This time it's different

Surviving small banks look battle-hardened at last

The financial crisis wiped out almost 2,000 community lenders. Those left have struggled with patchy loan demand, ultra-low interest rates and new rules. An improving economy and a hike from the Federal Reserve will help.

Higher rates appear to be on the cards for later this year, judging by comments from various Fed officials. Little wonder, then, that the mood at the Independent Community Bankers of America (ICBA)'s annual conference this week is optimistic. The more the Fed hikes, the more all-important net interest margins ought to widen at banks of all sizes. That means more revenue for little, if any, extra effort.

Getting this far has been a struggle. The 7,600 institutions with fewer than $1 billion in assets in 2008 fell to 5,800 at the end of last year. They have managed to eke out more revenue, but it has been slow going. Annual net interest income was up an average of 2.7 per cent a year, while non-interest income grew at a somewhat more impressive 3.6 per cent.

Lending is starting to pick up, too. ICBA Chairman-elect Jack Hartings, president of The Peoples Bank in Ohio, said his mortgage business grew 7 per cent last year. Loan loss reserves are way off their highs too - though, of course, these can lag credit problems.

The group's lobbyist Camden Fine has also become a strong voice for the group in Washington. He ensures lawmakers understand that the bankers he represents are Main Street workhorses, not Wall Street fat cats. That has helped shield smaller institutions from what would have been overly onerous rules.

The one major concern is what effect rising rates will have on their balance sheets. Net interest income takes months to fully appear. But some loans and securities get whacked immediately. Conference attendees seem confident they have avoided piling too much longer-dated risk into their holdings. And regulators have included rate shocks in stress tests. Any that do succumb will only have themselves to blame.