Community Bank Outlook - August 2023

Community bank earnings will fall this year as institutions face liquidity pressures and build reserves for a slip in credit quality. Results are unlikely to recover in 2024 as funding costs and credit costs remain elevated amid a higher for longer interest rate environment. The hits to earnings and returns will be manageable for the vast majority of institutions but could change the strategic outlook for many as boards and management teams contemplate stagnant earnings over the next few years.

S&P Global Market Intelligence.

Key findings include:

• If community banks grow CDs by 9% in the second quarter from the prior quarter — close to half the pace of the publicly traded bank group — and deposits held flat with the linked quarter, the products would rise to 22.8% of deposits from 20.9% at the end of the first quarter and 18.5% at year-end 2022.
• In the first quarter, community banks recorded a deposit beta on all deposits, including non-interest-bearing funds, of 49.0% when compared to the prior quarter. That is up from 22.6% in the fourth quarter and 11.9% in the third quarter.
• We expect second-quarter betas on interest-bearing deposits to rise from 62% in the first quarter and eventually rise above 100% over the next two quarters as banks raise deposit rates and seek to protect their funding by marketing products with higher-cost deposits, such as CDs.  
• Community banks' funding costs will rise at a quicker pace than earning-asset yields and pressure net interest margins. We project the full-year 2023 net interest margin to be 14 basis points lower than the level reported in the first quarter and then fall another 7 basis points in 2024.

If you are a client of S&P Capital IQ Pro, you can access the complete U.S. Bank Outlook here.

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S&P Global Market Intelligence. We provide essential insights for our clients through powerful business intelligence solutions that combine comprehensive data, actionable analytics

S&P Global Market Intelligence. We provide essential insights for our clients through powerful business intelligence solutions that combine comprehensive data, actionable analytics