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Asset/Liability Lending & Credit Risk

New Community Bank Sentiment Index Shows Bankers Largely Positive

Mary Ellen Biery
September 16, 2019
Read Time: 0 min

Community bankers are largely positive about the future, based on the first results of a new index gauging business sentiment among the financial professionals who serve a critical role in local economies.

More than two-thirds of community banks surveyed for the Conference of State Bank Supervisors (CSBS) Community Bank Sentiment Index indicated they expect business conditions will be the same or better in the next 12 months.

“Given the overall positive state of the economy, this is pretty remarkable,” Michael L. Stevens, CSBS Senior Executive Vice President, said in the conference’s newsletter announcing the results. “As you would expect, a positive economic environment has a direct correlation to the bottom line, with 80% of banks expecting the same or better profits and 60% believing they will see an increase in franchise value.”

Overall, the current average value of the Community Bank Sentiment Index is 122, indicating more positive than negative responses to seven mostly forward-looking questions that bankers will be asked each quarter to construct the index. An index of 100 would mean bankers’ outlook is neutral and anything below 100 would indicate a negative outlook.

“Banks are central to the effective performance of the business sector,” said Temple University economists William C. Dunkelberg and Jonathan A. Scott, who worked with CSBS to create the index, in a paper summarizing the first results of the index. Dunkleberg is the former dean of Temple’s School of Business and Management and has served as the Chief Economist for the National Federation of Independent Business since 1971.

“Bankers’ attitudes reflect conditions in capital markets and conditions in the economy, primarily the local economy served by each bank,” Dunkelberg and Scott wrote. “These insights have the potential to inform the market and policy makers on the overall health of the economy, opportunities, and risk.”

CSBS Community Bank Sentiment Index September 2019

Bankers were asked the following questions so that the index could be constructed:

  1. How do you expect business conditions in your market to change over the next 12 months?
  2. Where do you anticipate Federal Reserve monetary policy will be in 12 months from now?
  3. How do you expect the regulatory burden on your bank to change over the next 12 months?
  4. Is the current period a good time to expand your operations?
  5. How do you expect your bank’s capital expenditures on facilities or operations to change over the next 12 months?
  6. How do you expect your profitability to change over the next 12 months?
  7. How do you expect the franchise value of your bank to change over the next 12 months?

Shifts in the index will reflect shifts in expectations over time as the economic and regulatory outlook changes over time. The survey for the inaugural index included 512 FDIC banks responding from early in the second quarter through July 5.

Dunkelberg, who more than 45 years ago began a regular survey of small businesses for the National Federation of Independent Business to learn more about their expectations, said in an interview that the CSBS Community Bank Sentiment Index has the potential to provide valuable information – not only to the banks themselves but also to the broader market.

“If you watch CNBC, all you hear about is 10 big banks, but there are 5,000 small banks doing an incredibly important job in the economy and nobody knows anything about them, so let’s start finding out about them,” he said.

Despite the overall positive sentiment, a closer look at the index components showed some concern among bankers. For example, 13% of the bankers answered that they expected business conditions to be “better than today” in 12 months, but 27% expected them to be “worse than today.” Fifty-seven percent expected business conditions to be the same. The fact that a higher percentage expected worse conditions was consistent with bankers’ response to expectations about Federal Reserve policies: 32% said they expected monetary policy to be looser while only 15% expected policy to tighten.

CSBS Sentiment Index-Business Conditions

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Among other findings from the Community Bank Sentiment Index survey:

  • 44% of respondents expected profitability to increase over the next 12 months. “Only 18% expected it to be lower despite some headwinds to the longest expansion in U.S. history and some uncertainty about where the Fed is headed with its policy rate,” the authors noted.
  • Banks in the South CSBS District were more likely to report an index value above 145, while banks in the Midwest and Great Plains, where farmers have been hit by low commodity prices and the U.S. trade war with China, were more likely to report an index value below 90. Dunkelberg said the third-quarter survey should yield some additional information on how farm banks are viewing the tariffs' impacts.
  • Not surprisingly, asset growth was positively correlated with sentiment. Banks that had growth of 15% or more in 2018 more frequently reported index values above 145, while banks that experienced negative growth were more likely to report index values below 100.
  • 70% of community bankers said that now is a good time to expand in their market.
  • 70% also said the current period was a good time for higher capital spending, and 47% planned higher capital spending over the next 12 months.
  • 42% expect the regulatory burden will get heavier over the next 12 months, and 51% expect it to be the same.

CSBS has also issued the third-quarter survey to bankers and expects to release the index findings at the Community Bank Research and Policy Conference, which it co-hosts with the FDIC and the Federal Reserve, on Oct. 1.

CSBS Sentiment Index-Profitability

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About the Author

Mary Ellen Biery

Senior Strategist & Content Manager
Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she works with advisors and other experts to develop whitepapers, original research, and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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