What Is a Community Bank?

A community bank is a depository or lending institution that primarily serves businesses and individuals in a relatively small geographic area. Community banks tend to emphasize personal relationships with their customers. Often, these smaller banks don’t have the range of products or branch networks available from larger institutions, although they typically provide loans to local businesses and individuals who may not qualify based on the more standardized criteria used by big banks.

Key Takeaways

There is no clear-cut definition of what a “community bank” is, although it generally refers to smaller banks that mostly serve customers in a specific geographic area.

Community banks tend to emphasize relationships and even family histories when making lending decisions, whereas larger banks tend to rely heavily on credit scores, income, and other quantitative data.

Because community banks are generally owned and managed locally, proponents argue they are not beholden to Wall Street in the way that larger banks often are.

Understanding Community Banks

The term “community bank” is an informal designation without a consistent definition. In general, the modifier applies to banks with a limited number of branches that primarily serve local businesses and individuals who live nearby.

Occasionally, legislators have sought to outline what is or is not a community bank. The federal Economic Growth, Regulatory Relief, and Consumer Protection Act passed in 2018, for example, defined “community banks” as those with $10 billion or less in total consolidated assets. Over time, however, using dollar figures to define a community bank becomes problematic, as inflation and industry growth make those metrics less meaningful.

For marketing purposes, the term is used much more loosely. An emphasis on “community” often conjures an image of a friendlier, more personal banking experience. Consequently, it’s not uncommon for a relatively large depository institution to describe itself as a “community bank.”

According to the Congressional Research Service, most smaller banks are chartered at the state, rather than federal, level. However, they are still subject to a degree of federal oversight. Community banks may choose whether to join the Federal Reserve System (FRS); those that do not are primarily regulated by the Federal Deposit Insurance Corporation (FDIC) (which also insures depository accounts at most banks). These organizations examine the financial strength of lenders and ensure that they comply with federal banking laws.

They are able to forge deep and long-standing relationships and bring a keen knowledge of the local economy and culture. —Jamie Dimon, chairman and CEO of JPMorgan Chase

Community Banks vs. Large Banks

Small banks are more likely to have local owners, whereas large banks like Wells Fargo and Bank of America are publicly traded. Therefore, management does not have to answer to outside shareholders. According to the FDIC, “This means that community banks may weigh the competing interests of shareholders, customers, employees, and the local community differently from a larger institution with stronger ties to the capital markets.”

Community banks tend to focus on traditional functions such as accepting deposits and providing business loans, mortgages, and credit lines. Despite their emphasis on local customers, some have created online banking functionality that allows them to serve a wider audience.

Personal relationships

Primary decision-makers at a community bank are more likely to personally interact with the business leaders and individuals they serve, something that has long been a point of emphasis for smaller institutions.

As a result, community banks may be more likely to base lending decisions on relationships and a knowledge of the local economy, whereas large banks tend to rely on standardized metrics such as credit scores. The Independent Community Bankers of America, a trade group for small banks, asserts that its members typically make faster lending decisions versus large regional or national banks.

In a 2016 op-ed piece for The Wall Street Journal, JPMorgan Chase chief executive Jamie Dimon wrote the following about the role of community banks: “They sit close to the communities they serve; their highest-ranking corporate officers live in the same neighborhoods as their clients. They are able to forge deep and long-standing relationships and bring a keen knowledge of the local economy and culture. They frequently are able to provide high-touch and specialized banking services.”

4,979

The number of FDIC-insured community banks in 2018, down from 14,323 at the end of 1988.

Interest rates

Despite their smaller size, there’s also some evidence that community banks tend to offer better interest rates on deposits than larger ones. A 2017 analysis by the website DepositAccounts.com found that small- and medium-sized banks offered five-year CD rates that were more than half a percentage point higher than their bigger competitors.

Flexibility and services

One area where community banks tend to be at a disadvantage to big banks is flexibility. Without a large network of bank branches and ATMs, customers tend to have a harder time banking if they own a business with interstate operations or if they plan to move to another part of the country.

While banks of various sizes compete at the retail level—vying for checking accounts and home loans, for example—bigger financial institutions also provide a variety of services that community banks don’t. Larger banks, for example, may operate investment banking divisions that help companies raise capital, provide foreign-exchange services, and offer risk-management tools such as interest rate swaps.

Community Banks Are on the Decline

In a 2019 survey sponsored by the Federal Reserve, small businesses expressed a higher level of satisfaction with community banks versus larger ones. Overall, 79% of respondents said they were happy with their small-bank lender, as opposed to 67% who were satisfied with their big bank.

Even so, community banks have steadily lost market share to more expansive banks in recent years. According to the Small Business Administration (SBA), there were 4,979 FDIC-insured community banks in 2018, down from 7,442 in 2008 and 14,323 at the end of 1988.

A variety of factors have contributed to that decline, according to the SBA, including regulatory changes that are favorable to large banks and mergers that have folded small banks into much bigger entities.