What Is a Community Bank?

A community bank is a depository or lending institution that primarily serves businesses and individuals in a small geographic area. Community banks tend to emphasize personal relationships with their customers. These smaller banks typically don't have the product range or branch networks available at larger institutions, and often 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 for "community bank," although they generally are smaller banks that serve customers in a specific geographic area.
  • Community banks tend to emphasize relationships and even family histories when making lending decisions, whereas larger banks rely more on credit scores, income and other quantitative data.
  • Because community banks are typically locally owned and managed, proponents argue they are not beholden to Wall Street like their larger counterparts.

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. For example, Congress in 2018 passed the Economic Growth, Regulatory Relief and Consumer Protection Act, which defined "community banks" as those with less than $10 billion in consolidated assets, a leverage ratio of greater than 9 percent and other criteria.

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 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, the majority of community banks and thrifts are chartered at the state versus federal level. However, they are still subject to a degree of federal oversight. Community banks may choose to join the Federal Reserve System and those that don't are still obligated to meet the Fed's reserve requirements. State-chartered banks that are not Fed member banks are regulated by the Federal Deposit Insurance Corporation (FDIC), which also insures deposits at most banks. These organizations examine the financial strength of lenders and ensure they comply with federal banking laws.

[Regional and smaller community banks] sit close to the communities they serve ... 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 such as Wells Fargo and Bank of America are publicly traded. Therefore, the management of community banks do not have to answer to outside shareholders. "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," according to the FDIC.

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: "[Regional and smaller community banks] 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 some evidence community banks tend to offer better interest rates on deposits than their larger peers. A 2017 analysis from DepositAccounts found that small- and medium-sized banks offered five-year CD rates at 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 is flexibility. Without a large network of bank branches and ATMs, customers 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 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 from 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, including regulatory changes that are favorable to large banks and mergers that have folded small banks into much bigger entities.