Trouble on the Town Green

Four years ago, Bill Bambrick was looking for a little seed money. Literally. A horticulturist living in Augusta, Georgia, Bambrick had recently formed his own company, Loblolly Bay Landscape. Like most start-ups, Bambrick's needed cash to pay the bills and a line of credit to help nurture the business.

So the entrepreneur turned to Georgia Bank and Trust Co. Eventually, officers at the bank okayed equipment financing for the fledgling company, along with a $10,000 line of credit.

Dan Blanton, Georgia Bank & Trust's president and CEO, says he had a good feeling about the loan. "Bill always knew he wanted to be a horticulturist," he explains. Blanton should know. Back in their grammar-school days, he and Bambrick used to walk to classes together.

Basing a lending decision on personal knowledge of the loan applicant is something you'd expect from George Bailey, not from the CEO of a bank with $805 million in assets. But industry watchers say community banks, which make up 90 percent of U.S. banking institutions, service a lot of companies that wouldn't get a second look from multinational banking institutions. Even Blanton grants that it is highly unlikely that a deep-pocketed financial-services giant would "bank a guy who works out of his pickup truck or give him a $30,000 loan for equipment."

Trillion-dollar balance sheets do have their advantages, however. Some observers say smaller community banks could be headed for tough times. Thinning margins, they note, threaten the profitability of overextended lenders. So, too, does an industrywide obsession with building more branches. And global banks continue to steal away retail customers. Some proof: the top 10 U.S. banking organizations held 16 percent of industry deposits in 1985. Today, the big banks hold 40 percent of deposits.

On top of all that, local banks are struggling mightily to comply with a slew of new reporting regulations. Officers at scores of publicly traded community banks say they simply can't cope with all of these requirements, particularly those mandated by Sarbanes-Oxley.

The burden of being publicly traded has become so great, in fact, that some community banks have simply scrapped their stock-market listings. The 113-year-old American Savings Bank of Portsmouth (Ohio), for one, voluntarily removed its shares from Nasdaq because of Sarbox-related costs. According to president Bob Smith, the bank's bill for such costs was close to $200,000 — a number Smith expected would only increase in the future. That's a substantial hit for a business with about $180 million in assets. "It's 10 percent of our bottom line," says Smith. "[It's money] we could pay to shareholders in dividends."

Delightful, Delovely, Delisted
While statistical evidence is hard to come by, it appears that about 40 local banks have already ditched their listings on major stock exchanges. More telling: a Grant Thornton LLP survey found that 21 percent of executives at small and midsize public banks say they are contemplating taking their institutions private in the next three years. Most of the respondents blamed compliance burdens and costs for driving them off the big boards.

Although delisting (which is preceded by deregistering with the Securities and Exchange Commission) may get a bank out from under the more onerous provisions of Sarbox, it's not necessarily a good thing for its customers — at least not in the short term. To delist, a bank typically buys out record holders. According to sources, the process can cost a small bank anywhere from $100,000 to $3 million. For a community bank, a $3 million outlay could dramatically reduce the amount of capital available to clients. One local bank reportedly scrapped plans to open a new branch because it needed the money to buy back shares.

In addition, delisting from a major exchange makes it nearly impossible for a bank to fund future growth through equity issues. Moreover, Lana Chan, an analyst at New York­based investment bank Harris Nesbitt, says such a move effectively caps a bank's lending limits, which are geared to its access to capital.

The lack of available capital could have serious consequences for small-town America. As Chris Cole, regulatory counsel for the Independent Community Bankers of America, points out, loans from community banks account for more than a third of all borrowing by small businesses. "Because they are the leading supplier of small-business credit," notes Cole, "community banks play a very important role in local economies."

Case in point: the Southern Ohio Growth Partnership (the parent agency of the Portsmouth Area Chamber of Commerce) has partnered with local banks on two-thirds of the outstanding loans it has made to area businesses since 1996. According to Bob Huff, president and CEO of the Ohio partnership, the loan program has helped more than 50 local businesses.

There Go the Free Calendars
This is not to say that all smaller businesses are better served by community banks. Some local outfits, especially ones that are starting to break into the "M" of the SMB space, can benefit from a regional bank's wider array of offerings and cheaper prices. And commercial credit unions are currently lobbying Congress to expand their lending power. If passed, such legislation would give small companies more options when lining up funding.

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