Community banks more optimistic about economic conditions

Community banks are more optimistic about future economic conditions, according to the CSBS Community Bank Sentiment Index.

The index, produced quarterly by the Conference of State Bank Supervisors, ticked up 1 point to 99 compared to last quarter’s survey. But the index is up sharply from its all-time low of 73 points one year ago. It is creeping closer to the neutral score of 100.

Four of the of the seven components improved, led by the profitability component, which had the greatest quarterly improvement, up 9 points from the first quarter survey. It is at its highest level since the end of 2022.

In contrast, the franchise value indicator dropped the most, falling 6 points to 130 in the second quarter. However, it is still well above the neutral level of 100.

The capital spending and operations expansion components both showed gains from last quarter, reaching their highest levels since the end of 2022. The monetary policy component fell slightly to 100 but is 67 points higher than last year. This indicates greater confidence about the impact of monetary policies on the economic outlook.

The regulatory burden component remains by far the lowest among the seven components with a score of 20. It has been below 30 for 14 straight quarters. Also, the business conditions component fell 3 points to 75 from the previous quarter but is up 32 points from one year ago.

“Knowing that monetary policy operates with a lag, the rapid interest rate increases over the past two years are now likely taking more of a toll on consumers and businesses,” CSBS Chief Economist Tom Siems said. “Bankers and regulators need to be keenly aware of credit risks that might start to stress banks’ loan portfolios.”

This is the tenth consecutive quarter where community banker sentiment has been below 100. An index reading of 100 indicates a neutral sentiment. Anything above 100 indicates a positive sentiment, and anything below 100 indicates a negative sentiment.

Nearly 300 community bankers from 47 states responded to the survey.

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