Building Relationships and Interest Margins

People shaking hands with a background image of a community bank.

Building Relationships and Interest Margins

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Two bank failures and lots of banking news (some of which has been over-sensationalized) has given some bank customers the jitters. It seems that every few years we get a reminder of the importance of diversifying. This is one such time. The lessons, however, seem to  get lost in the fray when a new one arises.

We want to remind our readers that they should consider their neighborhood financial institutions if/when looking for a new place to store their cash. And build a relationship or two while you’re at it.

Community banks may not have thousands of branches, but there are thousands of them. The vast majority of them are recommended by Bauer (either 5-Stars or 4-Stars). Community bankers know their customers and their communities. They make decisions locally based on hands-on knowledge of the local economy.

We may be old-fashioned ourselves, which may be why we prefer “old-fashioned” banking. But we want a bank that cares about its customers and the communities it serves. And this may sound counter-intuitive, but by focusing more on the success of its customers and less on making money, a bank can actually make more money. The 50 community banks on page 5 of this week’s Jumbo Rate News prove it.

These 50 community banks reported net interest margins over 5½% at the end of 2022. They come from all over the country and while the majority specialize in commercial lending, the list includes mortgage lenders, consumer lenders and even banks specialized in farm lending.

These robust interest margins would be impressive even without the Fed’s continued credit tightening. This latest quarter point boost (3/22) puts the upper end of the target at 5.0%, its highest level since 2007. At least one more quarter point increase is projected this year  with no cuts in sight. Each increase makes it little more difficult to maintain a healthy net interest margin. Nine consecutive increases makes a 5½% margin very enviable.

Let’s take a closer look at a few of them.

5-Star First State Bank, Abernathy, TX has been serving the needs of its local communities since 1909. It is one of many banks to recently add qualifiers to its website. First State Bank’s home page clearly states: “FDIC Insured, No Exposure to Crypto Currencies, No Venture Capital Funding, Strong Capital Position, Relationship-Based” and (last but not least) Rated 5-Stars by Bauer.

Its roots are deeply planted in West Texas where it has been an integral part of the fabric for well over 100 years. According to the FDIC, First State Bank has an agricultural specialization, but looking at its loan portfolio, we can see it provides lending for virtually everything except residential real estate. With a net interest margin of 7.23%, that is certainly working for them.

5-Star McKenzie Banking Company, TN, or Foundation Bank, as it is commonly known, has been a “Family-Owned, Relationship-Building, Service-Oriented, Solutions Provider” since 1934.  Almost 43% of its loan portfolio is invested in single family homes in Carroll and neighboring counties. Commercial & Industrial loans take up the next biggest piece of the pie (20%). With a 6.13% net interest margin, McKenzie/Foundation Bank is clearly doing something right.

5-Star Traditions Bank, Cullman, AL touts itself as “Your TRUE Community Bank”. Its slogan is “Building Bridges”, which may be true, but it is also busy building single family homes. Residential real estate accounts for 40% of its loan portfolio. According to the FDIC, Traditions Bank has a Commercial Lending Specialization, but its commercial loans only comprise about 22% of total loans. Commercial Real Estate accounts for 13%; almost 11% goes to Construction and Land Development and the rest is divided primarily between Consumer Loans & Farm Loans. Traditions Bank is at the very bottom of the list with a 5.51% net interest margin.

We can continue, but the common thread is the same. Regardless of what the FDIC has listed as the bank’s specialization, each bank on page 5 is making the most of its resources. Those resources are the people and businesses in their own communities.

Foundation Bank said it well: “to foster a financial community where needs are met, relationships are built and loyalty is earned”. These are the hallmarks of  community banks.”

But not to be outdone,

“vibrant and diverse banks of all sizes that serve communities across the country are critical to our nation’s economy”

– Dianne Dobbeck, Head of the Supervision Group, Federal Reserve Bank of New York, perhaps said it best.

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