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How Do You Define a Community Bank?

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Since the financial crisis, there has been a lot of anger over megabanks which not only contributed to the financial crisis, but also grew bigger during the financial crisis as they acquired banks that failed. That anger peaked last year with the first Bank Transfer Day which was intended to encourage people to move their money from the megabanks to community banks and credit unions. If you want to help community banks, there's an important question to ask. How do you define a community bank?

This question has recently been investigated by the FDIC. This week the FDIC released its community banking study. The study was primarily intended to help regulators to understand community banks. You can read all of the details at this FDIC page. The first chapter deals with the definition of the community bank.

A common perception of a community bank is one that's focused on providing traditional banking services in its local community. In the FDIC study, quantitative attributes are described. The simplest way to define a community bank is by size. The FDIC cites past studies that have used size thresholds of $1 billion and $10 billion in assets. In addition to the issue of inflation affecting the dollar-based size thresholds, the FDIC mentioned another issue: "attributes associated with community banking are only loosely correlated with size." There are some small banks that shouldn't be considered community banks while there are large banks that may be considered community banks. Some examples of small banks that don't fit a community bank definition include credit card specialists, industrial loan companies and trust companies.

The following table shows the number of community banks and other banks based on the FDIC criteria:

community bank table

The table shows a total of 6,524 community banks which hold a total of $1.9 trillion in assets. There are only 298 large banks that aren't considered community banks, but their total assets are over $11.3 trillion. Out of those 298 large banks, 4 are the megabanks (Chase, Wells Fargo, Bank of America and Citigroup) which have a total of almost $6 trillion in assets.

One worry that I have with this FDIC research is that it may deter small banks from accepting out-of-state deposits. Over the years we have seen many community banks launch internet divisions and online applications that accept deposits from every state. They have given us more choices and higher rates for savings accounts, CDs, checking accounts and reward checking accounts. If these out-of-state deposits cause the loss of their community bank designations and if that has regulation consequences, will it deter community banks from accepting out-of-state deposits? I hope not.



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10 Comments.
Comment #1 by Paoli2 posted on
Paoli2
I define a Community Bank as that bank in the smaller towns around the bigger cities.  It has a smaller population so it may still "want" our deposits.  It usually has a 5 star rating since they seem to oversee what is going on in their banks than many larger banks do.  When interest rates crashed and I needed at least 2% or more for my CDs I did a 50 mile radius of all the "Community" or smaller banks in smaller towns around us.  That was where I was able to get the CDs I needed while banks like Chase etc were offering 1% CDs!  It was also nice to still be welcomed by banks who were glad to get my deposits. 

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Comment #2 by pearlbrown posted on
pearlbrown
It looked to me like the purpose of the study was simply to understand community banks better by identifying and exploring issues related to them (who they typically serve, range of asset size, branch locations, differences from mega-banks, etc).  I didn't get the sense that community banks are regulated differently than the megabanks. 

I think the issue with banks stopping out-of-state deposits has to do with how effectively they can put the flood of money to work and how soon they reach their fund-raising target.  If a community bank is overwhelmed with new money, or about to reach their new money goal, I would think it is preferable (better PR) to limit out of state deposits rather than denying your local accountholders/account base.

3
Comment #3 by Paoli2 posted on
Paoli2
Pearl:  I was responding to the topic question "How Do YOU Define a Community Bank?"   I did not think we were to go into the logistics of what a Community Bank is.  So it seems Ken got double for his post with both of our replies.  I have, however, dealt with banks which would not accept out of the state deposits.  That is why I stick to my local radius within my own state.

1
Comment #4 by scottj posted on
scottj
Funny that what I find to be my best "communtiy bank" is Penfed but I am nowhere near a branch. Since it is so easy for anyone to open with them they should be concidered a Nationally available bank. There customer service is the best I have dealt with, also offer great rates on CDs and their loan rates for cars and houses are about the best you will find

4
Comment #5 by pearlbrown posted on
pearlbrown
Paoli, I read it as "How does (one) describe a community bank", or "What defines (what are the characteristics of) a community bank" and responded to Ken's last paragraph.   Good discussion either way.

3
Comment #6 by lou posted on
lou
Scottj, I know this is off-topic, but I remember you posting around a year ago buying a signifcant chunk of Bank of America stock at $6 or so. Do you still own the stock? I noticed the stock is now $11.48, a very nice gain for you. Congratulations!

1
Comment #7 by Kaight posted on
Kaight
I'm willing to bite on the question Ken has posed with his headline, above:

I define community banks as being those banks about which Ben Bernanke cares least.  Further, community banks are those banks closest to the people, oftentimes the savers, about whom Bernanke also does not care and for whom, along with their banks, he harbors actual disdain.  Community banks are where the little guys bank.  They and their customers are, to Bernanke, his wicked and undeserving stepchildren.  

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Comment #8 by scottj posted on
scottj
Lou, Thanks and still have it, I really don't like trading but had my IRA in a CD at BoA and with their terrible rates I moved it into a brokerage account and bought BoA. Has turned out very well but I wont let that get me back into trading

1
Comment #10 by ChrisCD posted on
ChrisCD
I would define a community bank as one that as a limited geographic reach.  They are generally smaller and probably actually know you when you walk in.  Although, a well ran branch of a Megabank could also exhibit that behavior.

I don't know if it was in that report or a different one, but from 1984 to 2011 96% of banks that were $25MM or smaller in assets have either been gobbled up by a bigger bank or failed.

1