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Community Bank

Updated on June 3, 2024
Article byShrestha Ghosal
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Community Bank Definition

A community bank is a financial institution that is owned and operated locally. It primarily serves individuals and entities located within a particular geographic area. These banks focus more on building strong relationships with their customers. They work towards providing customers with customized financial services with excellent responsiveness and accessibility.

Community Bank

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The banks play an important role in driving economic growth by providing essential financial services, including deposit accounts, loans, mortgages, and small business support. They generally profoundly understand the local market and the community they serve. As a result, they can make their lending decisions based on customer relationships.

Key Takeaways

  • A community bank is a financial institution that serves individuals and entities based within a specific geographical location. These banks concentrate more on building strong relationships with their customers and offering personalized services according to their needs.
  • The banks obtain deep insights into the local market and the community they serve. As a result, they often base their lending decisions on their customer and local market knowledge.
  • These banks actively participate in local and community initiatives. They support small businesses and entrepreneurs and play a significant role in driving economic growth.

Community Bank Explained

Community banks are financial institutions that operate locally and have a limited geographical reach. They serve customers based in a specific location and focus on building close customer relationships. These banks offer tailored services to their small communities as they have more profound insights into the local markets. They cater to the financial needs of small businesses and non-profit organizations.

These banks play a vital role in supporting the local economy. They lend to small businesses and entrepreneurs and aid in fueling economic growth and job creation within the community. Moreover, they have a deeper involvement in the communities where they operate. They actively participate in community initiatives and events, supporting local charitable organizations, sponsoring community events, and contributing to local economic development. The banks align their business decisions with the best interests of the community.

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Service Offerings

Some service offerings these banks provide are:

  • These banks offer various deposit accounts, including savings accounts and certificates of deposit. These accounts provide a safe place for individuals and businesses to hold their money and earn interest.
  • They provide lending services to individuals and businesses. They offer a variety of loans, like personal loans, auto loans, home mortgages, and small business loans. They usually have a more personalized approach to lending where they consider the local market and their relationships with the borrowers.
  • Many such banks now offer online and mobile banking services. It enables customers to access their accounts, make transfers, pay bills, and manage their finances conveniently from their computers or mobile devices.
  • The banks issue debit cards to customers, allowing them to make purchases and withdraw cash. They may also offer credit cards with various rewards programs and benefits.
  • Such banks may have specialized services for non-profit organizations. These include customized accounts that meet specific needs and assistance with grant management.
  • Many such banks focus on financial education and offer workshops, seminars, and resources. They aid individuals and businesses in improving their financial awareness and making informed financial decisions.

Examples

Let us go through a few examples to understand these banks:

Example #1

The New York Community Bank share prices increased by around 30% after one of its subsidiaries decided to buy most of Signature Bank. The Federal Deposit Insurance Corporation declared the deal a week after it took control of the Signature Bank. The agreement suggested that NYCB would acquire a significant portion of the deposits in Signature Bank and over one-third of its assets. It included almost $13 billion in loans selling at a discount.

Example #2

According to the S&P Global Market Intelligence’s annual U.S. Bank and U.S. Community Bank Market Reports, the banks in the United States are going to see their earnings drop significantly in 2023. The S&P Global Market Intelligence’s financial institutions research group published two new reports that concluded that these bank earnings would fall by double-digits. It stems from the liquidity pressures weighing the net interest margins while credit costs rise. This is an example of a community bank.

Pros & Cons

Some community bank account pros are:

  • These banks prioritize building solid relationships with their customers. They offer personalized services by understanding each customer’s financial goals and tailoring their services to meet individual needs.
  • They have a deep understanding of the local market they serve. They are familiar with the community’s specific needs, challenges, and opportunities.
  • The banks are easily accessible and responsive. Customers can speak directly with decision-makers and receive prompt, efficient service. This accessibility makes it easier for individuals and businesses to address their banking needs and get assistance when required.
  • Such banks play a crucial role in supporting local small businesses. They understand the role of small businesses in driving economic growth and job creation. The banks often provide small business loans and resources customized to the entrepreneurs’ specific needs, which helps them in starting and growing their businesses.

A few cons of community bank accounts are:

  • These banks primarily serve a specific local or regional area. This limited geographic reach implies they have a limited network of branches and ATMs compared to larger institutions. This may not cater to customers’ needs who require banking services while traveling or living outside the community.
  • They have a more focused range of service offerings due to their smaller size and resources. They may not provide specialized services and extensive investment options. Thus, these banks cannot serve customers with complex financial needs.
  • While many such banks now offer online and mobile banking services, they have limited technological capabilities. They may have fewer digital features and slower technical upgrades.
  • The banks may face difficulties in sourcing funds for lending purposes. They may not have sufficient resources to provide large-scale loans or handle complex financial transactions.

Community Bank vs Credit Union vs Big Bank

The differences are as follows:

  • Community Bank: They are locally owned and operated financial institutions that focus on serving individuals and entities residing in a specific community or region. They offer personalized customer service and deeply understand the local market. They prioritize building relationships with their customers and customizing their services to meet the customer’s specific needs.
  • Credit Union: These are member-owned financial cooperatives. The credit union members have a stake in the organization and have a say in its operations. These institutions prioritize serving their members’ financial needs instead of maximizing profits. They often offer competitive interest rates, lower fees, and personalized service. Credit unions may have membership criteria based on employment, location, or membership in specific organizations.
  • Big Bank: They are large, national, or international financial institutions with widespread branch networks and a broad range of services. These banks have significant resources, advanced technology, and extensive service offerings. They serve many customers, including individuals, small businesses, corporations, and entities. They often provide comprehensive financial services, like personal and business accounts, loans, investments, wealth management, and global banking solutions. They offer services through a vast network of branches, ATMs, and online banking platforms.

Community Bank vs Regional Bank

The differences are:

  • Community Bank: These financial institutions are owned and managed by locals and serve customers in a small region. They focus on building close relationships with their customers and providing them with financial services based on the customer’s needs. As a result, the benefits these institutions offer are flexible and personalized. These institutions primarily aim for local and community development. They have a restricted geographical reach and limited services.
  • Regional Bank: These are financial institutions that operate within a specific geographic region and are spread across several states or a larger area. These banks have a wider reach and may have more extensive branch networks. They offer a broader range of services, including personal and business accounts, loans, mortgages, investment services, and wealth management. Although regional banks may not provide highly personalized services, they still offer a local presence and understanding of the regional market. These banks provide the resources of a larger institution alongside a focus on local customers and businesses within their specified region.

Frequently Asked Questions (FAQs)

1. Are community banks safe?

These banks are usually well-capitalized and have a more conservative approach. They are methodically well-equipped to deal with crises. These banks are risk-aversive by nature and do not get high exposure. Their services are more concentrated in the communities they serve. The banks focus on providing loans and accepting deposits locally. As a result, they do not engage in high-risk transactions, have a robust risk management system, and maintain overall financial stability effectively.

2. Is community bank FDIC insured?

The banks are insured by the Federal Deposit Insurance Corporation (FDIC). Due to this, they are stable and well-capitalized. Customers can continue to avail services from these banks with confidence as their money is always safe if it is FDIC insured. The FDIC protects the money deposited in banks and other savings institutions. The FDIC deposit insurance covers the depositors entirely up to the insurance limit and includes the principal amount and any accrued interest.

3. Are community banks going out of business?

These banks are gradually going out of business. Large banks and institutions are purchasing and consolidating them, due to which they are closing. However, small businesses and borrowers who cannot meet conventional lending requirements are being impacted by the erosion of this banking market. They are being charged higher interest rates on shorter periods. Moreover, they are paying higher rates for the same services that these banks would offer.

This article has been a guide to Community Bank & its definition. We compare it with credit unions, regional & big banks, & explain its examples & service offering. You may also find some useful articles here –

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