NEW YORK–The effects of interest rate cuts and the pandemic just beginning to show up in the financial performance data of community banks, according to Moody’s Investor’s Service.
In its report on community bank performance during Q1, which defines community banks as those with assets up to $10-billion, Moody’s said FDIC data show as of March 30 the number of FDIC-insured community banks declined 1.5% to 4,681 during the first quarter.
Among the other data points in the Moody’s report, along with the company’s analysis:
- Loans and deposits remained flat at $1.6 trillion and $1.8 trillion, respectively. “We expect sector consolidation to continue helped by lower valuations, though transaction volume may slow during the current period of heightened economic uncertainty.”
- Asset risk. “The rise in asset risk from the coronavirus pandemic has only begun to filter through to nonperforming assets, which rose three basis points (bps) over Q4 2019 as a percentage of total assets. Net charge-offs were up to 12 bps from nine bps a year ago, but remain low and decreased six bps from the prior quarter. Looking ahead, we expect community banks' strong asset quality to deteriorate more materially because of the economic slowdown.”
- Capital – The Tier 1 capital ratio decreased to 14.2% from 14.9% last quarter. “The leverage ratio remained high at 11.1% but continued a decline that began in Q4 2019. We expect capital to remain a strength of the sector despite rule changes that will allow community banks to reduce their regulatory capitalization.”
- Profitability. Sharp interest rate cuts reduced the community banks' net interest margin (NIM) another seven bps to 3.55% in Q1, the report notes. “Even so, the NIM of the sector continues to exceed that of all other FDIC-insured banks (3.08% in Q1 2020). Net income reflected ongoing economic distress, with a return on average assets (ROAA) for the group of 0.87% compared with 1.15% in Q4 2019. We expect the Fed's recent interest rate cuts, higher loan loss provisions and the economic slowdown will keep the pressure on banks' profitability.”