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Jan Moore Column: How rate cuts by Fed affect community banks
Tommy Davidweb
Tommy David

            The last couple of weeks have seen unprecedented moves by the U.S. Federal Reserve Board in which the regulatory agency took the federal funds rate governing overnight lending between banks down to 3.0 percent – a full 1.25 point reduction.

            The move was made to stem the tide of uncertainty, and some would argue panic, in the financial markets at home and abroad. After the two cuts, the markets calmed substantially. Now that the dust has cleared, I thought it would be interesting to get a local banker’s perspective of the Fed’s move, and the resulting impact it is expected to have on our local banks and their customers.

            Tommy David, president and ceo of First Southern National Bank in Statesboro, graciously took a few minutes out of his busy Friday to give an opinion of how the move is going to affect community banks like First Southern.

            “Most small banks make the majority of their income on the spread between what they pay depositors and what they lend,” David said. “Larger banks have a large branch network that allows them to have a large percentage of deposits in checking accounts or low interest accounts. The more low cost deposits – non CD(s) – the more spread you can make. In other words, the vast amount of the interest they are paying their customers is in low interest type of accounts.”

            David said community banks don’t have that same very high number of low interest accounts.

            “Unfortunately community banks rely primarily on the interest spread – the difference between the interest they are charging on loans, and the interest they are paying out on deposits,” he said. “Therefore, during a declining interest market, our spreads take a beating and at the same time loan demand is usually down.”

            In other words, interest rates paid by borrowers on loans go down, but banks are locked into fixed deposit rates on CD(s) and the like. Translation - bank profits go down. How does all of this affect the customer?

            “Commercial loans are more attractive since their rates are mostly tied to prime,” David said. “The consumer rate will be lowered, but they never get as good of a deal as the businesses do. However, because of the economic conditions, banks are a lot tighter in issuing credit, so it is harder to qualify.”

            David pointed out that our local economy has been driven to a certain extent by the residential building boom which has experienced a drastic slowdown resulting in a record number of homes on the market.

            “A lot of our growth has been in real estate development, and real estate development nationwide and here has really declined,” he said. “I don’t know that lower interest rates are going to have a major effect on real estate right now, so it isn’t necessarily going to give us a shot in the arm.”

            David believes that the environment of uncertainty created by the talk of inflation and recession has had a dramatic effect on both banks and borrowers.

            “Until the government can convince the consumer that the sky isn’t falling, the consumer won’t take a risk and the banks can’t make up the loss of income from the tight spreads by generating more volume; people are too scared to borrow, and the banks themselves are scared that the borrower won’t be able to pay it back if the borrower loses their job or is laid off,” he said. “Bottom line - banks don’t do as well in a declining interest environment, and consumers are hard pressed to take advantage of it.”

As far as interest rates are concerned, consumers should expect the following. The vast majority of credit card rates will not be immediately affected as they don't float, but are adjusted at fixed times throughout the year. Car loans already in place will not see any relief as these are fixed rates generally; new loans will see lower interest rates though. Those with home equity loans will be affected also because their rates are tied to the prime interest rate.


            Until next week, I bid you au revoir.


            Got a scoop for Jan? Call her at (912) 489-9463 or e-mail her at

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