CSBS: NIM overtakes reg burden as top concern for community banks

Net interest margins have overtaken regulatory burden as the top external risk for community banks, according to the 2025 Annual Survey of Community Banks from the Conference of State Bank Supervisors..Regulatory burden, once the leading issue, dropped to sixth place. Core deposit growth now ranks as the second biggest concern, followed by economic conditions, technology costs and cost of funds.NIMs have been a significant issue for banks since the Federal Reserve started increasing interest rates in 2022. The current Fed rate is 4.00 percent to 4.25 percent. NIMs have also shrunk due to deposit competition since the 2023 failures of Silicon Valley Bank and Signature Bank.Bankers are expressing more regulatory optimism since the Trump administration ushered in an era of deregulation in January. The vast majority of staff who worked at the Consumer Financial Protection Bureau last year no longer work at the agency. Since January, hundreds of FDIC positions have been eliminated as part of a push to reduce the size of the public sector. Cybersecurity continues to grade out as the top internal risk — and the leading overall risk — with technology implementation and credit concerns following.“One of the biggest shifts in this year’s survey was that community bankers expressed less concern over regulatory burden and are now primarily focused on managing interest rate risks and maintaining and growing deposits,” said CSBS President and CEO Brandon Milhorn.The survey revealed growing competition in payment services, especially from regional banks and nonbanks without physical locations. According to the survey, most community bankers support changes to the deposit insurance framework, with proposed alternatives including unlimited coverage and increased insurance limits. The survey was administered from April 15 to July 15 and included responses from 268 banks.