The latest issue of the FDIC Quarterly explores loan performance at community banks in five manufacturing-concentrated states: Indiana, Kentucky, Louisiana, Michigan and Wisconsin. In the report, the FDIC noted that these banks represent a “small but stable share of community banks,” accounting for about 12% of all community banks.
Based on an analysis of Call Report data, the FDIC said that community banks in these states support their local economies “through a higher share of commercial loans relative to community banks in other states,” including commercial and industrial loans, commercial real estate loans and construction and development loans. These banks also reported consistently higher net interest margins than community banks in other states.
The FDIC noted, however, that “the manufacturing industry is sensitive to business cycles and recessions, which has direct implications on community banks and has weighed on their profitability through both direct credit exposure to manufacturing firms and indirectly through the manufacturing industry’s impact on the local economy.” As an example, the FDIC highlighted that the pretax return on assets fell more precipitously among community banks in manufacturing-concentrated states and took longer to recover after the 2008 financial crisis than at community banks in other states.
While the agency acknowledged that the manufacturing sector bounced back faster than expected from the more recent pandemic downturn, credit risks remain for banks in manufacturing-heavy states. “The manufacturing industry remains susceptible to the risks of plant closure due to the evolving nature of the pandemic, or relocation of firms due to global market pressures as production and demand normalize,” the FDIC said. “Even as these short-term challenges resolve, banks face longer-term risks stemming from continued structural changes in the manufacturing industry as it transitions to advanced manufacturing, potentially affecting the concentration of firms among states.”