The net interest margin (NIM) at our nation's community banks dropped 26 basis points during the 12 months ending March 31, 2024 and is now at 3.23%.

In this week's issue of Jumbo Rate News, we list 50 community banks with a NIM of less than 1.58% (less than half the national average).

Over one-third (36%) of the banks listed are mortgage lending specialists while another 24% specialize in commercial lending. This week we look at how some community banks are managing to thread this narrowing gap.

Threading a Narrow Interest Rate Gap

We promised last week that we would look to see how a shift from non-interest bearing deposits to interest earning deposits was affecting net interest margins (NIMs) at community banks.  To do that, we have listed the 50 community banks with the narrowest NIMs on page 5. Surprisingly, there is no overlap between this week’s and last week’s list (which showed 50 community banks with large transfers).

The closest is 3-Star Thread Bank, Rogersville, TN. In the 12 months ending March 31, 2024, Thread Bank gained 45.7% in total deposits (it lost 16% of non-interest bearing deposits and gained 55% in interest bearing deposits). In addition, over 14% of its deposits are brokered. We would certainly expect a negative impact to Thread Bank’s NIM.

However, the opposite happened. Thread Bank went from a NIM of 1.63% a year ago to 2.22% today. That’s well above the cutoff of 1.58% that we used for this week’s page 5 list. In fact, it would have come in at the 324th slot (323 community banks have a narrower NIM).

At first glance, this seems contradictory, but a closer look and you’ll see that Thread Bank is not your average community bank. It used to be. Chartered in 1906 as Citizens Bank of Sneedville, it continued as a typical community bank, with a slightly broader range, when it changed its name in 1995 to Citizens Bank of East Tennessee.  In the 2000s, stress began to build.

By the end of 2009, Citizens Bank of East Tennessee was rated 2-Stars and a regular fixture on Bauer’s Troubled and Problematic Report.

By the end of 2010, just one year later, Citizens Bank had lost both of its remaining stars. It remained at Bauer’s lowest rating for over a decade—until 2021. (That may be a record.) It was no longer Citizens Bank, though. In 2013, the bank’s name was changed again, this time to Civis Bank. It was a new name, but the problems persisted.

Finally, in 2022, a group of fintech entrepreneurs and investors banded together to recapitalize Civis Bank and its parent, Volunteer Bancorp. The result is Thread Bank, another name change, but an appropriate name for the manner in which the investors weaved (or threaded) banking and technology together.

Thread Bank continues to operate as a community bank in Eastern Tennessee, but it also partners with other banks, credit unions and fintechs, nationwide. These partners are able to use Thread’s technology platform and embedded software to improve their own customers’ (or members’) experiences.

Due to this unique set-up, Thread Bank does not depend upon its NIM the same way most community banks do. In fact, its loan-to-deposit ratio is just 42.2%. This business model seems to be working, though. Thread bank has posted three consecutive quarterly profits.

Thread Bank’s loan quality has also done a complete turn for the better and, at 3-Stars for the third straight quarter, Thread Bank has finely put Bauer’s T&P Report behind it.

This story notwithstanding, the NIM is still squeezing many, if not most, traditional community banks.

One thing we did not mention last week, was that the March 2024 NIM of 3.23% for community banks was down 26 bps from a year-earlier. This drop was caused by: a) a 92 bp increase in the cost of funds as interest rates on interest bearing accounts have risen and; b) a yield on earning assets that increased by a much lower 66 bps. (In other words, higher interest paid on deposits that is not matched by higher interest coming in from loans & investments.)

The 50 community banks listed on page 5 each reported a first quarter NIM of less than 1.58%; that’s less than half the national average. Of the 50: 18 are mortgage lending specialists; 12 specialize in commercial loans; five are Ag lenders; and the other 15 vary.

One of the 18 mortgage specialists, 4-Star Bogota Savings Bank, Teaneck, NJ saw total deposits decline in the 12 month period noted. In fact, its deposits peaked at year-end 2022, then dropped for the next four  consecutive quarters. During calendar 2023, Bogota SB had lost 11% of its deposit base. That trend has finally reversed now and, with the help of brokered deposits, Bogota gained over $40 million in deposits during the first quarter 2024.

Since most of those new deposits were expensive, brokered deposits. Bogota SB’s already low NIM of 1.68% last quarter was just  1.15% at the end of March. This demonstrates how difficult this interest rate environment is  on mortgage lenders, which carry large amounts of long-term fixed-rate home loans.

Of course, we all know commercial lenders are feeling the pinch as well. 4-Star DMB Community Bank, Madison, WI is one of the 12 commercial lending specialists listed.

DMB has a history of using brokered deposits to fund loans. In the past three years, it had ramped up those brokered deposits from under 19% of total deposits to over 44%. In fact, brokered deposits exceeded 40% of total deposits for five straight quarters. Then, in the first quarter of this year, it pulled back... a little. Brokered deposits now represent 31% of the total. DMB’s loan-to-deposit ratio is well over 100% as well. Fortunately, its loan quality and capital levels are both quite strong.