WASHINGTON–A new report on the plight facing many community banks could easily substitute the words “credit union,” as they share much in common.
The analysis by the Wall Street Journal noted that many smaller banks, especially those in smaller towns, face gloomy prospects due to a combination of rising rates available from other competitors as well as just the just overall competitive threats from a variety of much larger providers.
Speaking to the challenge of rising rates, Mike Daniels, CEO of Nicolet Bankshares in Wisconsin, told the Journal, “Our raw-material costs just went up 600%.”
Nicolet Bank is hardly alone in dealing with a vastly changed marketplace.
“Thousands of small and midsize banks across the U.S. flourished after the 2008 crisis,” the Wall Street Journal reported. “They navigated tougher regulations, ultralow interest rates and competition from bigger banks with deep pockets and flashy apps. Families and small businesses that wanted high-touch, personal service were a winning clientele. For most of 2021, all but the very smallest community banks had a higher return on equity than the biggest banks.”
Expected ‘Boon’ Didn’t Happen
But when the Fed started raising rates, the Journal said the conventional wisdom had been the increases would be a “boon” for Main Street banks as they increased loan rates faster than deposit rates and pocketed the difference.
“Instead, the opposite is happening,” the Journal reported. “The Fed’s hikes and the failures of a trio of midsize banks are prompting once-loyal customers to pull their money out of checking accounts that pay no interest. Banks are paying much higher rates on the deposits they are retaining, which is eclipsing the benefit of charging more on loans. They also are hoarding cash and tapping high-cost loans in response to the recent failures.”
The Journal cited FDIC data showing that in Q1 of this year community banks paid on average 1.14% on deposits, up 0.39 percentage point from the prior quarter. During the same time period, those banks earned 5.36% on loans, up 0.16 percentage point from the prior quarter.
Familiar to CUs 1.0
In an observation that will sound familiar to credit union leaders, the Journal reported noted, “Community banks, which are smaller lenders that focus on plain-vanilla lending to their communities, are especially dependent on this type of interest income. Megabanks are also getting pinched by higher deposit rates, but they have the cushion of fee-based income from big trading, investment-banking and wealth-management businesses.”
The report added that community banks’ profits are expected to decline 23% this year, according to S&P Global Market Intelligence.
Familiar to CUs 2.0
In a second note that will also sound quite familiar to credit unions, the report added that the challenge could eventually speed up ongoing consolidation in banks, with the Journal stating there are fewer than 4,700 U.S. banks today, down from about 8,000 in 2010, according to the FDIC.
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