The Dodd-Frank Act "will have an enormous and negative impact on my bank," Charles Maddy, CEO of Summit Community Bank in Moorefield, West Virginia, told the House Financial Services Committee at a recent hearing on the topic. "Already there are over a thousand pages of new proposed rules, and there will be many thousands more." Among other costs associated with the legislation, the bank has "already added one new full-time member to our compliance staff, and that may not be enough," said Maddy.

Dodd-Frank may also indirectly suck revenue from community banks by drastically lowering the interchange, or "swipe," fees that large banks charge merchants when their customers use bank debit cards for payment, said Maddy. Although smaller banks have a "carve-out" from this mandate, they "will almost certainly be forced to adopt the same price level or risk losing business to the largest banks," he said. "We cannot afford to offer financial services if we can't cover the cost of doing so," he warned.

Many banks may simply be too small to shoulder the new regulatory burden. Maddy reported in his testimony that he had heard of bank regulators encouraging those with less than $500 million in assets to merge, which would translate into more than 90% of banks based in his state consolidating, he says. Fenech says he expects banks will need at least $1 billion to $2 billion in assets to sustain the additional costs, since "it's going to be really hard for some of these smaller institutions to make do."

Bigger Banks, Less Credit
Talk of such mergers makes executives like Mark Hagar nervous about future access to credit. "It is a big concern of mine that a community bank will be taken over, especially by a large national," says Hagar, president of Specialized Printed Products, a $2 million business based in Fort Wayne, Indiana. He has always worked with a community bank, and his current one, First Source Bank, helped him acquire five competitors, some out of bankruptcy, in 2008 and 2009. "Even though our business had suffered, we were able to show a good strategy, so our bank was happy to work with us," says Hagar. "But I don't know that other banks would."

Hagar's main concern is that decisions on lending would become "arm's length" and formulaic, with no regard for his credit and repayment history. By contrast, community banks "have ratios they work from, but there's an opportunity to discuss things," he says.

Indeed, 73% of small businesses using a small bank got the credit they sought in 2010, compared with 48% of those using a large bank, according to a recent report by the National Federation of Independent Business. "Many of the large banks right now are probably seeing a migration of small business to the community banks because it's well known that they help small businesses," says Walter Manninen, former CFO of publishing company CXO Media and a senior counselor at a
Boston-area Small Business Development Center.

Credit access isn't the only problem with the shifting bank environment, finance executives say. Sharon Gottlieb, CFO of LogicMark, a
fast-growing maker of personal emergency response systems, with more than $5 million in sales, has seen her bank service fees go up by 30% in the past year, largely due to hikes in checking-account fees and credit-card processing fees at the larger banks she uses. Such fees now consume about 1% of LogicMark's revenues. Unlike community banks, where fees are somewhat negotiable, Bank of America and others "are very polite but very firm about their fees," she says.

Gottlieb can't escape the large banks — Bank of America, for example, has a secure online wiring service that she needs to pay her overseas manufacturers — but she'd like to. "They're charging me more and giving me less," she says. At the community banks she works with, "you have [your banker's] cell-phone number, so when there's an issue you talk to a real person who knows who you are. At the big banks, you have to go through all the layers of the phone menu, and my 'banker' takes three or four days to call me back."

Adds Dr. Michael Lesser, who owns a $6 million specialty veterinary practice in Los Angeles: "I know [large banks] don't really care. I just want someone who will pretend to care." He has grown frustrated with Citibank after banking with them for 9 or 10 years, in part because they held up the sale of his wife's business by forcing him to come up with more than $400,000 in less than a week to replace collateral for a property loan he has with the bank. As soon as a third-party lawsuit involving his real estate is resolved, Lesser plans to roll over his loan to a smaller, more local bank.

Now for Some Good News
Amid the doom and gloom, there is some good news. For starters, banks are jumping on the small-business-loan bandwagon. One measure of that: Small Business Administration lending was up 30% in fiscal 2010, to $22 billion, and the signing of the Small Business Jobs Act in September catalyzed an additional $10.3 billion in loan guarantees (equating to $12 billion in loans) — the largest volume in that quarter on record, according to the SBA.

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