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What Is the Definition of a Community Bank?

May 16, 2022 | Online Banking powered by Zil Money is a financial technology company, not a bank or an FDIC member. offers banking services through partnership with FDIC member banks Silicon Valley Bank and Texas National Bank.

A community bank is a depository or lending organization that primarily serves local businesses and individuals. Customers’ personal interactions are emphasized by community banks. Because they lack the product offerings and branch networks that larger banks have, smaller banks are more likely than larger ones to make loans to individuals and local businesses in their communities who might not otherwise be eligible.


  • Although “community bank” has no formal definition, it is often defined as a smaller bank that serves consumers in a specified geographic area.
  • When it comes to lending choices, community banks favor relationships and even family histories, whereas larger banks depend more on credit scores, income, and other quantitative data.
  • Proponents believe that community banks are less reliant on Wall Street than their larger counterparts since they are often locally owned and controlled.

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What You Need to Know About Local Banks

No clear definition exists for the designation “community bank.” For the most part, the modifier refers to banks with a small number of branches that primarily serve local businesses and residents.

Sometimes legislators have attempted to define what constitutes a “community banking” institution. In 2018, Congress passed the Economic Growth, Regulatory Relief and Consumer Protection Act, which defined “community banks” as financial institutions with consolidated assets under $10 billion and a leverage ratio of at least 9 percent.

In the long run, the use of dollar values to identify a community bank becomes problematic because of inflation and industry growth. The word is used more liberally for marketing purposes. With an emphasis on “community,” it’s easy to imagine a more personable and welcoming banking environment. The term “community bank” is commonly used to designate a major depository institution.

[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, chair and CEO of JPMorgan Chase

A Comparison of Small Community Banks and Large Global Banks

In contrast to huge banks like Wells Fargo and Bank of America, small banks are more likely to have local proprietors. As a result, community bank executives are exempt from having to answer to outside shareholders. A small bank may evaluate the interests of shareholders, customers, staff, and their local community differently than a larger institution with better linkages to financial markets,” the Federal Deposit Insurance Corporation explains.

Most community banks focus on traditional duties like receiving deposits and offering business loans, mortgages, or credit lines in addition to other services. However, several have developed online banking features that allow them to service a broader consumer base.

Relationships with Others

When it comes to community banks, the primary decision-makers are more likely than those at larger institutions to interact with the business leaders and individuals they serve.

So, community banks are more likely to use personal ties and knowledge of the local economy to make loan decisions than larger financial institutions. Independent Community Bankers of America, a trade association for small banks, claims that its members often make quick lending decisions than larger regional or national banks.

Jamie Dimon, CEO of JPMorgan Chase, authored an op-ed post for the Wall Street Journal in 2016 in which he stated: “Regional and smaller community banks are located close to the communities they serve, and the highest-ranking corporate employees reside in the same areas as their customers.. Forging long-term partnerships and bringing a thorough understanding of the local economy and culture are the hallmarks of their work here. They are often able to provide specialized and high-touch banking options.”

In 2018 there were 4,979 community banks. This down from the 14,323 at the end of 1988.

Rates of Interest

Despite their smaller size, community banks appear to offer higher deposit interest rates than their larger counterparts. Small and medium-sized banks gave five-year CD rates that were more than half a percentage point higher than their larger competitors, according to a 2017 study by Deposit Accounts.

Services and Flexibility

Flexibility is one area where community banks have a disadvantage. Customers who operate a firm with nationwide activities or who plan to relocate to another region of the country may have a harder time banking without a large network of bank locations and ATMs.

While banks of all sizes compete for retail customers’ checking accounts and home loans, larger financial institutions also offer a range of services that community banks do not. Investment banking departments of larger banks may assist corporations in obtaining cash, provide foreign-exchange services, and provide risk-management instruments like interest rate swaps.

Community Banks Are Dwindling

Small companies showed a higher degree of satisfaction with community banks than with larger banks in a 2019 Federal Reserve study. Overall, 79 percent of respondents were satisfied with their small-bank lender, compared to only 67 percent with their large bank.

Despite this, community banks have been losing market share to larger banks in recent years. In 2018, there were 4,979 community banks, down from 7,442 in 2008 and 14,323 at the end of 1988, according to the Small Business Administration (SBA). A number of reasons have contributed to this drop, including beneficial regulatory reforms for major banks and mergers that have merged local banks into much larger corporations.

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