What Is a Local Bank and How Does It Work?
Understand the fundamental nature of local banks, their operational model, and how they stand apart from other financial institutions.
A local bank operates as a financial institution deeply rooted within a specific geographic community. These banks prioritize serving the financial needs of individuals and businesses in their immediate vicinity.
Defining a Local Bank
A local bank, often referred to as a community bank, is a financial institution primarily focused on serving a specific geographic area or community. These banks are typically smaller than national institutions. They distinguish themselves by deriving a majority of their deposits from the communities where they operate.
Local banks are characterized by their local ownership, which can be private or closely held. This structure allows for decision-making authority to remain at the local level, rather than being centralized in distant corporate offices. This localized approach enables them to understand the unique needs and economic conditions of their community. Community banks play a significant role in local economies by providing a substantial portion of financing for small businesses, construction, and commercial real estate projects within their service areas.
Key Differences from Other Financial Institutions
Local banks differ significantly from national banks. National banks operate on a much larger scale, often across multiple states or nationally, with centralized decision-making processes. This often leads to more standardized products and less flexibility compared to the personalized approach of local banks. National banks diversify their revenue streams more broadly, while local banks generate a greater proportion of their income from traditional lending and borrowing activities within their communities.
Local banks also contrast with credit unions, primarily in their organizational structure and profit motive. Banks, including local banks, are generally for-profit institutions owned by shareholders, aiming to generate returns for those investors. Credit unions, conversely, are not-for-profit cooperative organizations that are owned by their members. This member-owned structure means credit unions often return profits to members through lower fees, higher savings rates, and more favorable loan rates. While both types of institutions can be community-focused, credit unions typically have membership eligibility requirements, such as living in a specific area or belonging to a particular group, whereas banks are generally open to the public.
Services Typically Offered
Local banks provide a comprehensive range of financial products and services to meet the needs of their community members. Standard offerings include various types of checking and savings accounts designed for both personal and business use. They also offer certificates of deposit (CDs), which allow customers to earn fixed interest rates over a specified term.
Lending services are a core component of a local bank’s operations, encompassing personal loans, mortgages for home purchases or refinancing, and a variety of small business loans. Many local banks also specialize in agricultural loans, supporting farming operations within their rural communities. Most local banks also offer modern conveniences such as online and mobile banking, allowing customers to manage accounts remotely.