Community Banking

Even Before Covid-19, Community Banks Faced Significant Pressures

As the impact of the coronavirus pandemic wears on, much has been written about how community banks have stepped up to help small businesses in their time of need. These smaller financial institutions have played a key role in ensuring access to credit for small businesses, and in doing so, have served and strengthened local communities and economies in a time of great uncertainty.


However, as winter approaches and case numbers continue to rise across the continent, community banks will need to contend with the fact that there will likely never be a return to business-as-usual. Nearly every industry has been forced to confront the ways the pandemic has shone a light on the gaps in their customer experience and operations. For community banks, this impact moves beyond trying to navigate the peculiarities of the Paycheck Protection Program (PPP) and the uncertainty around their customers’ financial lives.


In this first article of our three-part series on community banking in the wake of COVID-19, we provide a brief overview of the key pressures that have historically impacted community banks over the past decade.


In our subsequent posts, we will tackle how the pandemic is changing the very fabric of community banking, including the levers available to these institutions that will help cement their status as an integral part of the financial system.

First things first: What is a community bank?

Before we dive into the many benefits community banks have to offer compared to their larger counterparts, let’s take a minute to define what it is that we are actually talking about.


The term “community bank” is an informal designation that generally applies to banks with a limited number of branches that primarily serve local businesses and individuals who live nearby. However, while many are able to describe the characteristics of a community bank with ease, the actual definition of a community bank remains unclearopens PDF file , especially in the United States.


Typical definitions tend to revolve around the asset size of the institution, but these figures tend to vary widely. For the purposes of this post, however, we define a community bank in the United States as one that:


  • Holds a Federal Deposit Insurance Corporation (FDIC) charter;
  • Manages a maximum of $10 billion in assets;
  • Covers a specific geographic reach, such as a town, county or state; and
  • Focuses on traditional banking activities as its primary operations.

Community banks offer a range of products and services across retail banking, commercial banking (primarily small business) and wealth management, including deposit accounts, term deposits, debit and credit cards, loans, mortgages, insurance, payments and cash management services for businesses, financial planning, 401(k) accounts and mutual funds.


Considered the “guardians” of the local community, community banks are a vitally important part of the U.S. banking system. They help small and mid-sized businesses across the country grow and invest. As of 2011, community banks held 14 percent of banking industry assets but 46 percent of small loans to farms and businessesopens PDF file .


Pie chart on community bank impact


As experts in their local markets, community bankers have built strong, trusted relationships with their customers. They are in a unique position to deliver exceptional value by responding to customer needs effectively and offering tailored, personalized service. And, in a world where consumers are increasingly interested in wanting to be part of their local bubble, community banks offer a unique way for consumers to “bank local.”

Pre COVID-19 Pressures Facing Community Banks

Four challenges faced by community banks

Despite the vital importance of community banking in the United States, these smaller financial institutions have experienced consolidation, steep competition, and increasing consumer demands over the last decade.


From 1993 to 2014, the number of community bank charters in the United States decreased by over 50 percentopens PDF file , driven primarily by acquisitions or consolidations with larger banks. Today, there are approximately 5,000 community banks in the United States, a drop from about 8.000 community banks fifteen years ago. This impact is compounded by the fact that consumers have steadily moved their deposits from smaller institutions to larger ones.


Although recent regulatory relief has lessened the burden of regulation for community banks, regulatory pressures tend to fall disproportionately on regional and local banks. In the last fifteen years, these smaller institutions have had to contend with a host of regulatory acts and agencies, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Basel Accords, the Bank Secrecy Act, and more. The pressure to keep up with all of these varying and sometimes complex regulations inhibits lending ability and increases costs associated with that lending. Add to these harsh financial penalties for non-compliance, and it’s no surprise that regulatory pressures remain a top concern for community banking leaders across the United States.

Overdependence on interest income

Loan growth has been a consistent challenge for community bankers. According to the FDICopens PDF file , community banks derive approximately 80 percent of their revenue from net interest income by focusing on traditional lending and deposit gathering. This heavy reliance on deposits is particularly challenging in a low-interest environment, and ongoing net interest margin compression places a significant drag on community bank earnings.

Increasing customer demands

Customers are looking for more from their banks in an increasingly Amazon and Netflix-driven personalized world. New digital technologies in mobile banking, online banking, social media, and cloud computing are hard to keep up with if you are a larger, Tier 1 and 2 bank. For community banks, investing in these technologies when resources are already limited has been a significant challenge.


Stay tuned for part two of our three-part series next week, where we will explore how the coronavirus pandemic is adding a new set of pressures to community banks, who must work to respond quickly and effectively to survive and thrive.