A deeper look into declining community bank sentiment

When the Conference of State Bank Supervisors (CSBS) released its Q3 Community Bank Sentiment Index earlier this month, the headline reading had dropped nine points. While overall sentiment was still well above the neutral level of 100, the change represented the fifth-largest quarterly decline in the survey’s history..Stating that community banks “provide a unique perspective on the health of the U.S. economy, often revealing emerging challenges before they become apparent in national economic statistics,” CSBS Chief Economist Thomas F. Siems, PhD, dug beneath the headline numbers in a follow-up analysis.Siems highlights a divergence between local operational strength and waning confidence in federal monetary policy. Feeding into the index’s nine-point Q3 decline was a 26-point drop in expectations for monetary policy, to a reading of 70. In just four quarters, this component has deteriorated 60 points, indicating that “bankers are becoming increasingly uncomfortable with the outlook for interest rates and inflation,” Siems said. “For community banks, interest rates affect far more than the cost of borrowing. They influence deposit pricing, net interest margins, securities valuations, loan demand and the ability of small businesses and households to finance new investments,” he said.Q3 perceptions of future business conditions also slid 16 points to 83. Since 2021, this reading has crossed above the neutral threshold only once – reaching 117 in Q4 2024.“Despite periods of relatively strong economic growth and continued resilience in labor markets, community bankers have remained skeptical about the durability of the expansion,” Siems said.Noting that bankers’ optimism about their own institutions remains high, Siems said their perceptions on monetary policy and the outlook for business deserve attention, given their conversations with local business owners, observations of credit demand and awareness of changing financial conditions across communities.“The message is not that community bankers have abandoned optimism. Rather, they are becoming increasingly concerned about the economic environment in which they must operate,” Siems said.