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ICBA Chief Economist Says Community Banks In Solid Shape Going into 2007

Washington, D.C. (October 20, 2006)—The Independent Community Bankers of America (ICBA) Chief Economist Paul Merski said community banks are in a strong capital position and well-positioned for the slower economic growth environment of the final quarter of this year and into 2007.

"Community banks are solid because they are well-capitalized and will likely see beneficial improvement as the Federal Reserve Board shifts its monetary policy to maintain current interest rates or lower them in the near future," said Paul Merski, ICBA chief economist and director of tax policy, speaking to a gathering of community bank directors attending the ICBA Annual Bank Director's Conference in Napa, Calif.

"The economic cycle is at a transition point and settling into a slower but steady growth rate," said Merski. "Fortunately, community banks are nimble and adept at adjusting as the economy changes. Community banks will benefit from the recent Federal Reserve Board policy shift away from hiking rates, and the current troublesome inverted yield curve will improve for banks in the months ahead. The improving shape of the yield curve should take some pressure off banks' compressed net interest margin going forward."

Merski also called attention to several positive signs in the economy. Chief among these are:

  • The dramatic 25% drop in energy prices that is boosting consumer confidence and disposable incomes.
  • Strong employment numbers and continued income gains are supporting consumer spending.
  • No dominant spillover impact on consumers from the sharp housing market correction that is underway.
  • Strong corporate earnings and the continuation of beneficial lower tax rates on capital, investment and savings that are reflected in higher stock market levels.

"The economy will remain resilient into 2007 and good for the community banking industry," said Merski. "Declining energy costs, advantageous monetary policy, a steady job market, reasonable borrowing rates, and solid consumer spending will keep the economy growing at a steady clip of 2.5% or higher into 2007."