With Guns (and Credit) At the Ready

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After Chappell hill bank was robbed early last year, CEO Edward Smith took down the large "no firearms" warning in front of the Texas bank's lone branch and put up a new sign, encouraging customers to carry licensed concealed weapons inside. The $24 million-asset bank also pays employees to take a concealed firearms course.

"I've got seven women in teller cages who are licensed to carry a firearm," Smith says. "I wouldn't try to rob them."

The story of the sign went viral, leading the Russian media to refer to the bank as "the crazy Texans," Smith says. Deposits poured in from sympathizers in 12 states and three countries. No robber has dared threaten the bank since.

Smith has taken some grief for his new firearm policy, which he defended in discussions with regulators. (An examiner once recommended that Smith remove paintings of Robert E. Lee and Stonewall Jackson from the bank's lobby, and he says he stood firm there, too.)

Yet guns and ammo can only ward off so many threats to the bank as it tries to return to profitability. Smith, like 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 just before the savings and loan crisis. He quickly restructured, doubling the firm's size by buying $3 million of assets from the Resolution Trust Corp.

Today, as it has for the past 104 years, Chappell Hill Bank epitomizes small-town banking. Instead of making loans for high-end speculative properties, it lends 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 $4 million-asset Oakwood State Bank. Such small banks "are definitely under a lot of pressure," Bacon says.

"Everything we hear about is of the regulatory burden," Bacon says. "One size does not fit all, and the one thing state regulators are trying to bring to the table is common-sense regulation."

At Sept. 30, banks with less than $100 million of assets had shrunk 5.5 percent from a year earlier, according to the Federal Deposit Insurance Corp. Meanwhile, all insured banks increased assets by 3.2 percent in 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, that meant dropping rates on new car loans and offering a three-year option to readjust the interest rate on real estate loans.

Tieman Henry Dippel Jr., the chairman of Brenham National Bank, which has a branch in Chappell Hill, says his institution also prefers to tailor loans rather than imitate the "cookie-cutter" process at big banks.

He worries, though, that new regulation will stymie the customized approach of small 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.

"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."

Withstanding the pressure no doubt will be easier for institutions with healthy capital ratios.

Chappell Hill Bank, for one, enjoyed a core leverage ratio of 13.9 percent at Sept. 30, with less than 1.4 percent of assets classified as nonperforming.

The bank has stayed healthy "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."

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