Net interest margins are clearly under pressure at community banks, but this trend is not new. It is a product of a highly competitive banking industry and a direct result of today’s lower lending levels and abundant balance sheet liquidity. The net interest margin is the difference between interest income and interest expense. Interest income and interest expense fluctuated considerably through the business cycle, but the long-term trend indicates that asset yields are falling faster than deposit and other funding costs.
The total volume of loans held by community banks peaked in 2008 and dropped during the financial crisis and Great Recession. Total loans bottomed out in 2011 and, as of December 2012, have only recovered to a level roughly 10 percent below their 2008 peak. During this period, both demand and supply factors undoubtedly played roles in the change in bank lending.
The Financial Accounting Standards Board (FASB) recently released a proposal that would change the way financial institutions set aside funds to cover losses on loans, debt securities and other assets. Under current accounting rules, the allowance for loan and lease losses is based on incurred losses; the new model, if adopted, would require the allowance to be established for losses expected over the life of the loan based on current and future economic conditions, historical losses, and other factors.
Despite historic drought conditions, crop producers and lenders in Eighth District states appear likely to exit the year in satisfactory financial condition, but the situation is somewhat different for livestock producers.
It is possible ROE will settle in at a lower-than-precrisis historical rate, leading to a resetting of performance expectations by community bank stakeholders.
With soaring commodity prices and farmland values in recent years, banks with an agricultural focus (where at least 25 percent of total loans are production and farmland loans) have outperformed their community bank peers. Find out what risks agriculture banks may face.
Outstanding loan volume at commercial banks declined 2.2 percent between June 2008 and June 2009.
Investors remain available for offensive capital-raising but are scarce for defensive capital-raising.
Data suggest that the city's banks fare at par with their peers.
U.S. agriculture has been booming in recent years with record farm incomes and double-digit percentage increases in cropland prices. However, farm income projections suggest a flattening, if not a reversal, of these trends. 2013 may prove to be a peak year, as analysts expect the agriculture sector to experience lower commodity prices, normal crop production and lower farm income over the next several years.
Since the third quarter of 2011, OREO levels at community banks in the District and nationwide have declined. However, the current volume of these properties is much higher than what it was before the start of the financial crisis, indicating that such banks have a long way to go before OREO levels return to what they were before the financial crisis.