1. 2017 National Survey of Community Banks: Presentation of Results
Michael Stevens and Andrew Meyer
October 5, 2017
Conference of State Banks Supervisors and Federal Reserve Bank of St. Louis. The views expressed do not necessarily represent those of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

2. Small Business Lending
Appreciating Relationship Lending

3. Small Business Lending as a % of Total Lending by Asset Group
Anyway you look at it, banks that the states supervise play an outsized role in small business lending:
--26% of the total loans at banks with <1B are SBL loans
--55% of the total small business loans come from state chartered banks.
--44% of total small business loans come from banks that satisfy the FDIC CB definition

4. Fig. 2: Bankers’ Definitions of Small Business Loans

5. Fig. 8: Percentage of Small Business Loans Made Due to Prior Banking Relationships

6. Fig. 9: Importance of Potential Future Relationship to Lending Decisions

7. The Fundamentals are Important to Lending to Small Businesses
The Basics of Credit
% Very Important or Important
Financial Statements 97
Credit Score of the Business Owner 85
Business Assets
Business Conditions 74
Prior Lending Relationship 60
Prior Deposit Relationship 49
Credit Score of the Business 34

8. Small Business Lending is Secured the Old Fashioned Way
Lending Practice
% Always or Usually
Backed by business collateral 95
Backed by other collateral / guarantees 46
Backed by business owner’s collateral 40

9. Fig. 17: Frequency of Small Business Loans Backed by the Small Business Administration

10. What bankers say about small business lending - Positive
Regional banks are primary competitors, but products are more rigid
Community banks accommodate customers who don’t “fit in a box”

11. What bankers say about small business lending - Negative
SBA takes too long and is too cumbersome
Larger banks able to take risk without SBA
Too many dollars chasing too few deals
Competition is leading to concessions, increasing risk
CFPB’s data collection potential rule (DFA 1071)

12. Competitive Pressure Concession % Always or Usually Interest Rates 20
Fees 16
Extending Maturities 6
Collateral 3

13. Fig. 31: Greatest Source of Current Competition: Small Business Loans

14. Fig. 32: Greatest Source of Future Competition: Small Business Loans

15. Mergers & Acquisitions
Activity and Drivers

16. M&A
2017
2016
2015
Received an offer
11%
10%
Made an offer
19%
20%
22%

17. Drivers for Considering an Offer
Reason
% Very Important or Important
Inability to Achieve Economies of Scale 70
Regulatory Costs 85
Succession Issues 33

18. Drivers for Making an Offer
Reason
% Very Important or Important
Entry into New Market 66
Expansion within Current Market 64
Exploit Underutilized Potential 52
Talent Acquisition 25

19. Perspectives on Consolidation
1,444 fewer banks in last five years; 20% less
Most common competitor for a community bank is other community banks
Consolidation creates “a void where individuals and small businesses will appreciate the services a community bank can provide”

20. Succession Planning: The Community Bank Case Study Competition
Succession planning – internal hires vs. external recruiting
Rotational programs 
Board composition – Diversity is key 
Academic outreach – Case Study Competition 
The small bank advantage – attracting talent
“Historically, people who were on community bank boards were large customers or ‘who’s who’ in the community or in the market and the movement is much more to skills – so ‘Who’s the financial expert? Who has an understanding of cyber? Who has an understanding of emerging technologies?’ That is an indication of what you’re looking for. It’s really the skills and the background.”

21. Supervision & Regulation
Ongoing Challenges

22. The smaller the bank, the greater the average compliance costs as a percentage of noninterest expense:

23. Fig. 28: Greatest Challenge from TILA-RESPA Integrated Disclosure (TRID)

24. Fig. 30: Percentage of Compliance Costs Due to Specific Regulations

25. Bankers & Regulation: BSA “…as many BSA staff as lenders”
Time consuming…number of dead ends from automated systems is high
One more area that requires auditing

26. Bankers & Regulation: TILA-RESPA “…stranded with children, pets, and a van full of furniture.”
“Absolutely exhausting”
Fundamentally changing the relationship model
Turned a simple transaction into a complicated and standardized product making it harder to differentiate from larger banks
Difficult to explain delays to customers
Impacting credit availability

27. Bankers & Regulation: But wait there’s more
Current Expected Credit Loss (CECL)
HMDA style reporting for small business loans (DFA 1071)

28. The Double-Edged Sword
Technology
The Double-Edged Sword

29. Bankers & Technology: Downside
Strong competitive pressure from other banks and non-bank lenders
Increasing costs
Increased regulatory expectations over IT
Significant risk to deploying the wrong solution
Balancing staying competitive with safety

30. Bankers & Technology: Upside
Partnership opportunities with FinTech firms has extraordinary potential
Creates acquisition opportunities as small firms cannot keep up
Do not have to lead, but better follow quickly

31. Banks & Technology: The 2018 Case Study Competition
Understanding how banks are using technology within day-to-day operations.
Technology utilization to meet local needs for products and services
Effect of technology on customer relationships
Technology adoption as part of strategic planning
Management’s short and long-term goals
Third party technology vendors
Integration of vendors in risk management process
Emerging trends with third party vendors to expand business lines and streamline processes