The Vital Role of Community Banks

Community banks play an important role in the banking and financial services industry, often serving areas and demographics overlooked by national banks. There are over 4,500 community banks in the United States, making up over 90% of all FDIC-insured institutions. Let’s explore what sets community banks apart and how they benefit local economies.

Defining Community Banks

Community banks, also called community development banks, are small, locally owned and operated banks. They are characterized by:

  • Local focus – Community banks cater services to local individuals and businesses.

Small Size

Most community banks have under $10 billion in assets. Many have just one or a few branch locations in a single city or county.

Relationship-Based Banking

Community banks rely on close personal relationships with customers in their service area. They provide highly customized products and services tailored to community needs.

Local Ownership and Leadership

Community banks are led by local executives and board members connected to the community. Decisions are made with intimate knowledge of local conditions versus a one-size-fits-all corporate approach.

Benefits of Community Banks

Community banks offer unique advantages including:

Personalized Service

Customers get to know bankers and receive customized solutions based on personal circumstances and goals. Decisions are made locally by people familiar with each customer.

Local Economic Growth

Community banks provide essential capital and services that help small businesses, farmers, and other customers in the community thrive and grow the local economy.

Focus on Agriculture and Small Business Lending

Unlike big banks, community banks specialize in providing loans to farmers, ranchers, and small business owners in their service territory. This supports economic diversity and jobs.

Investment in Local Needs

Community banks direct deposits back into the community to fund lending products that align with local priorities, such as affordable housing programs.

Stability in Times of Recession

Large national banks restrict lending during recessions. However, community banks continue serving local borrowing needs, even if it means lower profitability.

Challenges Facing Community Banks

While community banks fill a critical niche, they also face unique challenges including:

Economies of Scale

Lacking size and geographic scale, community banks have higher operating costs per dollar of assets compared to megabanks. This can inhibit growth strategies.

Access to Capital

Raising capital can be difficult for community banks. They compete for funding and deposits against bigger banks with ubiquitous ATM networks and nationwide marketing.

Technology Costs

Community banks must keep pace with technology and cybersecurity advancements, just like large banks. But they lack resources to make big investments in new systems.

Regulatory Burden

Industry regulations usually target complex big banks. But community banks get caught up in the extensive rules, compliance procedures, and costs despite their simpler operations.

Demographic Shifts

Young generations are more inclined to use digital banking from fintech and national brand banks. This erodes community banks’ local customer bases.

The Future of Community Banking

While facing hurdles, community banks remain resilient. Here are some trends and strategies that will shape their ability to thrive going forward:

Bank Consolidation

Industry consolidation will continue, with smaller community banks merging to gain efficiency and remain competitive. Those that stay independent will need strong niches.

Geographic Expansion

Most community banks will remain committed to local markets. But some may open branches or acquire banks in other metro areas to grow assets and customers while preserving their community approach.

New Technology Partners

Partnerships with fintech firms will allow community banks to offer innovative solutions like digital apps and online account opening while letting fintechs leverage the banks’ customer trust and deposits.


Successful community banks will avoid being everything to everyone. Specializing in commercial lending, small business services, or other areas of expertise will differentiate them from megabanks.

Focus on Quality Over Quantity

Maintaining strong underwriting and close customer relationships will be more critical than chasing rapid asset growth, which can jeopardize stability. Disciplined growth protects community banks.


From spurring small business growth to supporting farmers and low-income families, community banks are essential partners for economic prosperity in local markets. These homegrown institutions provide relationship-based solutions that big banks simply cannot offer mortgage loan. As community banks adapt to increasing challenges, they continue serving communities and customers in a more personalized way.

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