Community Banks – You Can do Business with a Bank That Cares

Have you ever seen a bank tucked away in some shopping plaza, or just sitting on some lonely street corner? Then you looked at the name of it and thought to yourself: “What is this bank? I’ve never heard of it before.”

Well, you were most likely looking at one of over 4,700 community banks in this country. They’re small, they’re not flashy, and they’re local. Generally defined as banks with less than $1 billion in assets, these small financial institutions underwrite local home or business loans and choose the safest investment options: U.S. government backed securities. Nothing fancy for these for-profit entities. The goal is to provide local customers with financial services.

Most community banks are either stand-alone corporations or held by a BHC (Bank Holding Company) and mainly focus on traditional banking services, such as deposits and lending. That contrasts with some of the largest banks, who are owned by financial holding companies and that get involved in investment banking, insurance sales, and stock brokering.

The number of individual community banks represented a staggering 87.2% of the entire banking industry in Q2 2017 (see all the blue in the pie chart below). However, their combined assets (measured in dollars) were only 7.2% of the industry.

Banks with assets greater than $1 billion, but less than $10 billion, represented 10.8% of the industry. The giants with $10 billion or more in assets accounted for only 2%, but held 83% of all banking assets in the country.

But asset size isn’t the only area where community banks get overshadowed. The latest data shows that only $786 billion in total loans and leases were held by community banks, compared to $7.1 trillion by the largest group of banks.

Net income reports paint a nearly identical picture. The $3.1 billion in bottom-line profits made by the small guys is nowhere near the $37.5 billion earned by the big dogs. The smaller banks also see much lower net income as a multiple of lending, with 33% lower returns than the largest banks.

Regardless of domination in numbers, community banks as a group are way behind in size, lending, and several other areas. This is because their business model is tailored for local customers and they don’t generally branch out too much.

Still, while you might think that Bank of America, NA (Rated “B-”), JPMorgan Chase Bank, NA (Rated “B’’) , and a handful of other well-known names represent the banking industry, the reality is that there are an abundance of banking options out there. And Weiss Ratings can help you pick the right bank out of over 1,500 recommended institutions, those with a safety rating of “B+’’ or higher.

You can also look up the safest and weakest banks in your state, then identify community banks by simply sorting the asset column in ascending order.

Think Safety,

Remi Lukosiunas

Money and Banking Edition, By Remi Lukosiunas, Financial Analyst Remi Lukosiunas, a Financial Analyst, joined Weiss Ratings in 2014 with a financial services background in internal audit and the credit union industry. Remi conducts banking, credit union, insurance and investment research. He has also written extensively on stocks and investing using ratings as a guide. Remi is a graduate of Florida State University with a degree in multinational business.