U.S. Community Banks: Trends, Challenges & Perceptions

Community Banks: Perception

Over the past few years, the number of community banks has been reducing, mainly due to the consolidated banking industry. More community banks are also being acquired by credit unions. Community banks in the US are facing several challenges including, core deposit issues, increased competition, and regulatory pressures. Nonetheless, the future is looking bright for community banks as most Americans prefer the impressive customer service they offer to large banks. Regarding competitors to South Shore Bank, North Easton Savings Bank and Mayville Savings Bank are some of its close competitors. All three banks are located in the Midwest.


1. Community Banks: Share of the US Banking Industry

  • By total assets, community banks have a 16% share of the US banking industry. These banks hold $2.9 trillion in total assets.
  • By bank size, community banks account for more than 97% of banks operating in the US.
  • With over 400 community banks each, Texas and Illinois have the highest number of these banks. Other states with a significant number of community banks include Minnesota, Iowa, Missouri, and Kansas. These states have more than 200 community banks each.

2. Decrease in the Number of Community Banks in the US

  • With the US banking industry moving towards consolidation, the number of community banks across most US states keeps reducing.
  • Across the 50 states in the US, there were 5,113 community bank charters as of 2019, down from 5,339 community bank charters the year before. The number of community banks in the US has been declining for the last two decades.
  • In 1997, there were 10,700 banks in the US, while there were 5,600 banks in 2016. According to the Federal Reserve System, up to 97% of this decrease was “accounted for by community banks.”
  • The decrease in the number of community banks – fueled by the consolidation of the US banking industry – is occurring across markets of all size.
  • Both urban and rural community banks have been declining over the fast few years. Before the financial crisis, this decline affected rural banks more, however, after the financial crisis, this reversed.
  • This consolidation has a greater impact on smaller asset segments. Community banks with an asset size of $500 million and below are reducing at the fastest rate.

3. More Community Banks Being Acquired by Credit Unions

  • Currently, the main perception in the banking sector is that bigger is better. Due to regulatory compliance costs – studies have shown that “the bigger the bank, the less it spends on regulatory compliance as a percentage of total non interest expense” – banks are consolidating in the US.
  • Credit unions in the US face several constraints on their growth, including economies of scale and restrictions on their level of membership.
  • To grow faster, these credit unions are purchasing other financial institutions and integrating them into their existing operations. It used to be that credit unions acquired other credit unions. Within the last few years however, more credit unions are buying out community banks.
  • In 2017, only three credit unions bought community banks. This rapidly increased to seven community bank acquisitions by credit unions in 2018. Since 2018, credit unions in the US have acquired more than 20 banks.
  • In May 2019, MIDFLORIDA Credit Union announced that it was acquiring Community Bank and Trust of Florida. Similarly, Advia Credit Union announced that it was buying out Golden Eagle Community Bank in November 2018. Achieva Credit Union acquired Preffered Community Bank in February 2018.
  • It appears this growth strategy leveraged by credit unions is paying off. Since 2015, credit unions that have acquired banks saw a membership growth of 22.7%. More community banks are expected to merge with or be acquired by credit unions in 2020 and beyond.

4. Performance Increases

  • Based on an analysis of almost 5,000 FDIC-insured community banks, their 2018 fourth quarter net income increased by 65.1%, while their full year income went up by 29.4%.
  • The improvement in earnings of these community banks was caused mainly by lower income tax expense and higher net interest income.
  • Only 3.4% of US community banks reported being unprofitable in 2018 making it a record setting year.
  • Community banks in the US are also seeing an improvement in their asset quality as net charge-off rates are declining.
  • This groundbreaking performance means that the sun may be setting for US community banks.


  • Based on various studies, US customers are happier with smaller banks in general. A study by Go Banking Rates revealed that US customers are “overwhelmingly more satisfied with banking at smaller community banks and credit unions compared to those banking with the top 50 global banks.”
  • According to another study by Blumberg Capital, 57% of US customers are convinced that large banks will eventually disappear. These Americans reported being happy to see them go.
  • About 80% of individuals surveyed prefer alternatives to large banks because big banks focus more on rich individuals and large businesses at the expense of an average consumer. The respondents in the study mentioned that traditional large banks are not efficiently supporting entrepreneurs.
  • Harris Poll conducted a survey that revealed that 78% of Americans consider using a local bank important. Among these individuals, support of employment in their area and growing their local economy are the main reasons they cited for using local banks.
  • The study revealed that almost 60% of Americans prefer local and regional banks. These customers mentioned that they receive a more personalized experience and better customer service at community banks. Over 90% of community bank customers trust their bank, while 84% are loyal to their bank.
  • About 79% of independent businesses using community banks reported being satisfied with their overall experience. In comparison, only 67% of independent businesses using large banks are satisfied with their experience.
  • Another study cited by American Banker revealed that although the reputation score of community banks has dropped by 3.3%, these banks have a better reputation than large banks.
  • Currently, community banks have a 77.3 (strong/robust) reputation score from customers. From non customers, these banks have a 63.7 (average/moderate) reputation score.


Core Deposits

  • A study by the Federal Reserve System revealed that over 20% of community bankers ranked core deposit growth as the greatest challenge facing their banks. Cost of funds was also ranked the highest by community banks in relation to the biggest influence on their profitability.
  • Retaining and acquiring core deposits is a priority to financial institutions, including community banks. Community banks have traditionally made their money by collecting deposits from customers and then lending the money at a higher rate.
  • The difference has always been used to cover overhead, reward investors with dividends, and pay taxes. While this model has worked for decades, the changing behavior of core depositors is negatively impacting community banks.
  • For community banks, the main impediment to attracting core deposits is market competitions, particularly other financial institutions with local branches and headquarters.
  • Other core challenges of attracting and retaining core deposits include market demographics and depopulation. Depopulation is a more significant issue for community banks in rural areas.
  • Although opening new branches, having a 24/7 call center, and offering new account opening functionality are short-term strategies to gain deposits, not all community banks can afford to do this. Moreover, more impactful and sustainable solutions need to be sought out as longer-term strategies to gain deposits.

Regulatory Pressures

  • About 16% of community bankers in the above-mentioned study cited regulation as the single greatest challenge facing their banks.
  • According to the Federal Reserve, the burden of regulation falls disproportionately on community banks.
  • For community banks in the US, it is difficult to keep up with the “alphabet soup of regulatory acts and agencies all passed in the past five years: the Bank Secrecy Act (BSA), Gramm-Leach-Bliley Act (GLBA), Dodd-Frank Wall Street Reform and Consumer Protection Act, the Basel Accords (especially Basel III) and other legislation.”
  • Community bankers are saying that the regulations are getting out of control. As described by one community banker, “the never-ending add-on of additional if/then type regulations are hard to understand, hard to teach and hard to implement.”
  • Regulatory relief is a process that reportedly takes too long. According to community bankers in this study, everything associated with the decrease of bank regulation is overwhelmed by political posturing.


  • Competition was ranked by 15.4% of community bankers as the single greatest challenge facing their banks.
  • The competitive environment facing community banks is a huge challenge. These banks are not just competing against national lenders, they are now competing against fintech firms, alternative lenders, and telecommunications firms among others.
  • For transaction deposits, the greatest competition, as per community bankers, are financial institutions with branches or satellite offices, but no headquarters in the markets these community banks are operating (53.5%) and financial institutions with headquarters in their markets (42.6%).
  • As large banks expand, small banks are direct affected due to the amplification of competition.


  • Almost 10% of community bankers surveyed cited technology as the greatest challenge facing their banks.
  • For a long time, community banks have been on the “cusp of a technological revolution that would require either a radical change in their business models or, possibly, a merger partner to help them achieve the scale necessary to offer the technology that customers expect.”
  • These banks need to keep with digital changes. They are expected by customers, especially millennials, to incorporate mobile banking as a delivery channel and have other digital features that make banking easy for customers.
  • Community banks are also faced with evolving marketing platforms such as social media and technology platforms like cloud computing.
  • The quickening pace of innovation could obstruct technology adoption by community banks as they operate at a significantly smaller scale and have lower budgets than large banks.
Glenn is the Lead Operations Research Analyst at The Digital Momentum with experience in research, statistical data analysis and interview techniques. A holder of degree in Economics. A true specialist in quantitative and qualitative research.

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