The CommunityBanker 10 Earnings at U.S. community banks in aggregate are expected to dip 1% in 2022 as higher credit costs and lower fee income mitigate the benefit of net interest margin expansion. Fed actions to combat elevated inflation through rate hikes and the shrinkage of its $9 trillion balance sheet will boost community bank net interest margins by 14 basis points in 2022 and another 2 bps in 2023. Even after that expansion, margins would remain 21 bps below pre-pandemic levels. Deposit betas, or the percentage of rate changes banks pass on to customers, will be lower than in past tightening cycles due to the massive influx of liquidity into the banking system during the pandemic. Community bank margins will jump as the Federal Reserve raises short-term interest rates and loan balances increase with economic recovery. Still, earnings are unlikely to grow in 2022 and 2023 as credit costs normalize and fee income declines. Credit trends should normalize in 2022 due to a lack of pandemic relief efforts and rising operating costs stemming from elevated inflation, requiring higher levels of provisions for loan losses. Community banks will have to grapple with higher wages as well, limiting efficiency improvements. Fee income surged over the last two years on strength in mortgage banking income, but higher rates should reverse the trend in 2022. Taken together, a rising rate environment and sustained economic recovery from the pandemic will create a more favorable operating environment for community banks, but earnings growth could be hard to come by in the near term. 2022 US Community Bank Market Report By Nathan Stovall, Principal Analyst for the FIG Research
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