The banking industry’s problems are well known–perhaps too much so. Fortunately, though, consumers have choices that go beyond big, super-sized financial institutions: community banks.
There are nearly 8,000 community banks in the U.S., with over 50,000 branch locations, and many of them are growing, innovating and challenging their larger competitors for customers. This new movement among smaller banks comes after more than a decade of losing out to national, name-brand banking firms. In 1994, for instance, community banks held the majority of U.S. deposits–70%, that is. Today, only 30% of U.S. deposits sit in community institutions. Experts believe consumers flocked to the larger banks because they offered more active products such as online banking, free ATM use, and free checking–at a time when community banks were hesitant to modernize.
Community banks see this as a perfect time to make their move. Many are offering the same innovative products as the big boys, without any of the worries. “Consumers are definitely waking up. And they’re realizing that the TARP-ridden mega-banks may not be the most beneficial banking relationship for them over the long term, notes Gabe Krajicek, CEO of BancVue, a consultancy that helps community banks modernize. Bancvue provides software, marketing, and other services for more than 550 community banks.
Although some community banks have run into trouble, “Most of them avoided the crazy loans made by so many larger banks,†says Greg McBride, senior financial analyst, Bankrate.com. Thus, many community banks (including credit unions) are still making loans. A good number are also offering higher yields and lower fees than their larger competitors in order to attract deposits. Here are the three main reasons consumers are giving community banks a closer look:
1) Higher yields. While money market mutual funds pay almost nothing (0.21%, on average, in mid-April), several community banks are paying over 2% on money market deposit accounts. These accounts are backed by the Federal Deposit Insurance Corp. (FDIC), up to $250,000 per depositor per bank, which is true for all accounts at FDIC-member banks. Money market deposit accounts are liquid and safe, so you might want to consider them for your cash reserves now. At www.bankrate.com, you can search for the highest yields on all types of bank accounts.
Even higher yields are available at the thousands of community banks offering so-called “rewards checking,†developed by BancVue. Yields generally are 3% or more. First Robinson Savings Bank (www.frsb.com) of Robinson, Illinois recently topped the list with a 6.01% yield. Rewards checking accounts typically have no fees or minimum balances; you can find participating community banks at www.checkingfinder.com.
“Rewards checking works for some people but not for everyone,†says McBride. “To get the high yield, you usually have to agree to direct deposit of your paychecks, online statements, and use of the bank’s debit cards at least 10 times each month. If you use your debit card nine times in one month, your yield will drop sharply that month.â€
2) Lower interest rates. Community banks offer attractive loan rates, especially on so-called “jumbo†mortgages, according to McBride. Such loans usually are larger than $417,000, and the national average for a 30-year, fixed-rate jumbo loan is now around 6.7%.
A recent look at Bankrate.com found lenders willing to make jumbo loans at rates around 5.4% to creditworthy borrowers. Community banks often hold onto the mortgage loans they make so they’ve avoided the problems of the mortgage-backed securities market, which enables them to quote lower rates on jumbo loans. “Considering the size of the loans and the difference in yields,†says McBride, “consumers may enjoy notable savings by going to community banks for jumbo mortgages.â€
3) Personal service. You don’t have to shop the Internet to find a community bank. Chances are, you can walk around the corner and find one of those 50,000 branches.
Sure, your local community bank might offer half a percentage point less on a money market deposit account than you could find online: that’s $50 a year (before tax) for every $10,000 you keep there. In return for giving up a smidgen of yield, you have the opportunity to deal with real people, face-to-face, and to resolve any problems personally.
What’s more, your local bank might offer you the best (or only) deal you’ll find. “Officers and directors of local community banks have often lived in the same small town their entire lives,†says Bedda D’Angelo, president, Fiduciary Solutions, a financial planning firm in Durham, North Carolina. “If you start hanging around the local Chamber of Commerce, you will meet attorneys, realtors, and bankers who went to school together and do business together. One of my former clients bought her house from a realtor who talked the executive lending officer of the community bank into approving a mortgage. The transaction would never have met Fannie Mae standards but she got her loan.â€