2024 Journal of Community Bank Case Studies

2024 COMMUNITY BANK CASE STUDY COMPETITION

Non-interest income accounts for the remaining 13.2% of INB’s gross income. This is significantly less than in previous years, partly due to the increase in interest rates and the resulting increase in overall interest income. Despite

Figure 2: NIM

0 0.5 1 1.5 2 2.5 3 3.5 4

making up a smaller proportion of income,

2019

2020

2021

2022

2023

INB

Peers

INB’s non-interest income levels have grown over the past five years with a CAGR of 4.05% compared to only 1.32% for their peers. Non-interest expenses, while also increasing in absolute numbers, have steadily decreased over a five year period as a percentage of total assets, from 3.28% to 2.34%. This has led to an improvement in INB’s efficiency ratio, a measure of how much the bank spends in operations for every dollar made, which has been fairly steady but has declined over the five-year period (73.88% to 69.75%). This shows they are being more efficient in how they make their money, but it still lags their peers’ average ratio of 57.42% (UBPR 3). Ultimately, a bank’s earnings should be sufficient to provide for retained earnings and to cover losses. While INB’s return on average assets (ROAA, subchapter S adjusted) at 0.73%, was lower than its peers’ 1.10%, it had a higher than average retained earnings (10.11% of average bank equity vs. peers’ 8.21%), as they elected not to declare dividends this year. Also, INB’s 2023 earnings covered their net losses 184.48 times. While this was an outlier due to low net losses

with lending, which is where most community banks derive the bulk of their income (Donovan Email ). As with all banks, the Federal Reserve’s interest rate increases have affected INB’s interest income and expense alike. INB’s interest income as a percentage of average earning assets increased 1.46 percentage points but was outgrown by their interest expenses, which increased 1.65 percentage points. This led to a decrease in their NIM to 2.63. The interest rate changes disproportionately affected INB’s expense side, at least in part, because a larger percentage of total assets are in interest-bearing deposits compared to their peers. The biggest difference is in transactions accounts, which make up 34.5% of total assets compared to only 11.5% for peers, thanks to INB’s interest-bearing checking accounts. In recent years, INB’s NIM has followed the same trend as its peers’, only diverging this past year with a slight drop (See Figure 2). Overall, INB’s net interest income increased 12.5% over the previous year, and they achieved a five-year CAGR of 11.4%. This is right in line with their peers who posted numbers of 12.6% and 9.5%, respectively (FDIC BankFind ).

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