Everyone Wants Interest on Their Deposits. That’s Bad for Main Street Banks.

livemint.com:

Nicolet Bankshares thrived in the years after the financial crisis. The lender, based in Green Bay, Wis., bought up smaller banks and focused on the kinds of Midwestern cities and towns that megabanks ignored. Then came the Federal Reserve’s rapid interest-rate increases starting last year.

The 60-branch bank took a big loss on the bonds it bought when it thought rates would stay low. Depositors started moving their money into higher-yielding places such as Treasurys, forcing Nicolet to pay higher interest rates. The urgency only intensified after Silicon Valley Bank failed in March.

“Our raw-material costs just went up 600%," said Chief Executive Mike Daniels, referring to the deposits Nicolet uses to fund loans in its community. Thousands of small and midsize banks across the U.S. flourished after the 2008 crisis.

They navigated tougher regulations, ultralow interest rates and competition from bigger banks with deep pockets and flashy apps. Families and small businesses that wanted high-touch, personal service were a winning clientele. For most of 2021, all but the very smallest community banks had a higher return on equity than the biggest banks.

When the Fed started raising interest rates to fight inflation, the conventional wisdom was that it would be a boon for Main Street banks. They were expected to increase the rates they charged on loans faster than those paid to depositors, pocketing the difference. Instead, the opposite is happening.