Ask Texas banker Edward Smith for the key to surviving the worst economic slump in recent memory and he's apt to give a simple response: guns and ammo.
After Chappell Hill Bank was robbed early last year, Smith replaced the large "no firearms" warning at the bank's lone branch with a sign encouraging customers to carry licensed concealed weapons inside. The bank also pays employees to take a concealed firearms course.
"If you're going to need help, you better help yourself because the government is not going to help when you need them," says Smith, the 104-year-old bank's chief executive and a member of the National Rifle Association.
"I've got seven women in teller cages who are licensed to carry a firearm," Smith says. "I wouldn't try to rob them."
Word of the sign went global, with Russian media calling them "the crazy Texans," Smith says. Deposits poured in to the $24 million-asset bank from sympathizers in 12 states and three countries. No robber has dared threaten the bank since its policy change.
Yet guns and ammo can only ward off so many threats to the bank as it tries to return to profitability. Smith, like many other small-bank CEOs, knows his institution's future also will depend on overcoming anemic loan growth and mounting regulatory costs.
"The hard times are not even here yet," says Smith, who left a career as a Houston real estate agent in 1984 to run the then distressed bank right before the savings and loan crisis. He quickly replaced management, restructured the bank and doubled its size by buying $3 million of assets from the Resolution Trust Corp.
Today, Chappell Hill Bank epitomizes small-town banking. Instead of making loans for high-end speculative properties, such banks expanded for more than a century by lending to farmers, local businesses and residents in towns with as few as 300 people.
"Are these community banks important? Yes. Are they going to survive? I sure hope so," says Robert Bacon, a deputy commissioner at the Texas Department of Banking. The state is home to some of the nation's smallest banks, including Chappell Hill and the 77-year-old Oakwood State Bank, which has $4 million of assets. Such small banks "are definitely under a lot of pressure," Bacon says.
"Everything we hear about is of the regulatory burden," Bacon says. "Regulation is mostly well intended but you have got to look at the unintended consequences. … One size does not fit all, and the one thing state regulators are trying to bring to the table is common-sense regulation."
Texas, along with Illinois, Massachusetts and Michigan, has some of the oldest banks in the country, with some nearing 200 years in business. Many of these are small, rural banks with especially weak growth prospects.
Banks with less than $100 million of assets had shrunk 5.5% at Sept. 30 compared with a year earlier, according to the Federal Deposit Insurance Corp. Meanwhile, all insured banks increased assets by 3.2% during the same period.
"Just by their nature, those little rural banks don't have a lot of loan demand," says Dan Bass, a managing partner at FBR Capital Markets.
"They've been able to historically make a spread off securities. But with securities at all-time lows and the net interest margin getting squeezed, it's hard to make any money."
That leaves the leaders of rural banks with big challenges. Many have looked beyond their communities in search of loans. Houston is just 65 miles away from Chappell Hill, but lending in larger markets would mean competing with bigger banks and cutthroat pricing.
"You just try real hard to get loans you can compete with," Smith says. At Chappell Hill Bank, it meant dropping rates on new car loans and keeping the option open for three years to readjust the interest rate on real estate loans.
"People are not tuned in" to adjustable-rate loans "when they can get a fixed-rate loan for 30 years or with a government guarantee," Smith says. "It's a hardscrabble situation so you have to hustle for it."
Tieman Henry Dippel Jr., the chairman of Brenham National Bank, which has a branch in Chappell Hill, echoes Smith. Dippel says he and his colleagues prefer to tailor loans rather than imitate the "cookie-cutter" lending at big banks.
"When you get to a rural area, you might not have the normal housing in a subdivision. It could be a home on 200 acres and maybe it includes a land loan," Dippel says. "It's community banks that are able to make those decisions and understand that relationship with the customer and judge that risk appropriately where they are then able to make a deal work."
Dippel is concerned that new regulation could stymie customization. "What worries me greatest about [the Dodd-Frank Act] is the change it has to the culture of community banking," he says. "You have circumstances that you need to be able to try and address based on individualized needs but the systems are inevitably being built more to numbers and not to relationships."
Dippel and Smith know there is a rough road ahead for organic growth, but they dispute a growing belief that banks with less than $1 billion of assets cannot survive. "They're as full of sauce as a Christmas ghost," Smith says.
Chappell Hill Bank has some trends working in its favor. It is well capitalized, with a core leverage ratio of 13.9% at Sept. 30, according to data from the Federal Deposit Insurance Corp. Less than 1.4% of its total assets are nonperforming.
The bank has survived "by using a lot of common sense and a lot of conservative lending practices," Smith says. "I try to lend money with the idea that it is mine and I want it back."
Smith also has plenty of fight left, saying he has taken some "grief" for the gun policy and for closing the bank in January for Confederate Heroes Day. He doesn't apologize for his conservative opinions. Republican presidential candidate "Ron Paul is an acquaintance of mine and he considers me one of the few people to the right of him," Smith says.
Smith says he has defended the firearm policy in discussions with regulators. An examiner once suggested he remove paintings of Robert E. Lee and Stonewall Jackson from the bank's lobby, and he says he stood firm there, too.
Both the paintings and the sign remain. Only time will tell if Chappell Hill Bank also will withstand outside pressure.