The rising costs of technology and increasing regulatory demands are becoming bigger concerns for community bank executives, according to the Conference of State Bank Supervisors’ 2024 community bank survey, published last week.

Additionally, community banks have felt the squeeze of the higher-for-longer interest rate environment, with close to 90% of surveyed bankers saying cost of funds is a crucial external risk to their bank, 

Banks have grappled with higher costs as competition for deposits intensified. That’s affected banks large and small, but community banks have fewer lines of business than do Wall Street lenders. Margin pressures have hampered bank earnings, which, in turn, has affected hiring and branch expansion, said Lori Maley, CEO of Bank of Bird-in-Hand in Pennsylvania. 

“Right now, our motto is ‘Survive until 2025,’” Maley told the CSBS.

The majority of the banks that weighed in are state-chartered lenders and have between $100 million and $1 billion in assets, the CSBS said; all banks polled have less than $10 billion in assets. 

Roughly 367 community bankers across 38 states participated in the survey between April and July.

About 89% of community bank respondents called regulation a top external risk. That’s up from 81% last year and 77% in 2022. 

Federal Reserve Gov. Michelle Bowman, speaking last week at the same conference where the survey findings were presented, called for a balanced approach to community bank regulation and supervision, and emphasized the need for tailored regulation for smaller banks. 

“Overregulation can impose disproportionate burden on a community bank, over time leading to the erosion of the viability of the community banking model,” she said.

Cathy Owen, executive chair of Eagle Bank and Trust Co. in Little Rock, Arkansas, noted the flurry of activity — from capital requirements hikes to the small-business lending data collection rule — has been called a “regulatory tsunami.” 

The regulatory burden on banks will “increase the need for staffing, training and additional technology — all of which come with increased risk and additional costs — which will result in shrinking margins,” Owen said.

“Obviously, there’s a purpose for regulation. There’s a purpose in protecting the soundness and safety of our institutions,” David Ehlis, CEO of Bravera Holdings Corp. in Bismarck, North Dakota, told the CSBS. “Where we get concerned is when some of these regulations don’t appear to enhance that, yet they add to our compliance costs without any direct apparent relationship to overall safety and soundness.” 

Surveyed bank executives noted rising competition from fintechs and nonbanks offering payment and banking-type services through mobile apps. 

“It makes it more difficult for us when we have these additional costs that we have to manage, which might not apply to our nonbank competitors,” Ehlis told the CSBS. 

Concerns around the cost of technology are rising, too: A bigger share of those surveyed named it a crucial external risk this year than last year. The largest portion of respondents (49%) view future technological innovation in banking as both a threat and an opportunity, pointing to tech’s double-edged-sword nature for smaller banks.

Almost all of those surveyed said adopting new and emerging technologies is crucial, but costs and implementation are the biggest barrier to doing so, with slightly more community bankers expressing that this year (46%) than last (44%), according to the CSBS. As community banks have sought to grow their online banking services, these lenders are prioritizing remote deposit capture, online bill pay and e-signature verification.

Cybersecurity remains the biggest internal risk in community bankers’ eyes. Although a lesser concern, liquidity is also a top risk for this category of banks.  

Brokered deposits, commercial real estate credit quality, FedNow adoption and bank consolidation were also noted in the survey. 

More than half of respondents said they are using or plan to use brokered deposits at or near current levels as a wholesale funding source, the survey said, which was up five percentage points from 2023. About one-quarter said there’s a high level of stigma surrounding brokered deposits.

The Federal Deposit Insurance Corp. in July proposed a measure that would raise banks’ standards for accepting brokered deposits, or “hot money.” Some have concerns that at-risk banks can use brokered deposits to bolster their books when longer-term customers pull their deposits.