Many Americans are ditching their local banks—and that may be a great reason for you to give them a second look.
Local and regional banks have long been part of the fabric of American life—just think of “It’s a Wonderful Life.” Despite consolidation due to new technology and regulations following the financial crisis, there are more than 4,700 community banks in America, according to the Federal Deposit Insurance Corp. These institutions, which can have just one branch or as many as dozens, often serve rural areas that aren’t covered by the nation’s biggest branch networks.
Small banks also tend to shine when it comes to being able to deliver personal, caring customer service and commitment to their local neighborhoods—and right now, many are offering deals for savers that leave their big-bank rivals in the dust.
In the past few weeks, many small bank account holders have gotten jitters: The surprise collapse of Silicon Valley Bank and Signature Bank has sent customers scrambling to larger competitors. As The Wall Street Journal reported last week, following the news about Silicon Valley Bank, the nation’s 25 largest banks gained an additional $120 billion in deposits, while the rest—those outside the top 25—lost $108 billion.
Thinking of joining the stampede? In fact, experts say now may be the time to consider what small banks have to offer. Thanks to FDIC insurance, they are just as safe as larger competitors. And right now they’re competing harder than ever for your dollars—which means you’re more likely to get great rates on top of more personal customer service.
Are small banks safe?
Depositors appear to be fleeing small banks because they fear problems in the banking sector could spread beyond the tiny number of troubled banks that have made headlines so far. While many small and regional banks have seen their stock prices take a hit, the problems don’t appear contagious.
But for the vast majority of bank customers, far more important is that—assuming your bank is a member of the FDIC—your deposits are guaranteed by Uncle Sam, no matter what foolish mistakes the bank’s executives might make. “A lot of the flight to capital to large banks is driven by emotion and not by true risk,” says Michael Finke, professor of wealth management at the American College of Financial Services.
Just how much of your savings will be covered? FDIC insurance protects savings and checking account deposits up to $250,000—an amount much higher than most Americans keep as cash savings. Joint accounts, say between you and your spouse, are covered for up to $500,000. And if you have to protect still more than that, there are other simple strategies you can use to guarantee even larger sums. “The FDIC is going to protect you,” says Finke.
Small-bank savings and CD APYs are great right now
When it comes to interest rates, the nation’s largest banks offer savers little more than their famous brand names. At both JPMorgan Chase and Bank of America—the nation’s top two banks by assets—basic savings accounts earn a puny 0.01% interest.
Meanwhile, the average rate across all savings accounts nationally is 0.37%. And one-year CDs do only a bit better at 1.49%. By contrast, many small banks are sweetening the pot, with savings accounts paying in the neighborhood of 4% and CDs rates that top 5%.
Just a few examples: North of Salt Lake City, Utah’s Prime Alliance Bank is offering an APY of 4.05% for its Personal Savings account, while Baltimore’s CFG Bank has 12- and 18-month CDs that earn an APY of 5.2%. (For more of the best current interest rate deals, check out our roundups of the best savings account and CD rates for April.)
The contrast has a lot to do with the fact that the nation’s megabanks are awash in cash, while smaller banks are trying to hold on to to customers, according to Alexander Yokum, an equity analyst at CFRA Research, a New York City-based investment research firm. Smaller banks are “more likely to need to raise their rates,” he says. “Which is bad for them, but good for their customers.”
Of course, online banks also offer savers high interest rates that meet or exceed what most small banks offer. But you’re more likely to get attentive customer service in person from a local branch than through a screen. Plus, says Finke, many small banks have been investing in technology to give customers a digital experience comparable to what they could expect with a better-known competitor.
Small bank loans
If you are looking for a loan, small banks have a lot to offer, too. As a borrower, you don’t need to worry about the bank’s financial health. Even if your lender did go out of business, your loan would simply be transferred to another lender under FDIC protocols.
For those with complex borrowing needs, a smaller bank might not offer the same breadth of loan types as a larger, national competitor, but the prospect is still worth investigating, especially if you live in a smaller community, according to financial planners.
Small-bank loan officers are more likely to be intimately familiar with local economic conditions, knowledge that could work in your favor when your creditworthiness is assessed. And if you already have a relationship with a small bank, you might be able to obtain more favorable borrowing terms.
“There still is value in having a personal relationship with your banker,” says Joseph Heider, president of Cirrus Wealth Management, a Cleveland-area wealth management firm. “They can tailor those loans around your needs.”
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- What Is a Money Market Account
Meet the contributor
Martha C. White
Martha C. White is a contributor to Buy Side from WSJ.
