Some causes of interstate differences in community bank performance

Abstract

This study assesses the relationship between the performance of community banks and conditions in their marketplaces over the 1994–2008 period. A panel model is used, in which the states serve as the panels, and focuses on banks termed community financial institutions (CFIs). Bank performance is measured by the return on assets (ROA). The ROAs are averaged for all CFIs in each state. Statewide ROAs are related to each state’s economic, demographic, and market structure characteristics. These state-level characteristics explain some of the variations in the performance of each state’s CFIs over time, and results are economically and financially reasonable. Fixed effects play a role, linking each state’s performance to unidentified factors unique to each state. The mild (but statistically significant) explanatory power of the economic/demographic variables suggests that CFI managers can effectively deal with economic/demographic changes in their marketplace, in contrast to the troubles of big banks.