What Is Community Bank?

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 8 minute read

Consider visiting a bank where the teller knows your name and greets you by it. A manager who is familiar with you and your company will answer your questions concerning small business loans. The approval procedure is simple and fast since you are a reliable client.

This may seem like something out of a tiny town in the 1950s, but it’s still very much a part of life at community banks all around the United States. Still tens of thousands of small community banks exist in the twenty-first century, each offering customers the type of individualized attention that large financial institutions cannot.

What Are Community Banks?

Individual community banks or regional branches of larger financial institutions are known as “community banks.” Profit is generated via providing credit to local companies and consumers. These loans help the local economy, which benefits both the clients and the companies that serve them.

When it comes to running a local bank, it’s not uncommon for the owners and managers to call the region home as well. They know their clients by name and are well-established in the neighborhood.

In 2012, the Federal Deposit Insurance Corporation (FDIC) conducted a study to establish its official definition of a community bank; the term will be revised in 2020. This term encompasses:

  • Identify the Service Type. A local bank’s primary functions are deposit gathering and loan extending. It’s not allowed to focus on one particular type of banking, such as credit cards, business loans, trusts, or bank loans. In addition, it can’t have more than 10% of its assets located outside the country.
  • Intangible Assets Any bank that fits the following criteria and has less than a specified amount of total assets is considered a community bank. This cap was $1.815 billion in 2022. However, financial institutions that exceed this threshold yet still fulfill the criteria below may be classified as community banks.
  • Locations. The financial institution must have at least two and no more than a maximum allowed number of branches. This figure stood at 98 in 2022. Further, it may not have locations in more than three states or two major cities.
  • Paying into a Single Location Branches. There can be no more than a certain quantity of deposits at any one bank location. The cap for 2022 is $9.075 billion.
  • Bank Accounts and Borrowings. Greater than 33 percent of the bank’s total assets must be in loan status at any one moment. Also, it must have more than half of its total assets in the form of deposits.

To find out if a local bank is considered a community bank by the FDIC, check their online database.

The percentage of banks that are compliant has steadily declined over time. According to the Small Business Administration, the number dropped from over 14,000 in 1988 to around 5,000 in 2018. Many of them did not cease operations but rather amalgamated into larger financial institutions.

Community banks against large banks

Community banks, which are often smaller than national chains, are more invested in their communities than their larger commercial banking counterparts. There are several manifestations of this:

  • Ownership. Bank of America and Citigroup are two examples of publicly listed major banks. There is a strong preponderance of privately held, locally based businesses among community banks. Their management can put the interests of their consumers ahead of that of their shareholders.
  • Services. Local banks focus on providing customers with the full range of banking services, including checking and savings accounts, home mortgages, individual loans, and loans to small businesses. They don’t give much attention to interconnected industries like banking or consumer finance.
  • Payees of Loans. Local companies and residents benefit from the loans made by community banks. Only 15 percent of all loans in the United States are made by community banks, says the FDIC’s 2020 report. However, they account for 30% of all commercial real estate loans, 36% of all loans to small businesses, and 70% of all loans to the agricultural sector in the country.
  • Get Your Loan! Loan approval at the larger financial institutions is based on credit ratings and other cold, hard data. Local banks place a greater emphasis on developing meaningful connections with their customers. Since they have more information about their customers’ backgrounds and purchasing habits, they can make more informed choices.
  • Banking based on established relationships. All financial services share a common emphasis on individual connections. When bank management and staff interact with their local community and clientele, they learn more about both. Because of this, they are able to cater to the specific requirements of their local clientele.

The Benefits and Drawbacks of Community Banks

When compared to large banks, community banks do offer certain benefits and drawbacks. Because of their size and location, they are better able to meet the requirements of their local community. However, they are limited in comparison to larger banks in terms of branch locations and services.

Advantages of Community Banks

Individuals and smaller companies are the primary focus of community banks. There are several benefits to using a local bank for this sort of customer. The following are some of them:

  1. Concentrated Effort. The smaller customer base of a community bank allows the staff to focus on each individual’s financial needs. In contrast to large banks, they take the time to get to know their clients. A person’s account size is irrelevant to them.
  2. Favorable Interest Rates. According to research conducted by LendingTree in 2017 on deposit interest rates, smaller banks are more likely to pay higher rates than their larger counterparts. Their typical savings, checking, and certificate of deposit rates were all half a percentage point higher.
  3. Reduced Costs. The banking costs are usually less expensive in local banks as well. Wallethub estimates that in 2021, monthly costs at community banks will be around 40% cheaper than those at national banks.
  4. Guidelines for loans that are easy to meet. When compared to large financial institutions, community banks’ lending criteria are more lenient. They take into account more than just your credit history when making a decision. In this way, even those with a spotty credit history may be eligible for a loan.
  5. Reduce the Waiting Time for Loan Approval. Because of the need to consult with committees in other states, huge banks’ lending decisions can drag on for weeks or months. Since all decisions are made in the local area, community banks are able to move much more quickly.
  6. Public backing. Your money will have a much greater impact on the local economy when you utilize a community bank. Banks use it to provide loans to customers, which helps the economy and housing market in your area.
  7. An Enhancement in Happiness for the End User. Local banks are the most popular option for small businesses. According to a Federal Reserve research from 2021, 81% of borrowers at small banks were happy, whereas this figure dropped to 68% at large banks and 43% at internet banks.

The Drawbacks of Community Banks

Community banks have some advantages over large banks, but they fall short in other areas. Some of their drawbacks are as follows:

  1. Fewer nodes in the network. Compared to major banks, community banks often have fewer locations and fewer automated teller machines. That makes them less convenient if you often travel or do business across a large geographical region. If you relocate to a different state, you’ll likely need to switch banks.
  2. Open for a limited time only. More convenient banking hours are often provided by larger financial institutions. Time of day when they are most likely to be open is the nights and weekends. If you are unable to access your funds during normal banking hours, you may find it more difficult to use a local bank.
  3. Lessening of Banking and Related Services. Core financial services are what community banks prioritize. Investment services, credit cards, foreign currency exchange, and business bank accounts are less likely to be provided by these institutions. Even if they have access to these amenities, their selection is typically restricted.
  4. Reduced Caps on Borrowing. Community banks focus especially on providing loans to small businesses. However, they lack the financial resources necessary to offer larger loans to established enterprises.
  5. Constraints on Digital Technology Exist. The ability to bank online or through mobile devices is a service provided by several local financial institutions. Digital banking systems vary in sophistication, although larger banks tend to have ones with more features. Moreover, they invest more than the bare minimum towards maintaining system security.

Is a Community Bank a Good Fit for You?

There are two primary aspects to think about when determining where to create a bank account. The initial concern is what kinds of banking assistance you require.

Whether you’re looking for a checking account, savings account, or certificate of deposit, local banks have you covered with competitive rates and cheap fees. Mortgages, loans to small businesses, and loans to farmers all fare above average with them. Loans are frequently easier to qualify for and processed more quickly due to their lenient requirements.

However, they often have fewer personal banking, credit card, and investment products available. Complex services like this are rarely offered. Community banks aren’t the ideal option if you’re looking for a comprehensive financial institution.

Your priorities are a secondary consideration. A local bank is a great option if you’re looking for friendly service and assistance. It’s also a good option if you care about reinvesting your money in your neighborhood. A larger bank, however, will have more convenient banking hours and a wider selection of both physical locations and automated teller machines.

The Independent Community Bankers of America (ICBA) is a national trade group representing smaller banks that may help you locate community banks in your region if you decide that’s the route you want to go. The FDIC does not consider all of the institutions listed below to be “community banks.” But they have all agreed to back the fundamental principles of community banking.

Bottom Line

The fact that community banking helps to boost the regional economy is, for many, its greatest advantage. Your deposits at a community bank will be put to use as loans to area merchants and homes. Because of the taxes they pay, public education in the area benefits.

In addition, the advantages extend well beyond that. When people are employed, more money is circulated throughout the community. They maintain the vibrancy of your city center. You can get some fresh air and some exercise while running errands and chatting up the neighbors at the same time.

To sum up, supporting your community by banking locally benefits everyone in it. The competitive interest rates, adaptable lending process, and individualized attention offered by local banks are frosting on the cake.

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