What is a community bank?
A community bank is a locally owned and operated financial institution. They address the needs of a community by offering loans to small-business owners or personal loans to individuals. Typically operating with significantly smaller assets, the appeal of a community bank is the social relationship it has with customers.
There’s no legal definition of a community bank, so organizations like the Federal Deposit Insurance Corporation (FDIC) consider the size of a bank’s assets in determining whether it counts as a community bank. In most cases, community banks have less than $1 billion in assets, but the FDIC’s research sometimes puts the upper asset limit at $10 billion.
While they mainly conduct traditional banking services like lending and deposit gathering activities, community banks operate under a personal banking relationship with their customers. It’s the place to take your money if you’re concerned about malfeasance by corporate banks, or if you appreciate the community bank’s role in fostering small businesses and growing the local economy.
The caveat is that the financial services offered by a community bank could be considerably weaker than those of a corporate bank. For example, a corporate bank might offer higher interest rates on investment products like savings accounts or CDs, or offer a wider variety of such products. It can can also issue larger loans, and do so more quickly.
However, corporate banks lack intimate knowledge of the communities they’re in and might be reducing their customers to numbers in a ledger. By contrast, community banks can base lending decisions on the close relationships they have with their customers, extending access to banking services that corporate banks might deny to people.
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Community bank example
Old MacDonald has a farm, and he wants to build a barn on the property. He’s a beloved member of a small town in Ohio, but he’s also stubborn about adhering to the norms of modern society and never built up a credit history. He goes to a major corporate bank that just opened up a mile away, but they won’t extend him a loan for his construction project. He tries again at his local community bank, where he recognizes one of the tellers as his grandson’s classmate. They all love Old MacDonald and have no problem lending him the money for his barn.