Seven Key Themes From the 2024 RMA Community Bank Survey

The Covid-19 pandemic and its economic fallout dramatically changed the operating landscape for community banks. Today’s higher interest rates—a product of post-lockdown inflation—are pressuring profitability, and forcing banks to more closely manage their liquidity, deposit rates, and margins.

What’s more, the leap in digital capability that enabled service continuity and a smooth transition to remote work left banks with more technology risk—and a greater share of digital-first customers with the ability to move deposits at the first sign of bank stress.

In RMA’s latest Community Bank Survey, we explored the top concerns of community banks and their responses to them in this post-pandemic era. About a third of the 210 survey respondents were CEOs or reported to CEOs, 23% were senior managers, and 22% were middle managers. More than half work in risk management. The majority (66%) represented banks with assets of $1 billion to $10 billion.

Among respondents’ biggest concerns are interest rates, along with risks created by their spill-over. Banks expect net interest margins to suffer for as long as this rate environment persists. They’re exploring ways to compensate by boosting revenue and cutting costs. They’re also focused on liquidity alternatives; depositors demonstrated in their flight to big banks last year that they’ve become a more volatile source of funding. Meanwhile, community banks are coping with the effects of pandemic work-from-home policies, both in their ability to attract talent and in how vacancies in the office space market are heightening credit risk.

The regional banking crisis last year highlighted the costs of underestimating these new market dynamics and reminded banks that maintaining strong customer relationships remains essential. Community banks are keenly aware of the potential pitfalls they’re facing in the year ahead. Here are the key themes that emerged from the survey, revealing the focus of community banks’ risk management efforts:

 

Theme 1: Interest Rates Are the X Factor of 2024

The high-for-longer interest rates prompted by pandemic-related inflation continue to dominate concerns and activity at community banks.

Partly it’s because high rates, after more than a decade of cheap money, can mean big disruptions. Case in point: The upside-down investments in low-rate, long-term assets that played a part in last year’s destabilizing bank failures and deposit runs. The regional banking crisis reminded banks of what can happen when they’re caught out by fast-moving rates.

Among all risks, interest rate risk, by far (57%), had the most negative effect on banks’ strategic plans over the previous 12 months, survey respondents said (see Figure 1). And a related risk—liquidity—came in at number two (32%).

Figure 1. Most disruptive risks to bank strategy over the past 12 months

How are they reacting? According to open-ended survey responses, banks are:

• Stepping up interest rate-risk stress testing and asset-liability committee reporting.
• Cutting back on lending to preserve liquidity.
• Raising interest rates to help prevent the flight of deposits to large banks, which are perceived to be safer.

Looking ahead, 52% of respondents said interest rates will again be a top concern over the next 12 months, second only to cybersecurity risk at 56% (see Figure 2), and 60% said interest rates are the top external threat to success over the next year. Overall, 73% of respondents said they will increase the time, attention, and resources they spend on interest rate risk this year. “We will be watching the market very closely in the near future for both credit risk and interest rate risk…The purpose is to avoid any surprise to the bank’s operations and bottom line,” said one survey respondent.

Figure 2. The risks that most concern banks for the year ahead

 

Theme 2: Net-Interest Margins Are Under Pressure

While rising interest rates can be beneficial to a bank’s bottom line, the impact of a 525-basis point hike in little more than a year for community banks has largely been rising pressure on net-interest margins. Citing funding costs, 70% of respondents said that their net-interest margin had fallen over the past 12 months. About two-thirds expect net-interest margin pressure to increase over the next 12 months.

To counter this, they are targeting higher lending rates, upselling, and expansion into new markets as ways to drive top-line growth (see Figure 3). “Management is focused on retaining our customers,” said Tom McDonald, EVP and chief risk officer at Maine Community Bank. “But we’re also looking to grow core deposits, add new products and cross-sell to them while pricing our offerings competitively.”

From a cost perspective, they’re exploring efficiencies through technology, cuts to travel and training, and layoffs to save cash (see Figure 4). Seventy percent of respondents said they would focus on a combination of increasing revenue, controlling costs, and reducing expenses in the coming 12 months to improve net-interest margins.

They also plan to focus more on customer retention. In fact, 35% of respondents said a key tactic would be improving their value delivery to current customers.

Figure 3. Top steps banks will take to grow revenue in the coming year

Figure 4. Top steps banks will take to manage costs in the coming year

Another possibility is that banks will pursue acquisitions to realize the scale and efficiencies they need to keep up. Others may determine that the best course for stakeholders/owners in this challenging environment is to be acquired. While just 16% of survey respondents said their banks were likely to acquire another institution in the next two years—a decline from the 29% in the year-earlier survey—another 46% said they were unsure or not permitted to answer.

 

Theme 3: Banks Are Intensifying Their Focus on Liquidity

Profitability isn’t all that is at stake when interest rate risk spikes; stability—and, in extreme cases, survival—might also be threatened. The rapid deposit withdrawals that marked the regional bank crisis left some institutions scrambling to restore the liquidity that’s elemental to their business.

Even now, community banks are feeling the hangover from the crisis. “Large depositors who never worried about FDIC insurance have become more cautious, making it difficult to retain those deposit balances,” one community banker said.

At 32%, liquidity risk was the second-most cited disruptor of banks’ strategic plans over the past 12 months. For the first time in years, community banks were reminded that, in a rising rate environment, deposit interest rates matter. They can help stabilize a bank’s core deposits in times of rate volatility and industry uncertainty. After years of paying very little on deposits, community banks were prompted to rapidly increase rates and take other steps to attract and retain customer relationships. Other steps community banks are taking to ensure liquidity include (see Figure 5):

• Deposit-related covenants in loan agreements (36%).
• Increasing Federal Home Loan Bank borrowing (25%).
• Buying brokered certificates of deposit (18%).

Figure 5. Steps banks are taking to improve liquidity

 

Theme 4: Credit Risk Is Mounting

Government stimulus programs and thrifty saving during pandemic lockdowns filled consumer coffers. They also funded paydowns of personal debt. As the wheels of business started turning again post shutdown, consumer spending fueled a rapid economic rebound. Consumer savings haven’t run dry yet, but we’re now seeing a slowdown in demand and warning signs of distress.

The New York Fed recently reported a 50% surge in credit card delinquencies in 2023 and an increase of $212 billion in total consumer debt to $17.5 trillion. Serious delinquencies, or those more than 90 days past due, increased across several consumer debt categories, the NY Fed said.

Credit risk ranked a tie for second among community bank survey respondents for top risks in the coming year. More than half (52%) said credit risk would be an area of greatest concern, and 84% said they would dedicate more resources to it (see Figure 6). But credit risk was not as disruptive to strategy as interest rate risk. Only 15% of respondents said it had a negative effect on their strategic plans last year, perhaps because a credit downturn— and indeed an overall economic downturn—was expected heading into 2023.

Figure 6. The top areas where banks will devote resources in the coming year

 

Theme 5: Outlooks Vary on Office Space Risk

Surprisingly, seventy percent of respondents somewhat or strongly disagreed that their exposure to office real estate would pose a significant risk to their performance over the next year. Two percent strongly agreed that it would pose a significant risk, while 20% somewhat agreed and 7% were not sure.

While it’s true that work-at-home policies emerging from the pandemic emptied out many an office and made businesses rethink their real estate needs, office space exposures vary widely among community banks. Expect credit stress from these properties to be a mixed bag for their portfolios.

Community banks are traditionally more exposed to CRE than larger banks, but their exposure to office real-estate risk depends on occupancy rates in the markets they serve. As multi-year leases—typically matched to loan lengths—on spaces in some volatile urban markets come due, bankers with CRE concentrations there worry that tenants won’t renew, plunging their loans into distress. San Francisco, Los Angeles, Houston, and New York are notable examples.

Community banks have also taken substantial steps to mitigate risk in their office CRE portfolios (see Figure 7). Eighty-six percent of respondents said their bank has already increased portfolio monitoring and some (30%) plan to tighten their lending policies with respect to office-space CRE. It’s all part of the time, resources, and attention they are investing this year to mute the fallout from potential credit deterioration.

Figure 7. Actions banks are taking to address office-space CRE

Theme 6: Attracting Talent Can Still Be Tough

Hybrid work policies are on the minds of community bank leaders this year. An overwhelming majority (90%) of respondents agreed that allowing hybrid work is a useful tool in competing for talent. And more than half (54%) believe the advantage of hybrid work offsets possible reduced productivity or loss of collaboration (see Figure 8).

Still, there are misgivings. Among them: Remote work can delay skills development. Three quarters of respondents agreed that new entrants to the banking workforce need more support now than they did prior to the pandemic in building hard and soft skills. And for certain positions, in-office is a must. Seventy-five percent said they expect their front-office workers in the office four or more days per week.

More than half (54%) of survey respondents said that filling any open roles at their banks had become harder in the past 12 months. And despite growing reports of layoffs at larger banks—a possible source of replacement talent—they expect only a slight recruiting reprieve, with 41% saying it will be harder to fill roles in the coming year. One reason could be that larger bank experience does not always translate easily to a community bank, where a small staff can mean a single employee needs expertise in several roles.

Should community banks choose to limit work-from-home policies, many (74%) believe that they will have more leverage in the coming year to do it, even as some concede that hybrid work is here to stay.

Figure 8. Views on hybrid work and talent development

Theme 7: Technology Creates Opportunity—and Risk

If they hadn’t already done so, community banks quickly expanded their digital capabilities during pandemic lockdowns to ensure customers received needed services and employees were connected and ready to do business. That put them in better positions to serve and take part in the banking industry’s digital evolution.

It also exposed them to a world of new cyber risks as their customers and employees engaged electronically off site.

Community bankers are acutely aware of the dangers. Cybersecurity ranked first (56%) among the risk areas of greatest concern to community banks over the coming 12 months. Interest and credit risk were tied for a close second, at 52% each. Cybersecurity is also the area where most respondents expect to devote more resources, with 87% saying they would increase their investment in cybersecurity this year.

But as was the case with credit risk, a relatively small group of respondents (12%) said cyber risk had a negative effect on their institutions’ strategy in the past 12 months—well below the 57% of respondents who said strategy was disrupted by interest rate risk. That could reflect the years of focused attention and preparation community banks have devoted to cybersecurity. In open-ended responses, community banks said the most effective ways to boost cybersecurity include focusing on the fundamentals: educating employees and customers, and investing in strong IT teams, tools, and systems.

While it may not be seen as a major strategic threat, the attention community banks will pay to cyber this year reflects how rapidly the threat is growing. More than two-thirds of survey respondents said that the cyber threat facing their bank worsened in the past 12 months (see Figure 9). An even bigger percentage (74%) expect it to get worse in the coming 12 months.

“Of all the risks, cyber is the one area where individuals are actively seeking to do harm to the institution,” one respondent said. “It requires that we are constantly up to date in terms of technological defenses and employee knowledge.”

Figure 9. Banks’ outlook on cyber threats for the year ahead

Closing Thoughts

While no one can say for certain where interest rates are heading in the year ahead, community banks have prepared for a range of possibilities by sharpening their focus across areas that rate disruptions will touch. Managing liquidity, capital, and pressure on net interest margins will continue to command resources, even as credit risk reemerges as a big concern. “Constant attention to risk mitigation” is the mantra of one community banker, given the current economic and rate outlook.

That includes technology. Community banks’ rapid digital ramp-up during the pandemic heightened the security challenges for organizations that sometimes lacked the technological expertise of larger banks. Finding technology talent to manage these risks is among the challenges community banks face in building a next-generation workforce.

All these pressures have an upside, some community bankers suggest. The vigilance required to manage them has brought renewed rigor to risk areas many community banks had de-emphasized in an environment of low interest rates. Banks are rediscovering the importance of managing deposit rates, funding diversification, and customer retention and satisfaction in response to the post-pandemic brew of factors they now face. What could emerge are institutions better prepared to take on the risks of an increasingly complex operating environment.

 

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Author

Michael Bender, Senior Editor, Content, RMA, mbender@rmahq.org 

Contacts

Steven Martin, Head of Membership, Member Relations, RMA, smartin@rmahq.org
Sandy Sutermaster, Relationship Manager, Community Banks, Member Relations, RMA, ssutermaster@rmahq.com 
Mark Burgoon, Relationship Manager, Community Banks, Member Relations, RMA, mburgoon@rmahq.com 

 

 

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