Trouble on the Town Green

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

Of course, some fast-growing local businesses simply outstrip a lender’s ability to provide adequate capital. Even then, community banks have looked for ways to retain their customers. A few years back, Eagle Place Industries Inc., in Winchester, Virginia, needed a loan that exceeded the amount its bank could supply to one customer, says Jim Gibson, the construction company’s CEO. To keep the business, Eagle Place’s bank relied on an informal syndicate it had formed with other local lenders. “As small businesses grow, community banks must be able to [band together] to grow with them,” says Gibson.

Pew Trust

In truth, community banks are nothing if not adaptable. Gary Townsend, an analyst at Friedman Billings Ramsey, in Arlington, Virginia, points out that a host of community banks started out as thrifts or savings and loans. Not surprisingly, many were seared by the S&L scandal of the late 1980s.

After the crisis, small S&Ls began looking for new identities. Most settled on the “community bank” rubric. (Unlike “savings and loan association,” the term “community bank” does not denote any legal standing.) “Everyone [started] calling itself a community bank,” recalls Townsend. “‘Thrift’ or ‘S&L’ had a bad connotation.”

For managers at small businesses, “community bank” now has its own association. “Smaller banks — community banks — have been much more open in dealing with us,” notes VanScoy. “The big thing with community banks is their good working knowledge of your business.”

The personal touch plays in Peoria. And in West Virginia, too. Says Keller of Insurance Systems: “You like to feel important. And you like to do business with the people you go to church with and see at the country club.”

Helen Shaw is a staff writer at

Giving Back to the Community

Any way you slice it, it’s been a rough two decades for local banks. The savings-and-loan crisis, industry consolidation, and regulatory burdens have all conspired to substantially reduce the number of small players in the financial-services sector. How substantially? According to the Federal Deposit Insurance Corp., there were 14,000 community banks in 1985. Today, that number is closer to 7,000.

The thinning ranks of community banks have not gone unnoticed by lawmakers in Washington, D.C. In May, a bill was introduced in Congress that would offer some relief to the beleaguered industry. Dubbed the Communities First Act, the legislation would provide community banks (those with assets below $5 billion) with a 20 percent tax credit on income (a reduction that can’t exceed $250,000).

Not surprisingly, industry representatives applaud the bill. Says Chris Cole, regulatory counsel for the Independent Community Bankers of America: “It would give some good tax relief to community banks, particularly since we have to compete with credit unions, which are tax-exempt.”

Managers at those commercial credit unions, which are pushing to extend their own lending capabilities, are not as effusive about the bill. That’s understandable, since among other things, the law would repeal the alternative minimum tax for banks with assets under $5 billion. In addition, the proposal would allow the banks to be treated (for tax purposes) as limited liability companies.

If passed, the legislation would no doubt be welcomed by small-business owners. Why? Because the bill, sponsored in the House by Rep. Jim Ryun (R-Kan.) and in the Senate by Sen. Sam Brownback (R-Kan.), would also exempt banks with up to $1 billion in assets from the internal-controls section (404) of the Sarbanes-Oxley Act. That section, says the Independent Community Bankers of America, cost community banks an average of $200,000 last year in consulting, auditing, and vendor fees. By cutting small banks loose from 404, the bill would likely free up some of that money for customers.

At press time, Ryun’s bill had yet to come up for a vote. But even if the bill fails to pass, community bankers still have a possible lifeline: the Securities and Exchange Commission is currently looking into providing smaller businesses with some relief from certain oft-criticized provisions of Sarbanes-Oxley. —H.S.


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