What Is A Community Bank?

There’s no clear-cut legal or consistent definition for “community bank.” As such, historically, it’s been challenging to define what qualifies as a community bank precisely. In 2012, the Federal Deposit Insurance Corporation (FDIC) launched a study of community banks and changed its approach to identifying them. Today, the FDIC generally defines community banks as those with less than $10 billion in assets, a definition that’s still fairly broad.

Fortunately, the characteristics of these institutions are a little easier to point out. Generally, community banks provide traditional banking services in their communities. These banks tend to support their local communities, obtaining many of their core deposits locally and making loans to local businesses.

In the same way some people like to buy local and support small businesses, others may prefer to do their banking with a local community bank.

As mentioned above, community banks are generally defined as those with less than $10 billion in assets, according to the FDIC. The FDIC also describes community banks as providing traditional banking services in local communities, obtaining deposits locally and providing many of their loans to local businesses. Community banks tend to be more likely to be privately owned and locally controlled, unlike larger publicly traded banks owned by stockholders.

Community banks are generally considered “relationship bankers” who have a close relationship with their customers and special knowledge and expertise of their local communities. They may have less-structured underwriting for credit decisions than big banks, making it possible for consumers and small businesses to get approved for credit that may not meet the requirements of a larger bank.

As of the end of 2019, the U.S. had 4,750 community banks with more than 29,000 branches throughout the country, according to the FDIC’s 2020 Community Banking Study, the latest study available. Community banks represent 15% of the banking industry’s total loans but make 36% of all small business loans and 70% of all agricultural loans. If you’re a small business owner, a farmer or live in a small town, community banks may be a big part of the backbone of your local economy.

You can use the FDIC’s Community Bank Search tool to see if your bank meets the FDIC’s definition of “community bank.”

If you’re trying to decide where to do your banking, there are a few key benefits and perks that a community bank may offer.

Better Interest Rates

Community banks may be able to offer you better interest rates on financial products compared to a big national bank. For example, some of the best CD rates and best high-yield savings accounts can be found at what could be defined as community banks.

Flexibility

If you have had a bad experience with banking, are unbanked or underbanked or have struggled to get credit from bigger banks, consider a community bank.

Because these banks are focused on personal relationships in local communities, they tend to have less-structured standards when approving loans. You could find that community banks offer a bit of extra flexibility in working with you, compared to a larger bank with stricter standards for lending.

Personal Attention

You may find that a community bank is more customer-facing, offering more personal service than a big bank. If you want to do your banking somewhere that knows you and is closely connected to your community, you may get a more personalized experience at a community bank.

Working with a community bank might also give you a better customer experience. The 2019 Small Business Credit Survey, a collaboration of the 12 Federal Reserve Banks, found that 79% of small business owners who applied for credit from a small bank were satisfied with the customer experience, compared to only 67% of applicants at large banks. Some of the best checking accounts for customer experience are offered by what could be defined as community banks.

Community Investment

Some community banks are also designated as Community Development Financial Institutions, or CDFIs, which have a special mission to help provide economic opportunities and create financial self-sufficiency for underserved communities. CDFIs can be community banks or credit unions, and there are 1,000 CDFIs nationwide. To find a CDFI near you, visit the CDFI Fund website.

In recent years, the number of community banks has declined more quickly than larger banks. Between 2012 and 2019, the number of community banks decreased from 6,802 to 4,750, a decline of 30%. During those years, the number of larger non-community banks declined from 555 to 427, a decline of only 23%.

This doesn’t mean that community banks are disappearing. Rather, community banks are consolidating into larger entities. Among the community banks that closed during this time frame, two thirds were acquired by other community banks.

The FDIC’s 2020 Community Banking Study found that regulatory compliance has become a more significant challenge for community banks in recent years, compared to bigger banks with more resources to devote to this function. As the regulatory complexity of the financial industry has increased since the financial crisis of 2008-2009, some community banks have struggled to adapt.

If you are trying to decide between a community bank and a major national bank, there are a few reasons to consider choosing a big bank:

• More extensive range of services and products. Some big banks offer a wider range of financial services and products, such as investment accounts, specialized business banking solutions or foreign currency exchange. Depending on your needs, a smaller community bank may not provide the full range of financial services that you want.
• Easier access. Major national banks tend to offer a national or global network of ATMs. Some even provide 24-hour customer service. Smaller local community banks may not have the same level of availability and service as major banks.
• Better digital technology. Depending on your must-have mobile app features and other digital banking experience needs, your local community bank may not offer what you need. That’s not always the case, though. There are several smaller online banks that offer a robust digital experience.

Bottom Line

Community banks are a vital part of the U.S. economy, providing loans and deposit accounts to millions of customers. Although they are known for their local presence and personal relationships, community banks are more than brick-and-mortar branches—many community banks are innovating and investing in new digital technology. In fact, some of the best online banks are community banks.

If you’re looking for a new bank account, a loan or a new home base for your personal or small business finances, you may want to consider a community bank.