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Community banks have long played an important role in the U.S. economy, providing loans and other financial services to households and small businesses within their local markets. In recent years, technological and legal developments, as well as changes in the business strategies of larger banks and non-bank financial service providers, have purportedly made it more difficult for community banks to attract and retain customers, and hence to survive. Indeed, the number of community banks and the shares of bank branches, deposits, banking assets, and small business loans that are held by community banks in the U.S. have all declined substantially over the past two decades. Nonetheless, many community banks have successfully adapted to their changing environment and have continued to thrive. This paper uses data from 1992 through 2011 to examine the relationships between community bank profitability and various characteristics of the banks and the local markets in which they operate. We divide these characteristics into two categories—those that are exogenous to the control of bank managers and those that reflect the decisions or actions of bank management. We find that variables from both categories significantly influence bank profitability. Statistical tests indicate that variables within managers’ control account for between 70 and 97 % of the total explanatory power of regression equations that explain variations in performance across community banks, which suggests that managers are extremely important to community bank performance.
