Community banker outlooks on economic conditions remain negative but are becoming more optimistic, according to the fourth quarter Community Bank Sentiment Index released by the Conference of State Bank Supervisors.
The Sentiment Index rose six points to 92 in the fourth quarter, its second straight increase and its highest mark in two years. Even with the increase — and the 13-point rise in the third quarter — the index remained below the neutral mark of 100 for the eighth straight quarter. Bankers continued expressing concern over future business conditions, regulatory burdens and profitability.
The profitability component increased three points but is down 18 points from the year prior. The regulatory burden component, at 25 points, remained the lowest among the seven indexes. The business conditions index increased 14 points to 73, its highest mark in two years. The monetary policy component had the highest quarterly improvement, rising 40 points to 96.
“While it is encouraging to see the CBSI improve even slightly, rapidly rising interest rates that started in early 2022 — while necessary to combat inflationary pressures — have stressed net interest margins, liquidity, securities valuations, loan demand and credit quality,” said CSBS Chief Economist Tom Siems.
United Bankers’ Bank President and CEO Dwight Larsen expects aggregate community bank earnings will fall this year due to the impact of higher short-term rates increasing deposit costs and the potential for minimal loan growth. Larsen expects the pace of mergers and acquisitions will ramp up this year as lessening bond portfolio depreciation continues giving potential sellers more on the sales price.
“The pool of potential buyers continues to grow, as community bankers will continue to see competition from credit unions, and possibly more fintechs looking to expand their access to the payment systems,” he added.
Short-term loan growth could be limited as most banks have finalized their strategies for funding and liquidity, added Cornerstone Advisors Managing Director Vincent Hui. “The main change is likely more scrutiny on regulatory exams on what banks are doing in managing balance sheet risk including liquidity risk,” he added.
Hui said if the yield curve continues to flatten, NIM will improve. Though recession fears have lessened, delinquencies have risen, causing banks to prepare for weakening economic conditions.
Hui expects bank acquirers will include those who used the recent slowdown in M&A to improve their operations and have “strong capital and a strong earnings engine as they will be rewarded with a strong currency — stock price — to make acquisitions.” According to S&P Global, the 91 bank M&A deals announced through the first 11 months of the year had an aggregate deal value of $3.95 billion, compared to $8.24 billion from the 144 deals announced over the same time in 2022.