Mergers by some growth-minded rural banks are being blocked by antitrust rules.

Instances in which the Federal Reserve and the Justice Department have blocked small-bank mergers have picked up in the last year, observers said, as many of these institutions try acquisitions to compete better with regionals and a host of nonbank companies.

Experts worry that as their growth plans are thwarted by regulators, many banks based in isolated communities could be left behind in technology and left out of the low-cost delivery channels that are reshaping the banking industry.

"It's another instance in which community banks are being put at a competitive disadvantage simply because they're community banks," said Diane Casey, national director of financial institutions at Grant Thornton. "With all these huge combinations in banking going on, it's ironic that the small banks are running into the most antitrust roadblocks."

While it's unknown how many small bank mergers have been blocked by antitrust concerns - Ms. Casey said many make informal inquiries to the Fed before applying and are told "no" - one tiny bank in rural Georgia took its merger application all the way to the Board of Governors only to be shot down for antitrust reasons.

The merger would have created a $140 million-asset bank. Four days after this Aug. 26 Fed decision, NationsBank Corp. and Boatmen's Bancshares announced a merger that would create the fourth-biggest bank company in the country, with no concern about antitrust issues popping up at all.

George Astrike read about the Boatmen's-NationsBank deal and "threw my hands up," he said. Mr. Astrike's German-American Bancorp in Jasper tried to buy another southern Indiana bank this year but was told by Federal Reserve staff members not even to bother submitting a merger application.

"I would have hardly created a market powerhouse," said the chief executive, whose holding company has $368 million of assets and four banks - and would like to reach $1 billion in assets eventually.

"We look around for probable alliances, and in many instances we can't do a deal because of antitrust considerations," Mr. Astrike said. "It's as if we were treated as some kind of monopoly, which of course we're not."

Mr. Astrike said the Justice Department and the Fed consider deposit concentration and concentration of small-business loans among banks and thrifts but leave out nonbanks and credit unions in determining the size of the market.

"I have a whole drawerful of fliers and letters from a bunch of banks and nonbanks that have solicited our customers," Mr. Astrike said.

Karen Thomas, director of regulatory affairs for the Independent Bankers Association of America, said such instances of antitrust roadblocks are unique to small banks in isolated communities but that this doesn't lessen their impact.

"For any small bank that wants to grow in their market, it means they simply can't grow," she said. "It's not a little barrier; it's a complete barrier. They're in effect barred from doing transactions."

In the rejected Georgia merger, First State Bancshares in Blakely, a small town near the Florida border, tried to convince the Fed to approve its acquisition of First Southwest Bancorp of Donalsonville, Ga. The merger would have created a $140 million-asset institution, the 62d largest in Georgia, according to the Fed's decision barring the merger.

The reason for the rejection: Such a combination would have controlled 66% of deposits in its home county. That dominant a share in a bank's defined market violates Justice Department antitrust rules, the Fed ruling said.

The Fed's "main concern was, the customer wouldn't have had as many choices," said Bill Lane, president of First State. "But the deal made a whole lot of business sense for southwest Georgia."

The Federal Reserve Bank of Atlanta supported the merger, Mr. Lane said, and helped the two institutions compile data on traffic patterns and competition, and it even surveyed customers to show competition would not be inhibited. But citing the competitive presence of another local bank, nonbanks, and a credit union did not move the Fed.

Now, First State is going to divest one of its Blakely branches, with $18 million of deposits, and resubmit its merger application. With the branch sale, a new competitor is almost assured.

"We probably should have sold the branch from the start to expedite this thing," Mr. Lane said. "Now, we're going to start off as a new company with $18 million less in deposits than we would have."

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