Community bankers are more optimistic about future economic conditions but still concerned over regulatory burdens, according to the first quarter Community Bank Sentiment Index released by the Conference of State Bank Supervisors.
The Sentiment Index increased six points to 98, its highest mark in two years, but remained below the neutral mark of 100 for the ninth straight quarter. The rise follows a six-point increase in the fourth quarter of last year, and brings the index 15 points higher than a year ago.
Six of seven components improved, but concerns over future business conditions and profitability along with regulatory pressure continued to limit optimism. The index for regulatory burden fell to 18, its lowest reading since 2022.
The capital spending component increased the most, rising 13 points to 131. The monetary policy component increased nine points to 105, which is 66 points higher than a year ago. The business conditions index increased five points to 78, its highest mark since the first quarter of 2022. The profitability index increased six points to 87.
Two-thirds of community bankers said the U.S. economy was either starting or already in a recession, down from 81 percent in the fourth quarter of last year. Respondents cited cyberattacks, government regulations, federal debt, the availability/cost of labor and inflation as top concerns.
“Rapid interest rate increases over the past two years have resulted in an inverted yield curve, where short-term interest rates have been higher than long-term rates for more than a year,” noted CSBS Chief Economist Tom Siems. “This has created challenges for community bankers to maintain profitability as net interest margins and liquidity positions are squeezed. Moreover, because of higher overall interest rates, bankers must be keenly aware of credit risks that might develop in their loan portfolios.”