Falling margins top bankers’ worries

Producing profits amid plunging net interest margins and plummeting loan demand is the chief concern for America’s community bankers, according to a new survey.

Over the past year, influenced by the lingering pandemic, community bankers have shifted their primary concern to narrowing net interest margins, which have reached historic lows. Nearly 500 community bankers nationwide participated in the eighth annual survey conducted by the Conference of State Bank Supervisors and the results were released to open the national conference focusing on community banking in the 21st century.

In 2020, community bankers cited overall business conditions as their primary concern as the pandemic began ravaging the economy.

That changed this year. About 65% of those surveyed cited declining net interest margins as their primary external concern. Cybersecurity was the top internal challenge.

“Maintaining and growing net interest margins are problematic for most bankers right now,” Meredith Covington, a manger with the Federal Reserve Bank in St. Louis, said in announcing the results.

Margins reached historic lows in the first quarter and community bankers “expect low rates to persist for the foreseeable future,” she said.

Southern Bancorp Inc. Chief Executive Officer Darrin Williams delivered the keynote address to the group Wednesday after being introduced by Arkansas State Bank Commissioner Susannah Marshall.

Williams encouraged community bankers to become more involved and support the efforts of Community Development Financial Institutions like Southern Bancorp. CDFIs are lenders that focus on

underserved and underbanked individuals to promote income equality, close the racial wealth gap and unite rural and urban economic development efforts.

The speech was a “call to action for community banks and CDFIs to work better together,” Williams told the audience in a virtual presentation.

Williams called on larger banks to support the work of CDFIs in their communities as a key means to generating wealth for families in underserved areas. Southern, for example, has focused on building net worth by promoting home ownership, job creation and personal savings.

The nation’s financial institutions and CDFIs should “join forces to help foster economic inclusion,” Williams said, noting that 7.1 million households in the U.S. do not have a bank account. For every $1 in wealth that a white family has, the average Black family has less than 15 cents in overall wealth, he said.

Home ownership also has wide disparities between ethnic groups, Williams said, adding that legacy discrimination issues that denied loans to minorities “continue to bolster this country’s racial wealth divide.”

Community banks have the ingredients to change conditions in neglected regions, according to Williams.

“Our industry’s power has been put on full display as community banks have helped support and rebuild America’s economy during this global pandemic,” he said. “Let me challenge you … to use our collective power to fight against poverty, to fight against the widening racial divide and to fight against a two-tiered economic system where the wealthy advance and everyone else struggles.”

For example, Williams noted that the nation’s biggest banks can support those efforts by advancing their investments in CDFIs.

On Tuesday, JPMorgan Chase, the nation’s largest financial institution, announced it was making an unspecified investment in Southern Bancorp, which is one of 14 CDFIs to receive a multimillion-dollar equity investment as part of Chase’s $100 million commitment to minority-owned and minority led financial institutions.

This year’s community banking survey was conducted from April-July, with 470 respondents participating.

Along with shrinking net interest margins, community bankers noted in the survey that they also are concerned with “significant fall off in loan demand,” said Tom Siems, chief economist with the Conference of State Bank Supervisors.

“As a result of these things … banks are clearly concerned about where they are going to earn profits,” he said.

The pandemic also created some long-lasting improvements, with more than 40% of community bankers saying it increased efficiency and more than 70% saying they had a more optimistic outlook on lending to small businesses as a result of the success of the Paycheck Protection Program.

Other key findings from the 2021 survey included:

■ A rise in cybersecurity risks with 81% of respondents calling it a very important concern.

■ Technology costs climbed from one of the least important issues two years ago to the most important internal concerns, with about 47% of bankers citing it as a very important challenge.

■ Regulatory risks also remained a top concern as about 50% of community bankers called it very important going forward.