Community Banking- Looking Back to Better Prepare for the Future

rural community

In the research publication from the St. Louis Federal Reserve, The Future of Community Banks: Lessons from Banks That Thrived During the Recent Financial Crisis by Gilbert, Meyer, and Fuchs, they studied the distinguishing characteristics of community banks that managed to maintain the highest supervisory ratings during the financial crisis between 2006 and 2011.  Their rating system focused on six areas of bank safety and soundness examinations, called CAMELS:

  • capital protection
  • asset quality
  • management competence
  • earnings strength
  • liquidity risk exposure
  • market risk sensitivity

The categories for community banks in this report are thriving, surviving, and failing.  The study links the health of real estate and property values to the solvency of a community bank.  The time frame, 2006 to 2011, represents the shift from peak residential values through the decline and ending the cycle at 2011.  Hence the West Coast and Southeast, with the largest declines in property values, showed the fewest number of thriving banks.  Another correlation is drawn between GDP of the state and the number of thriving banks but is less absolute, as some states with high GDP still had several failed banks and some states with low GDP still had several thriving banks.

Not surprisingly, energy and agriculture seem to play the biggest hand in sustaining community banks and helping them to thrive.  The states with the largest number of thriving banks are Louisiana (40.32%), Oklahoma (27.66%), and Texas (22.46%).  Other characteristics of thriving community banks during this time are:

  • smaller (<$100 million in total assets)
  • rural
  • less focus on commercial real estate
  • less construction and land development loans
  • more concentrated on consumer loans and agricultural loans

Naturally, not all success indices can be measured numerically. Management quality and local economic climate within the community also enable banks to surpass and/or sustain performance levels that banks in other areas do not enjoy.  A few of the winning traits that thriving banks demonstrated are:

  • high visibility within the community
  • strong and localized customer service
  • risk management focused on long-term performance
  • show conservative balance between growth and risk
  • contentment with modest ROIs

Despite the defined time period and economic conditions that were sustained during this time, the look back on the community banks that thrived during this “petri dish sampling” of economic instability shows that there is a definitive place for community banks in the nation’s financial system moving forward.  Traits similar to those of the thriving banks will likely be seen in the sustaining and growing Community banks of the future. We will see strong commitments to maintaining risk control and conservative management of economic environments. They will also customize business plans to meet the needs of their specific market and focus on a more granular level within their community.

Honing in on Community Banking at GSBLSU

Community banking will continue to evolve. There is no doubt that economic conditions and regulatory climates will impact how all banks fare in the future.  Community banks are great indicators of progressive methodologies that work to keep banks afloat and that lead particular institutions to thrive as opposed to others.

GSBLSU has numerous offerings that can help bankers in the community banking arena to use data from historic results, like the one noted above, to better plan for their banks futures.  A few of the classes that apply to community banking are:

  • Monetary Economics – Thomas Payne (Required- Year 1)
  • Rural and Small Business Lending – David M. Kohl (Elective- Year 2 or 3)
  • Interpreting Economic Change – David M. Kohl and Thomas H. Payne (Required- Year 3)

To begin your journey with the Graduate School of Banking at LSU you can apply online here or contact us here.