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St. Louis Fed Research Focuses on How Community Banks Get or Stay Healthy in Difficult Times

Tuesday, October 1, 2013

Researchers have paid considerable attention to studying what can be learned from the failures of community banks during the recent financial crisis. Researchers at the Federal Reserve Bank of St. Louis, however, have taken a different approach in their studies of recent community bank performance.

In two separate research papers, authors Alton Gilbert, Andrew Meyer and James Fuchs explored features that distinguish community banks that thrived during the recent financial crisis and those that were distressed and subsequently recovered. The paper “The Future of Community Banks: Lessons from Banks That Thrived During the Recent Financial Crisis” was published in the March/April 2013 issue of the St. Louis Fed’s Review. The working paper “The Future of Community Banks: Lessons from the Recovery of Problem Banks” was presented at the research conference Community Banking in the 21st Century, co-hosted by the St. Louis Fed, the Conference of State Bank Supervisors and the Federal Reserve System. (See article “Bankers, Regulators and Academics Gather at St. Louis Fed to Discuss State of Community Banking” in this issue of Central Banker for a summary of the conference.)

In both papers, the authors took qualitative and quantitative approaches to their research, not only digging into the data of qualifying banks, but also interviewing officials from these institutions to provide additional insights into how their institutions fared as they did.

How Thriving and Recovered Banks Performed

The authors discovered similarities between banks in both categories. (See the Definitions box at the bottom of the page for definitions of thriving and recovered banks.) In general, thriving and recovered banks had lower total-loans-to-total-assets ratios and were less concentrated in construction and land-development loans, commercial real estate and home equity lines of credit and were more reliant on core deposits. (See Table 1 below.)


Metrics of Thriving and Recovering Banks

  Lessons from Thriving Banks Lessons from Recovered Banks
  Thriving Surviving CAMELS 5 CAMELS 4 CAMELS 3 CAMELS 1 or 2
Number of banks 702 4,525 191 332 196 155
TL / TA 54.4 65.0 63.19 63.12 63.03 61.15
CRE / TL 23.3 34.4 56.23 50.11 49.79 43.42
CLD / TL 4.6 8.3 9.40 8.10 6.96 5.56
Nonfarm nonresidential / TL 17.4 23.8 42.73 37.48 38.09 33.70
Multifamily / TL 1.0 1.9 3.91 4.13 4.34 3.79
Farmland-secured / TL 11.4 7.8 2.21 3.64 4.89 6.48
1- to 4-family property-secured / TL 24.4 23.8 22.12 22.52 20.26 22.10
HELOC / TL 1.2 2.5 4.16 3.66 3.40 2.81
C&I / TL 13.7 14.4 11.12 13.82 13.06 14.81
Consumer / TL 10.5 7.6 2.42 3.62 3.46 3.90
Agricultural / TL 14.1 8.2 0.82 1.85 3.52 5.33
All other loans / TL 1.2 0.9 0.74 0.37 1.22 0.77
Core deposits / Total deposits 83.0 80.7 72.88 78.45 81.08 82.94

SOURCES: “The Future of Community Banks: Lessons from Banks That Thrived During the Recent Financial Crisis,” R. Alton Gilbert, Andrew Meyer and James Fuchs, Review, March/April 2013; “The Future of Community Banks: Lessons from the Recovery of Problem Banks,” R. Alton Gilbert, Andrew Meyer and James Fuchs, working paper, September 2013.

These similarities weren’t limited to a particular asset range. Both thriving and recovered banks ranged from having less than $50 million in assets to near or slightly more than $10 billion in assets. Thriving banks were not concentrated in any particular asset range, though the greatest percentage of recovered banks was in the $300 million to $1 billion range.

As one might expect, performance metrics were better over the periods studied for thriving banks and recovered banks compared with their counterparts. The mean return on assets (ROA) for thriving banks was 1.5 percent, compared with only 0.8 percent for surviving banks, while the mean return on equity (ROE) was 12.7 percent for thriving banks versus 7.3 percent for surviving banks. Regarding recovered banks, those with CAMELS ratings of 1 or 2 experienced ROA of 0.88 percent and ROE of 7.50 percent, compared with -0.81 percent ROA and -20.55 percent ROE for banks with a CAMELS rating of 5.

Lessons from Community Bankers

During the interviews with bank leaders, the authors sought common threads among these banks. For both thriving and recovered banks, management and ownership were significant factors, with local presences of each contributing directly to the banks’ prosperity. Many bankers from thriving banks indicated that they recruited managers and staff specifically from the communities they served because they would know the communities the best and be known by the banks’ customers. Bankers also said the importance of all staff members staying active in their communities was paramount because it helped build relationships based on trust and serving community needs.

Perhaps not surprising, recovered banks often experienced a change in management and/or ownership, and when a change in management occurred, the new president was generally well-known in local banking circles and well-connected in the geographic area served. It should be noted that a change in ownership did not necessarily dictate a change in management. In some cases, new owners would leave existing management in place if they believed the banks’ problems were caused by the previous owners.

Local ties were also important in helping foster relationships within the community, which thriving and recovered banks alike cited as being important to their successes. For example, the president of a recovered bank mentioned the importance of retaining nonmanagerial employees who had day-to-day interactions with customers and treating employees professionally and with respect as keys to managing the bank’s reputation.

Related to the leadership of the banks was an emphasis by management of both thriving and recovered banks on basic banking practices. Many of those interviewed from thriving banks cited their conservative growth strategies as a reason for success, though it meant seeing slower growth than their competitors in the years leading up to the crisis. (See Table 2 below.)


Asset and Loan Growth of Thriving and Surviving Banks

  Asset Growth Loan Growth
  2004-2007 2008-2011 2004-2007 2008-2011
Thriving 23.58 31.16 31.06 19.68
Surviving 44.28 26.91 66.04 18.67

SOURCE: “The Future of Community Banks: Lessons from Banks That Thrived During the Recent Financial Crisis,” R. Alton Gilbert, Andrew Meyer and James Fuchs, Review, March/April 2013.

Maintaining high lending standards was one example cited by many thriving banks. One bank in particular required its lenders to review all charged-off loans, reassess the fundamentals of the loan at the time it was made and communicate with management whether they would still make that loan today.

Most new presidents of recovered banks emphasized the need to return to such core banking principles and conservative underwriting standards. In many cases, this meant providing additional education to the bank’s directors. One president, for example, used significant amounts of time during board meetings to educate the directors on their responsibilities and hired an outside consultant to analyze lending opportunities and present them to the board.


The results of both papers show banks that emerged from the financial crisis in good health—either through recovery or by maintaining good health throughout the period—largely centered on a commitment to sound standards and strong management.