As the economic landscape continues to shift rapidly, the ability to navigate unforeseen macroeconomic changes is essential for a bank’s long-term success and the preservation of franchise value. Traditional financial analysis often fails to fully capture the dynamic impacts of credit and interest rate cycles, leaving management teams exposed to unpredictable shifts in earnings performance.
Bank profitability is particularly sensitive to these macroeconomic changes. For example, the average return on assets (ROA) for U.S. community banks with $500 million to $1 billion in total assets has ranged from a high of 1.37% to a low of -0.28% during the depths of the Great Recession. These swings can mislead stakeholders about a bank’s true financial health.
Drawing on our experience—20 years managing a regional bank, 10 years analyzing the largest U.S. institutions, and another 10 years advising community banks—we’ve observed that too many bank leaders become overly focused on the earnings highs and lows tied to economic cycles. It's natural to feel optimistic during record earnings periods and discouraged during downturns. However, this mindset can distract from what matters most: the steady progress being made through day-to-day operations.
Since 2020, ROA has generally declined across the banking sector. But this pressure has largely been the result of external forces, including the historically inverted yield curve, rising interest rates, and significant deposit outflows. While these factors can lead to tough conversations with boards, shareholders, and employees, they don’t necessarily reflect deterioration in a bank’s core performance.
To help management teams see through this volatility, we’ve developed a framework to isolate a bank’s long-term core profitability. By adjusting current net interest margins and provisioning levels to align with ten-year averages, we remove both positive and negative noise. The result is a clearer picture of sustained improvement over the past 20 years—one that reveals steady progress rather than a story of boom and bust.
When we strip out the impacts of current credit and rate cycles, a stable trend in core ROA emerges. For most of the past two decades, the average core ROA for these community banks has remained around 1.00%. The Tax Cuts and Jobs Act and the Paycheck Protection Program (PPP) temporarily lifted the core ROA in 2020–2021. As those effects faded, underlying ROA has settled back at 1.15%, higher than the prior 1% level primarily due to lower effective tax rates.
This type of long-term focus can help bank leaders make better strategic decisions, especially during periods when reported earnings appear weak. Rather than reacting to temporary shifts, management can remain proactive—investing in talent, technology, and growth even in down cycles—knowing that the fundamentals are intact.
Our analysis also reveals that community banks typically operate within a relatively narrow range of outcomes unless the economy enters a full recession. The modeled worst-case loss scenario in our framework estimates a positive ROA of around 0.25% today—compared to a negative 0.60% during the 2005–2010 period. That improvement highlights the impact of better risk management practices and stronger balance sheet structures across the sector.
By clearly defining their expected range of ROA—from baseline to worst-case—bank management teams can set more realistic expectations with boards and shareholders. For banks in this asset range, a normalized ROA between 1.00% and 1.25% reflects solid, consistent profitability. Understanding this band helps stakeholders see through short-term volatility and focus on long-term franchise value creation.
Most importantly, shifting attention toward underlying core performance allows leadership to move past the emotional highs and lows of earnings cycles. When core profitability is improving, stakeholders can be confident that franchise value is rising. When it’s declining, management can react quickly and strategically to course correct.
Now is the time for bank leadership to shift the conversation—from reacting to economic cycles to building long-term value. By focusing on normalized profitability and clearly defining expected earnings ranges, bank managements can lead with greater clarity, invest with confidence, and build trust with all stakeholders—regardless of where we are in the economic cycle.
