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August 2025

View from the District: Community Banks Can Serve as a Source of Strength, Even Through Times of Stress
by Anulekha Mohanty, Senior Vice President, Supervision, Credit Risk, and Statistics, Federal Reserve Bank of Cleveland*

Community banks¹ play an important role across the Fourth District, which is served by the Federal Reserve Bank of Cleveland, by providing critical financial products and banking services.² Community banks catalyze local economic development and growth in their communities with the services they provide.³ Perhaps equally as important, community banks also serve as a source of stability during times of economic stress, and their presence can mitigate some of the adverse effects of economic downturns in the communities they serve. For example, one study finds that economies with a greater share of their banking presence constituted by community banks before the Great Recession (2007–2009) had fewer job losses than economies with less community banking presence, and this effect is most pronounced in rural areas that are heavily dependent upon community banks for their financial service needs.⁴ Community banks also played an integral part in maintaining economic resilience during the COVID-19 pandemic, providing flexibility to borrowers through loan accommodations and fee waivers while helping stimulate the economy via Paycheck Protection Program loans.

This article reflects on how community banks in the Fourth District were well positioned to support their communities following the liquidity stresses and subsequent bank failures in March 2023. It also explains how banks can continue to serve as a source of financial strength and resilience for their communities if and when the next stress event occurs.

Fourth District Community Banks and Inherent Risk: March 2023

Following the banking sector stress events in March 2023, Fourth District community banks were able to provide credit to borrowers and maintain a stable deposit base, as evidenced by continued loan and deposit growth. To thrive during periods of stress, it is critical for community banks to start from a solid financial footing. By some aggregate metrics, Fourth District community banks had lower inherent risk positions⁵ compared with larger banks as well as with other community banks nationally. Both Fourth District community banks and their counterparts throughout the Federal Reserve System maintained lower uninsured deposit concentrations leading up to the 2023 liquidity stress events compared with banks with assets between $10 billion and $250 billion. Furthermore, Fourth District institutions had a higher percentage of core deposits⁶ when compared with their System counterparts. The combination of higher rates of insured and core deposits tends to indicate higher levels of deposits that are more stable and less sensitive to market shocks and volatility.⁷ Fourth District community banks also maintained lower aggregate concentrations in commercial lending segments compared with community banks across the rest of the System, indicating reduced pressure on bank capital. Commercial real estate (CRE) credit concentrations,⁸ specifically nonowner-occupied (NOO) CRE credit concentrations,⁹ and commercial and industrial (C&I) credit concentrations¹⁰ were lower at Fourth District community banks than at other community banks nationally (see Table 1).

Table 1: Inherent Risk Positions as of December 31, 2022

	Fourth District CBOs	Non–Fourth District CBOs	All Banks Between $10B and $250B
Core Deposits/Total Deposits	94.3%	90.3%	89.1%
Uninsured Deposits/Total Deposits	27.5%	32.9%	39.7%
Total CRE Credit Concentration	238.2%	256.7%	179.9%
NOO CRE Credit Concentration	171.9%	190.7%	142.8%
C&I Credit Concentration	73.5%	82.2%	120.1%

Source: Consolidated Reports of Condition and Income (Call Reports)

Note: Credit concentrations are calculated as outstanding loan balances as a percentage of tier 1 capital plus allowance; CBO populations include all Call Report filers reporting less than $10 billion in total assets as of March 31, 2023, to ensure consistent portfolio populations over time; “All Banks Between $10B and $250B” excludes Silicon Valley Bank, Signature Bank, and First Republic Bank.

Risk Management Practices

Financial positioning and performance are important in assessing the point-in-time health of each institution and the community banking sector overall. However, they do not tell the whole story. Risk management practices also factor into a bank’s ability to handle adverse economic situations. Therefore, risk management practices should align with the size, complexity, and risk profile of the institution, and these practices should consider the range of a bank’s potential operating environments. The sudden bank failures in March 2023 highlighted the importance of banks having existing preventative and contingency measures in place to deal with economic stress events. Leading up to the March 2023 banking stress events, Fourth District community banks generally maintained effective risk management programs along with a sound financial position.

Several practices were identified that helped community banks effectively manage the uncertainty that arose from the banking stress events. One practice is tied to the traditional relationship-based approach taken by many community banks. Often having cultivated deeply embedded roots in their communities, community bank management can have a more thorough understanding of their local markets and customers, allowing them to effectively manage the risks inherent in their respective markets.^11,12 Fourth District community banks that had this deep understanding of their depositor relationships and customer behaviors were able to incorporate this information into their liquidity stress tests¹³ and modeling to proactively formulate effective contingency planning. Following the banking stress events in 2023, it became clearer that many Fourth District community banks with robust asset and liability concentration monitoring systems were able to more quickly identify and react to potential risks and exposures than they otherwise would have been.

While concentration risk is generally viewed through an asset lens, the March 2023 liquidity stress events reaffirmed that taking a wider look at concentration exposures is important to manage and monitor risk. Also key to weathering these stress situations is identifying and testing access to a diverse range of contingency funding options and seamlessly transitioning between options within the contingency funding plan.¹⁴ As noted in Federal Reserve guidance, if depository institutions choose to use the discount window as part of their contingency funding arrangements, they should also establish and maintain discount window operational readiness. This includes maintaining familiarity with the pledging process for different collateral types and with the pre-pledging process, the latter of which can be useful if liquidity needs arise quickly.¹⁵

Fourth District Community Bank Performance Following the 2023 Bank Failures

The combination of stable, insured deposits, lower commercial lending concentrations, and sound risk management practices has allowed Fourth District community banks to use their liquidity and capital to fund loan growth and react appropriately during times of stress. The outcome of these positions was demonstrated by the steady loan growth at community banks throughout 2023 and into 2024, with more pronounced growth rates in both loan and deposit balances among Fourth District community banks (see Figure). Furthermore, based on December 31, 2022, data, annual aggregate loan growth at Fourth District community banks was 12.3 percent, somewhat below the growth rates of other community banks nationally (15.5 percent) and all banks between $10 billion and $250 billion (15.8 percent); however, by the middle of 2023, annual loan and deposit growth accelerated at Fourth District community banks but decelerated across these other two groups (see Table 2).

Table 2: Annual Loan and Deposit Growth Rate Comparisons

		Fourth District CBOs	Non–Fourth District CBOs	All Banks Between $10B and $250B
Annual Loan Growth	December 31, 2022	12.3%	15.5%	15.8%
	June 30, 2023	13.7%	12.6%	8.0%
Annual Deposit Growth	December 31, 2022	2.2%	4.3%	4.3%
	June 30, 2023	3.0%	1.2%	0.5%

Source: Consolidated Reports of Condition and Income (Call Reports)

Note: Community bank populations include all Call Report filers reporting less than $10 billion in total assets as of March 31, 2023, to ensure consistent portfolio populations over time; “All Banks Between $10B and $250B” excludes Silicon Valley Bank, Signature Bank, and First Republic Bank.

Conclusion

While many Fourth District community banks were able to weather the March 2023 bank failures effectively, bank management teams should continue to maintain a forward-looking risk management approach by incorporating both the inherent risks of their current business models and potential emerging risks and vulnerabilities in their portfolios. When looking to expand the complexity or materially increase the size of a bank, bankers need to understand the associated risks and ramifications to ensure that the new activity is within the risk tolerance and limits of the board of directors¹⁶ and that risk management practices can mitigate any significant gaps identified during due diligence.¹⁷ Possible risk management practices include establishing key performance and risk indicators, budget forecasting, modeling, scenario analysis, and contingency planning. Having these important practices in place and operationalized before a stress scenario materializes will support community banks as they continue to serve as a source of resilience and stability for their communities.

While the banking landscape is constantly evolving and new risks continue to emerge, the benefits of having a strong community banking presence in our communities remain unchanged. Community banks are uniquely positioned to provide financial support to their communities during both prosperous periods and times of economic stress. Strong relationships and ongoing, transparent communication between supervisors and bankers will continue to support this goal moving forward.

• * The author thanks Adam Krueger, banking analyst II, Federal Reserve Bank of Cleveland, for his contributions to this article.
• ¹ The Federal Reserve defines community banks, or community banking organizations (CBOs), as banks with less than $10 billion in total assets.
• ² The Fourth District covers the state of Ohio, 56 counties in eastern Kentucky, 19 counties in western Pennsylvania, and six counties in northern West Virginia.
• ³ Vice Chair of Supervision Michelle W. Bowman’s February 27, 2025, speech at the Robbins Banking Institute Lecture Series “Community Banking,” Hays, KS, is available at www.federalreserve.gov/newsevents/speech/bowman20250227a.htm.
• ⁴ See Luke Petach, Stephan Weiler, and Tessa Conroy, “It’s a Wonderful Loan: Local Financial Composition, Community Banks, and Economic Resilience,” Journal of Banking & Finance, 126 (2021), 106077, available at www.sciencedirect.com/science/article/pii/S0378426621000352. Note: In this paper, community banks are defined as banks with assets that fall below an indexed threshold of $1 billion in 2010 dollars or banks with total assets exceeding this threshold that: (1) maintain a loan-to-asset ratio greater than 33 percent, (2) maintain a ratio of core deposits to assets greater than 50 percent, (3) maintain less than 75 officers, (4) maintain offices in less than two large metropolitan statistical areas and less than three states, and (5) have no single office with more than $5 billion in deposits.
• ⁵ Inherent risk encompasses risk levels absent any risk management or risk mitigation efforts.
• ⁶ Core deposits are defined in the Uniform Bank Performance Report (UBPR) as the sum of all transaction accounts, nontransaction money market deposit accounts, nontransaction other savings deposits (excluding money market deposit accounts), and nontransaction time deposits of $250,000 and below, less fully insured brokered deposits of $250,000 and below. Core deposits under this definition can include some levels of uninsured deposits.
• ⁷ Section 2330.1, Deposit Accounts, of the Federal Reserve’s Commercial Bank Examination Manual notes that core deposits and insured deposits are relatively more stable and lower cost than noncore and uninsured deposits. However, the manual does note that the UBPR’s definition of core deposits represents an analytic starting point for assessing a bank’s deposit volatility, although other unique characteristics of the deposit composition contribute to deposit stability. For more information, see the manual at www.federalreserve.gov/publications/supervision_cbem.htm.
• ⁸ Section 2050.1, Concentrations of Credit, of the Federal Reserve’s Commercial Bank Examination Manual discusses the noteworthiness of CRE credit concentration management given the historical volatility in CRE markets and the role of CRE loan conditions in bank failures. These concentrations can include total CRE credit balances or only NOO CRE credit balances, depending on the characteristics of a bank’s loan portfolio.
• ⁹ An attachment to Supervision and Regulation (SR) letter 07-01, “Interagency Guidance on Concentrations in Commercial Real Estate,” notes that elevated levels of NOO CRE exposures may make institutions more vulnerable to cyclical CRE markets. SR letter 07-01 and the relevant attachment are available at www.federalreserve.gov/boarddocs/srletters/2007/sr0701.htm.
• ¹⁰ During and immediately after the Great Recession, C&I loan charge-off rates at community banks exceeded CRE loan charge-off rates, indicating the potential for elevated losses. For more information, see Cynthia Course, “Sound Risk Management Practices in Community Bank C&I Lending,” Community Banking Connections, Fourth Quarter 2012, available at www.cbcfrs.org/articles/2012/q4/sound-risk-management-practices-in-community-bank-ci-lending.
• ¹¹ See Allen N. Berger, Nathan H. Miller, Mitchell A. Petersen, et al., “Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks,” National Bureau of Economic Research Working Paper 8752, 2002, available at www.nber.org/system/files/working_papers/w8752/w8752.pdf.
• ¹² See Dmytro Holod, Joe Peek, and Gökhan Torna, “Relationship Lending: That Ship Has Not Sailed for Community Banks,” Federal Reserve Bank of Boston Research Department Working Paper No. 24-5, 2024, available at https://doi.org/10.29412/res.wp.2024.05.
• ¹³ Section 3200.1, Liquidity Risk, of the Federal Reserve’s Commercial Bank Examination Manual notes that the magnitude and frequency of liquidity stress testing may be less at smaller, noncomplex community banks.
• ¹⁴ For more information about managing liquidity risk and correspondent concentration risk, see SR letter 10-06, “Interagency Policy Statement on Funding and Liquidity Risk Management,” and its attachments, available at www.federalreserve.gov/boarddocs/srletters/2010/sr1006.htm, and SR letter 10-10, “Interagency Guidance on Correspondent Concentration Risk,” and its attachments, available at www.federalreserve.gov/boarddocs/srletters/2010/sr1010.htm.
• ¹⁵ For more information on contingency funding and the Federal Reserve’s discount window, see the July 28, 2023, press release from the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency, available at www.federalreserve.gov/newsevents/pressreleases/bcreg20230728a.htm.
• ¹⁶ SR letter 16-11, “Supervisory Guidance for Assessing Risk Management at Supervised Institutions with Total Consolidated Assets Less than $100 Billion,” discusses the importance of establishing risk tolerances and limits reflective of established risk tolerances for new activities and products or changes in the industry and market conditions, but the guidance acknowledges that a small community banking organization engaged solely in traditional banking activities may not require a formalized risk tolerance or limits. For more information, see SR letter 16-11 and its attachment, available at www.federalreserve.gov/supervisionreg/srletters/sr1611.htm.
• ¹⁷ Section 4011.1, Supervisory Guidance for Assessing Risk Management at Supervised Institutions with Total Consolidated Assets Less than $100 Billion, of the Federal Reserve’s Commercial Bank Examination Manual discusses the necessity for a bank’s board of directors to establish risk tolerances for the institution’s activities and periodically review risk exposure limits to align with changes in the bank’s business strategy, to address new activities and products, and to react to changes in the industry and market conditions.