Low interest rates are drag on community banks' earnings

FDIC study finds community banks still important to economy

George Ford
Published: December 21 2012 | 6:30 am - Updated: 1 April 2014 | 3:38 am in

Low interest rates are making it easier for consumers to buy cars, trucks and houses. But they have become a problem for the nation's 7,658 community banks.

Because of their focus on traditional loans and deposits, community banks derive 80 percent of their revenue from net interest income. The narrowing of net interest margins — the difference between the interest banks charge for loans and how much they pay for deposits — has created a significant drag on community bank earnings, according to a study released by the Federal Deposit Insurance Corp. on Wednesday.

The study defines community banks as those that handle traditional loan and deposit activities in a limited geographic area. Iowa has 350 community banks in more than 1,000 communities that employ more than 5,000 Iowans.

The FDIC study found that community banks have almost always sustained lower credit losses than non-community banks.

"This difference has been most notable in economic downturns, and is likely a result of the relationship lending approach favored by most community banks," the FDIC study concluded.

Far-reaching changes in the U.S. financial sector in recent decades have made community banks a smaller part of the nation's financial system, according to the FDIC. Between 1984 and 2011, the share of U.S. banking assets held by community banks declined by more than half, from 38 percent to 14 percent.

Despite those changes, the FDIC study concluded that community banks continue to play an important role in the economy. As of 2011, community banks made up 92 percent of FDIC-insured banks and 95 percent of U.S. banking organizations.

Community banks hold the majority of banking deposits in U.S. rural and micropolitan counties. The latter are defined as counties surrounding and including a core city with a population of between 10,000 and 49,999.

The FDIC study found that there are more than 600 counties – or almost one out of every five U.S. counties – that have no other physical banking offices except those operated by community banks.

Community banks are inextricably connected to entrepreneurship. The FDIC study showed that community banks held 14 percent of banking industry assets in 2011, but 46 percent of the industry’s small loans to farms and businesses.

Community banks in Iowa have made more than $3.2 billion in loans to consumers, small businesses and the agricultural community.

"As a community banker, the study confirms for me that the business model is important to Iowa’s main street communities, the nation's and Iowa's economic recovery," said Erik Skovgard, executive vice president of Lincoln Savings Bank in Cedar Falls.

"Community banks are based on relationships with customers and their symbiotic relationships with the communities they serve help small business and main street Iowa communities survive as the economy continues to recover."

The full FDIC community bank study can be seen at  http://fdic.gov/regulations/resources/cbi/study.html.

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