3  The Future of Community Banks: Lessons Learned from Banks That Thrived During the Recent Financial Crisis by R. Alton Gilbert, Andrew P. Meyer, and James W. Fuchs all of the Federal Reserve Bank of St. Louis. 2  BIS central bankers’ speeches  characteristics across the successful banks? These characteristics are undoubtedly important and will be an essential element of success in the future. Some factors that one might think are important turn out not to be critical in determining performance. For example, asset size was generally not a factor in performing well during, and following, the financial crisis. Community banks that thrived varied in asset size – from below $ million, to as large as $ billion in assets. Geography, though, did matter to a degree. By definition, community banks are not geographically diversified, so those located in states that were most severely affected by the financial crisis and the recession faced the largest challenges. However, there are examples of banks that performed well in Michigan despite the severe economic problems that Michigan experienced; and there are examples of banks that floundered in Texas despite the solid economic performance that Texas experienced. Here in the Second District, while we had relatively modest declines in real estate values on average, some local areas saw house price declines as serious as in the worst hit states such as Arizona, California, Florida and Nevada. Recent research has identified several characteristics common to community banks that prospered during and following the financial crisis.
4 First, thriving banks exercised a comparatively conservative growth strategy during good times, with a management culture that focused on long-term franchise value and not short-term profitability. Successful banks had lower concentrations in commercial real estate lending generally; and much lower concentrations in construction and land development loans specifically. While profitable during the boom, these loan categories suffered the greatest losses as real estate values declined and the recession set in. As the boom progressed, the more conservative underwriting standards of successful banks led to declines in their market shares as other banks competed for business by relaxing their standards. However, successful banks were able to gain back this market share and then some after the bust due to the relative strength of their balance sheets. The successful community banks were patient and conservative regarding investments – desiring reasonable, sustainable returns, not necessarily “spectacular” returns. It seems that their managers devised their business plans heeding Friar Lawrence’s advice to Romeo as he devised his courtship plan for Juliet: “Wisely and slow; they stumble that run fast.” Other noteworthy characteristics also identified in this research were an engaged board of directors, talented staff who were familiar with the community, sound senior management oversight and thorough due diligence before offering a new product or service.