BANK EXECUTIVE BUSINESS OUTLOOK SURVEY 2018, Q1

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1 BANK EXECUTIVE BUSINESS OUTLOOK SURVEY 2018,

2 INTRODUCTION What a difference three months make. After a fourth quarter jump in, both the Bank Experience Index SM and the Bank Confidence Index SM dropped precipitously to record lows in the first quarter of Although the outlook for economic conditions declined as well, bank respondents still generally held a positive view of the direction of the economy over the next year. So why then are respondents wary about the future for their banks? One explanation could be that banks are experiencing greater deposit competition and higher funding costs, and they expect both trends to continue moving forward. A record number of bank respondents (76%) reported facing more competition for deposits over the last 12 months, and 81% reported experiencing higher funding costs. Another explanation could be the extraordinarily high threat level bankers associate with the potential entry of Amazon into the banking space particularly in tandem with further disruptions they expect from fintech players and the competition they feel from the nation s largest banks. If you are interested in learning more, read on. And as always, if you have any thoughts or questions about the results, please contact Steve Kinner, Senior Managing Director, Sales, at (866) , x3445, or Phil Battey, Senior Vice President, External Affairs, at (866) , x3357. Sincerely, Mark Jacobsen President & CEO Promontory Interfinancial Network, LLC Arlington, Virginia

3 EXECUTIVE SUMMARY Table of Contents In the News 3 Bank Confidence Index 10 Loan Demand 12 Deposit Competition 14 Access to Capital 16 Funding Costs 18 Overall Economic Conditions 20 Banker experiences over the past 12 months and their overall confidence in the next 12 months hit new lows since we started tracking these measures more than three years ago. What explains the shift to this negative outlook? It could reflect that the prior survey was taken subsequent to the passage of the federal tax-cut legislation, which may have led to a temporary spike in optimism. This is supported by the fact that, outside of last quarter s results, the trend for both indices has been downward since Other possible factors to consider include a rising interest rate environment and expectations that the Fed will continue on that path, concern about higher projected federal deficits and a possible trade war, higher than expected competition for deposits, and a growing wariness about new competition from nontraditional financial firms. Along those lines, we asked survey participants to rank the threat level of each of the following entities on a scale of 1-5, with 1 being the lowest and 5 being the highest: 1) Amazon (which is in talks with J.P. Morgan to offer checking account-like products), 2) fintechs that compete with banks, 3) the nation s largest banks, 4) and Goldman Sachs (which launched its new online personal loan platform Marcus in October 2016). By overwhelming margins, community bankers described Amazon s potential entry into this market as their greatest threat. Additionally, bankers were asked what they see as the biggest risk when choosing a fintech with whom to partner. A lack of understanding of regulatory and compliance issues was the top response, followed by the increased risk of data breaches. In what is likely welcome news at the White House, one-third of respondents said the enactment of the recent tax reform law has increased demand for credit at their bank. In less positive news for the White House, however, fewer than one in five of the bankers surveyed said the recently announced trade tariffs had positively changed their outlook on President Trump s stewardship of the U.S. economy. Highlights from other parts of the survey include: Deposit Competition. The number of respondents reporting that deposit competition increased over the last 12 months jumped by 13 percentage points since last quarter. The number of respondents expecting competition for deposits to increase over the next year also rose again from 80% in to 88% this quarter. Access to Capital. Only 24% of bankers across all assetsize tiers and regions reported an improvement in access to capital this quarter, down from 35% last quarter. The number of respondents who expect to see even more improvement over the coming year (23%) also dropped compared to last quarter (37%). Funding Costs. The number of banks reporting higher funding costs rose three percentage points this quarter to 81%. Nearly 92% of respondents across all asset-size tiers and regions expect to see funding costs rise in the coming year, compared to 89% last quarter and 87% in. 2

4 BANKER PERSPECTIVES ON RECENT EVENTS AND ISSUES IN THE NEWS In this survey, we asked bankers a number of questions about recent happenings in the news and what impact these happenings might have on the financial sector. This broad range of events included a recent announcement from Amazon that it might offer a product similar to checking accounts, a possible new direction on trade policy, talks of a trade war between the U.S. and China, and the impact of the tax reform legislation passed at the end of. We also asked bank executives what they see as the biggest risk when choosing a fintech with whom to partner. Additionally, we repeated a question that we asked one year ago: which area of technology are banks currently allocating the most budgetary resources to. 3

5 BANKER PERSPECTIVES ON RECENT EVENTS AND ISSUES IN THE NEWS Amazon has been in the news a lot in recent months from stories on where the tech/retail giant might locate its new, second headquarters to President Trump s tweets about its business practices. One story that did not garner quite as much attention was the recent announcement that Amazon is in talks with J.P. Morgan to offer a product similar to a checking account. In this survey, we asked respondents the following question: On a scale of 1-5, with 1 being the lowest and 5 being the highest, rank the threat to your bank from each of the following entities: 1) Amazon, 2) fintechs that compete with banks, 3) the nation s largest banks, and 4) Goldman Sachs. A whopping 62%, or nearly two in three bankers surveyed, perceived Amazon as a level 4 or 5 disruptor. Additionally, more than a third feel pressure from the nation s largest banks. Clearly, bankers believe they are facing aggressors on a number of fronts. It is important to note that the number of bank executives attaching the highest threat-level rating to Amazon was roughly 2.5 times the number of those who assigned the same rating to fintechs and the largest banks, and about 8.5 times the number who chose that rating for Goldman Sachs. Bankers Perceived Threat Level Amazon 7% 12% 19% 28% 34% Fintechs That Compete w/banks The Nation s Largest Banks 5% 19% 32% 14% 5% 25% 35% 24% 12% Goldman Sachs 32% 15% 4% 1 (LOWEST) (HIGHEST) 4

6 BANKER PERSPECTIVES ON RECENT EVENTS AND ISSUES IN THE NEWS Bankers Perceived Threat Level Highest Threat Level (4-5) by Asset Size Highest Threat Level (4-5) by Region Midwest South Amazon 49% 65% Amazon Fintechs That Compete w/banks 50% 66% Amazon Fintechs That Compete w/banks 43% 58% Fintechs That Compete w/banks 31% 48% The Nation s Largest Banks Goldman Sachs 15% 35% The Nation s Largest Banks Goldman Sachs 23% 39% The Nation s Largest Banks 35% 34% Amazon Northeast 60% Amazon West 64% Goldman Sachs 7% Fintechs That Compete w/banks The Nation s Largest Banks 37% 37% Fintechs That Compete w/banks The Nation s Largest Banks 31% 45% Banks with assets of <$1B Goldman Sachs Goldman Sachs 22% Banks with assests of $1B - $10B REGIONS BY FEDERAL RESERVE DISTRICTS Midwest: Chicago, Cleveland, Minneapolis, St. Louis Northeast: Boston, New York, Philadelphia South: Atlanta, Dallas, Richmond West: Kansas City, San Francisco 5

7 BANKER PERSPECTIVES ON RECENT EVENTS AND ISSUES IN THE NEWS After the enactment of the tax cut, the Trump administration began to turn its focus towards the U.S. trade deficit and what it believes are unfair trade practices that have hampered the U.S. economy. We asked bank respondents the following question: How do the recently announced trade tariffs change your outlook on President Trump s stewardship of the U.S. economy? Forty-two percent of bank executives who responded to the survey had a dimmer view of President Trump s stewardship of the economy in light of his recently proposed trade tariffs. While another 39% of respondents said the tariffs had not affected their opinions on the administration s stewardship of the economy, only 19% held a favorable view on the changes such tariffs may foreshadow. Banker Perspectives on Trade Tariff Announcement 39% No Change 42% Negatively 19% Positively Segmentation by Asset Size Banks With Less Than $1 Billion in Assets 18% 42% Banks With Between $1 Billion - $10 Billion in Assets 26% 33% 42% POSITIVELY NO CHANGE NEGATIVELY 6

8 BANKER PERSPECTIVES ON RECENT EVENTS AND ISSUES IN THE NEWS In light of the recent enactment of the Trump tax cut, we asked survey participants the following question: How has the enactment of the tax reform law affected demand for credit at your bank? Sixty-five percent said it had not changed at all, but roughly a third reported an increase in credit demand. As it has only been three months since the enactment of the tax cut, perspectives may change in the future. By the largest margin (73%), executives in the Northeast said tax reform had not affected demand for credit at their banks. Thirty-five percent of bankers in the South believe the new tax cut is increasing demand for credit, the largest response of that type among all four regions. Banker Perspectives on the Effect of Tax Reform on Credit Demand 3% 65% Not Changed at All Moderately Decreased 2% Significantly Increased Moderately Increased Segmentation by Region Northeast 23% 73% West 31% 68% South 35% 62% Midwest 34% 63% INCREASED NOT CHANGED AT ALL DECREASED 7

9 BANKER PERSPECTIVES ON RECENT EVENTS AND ISSUES IN THE NEWS We also asked community bank executives what they see, other than financial soundness, as the biggest risk when choosing a fintech with whom to partner. By a large margin (17%), respondents across all asset-size tiers and regions chose lack of understanding of regulatory and compliance issues. The second biggest risk chosen by bank executives (29%) was increased risk of data breach(es). Banker Perspectives on the Biggest Risk When Choosing a Fintech Partner Lack of understanding of regulatory and compliance issues 46% Increased risk of data breach(es) 29% Losing customer relationships to the fintech partner Security risk associated with the flow of funds Lack of knowledge regarding the banking sector Other 9% 7% 6% 4% 8

10 BANKER PERSPECTIVES ON RECENT EVENTS AND ISSUES IN THE NEWS We reintroduced a question we had asked a year ago in. Please indicate the area of technology in which you are currently allocating the most budgetary resources: 1) data processing/management/mining, 2) online banking experience, 3) information security, 4) regulatory compliance, 5) fraud detection, 6) online lending, or 7) marketing/outreach. Technology Areas with Most Budgetary Resources 25% 28% 26% 24% We assumed the number-one choice would be the same as last year information security. Instead, data processing/management/mining jumped from the middle of the pack in to the first choice in this survey. Online banking once again took second place, although it too saw a decline by nine percentage points to 26%. Information security fell to third with 24%, compared to 37% in. Regulatory compliance saw an increase to 13%, compared to 8% in ; fraud detection, online lending, and marketing/outreach rounded out the list. Banks in the West picked data processing/management/ mining as number one (41%), while online banking experience was the first choice of banks in the Midwest and Northeast (although only by relatively small margins). Online banking experience and information security tied for the number-one choice in the South at 27%. 15% 5% 0% Fraud Detection Regulatory Compliance Info Security Online Banking Experience Data Processing/Management/Mining 13% 5% 3% 1% Marketing/Customer Outreach Online Lending 9

11 BANK CONFIDENCE INDEX The Bank Confidence Index is meant to quantify bankers forward-looking expectations for the industry, while the Bank Experience Index is meant to quantify bankers experiences over the last 12 months. The expectation for overall economic conditions is a composite of expectations looking beyond the banking industry for the next 12 months. These are based on responses by C-level bank executives to survey questions relating to four key factors: access to capital, loan demand, funding costs, and deposit competition. (Charted on a scale of 0-100, a score >50 can be read as expansionary.) Bank Confidence Index EXPECTATION FOR OVERALL ECONOMIC CONDITIONS BANK EXPERIENCE INDEX BANK CONFIDENCE INDEX Bank Experience Index -3.9 over previous quarter (composite of reported experiences looking back at the preceding 12 months) 45.7 Bank Confidence Index -4.8 over previous quarter (composite of expectations for core banking conditions looking forward to the next 12 months) 61.8 Expectation for Overall Economic Conditions -4.7 over previous quarter (composite of expectations looking beyond the banking industry for the next 12 months) Bank Experience Index Bank Confidence Index The Bank Confidence Index and Bank Experience Index are proprietary indexes of Promontory Interfinancial Network, LLC calculated using Promontory Interfinancial Network s proprietary algorithm. Bank Confidence Index and Bank Experience Index are service marks of Promontory Interfinancial Network, LLC. 10

12 BANK CONFIDENCE INDEX - REGIONAL AND ASSET-SIZE SEGMENTATIONS Summary Highlights The Bank Confidence Index dropped below 50 this quarter to 45.7 the lowest since the survey s inception just over three years ago and 4.8 points lower than last quarter. Respondents from smaller community banks (banks with less than $1 billion in assets) felt more confident about banking conditions (46.0) than their counterparts at larger community banks (banks with between $1 billion and $10 billion in assets) (43.6). Bankers from the South, who showed the highest level of confidence last quarter (53.5), continued that trend this quarter, though their confidence dipped significantly overall by 6.3 points to Respondents from the Midwest were the least confident of all regions again this quarter (44.1), down from 49.2 last quarter. Bank Confidence Index by Asset Size Between $1 Billion and $10 Billion in Assets Less Than $1 Billion in Assets Bank Confidence Index EXPANSIONARY CONTRACTIONARY Overall Economic Conditions West 46.6 REGIONS BY FEDERAL RESERVE DISTRICTS Midwest: Chicago, Cleveland, Minneapolis, St. Louis Northeast: Boston, New York, Philadelphia South: Atlanta, Dallas, Richmond West: Kansas City, San Francisco Midwest 44.1 Northeast 45.0 South 47.2 Bank Confidence Index by Region Midwest Northeast South West EXPANSIONARY CONTRACTIONARY Midwest Northeast South West Midwest Northeast South West Bank Confidence Index Overall Economic Conditions 11

13 LOAN DEMAND Summary Highlights About 51% of bankers reported an increase in loan demand this quarter up four percentage points from. Fifty-three percent of respondents expect to see an increase in loan demand over the next 12 months, compared to 64% last quarter and 57% in. The Northeast showed significantly less optimism about expectations for increased loan demand over the next year; only 37% expect an increase, down from 64% in the previous quarter. The South was the most optimistic; 61% of respondents expect loan demand to increase over the coming year. Experience Compared to 12 Months Ago 22% Expectation for the 12 Months Ahead 11% 51% 53% IMPROVED 27% IMPROVED 37% Worse Same Improved Responses over Time Experience Compared to 12 Months Ago Expectation for the 12 Months Ahead 90% 80% 70% 60% 50% 0% Moderately Improved Same Moderately Worse Significantly Improved Significantly Worse 90% 80% 70% 60% 50% 0% Moderately Improved Same Moderately Worse Significantly Improved Significantly Worse

14 LOAN DEMAND - KEY SEGMENTATIONS Segmentation by Region This chart looks at expectation by region for banks loan demand 12 months from now. MIDWEST NORTHEAST SOUTH WEST REGIONS BY FEDERAL RESERVE DISTRICTS 14% 36% 50% 7% 57% 37% 8% 31% 61% 11% 36% 53% Worse Same Improved Midwest Chicago, Cleveland, Minneapolis, St. Louis Northeast Boston, New York, Philadelphia South Atlanta, Dallas, Richmond West Kansas City, San Francisco Segmentation by Asset Size Expectation of Banks with Less Than $1 Billion in Assets 51% Moderately Improved 54% IMPROVEMENT 3% Significantly Improved 11% Moderately Worse 35% Same Expectation of Banks with between $1 Billion - $10 Billion in Assets 49% Same 42% IMPROVEMENT 9% Moderately Worse 2% Significantly Improved Moderately Improved 13

15 DEPOSIT COMPETITION Summary Highlights The number of respondents expecting competition for deposits to increase over the next year rose again from 80% in to 88% this quarter. This quarter, 95% of respondents from larger community banks (up from 85% last quarter) and 87% of respondents from smaller community banks (up from 80% last quarter) believe increases in deposit competition are likely over the next 12 months. All regions once again expect to see greater deposit competition over the next 12 months; however, this time, respondents from the Northeast topped the list at 93%, compared to 80% last quarter. Experience Compared to 12 Months Ago 3% 21% Expectation for the 12 Months Ahead 2% 76% 88% WORSE WORSE Worse Same Improved Responses over Time Experience Compared to 12 Months Ago Expectation for the 12 Months Ahead 90% 80% 70% 60% 50% 0% Moderately Worse Same Significantly Worse Moderately Improved Significantly Improved 90% 80% 70% 60% 50% 0% Moderately Worse Significantly Worse Same Moderately Improved Significantly Improved

16 DEPOSIT COMPETITION - KEY SEGMENTATIONS Segmentation by Region This chart looks at expectation by region for banks deposit competition 12 months from now. REGIONS BY FEDERAL RESERVE DISTRICTS MIDWEST NORTHEAST SOUTH WEST 2% 8% 90% 7% 93% 5% 12% 84% 1% 11% 88% Improved Same Worse Midwest Chicago, Cleveland, Minneapolis, St. Louis Northeast Boston, New York, Philadelphia South Atlanta, Dallas, Richmond West Kansas City, San Francisco Segmentation by Asset Size Expectation of Banks with Less Than $1 Billion in Assets Expectation of Banks with between $1 - $10 Billion in Assets 2% Moderately Improved 87% WORSE 11% Same 95% WORSE 5% Same 53% Moderately Worse 34% Significantly Worse 58% 37% Significantly Worse Moderately Worse 15

17 ACCESS TO CAPITAL Summary Highlights Only 24% of bankers reported improved access to capital this quarter, compared to 35% last quarter. The percentage of respondents who expect to see improvement over the coming year (23%) was also down compared to last quarter (37%). Most respondents across all asset-size tiers and regions (75%) expect their access to capital to remain the same in the coming year, up from 62% last quarter. Respondents from larger community banks are more optimistic about the future of their access to capital (28%) than those from smaller community banks (22%). Experience Compared to 12 Months Ago Expectation for the 12 Months Ahead 2% 3% 24% 23% IMPROVED IMPROVED 75% 75% Worse Same Improved Responses over Time Experience Compared to 12 Months Ago 90% 80% 70% 60% 50% 0% Same Moderately Improved Significantly Improved Moderately Worse Significantly Worse Expectation for the 12 Months Ahead 90% 80% 70% 60% 50% 0% Same Moderately Improved Significantly Improved Moderately Worse Significantly Worse 16

18 ACCESS TO CAPITAL - KEY SEGMENTATIONS Segmentation by Region This chart looks at expectation by region for banks access to capital 12 months from now. MIDWEST NORTHEAST SOUTH WEST REGIONS BY FEDERAL RESERVE DISTRICTS 3% 79% 18% 3% 60% 37% 1% 75% 24% 4% 73% 24% Worse Same Improved Midwest Chicago, Cleveland, Minneapolis, St. Louis Northeast Boston, New York, Philadelphia South Atlanta, Dallas, Richmond West Kansas City, San Francisco Segmentation by Asset Size Expectation of Banks with Less Than $1 Billion in Assets Expectation of Banks with between $1 Billion - $10 Billion in Assets 76% Same 22% IMPROVEMENT 2% Moderately Worse 18% 4% Moderately Improved Significantly Improved 67% Same 28% IMPROVEMENT 5%Moderately Worse 26%Moderately Improved 2% Significantly Improved 17

19 FUNDING COSTS Summary Highlights The number of banks reporting higher funding costs rose three percentage points this quarter to 81%. Nearly 92% of respondents across all asset-size tiers and regions expect to see funding costs rise in the coming year, compared to 89% last quarter and 87% in. A whopping 98% of respondents from larger community banks expect to see funding costs rise in the next 12 months. Approximately 90% of respondents from smaller community banks expect an increase over the next year. About 97% of respondents in the Northeast expect increases in funding costs over the next year the most of any region. Respondents from the Midwest and South were tied again at 93%, up from 89% last quarter, and respondents from the West were at 86%, down one percentage point from last quarter. Responses over Time Experience Compared to 12 Months Ago Experience Compared to 12 Months Ago 16% 4% WORSE Worse Same Improved Expectation for the 12 Months Ahead Expectation for the 12 Months Ahead 5% 4% 81% 92% WORSE 90% 80% 70% 60% 50% 0% Moderately Worse Same Significantly Worse Moderately Improved Significantly Improved 90% 80% 70% 60% 50% 0% Moderately Worse Significantly Worse Same Moderately Improved Significantly Improved

20 FUNDING COSTS - KEY SEGMENTATIONS Segmentation by Region This chart looks at expectation by region for banks funding costs 12 months from now. MIDWEST NORTHEAST SOUTH WEST REGIONS BY FEDERAL RESERVE DISTRICTS 3% 5% 93% 3% 97% 4% 4% 93% 6% 7% 86% Improved Same Worse Midwest Chicago, Cleveland, Minneapolis, St. Louis Northeast Boston, New York, Philadelphia South Atlanta, Dallas, Richmond West Kansas City, San Francisco Segmentation by Asset Size Expectation of Banks with Less Than $1 Billion in Assets Expectation of Banks with between $1 Billion - $10 Billion in Assets 3% Moderately Improved 2% Same 90% WORSE 2% Significantly Improved 5% Same 98% WORSE 62% Moderately Worse 28% Significantly Worse 61% Moderately Worse 37% Significantly Worse 19

21 OVERALL ECONOMIC CONDITIONS Summary Highlights Fifty-eight percent of bankers reported an improvement in overall economic conditions in 2018, down from 63% in. Fifty-five percent expect to see further improvement over the coming year, compared to nearly 65% last quarter. Smaller community banks and larger community banks were almost equally optimistic this quarter with 55% of respondents from smaller community banks and 53% of respondents from larger community banks expecting to see improvement in overall economic conditions over the next 12 months. While bankers in the Northeast were the most positive of any region last quarter (74%), they are the least optimistic region this quarter, tying with the Midwest with just 47% expecting to see improvement in overall economic conditions for their banks over the next 12 months. Experience Compared to 12 Months Ago 35% 8% 35% Worse Same Improved Expectation for the 12 Months Ahead 58% 55% IMPROVED IMPROVED Responses over Time Experience Compared to 12 Months Ago Expectation for the 12 Months Ahead 90% 80% 70% 60% 50% 0% 2016 Moderately Improved Same Significantly Improved Moderately Worse Significantly Worse % 80% 70% 60% 50% 0% 2016 Moderately Improved Same Significantly Improved Moderately Worse Significantly Worse

22 OVERALL ECONOMIC CONDITIONS - KEY SEGMENTATIONS Segmentation by Region This chart looks at expectation by region for overall economic conditions 12 months from now. REGIONS BY FEDERAL RESERVE DISTRICTS MIDWEST NORTHEAST SOUTH WEST 13% 47% 13% 47% 5% 31% 65% 11% 32% 57% Worse Same Improved Midwest Chicago, Cleveland, Minneapolis, St. Louis Northeast Boston, New York, Philadelphia South Atlanta, Dallas, Richmond West Kansas City, San Francisco Segmentation by Asset Size Expectation of Banks with Less Than $1 Billion in Assets Expectation of Banks with between $1 - $10 Billion in Assets 55% IMPROVEMENT 35% Same Same 53% IMPROVEMENT 2% 7% Significantly Improved Moderately Worse 51% Moderately Improved 4% Moderately Worse Significantly Improved 51% Moderately Improved 21

23 METHODOLOGY AND RESPONSE Promontory Interfinancial Network s Bank Executive Business Outlook Survey was conducted online over the course of two weeks from April 3 to April 13, The survey was delivered via to bank CEOs, presidents, and CFOs. Leaders from 306 unique banks throughout the United States completed the survey. Of these 306 respondents, 122 were CEOs (), 38 were presidents (12%), and 146 were CFOs (48%). Compared to the asset-size breakdown of the overall banking industry, the sample of respondents skewed slightly towards larger community banks, banks with assets between $1 billion and $10 billion. All percentages have been rounded to the nearest whole number unless reported otherwise. ABOUT THE COMPANY Promontory Interfinancial Network offers unique services that bring banks and other institutions together in a way that helps each to benefit from The Power of Many SM enabling them to offer services that otherwise might be too difficult or costly for them to offer on their own and providing them with tools to help manage their balance sheets. Promontory Interfinancial Network s services include Insured Cash Sweep, CDARS, Promnet Repo SM, IND, Yankee Sweep, and Bank Assetpoint. For more information about this survey, Promontory Interfinancial Network, or its services, please call (866) or visit Promnetwork.com. The Promnet Repo service is provided by Assetpoint Financial LLC, a wholly-owned subsidiary of Promontory Interfinancial Network, LLC, and a member of FINRA and SIPC. Insured Cash Sweep, CDARS, IND, Yankee Sweep, and Bank Assetpoint are registered service marks, and Promnet Repo is a service mark, of Promontory Interfinancial Network, LLC N. 17th Street Suite 1800 Arlington, VA contactus@promnetwork.com (866) Promnetwork.com