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 YorkÂbased 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.
Still, many large financial institutions simply aren’t interested in dealing with non-Fortune 2,000 customers. Dr. Darrin VanScoy, a member of a Hurricane, West Virginia-based medical group, says his firm had a positive, long-term relationship with a national bank. That all changed last year when the financial institution ceased providing loans to companies below a certain revenue threshold. “Suddenly, it had a different philosophy on how much it wanted to extend itself to smaller businesses,” says VanScoy, who declined to name the bank.
Industry observers say mergers are often behind such abrupt changes in corporate policy. Community banks are not immune from this phenomenon, either — particularly as regional banks gobble up smaller rivals. Managers at Treasury Strategies, a closely held consulting firm, decided to find a new lender after their local bank was acquired by a larger one. The company stuck with a community bank. “We were not looking for privileged treatment,” says Cathryn Gregg, partner and director of the Chicago-based business. “We wanted someone to understand why we didn’t look plain vanilla.”