What Is a Community Bank?

Banking is so much more than choosing a savings account or checking account. Here, we break down the differences between a large bank and a smaller, community bank. We'll highlight the pros and cons of each and help you select which type of banking service best meets your needs.

What is a community bank?

Unlike a credit union or savings and loan, there is no single way to define a community bank. The closest we can get is the Federal Deposit Insurance Corporation (FDIC) definition. According to the FDIC, a community bank is a financial institution with less than $10 billion in assets. To put that into perspective, JPMorgan Chase has more than $2.8 trillion in total assets, and Bank of America is sitting pretty with more than $2.1 trillion.

Here's something all community banks have in common: They serve their communities. That means bank customers tend to be from the area, and the bank reinvests in the community by making loans designed to help area businesses grow.

What's the difference between a community bank and a large bank?

The major difference between a community bank and a large bank is the mission. Community bankers are all about shoring up the communities they serve. That means taking in local deposits, making loans to area residents, and doing what it can to help area businesses prosper. While many large banks are owned by stockholders, a community bank is more likely to be privately owned. Community banks also tend to be controlled locally by people who understand the area and are invested (financially and emotionally) in its growth.

The last FDIC community banking report was published in 2020. At that time, community banks represented only 15% of the entire banking industry. Yet, community banks granted 70% of all agricultural loans and 36% of small business loans. Community banks may not be large but they do have a powerful impact on local businesses and farms.

One big similarity between community banks and big banks

Just like big banks, community banks are typically FDIC insured. That means FDIC insurance covers your account, dollar for dollar, including any interest accrued. In 2022, FDIC insures accounts up to $250,000 per depositor, per ownership category. Let's say you have a money market account (MMA) in your name only. It has a $250,000 balance. You also have a shared checking account with your spouse. That account has $400,000. If the bank failed, FDIC would insure the entire $650,000. That's because the MMA and checking account are in two separate ownership categories and because both you and your spouse are insured up to at least $250,000 for each account category.

Benefits of a community bank

It makes sense to compare the benefits of a community bank to those of a large bank before deciding where your money should go. Here's some of what community banks have to offer:

• Personal attention: You're more likely to be recognized when you walk into a community bank. After all, the people who work there also live nearby. And because there's not as much foot traffic through a community bank, everyone -- from loan officers to tellers -- will probably remember you. If you're looking for a bank that offers personalized service, a community bank is tough to beat.
• Better rates of return: Some of the best rates on MMAs, certificates of deposit (CDs), and high-yield savings accounts are available through community banks.
• It may be less structured: Let's say you had a bad banking experience in college or ran into financial trouble during the pandemic. You need a loan but can't qualify through a large bank, or if you do qualify, the APY on the loan will be too high. Since they tend to be locally run, community banks are often less strict about lending practices. That's not to say they'll give you whatever you want or that your credit score does not matter. Like every other bank, community banks must protect the bottom line (and other customers). However, because you have a working relationship with a community bank and the people who work there, they are more likely to work with you to find a creative way to finance a loan.
• Giving back: You know that every dollar you deposit represents more money the bank can invest in your community. You play a role in helping your community grow and prosper.

Benefits of a big bank

There are some services a larger bank can offer that are less likely to be provided by a local community bank. For example:

• Online and mobile technology: While some community banks offer a strong digital presence, large banks have more money to pay for the technology that goes into developing robust online and mobile banking. If that's important to you, it's worth checking out the digital technology available through both large banks and local community banks.
• A more comprehensive range of products: Offerings vary by community banks, but most large banks provide services like foreign currency exchange, a wide array of investment accounts, and financial advisors.
• Greater access: If you travel away from home, it's easier to find an ATM associated with a large bank. Finding a branch will also be easier if you need to stop in for a wire transfer or money order.

The great thing about humans is how different we are. What's suitable for one may not be right for another. The best bank for you may not be the best bank for another person. As with any financial decision, take time to figure out what you're looking for. If it's personalized customer service, a higher rate of return on investments, and the ability to help your community grow, a community bank is certainly worth a closer look.