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Community Banks: What Are They?

What Is a Community Bank?
Chris Alexis
Chris AlexisUpdated March 27, 2023
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You’re likely familiar with the big commercial banks in the U.S. But many towns offer an alternative banking option — a smaller, privately owned bank that focuses on serving the local community. These so-called “community banks” may only have one or two branches and are typically owned and managed by people who live in the area. They tend to focus on personal relationships with their customers and use more flexible criteria when making loan decisions compared to big banks.Is community banking right for you? And, more importantly, are these banks safe? Read on for a closer look at community banks, including how they work and how they compare to large national banks in terms of service, product offerings, and safety.

What Is Community Banking?

While there is no formal definition for a “community bank,” the term generally refers to a bank with only a few branches that strive to support individuals and small businesses in the community. These banks offer traditional banking services, such as checking and savings accounts, mortgages, personal loans, and small business loans. They obtain most of their deposits locally and extend loans to local businesses.The Federal Deposit Insurance Corporation (FDIC) broadly defines community banks as those with less than $10 billion in assets. As a comparison, JPMorgan Chase has $3.20 trillion in assets, while Bank of America has $2.41 trillion in assets.

Understanding Community Banks

Community banks are often chartered at the state level, as opposed to the federal level. However, they still have to meet the Federal Government’s reserve requirements. And just like other banks, deposits are typically insured by the FDIC. This means that you can’t lose your money (up to $250,000 per account, per account holder), even if the community bank should go out of business.

Community Banks vs Large Banks

Unlike large, publicly traded banks (which are owned by stockholders), community banks are often privately owned and locally controlled. They tend to have more personal relationships with their customers than larger banks, along with more expertise about the local community.Since managers don’t have to answer to outside shareholders, community banks often have a more flexible underwriting process for loans. As a result, individuals and small businesses that might not get approved for loans with a large bank may have more success with a community bank.While big banks tend to offer a larger suite of products and services and more branches, a community bank may be worth considering if you like the idea of “shopping local,” even when it comes to banking. In some cases, these banks also offer higher interest rates and charge lower fees on savings products than large traditional banks.Recommended: Guide to Switching and Changing Banks 

Pros of Community Banking

Here’s a look at some of the advantages of community banking.

Personal Relationships

Community banks tend to make lending choices based on things like the local economy and personal relationships. This differs from large banks, which use more standardized criteria, like credit scores. If you need a loan, you have a better chance of looking the decision-maker in the eye with a community bank.

Personal Attention

People who work in community banks usually live nearby. They often know their customers by name and may even have long-standing friendships with many of them. This can make doing business with a community bank feel less intimidating than a larger bank. You’re likely to find a friendly face who can help you choose the right savings account or find the best mortgage option.

Competitive Interest Rates

Surprising but true: You may be able to get a higher annual percentage yield (APY) on your savings at a community bank than a big traditional institution. In fact, some of the best rates for certificates of deposit (CDs) and high-yield savings accounts are available at smaller, community banks.

Lower Fees

Bank account fees, such as overdraft and insufficient funds (NSF) fees are often lower at community banks than commercial banks.

Local Investment

Opening up a savings or checking account at a community bank allows you to support a local business that, in turn, helps support other local businesses in your community.Recommended: What Is Relationship Banking?

Cons of Community Banking

Here’s a look at some of the disadvantages of community banking:

Limited Products and Services

Community banks tend to offer a smaller array of financial products compared to large commercial banks. For example, you may not find investment services or credit cards at a community bank. 

Fewer ATMs and Branches

Unlike national banks, community banks don’t have a large network of branches. In addition, their network of ATMs is typically smaller. This could be a disadvantage if you frequently travel and/or end up moving out of the area. 

Less Sophisticated Digital Banking

The online and mobile banking services offered by community banks typically aren’t as state-of-the-art as those offered by national and online banks. You’ll likely find digital tools with more bells and whistles at a larger bank.

On the Decline 

Community banks are slowly disappearing as they surrender more and more market share to their larger competitors. According to the Small Business Administration (SBA), there were 4,490 FDIC-insured community banks in 2021, a sharp decline from 7,442 in 2008. At the end of 1988, there were 14,323. Different factors have caused this, including regulatory adjustments that benefitted larger banks and mergers that folded small banks into bigger organizations. 

Alternatives to Community Banking

One alternative to a community bank is, of course, to go with a big traditional bank. These institutions offer brick-and-mortar branch locations for in-person banking, as well as robust online services. If you don’t need access to physical branches, you might consider an online-only bank. These institutions have lower overhead than traditional banks and typically pass that savings on to their customers in the form of higher APYs and low, or no, fees. If you like a community feel, you might consider a credit union. They offer banking services, but unlike banks, they are not-for-profit institutions created for and managed by their customers, who are called “members.” Members typically have the same occupation or come from a particular region or community. They purchase shares in the credit union, and that money is pooled together to fund the credit union's loans.  Recommended: Why Are Banks Closed on Sundays?

The Takeaway

So what is a community bank? Community banks are smaller banks that provide traditional banking services — including deposit accounts and loans — to their communities. They often provide excellent, personalized customer service and competitive rates on savings accounts and CDs. However, community banks are becoming fewer and farther between, and generally don’t offer as many types of financial products as big commercial banks.If you’re looking for a new banking relationship, it pays to shop around and compare rates and terms offered by different institutions. One way to simplify your search is to use a bank comparison site. With Lantern by SoFi’s online banking marketplace, for example, it’s easy to compare high-yield savings accounts based on APY, fees, and balance minimums all in one place.Lantern can help you compare online savings accounts and find today’s best rate.

Frequently Asked Questions

What is the purpose of community banks?
Are community banks safe?
Are community banks better than big banks?
Photo credit: iStock/AmnajKhetsamtip

About the Author

Chris Alexis

Chris Alexis

Chris Alexis has been putting pen to paper and fingertips to keyboard since his youth. He ultimately grew into an accomplished and award-winning writer who loves using the power of language to connect with audiences. He also strongly enjoys learning about who he is writing for so he can create something that will truly resonate with them. He has worked for a variety of companies, each of which have given him more experience and insight.
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