Imagine going into a bank where the teller greets you by name. When you inquire about a small business loan, you talk to a manager who knows you and visits your business regularly. Because you’re a trusted customer, the approval process is quick and easy.
This may sound like a scene that could only take place in a small town in the 1950s, but it’s still a reality in community banks across the U.S. Even in the twenty-first century, there are thousands of these local banks providing the kind of personal service big banks can’t.
Community banks are either stand-alone banks or small chains that serve a specific area. They make their money by making loans to local businesses and individuals within that area. Those loans support people and businesses in the place where their customers live and work.
Often, the owners and managers of a community bank also live in the area. They have personal relationships with their customers and are familiar with the local community.
The Federal Deposit Insurance Corporation (FDIC) developed its official definition of a community bank in a 2012 study, then updated it in 2020. The definition covers:
- Type of Services. A community bank must both accept deposits and make loans. It cannot specialize in credit cards, industrial loans, trusts, or loans to other banks. It also cannot have 10% or more of its assets in foreign countries.
- Total Assets. Any bank that meets the rules above qualifies as a community bank if it has less than a certain amount in total assets. As of 2022, this limit was $1.815 billion. But banks over this limit can still be community banks if they meet the guidelines below.
- Locations. The bank must have more than one office, but no more than a certain number of offices. In 2022, this number was 98. It also can’t have offices in more than three states or more than two large cities.
- Deposits at a Single Branch. The bank must have no more than a certain amount in deposits at any one branch. For 2022, this limit is $9.075 billion.
- Deposits and Loans. The bank must have more than 33% of its total assets loaned out at any given time. At the same time, it must hold more than 50% of its total assets in the form of deposits.
You can use this FDIC search tool to see if a bank in your area qualifies as a community bank.
The number of banks that meet these requirements has fallen over time. A Small Business Administration report says there were more than 14,000 in 1988, but by 2018 there were fewer than 5,000. Most of them didn’t go out of business but merged to form larger banks.
Local community banks have a stronger connection to their area than big commercial banks. This manifests in several ways, including:
- Ownership. Most large banks, such as Bank of America and Citi, are publicly traded. Community banks are much more likely to be private companies with local owners. The people who run them can focus on the needs of their customers, not their stockholders.
- Services. Community banks specialize in traditional banking services, such as deposit accounts, mortgage loans, personal loans, and small business loans. They don’t focus on related businesses like trusts and credit cards.
- Loan Recipients. Community banks lend out their money to local people and local businesses. According to the 2020 FDIC report, community banks only make 15% of total loans in the U.S. Yet they make 30% of all the nation’s commercial real estate loans, 36% of small business loans, and 70% of agricultural loans.
- Loan Approval. Large lenders base loan decisions on impersonal numbers, such as credit scores. Community banks rely more on personal relationships with individuals and small business owners. They know more about each customer’s family history and spending habits and can factor that into their decisions.
- Relationship Banking. This focus on personal relationships extends to all banking services. Bank managers and employees get to know their customers and the local community. They can tailor the service they provide to their local customers’ needs.
Pros and Cons of Community Banks
Community banks have both advantages and disadvantages compared to big banks. Their small size and local focus makes them more attentive to customers’ needs. But they can’t offer the same range of branches and services as larger banks.
Community banks cater to individuals and small businesses, not big corporations. For this type of client, a community bank has many advantages. These include:
- Personal Attention. Because community banks have fewer clients, they can pay more attention to each one. They get to know their customers the way big banks can’t. Each one matters to them, no matter how small their account is.
- Better Interest Rates. A 2017 study by LendingTree found that smaller banks tend to pay more interest on deposits than big ones. Their average interest rates on checking accounts, savings accounts, and five-year CDs were all about half a point higher.
- Lower Fees. Community banks also tend to have lower banking fees. According to a 2021 report from Wallethub, average monthly fees at community banks are about 40% lower than at national banks.
- Flexible Loan Standards. Community banks have more flexible standards for lending than big banks. They look at your overall situation, rather than relying strictly on your credit score. This makes it easier to get a loan if you have a limited credit history.
- Faster Loan Decisions. Lending decisions from large banks often take a long time because they depend on approval committees located in another state. Community banks can work faster because they make all their decisions locally.
- Community Support. When you use a community bank, you know your money is helping your local economy. The loans the bank makes with it support local businesses and promote homeownership in your neighborhood.
- Higher Customer Satisfaction. Overall, small business owners prefer community banks. In a 2021 Federal Reserve report, 81% of borrowers at small banks were satisfied with their experience, compared to 68% at big banks and 43% at online banks.
Despite their perks, community banks can’t beat big banks in every area. Their disadvantages include:
- Smaller Networks. Community banks have fewer branches and ATMs than large banks. That makes them harder to use if you travel a lot or do business across a wide area. And it usually means changing banks if you move to another state.
- Limited Hours. Big banks tend to offer longer banking hours. They’re more likely to be open on evenings and weekends. This makes community banks less convenient if you have trouble getting to the bank during regular business hours.
- Fewer Financial Services. Community banks focus on core banking services. They’re less likely to offer investing services, credit cards, foreign currency exchange, and business bank accounts. If they do have these services, choices tend to be limited.
- Smaller Loan Limits. Small business loans are a specialty of community banks. However, they don’t have the funds to provide bigger loans for large businesses.
- Digital Technology Can Be Limited. Many community banks offer online banking and mobile banking. However, larger financial institutions sometimes have more advanced digital banking systems. They also have more resources to protect the security of their systems beyond the minimum required by law.
When deciding where to open a bank account, there are two main factors to consider. The first is what type of banking services you need.
Community banks offer good interest and low fees on checking accounts, savings accounts, and CDs. They’re also better than average for loans like mortgages, small business loans, and agricultural loans. Their flexible standards often make getting a loan quicker and easier.
However, they tend to offer fewer options for business banking, credit cards, and investing. Often these more complex services aren’t available at all. If you want a full-service bank that covers all your financial needs, a community bank isn’t the best choice.
The second factor is your priorities. If you value personal attention and good customer service, a community bank is a good choice. It’s also great if you want your money to support your local community. But if you care more about longer banking hours and a wide network of branches and ATMs, you’re better off with a larger bank.
If you decide a community bank is for you, you can find one in your area through the Independent Community Bankers of America (ICBA), a national trade organization for smaller banks. Not all the banks on this site meet the FDIC definition of a community bank. However, they’ve all signed on to support the basic goals of community banking.
Final Word
For many people, the best thing about community banking is that it strengthens the local economy. The money you deposit at your local bank turns into loans for local businesses and homeowners. They, in turn, provide tax revenue that supports local schools.
And the benefits don’t stop there. Local businesses create jobs, which pump even more money into the local economy. They keep your downtown busy and exciting. They allow you to run errands on foot, getting healthy exercise and meeting with your neighbors in the process.
In short, banking locally helps your entire neighborhood thrive. The good interest rates, flexible loan process, and personal service that community banks offer are just the icing on the cake.