Trouble on the Town Green

Long a source of funds for local businesses, community banks have been hit hard by new regulatory requirements.

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.

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