STATE COLLEGE, Pa., August 26, 2022 - Article in Pennysylvania Business Central by David Harry
The continued growth of Centre 1st Bank in central PA is the latest example
With record high inflation, accompanied by rising interest rates to combat it, the economy is struggling through a period of uncertainty. One industry well-positioned in the current economic climate is the banking industry, and especially community and independent banks.
As inflation increases, interest rates rise as well. There is more incentive for banks to make additional profits when interest rates rise. Their profits can also be reduced as their cost of funds increases. Interest Rates tend to rise with inflation but the banks' costs of funds (what they pay depositors) lag, providing the necessary cushion.
Generally, rate hikes are advantageous for community and independent banks. Research by the Independent Community Bankers of America (ICBA) suggests that community banks focus their asset base on higher-yielding loans that reprice faster than deposit rates when interest rates rise. Meanwhile, large banks are more likely to focus on tradeable assets, including securities and other debt instruments, that make them less sensitive to interest rate changes.
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