $3.2 billion in the first quarter and to $3.4 billion in the second quarter of 2020.
Quarterly charge-offs decreased from the fourth quarter of 2019 to the second quarter of 2020, the CSBS said, with relief from accounting rules for troubled debt restructurings as the likely cause. According to the survey, 76 percent of bankers said the most important factor in increasing reserves was COVID-19 and the related economic impact and credit repayment issues.
Despite challenges faced during the pandemic, the CSBS said bankers see the pandemic as an opportunity to reverse recent problems with economies of scale faced by the industry.
“One banker pointed to the advantage smaller banks have in their ‘nimbleness in adapting,’” the CSBS said. “Another banker noted that loans during the pandemic ‘were never transactional matters. We were presented with several opportunities by bank customers who simply couldn’t get a loan from their large corporate-style banks. Their loss is our gain.’”
