Who can blame small community banks for feeling boxed in?
"The world has changed," said Jerry Engle, president and CEO of Greenwoodbased First Bank. "I guess we'll have to get used to it."
Far and away, it's the increasing cost of regulatory compliance that keeps community bankers tossing and turning at night. In recent months, the Independent Community Bankers of America, a small-bank advocacy group based in Washington, D.C., has stepped up its ongoing campaign against additional regulation by asking the Federal Deposit Insurance Corp. and other government banking agencies to find ways to reduce the regulatory burden.
The stringent new accounting provisions of the Sarbanes-Oxley Act are just as expensive for a small bank to implement as for a large one. The cost runs into the hundreds of thousands of dollars, or even millions. For publicly-traded community banks, that's a bitter pill to swallow.
"I know the reason for it is to protect the shareholders and investors, but, other than that, there's no benefit to the bottom line," complained Steve Bechman, president of Franklin-based Heartland Community Bank, which has assets of $170 million. "We have a full-time compliance person now. For a bank our size, I never dreamed we'd have a person who did nothing but that."
Don't be fooled into assuming privately held banks can get by on the cheap. Sarbanes-Oxley may not be an overt requirement for them. But as it increasingly becomes industry standard, they have little choice. Ignoring it would erode the trust that's a community bank's foundation.
"Even though it's not explicit, the implication is that these are things we see other banks doing, so they're best practices and we're encouraged to follow along," said Lynn Gordon, president and CEO of Mooresville-based Citizens Bank. "The banking business is based on trust. Perception is reality."
There's another costly regulatory mandate that has community banks fretting: security. Since 9/11, concern about criminal financial activity is at an all-time high. Without vigilance, regulators fear terrorists might take advantage of the fast and flexible U.S. banking system for money laundering or worse.
Such fears seem awfully unrealistic to sleepy, small-town banks.
"It's just hard to imagine a lot of that would take place in the Midwest, but you can't be too cautious anymore, unfortunately," Engle said.
Banking is one of the most heavily regulated of all industries. And for good reason. Insolvency of even small banks can be devastating to the economy.
Bankers aren't against regulation, said Tim Cook, spokesman of Independent Community Bankers of America. They just want it simplified so they can afford to comply.
For example, Cook said, the law requires banks to make lengthy privacy disclosures to their clients. The realworld result is mass mailings of envelopes stuffed with legalese, most of which end up in the garbage can. The banks have spent a great deal of money, but the consumer isn't any better informed than before.
"It's one thing to have a disclosure," he said. "But if the consumer can't make heads or tails of the disclosure, and you're giving it the way the regulators want you to, it's a lot of burden and cost for no avail."
Often operating in smalltown markets, community banks have more problems than just regulations. Their fortunes are intrinsically tied to the local economy. And if it's flagging, it doesn't matter how efficiently the bank is run.
"If those communities just aren't growing, what can you do?" asked Joe DeHaven, president and CEO of the locally based Community Bankers Association of Indiana. "Even if you've got 80 percent of the business in the community."
One more factor every bank must face is competition. And not just from other banks. Businesses from retailers to real estate agencies to credit unions have encroached on what was once banks' exclusive territory.
But encroachment by larger players is more often a community banker's dilemma. Gordon noted Charter One's recent local branching spree. In less than three years, more than 60 Charter One branches have popped up around the state. Charter One's ultimate owner is the Royal Bank of Scotland Group, the secondlargest bank in Europe.
Against all those factors, community banks have one primary asset: their devotion to service through long-term relationships and understanding of the local market.
Fortunately for them, it's one of the cornerstones of banking.
"[Customers] want me to be able to look 'em in the eyeballs, visit with them and really develop that understanding of their situation," DeHaven said. "It's still a local thing."