St. Louis Fed Study Shows Community Bank Model Can Thrive In Good Times and In Bad


ST. LOUIS – A new study from the Federal Reserve Bank of St. Louis shows a surprising number of the nation’s community banks not only survived the financial crisis – they thrived.

In “The Future of Community Banks: Lessons From Banks That Thrived During The Recent Financial Crisis,” authors R. Alton Gilbert, Andrew Meyer and Jim Fuchs of the St. Louis Fed’s Banking Supervision and Regulation department show that during the financial crisis of 2006-2011, community banks that maintained certain standards and qualities were able to consistently deliver strong performances while others merely survived or failed. The study was published in the March-April 2013 edition of the Review, the St. Louis Fed’s bimonthly research journal.

While these standards and qualities include continually achieving the highest of supervisory ratings, further analysis of these banks and interviews with bank leaders revealed a strong commitment to maintaining standards for risk control in all economic environments as well as a striking diversity in developing and deploying business plans unique to each bank’s respective market.

“The community banks that will prosper in the future will have characteristics similar to those of thriving banks that performed well during the recent financial crisis and its aftermath,” the authors said. “The events of recent years can be considered a real-world stress test of the community bank business model.”

Defining “Thriving” Versus “Surviving”

For the St. Louis Fed study, the primary criterion for defining “thriving” community bank performance was a continual composite CAMELS rating of 1. The authors consider banks under $10 billion in assets to be community banks because the Dodd-Frank Act of 2010 treats them differently from larger, more complex banks. There are close to 7,000 community banks currently operating in the United States.

CAMELS is the acronym for the primary bank-rating system widely used by regulators. It stands for six examination factors: Capital adequacy; asset quality; management quality; earnings; liquidity and sensitivity to market risk. Each factor is scored on a scale of 1 (best) to 5 (worst). CAMELS ratings were chosen as the best indicator of a bank’s health because they capture a bank’s overall financial condition as well as an assessment of its management.

According to this criterion, 702 community banks across the U.S. were classified as thriving during this timeframe, while 4,525 were classified as surviving. To qualify as “surviving” in this sample, a community bank had to exist throughout the period of 2006 to 2011, but fall below a CAMELS 1 rating at some point in time. Thus, community banks that had either failed or merged out of existence were not included.

Thriving banks were found in 40 of the 50 states, with the majority located in states where the impact of the financial crisis was offset by robust agricultural and energy sectors. Asset size was not a factor in achieving thriving status: Banks varied in size from below $50 million in assets to as large as $1 billion to $10 billion in assets.

The top 15 states with the highest percentage of thriving banks were Louisiana (40.32 percent); Oklahoma (27.66 percent); Texas (22.46 percent); Massachusetts (20.83 percent); Iowa (19.82 percent); Nebraska (18.36 percent); North Dakota (15.91 percent); South Dakota (15.38 percent); Kansas (14.47 percent ); West Virginia (13.79 percent); Missouri (13.53 percent); New Mexico (13.33 percent); Kentucky (10.67 percent); Arkansas (10.66 percent) and Illinois (9.84 percent.)

The fewest thriving banks were located mostly in the western and southeastern states, regions where real estate values fell the most.


Thriving banks were not solely defined by their superior supervisory ratings; the study found they also outperformed surviving banks based on a wide variety of performance measures.

From 2006-2011, thriving banks’ mean return on assets was 1.5 percent, compared with 0.8 percent for surviving banks. Thriving banks also provided a higher return on equity to their shareholders; managing a return on equity of 12.7 percent, with surviving banks managing a 7.3 percent return.

Thriving banks not only experienced asset growth during the crisis they also continued lending to their customers.

In the period leading up to the crisis, from the beginning of 2004 to the end of 2007, surviving bank asset growth rates were considerably higher than that of thriving banks: 44.28 percent versus 23.58 percent. However, once the crisis hit, surviving bank growth rates plummeted to 26.91 percent while thriving bank growth rates actually rose to 31.16 percent.

While loan growth fell for both thriving and surviving banks during the crisis, the drop-off was not as steep for thriving banks. Pre-crisis, surviving banks had a loan growth rate of 66.04 percent, compared with thriving banks, which had a loan growth rate of 31.06 percent. Amidst the crisis, surviving bank loan growth plummeted to 18.67 percent. Meanwhile, loan growth for the thriving banks fell more moderately to a rate of 19.68 percent.

This pattern proved to be consistent with other findings in the study that showed thriving banks exercised a comparatively conservative growth strategy during good times and were able to capitalize on the mistakes of their competitors during bad times.

Thriving banks also outperformed surviving banks on return on assets, return on equity, loan losses, provision expense, efficiency ratio, asset growth, net interest margin, and net non-interest margin. The study revealed that thriving banks had lower levels of loans-to-total-assets and were more reliant on core deposits than surviving banks.

Thriving banks also had lower concentrations in commercial real estate (CRE) lending and much lower concentrations in construction and land development loans. Moreover, thriving banks were slightly more concentrated in one- to four-family mortgage loans held in portfolio, as well as in consumer loans.

Beyond Performance Measures

Good bank performance also relies upon quality of management and the local economic conditions of the community in which the banks provide their services. Since these factors are hard to quantify, the authors also examined a sample of comments in thriving bank examination reports and found several recurring themes, including that these banks:

  • Featured strong and localized customer service focus with high community visibility;
  • operated in a thriving (i.e., growing ) environment;
  • practiced forward-looking risk management with an eye toward long-term bank performance;
  • demonstrated balance between growth and risk levels, and
  • had patient and conservative ownership that operated with the belief that returns on investments should be attractive, but not necessarily spectacular.

Overall, the study provides a window into those factors that enabled more than one-tenth of the nation's community banks to not only operate in a safe and sound manner, but to do so in a way that ensured they continued to allocate credit in the communities they served.

While the strong performance of certain types of loans will constantly change, this study provides strong evidence that in future crises, community bankers who maintain a strong commitment to conservative lending principles and sound underwriting, even in the face of relaxing standards by their competitors, will likely thrive in the future.

Contact Us

Adriene Dempsey


Suzanne Jenkins


Laura Girresch


Maria Hasenstab


Laura Taylor