Credit problems are leading some multibank holding companies to rein in executives at subsidiary banks.

GB&T Bancshares Inc. in Gainesville, Ga., which owns seven banks, and Clarkston Financial Corp. in Waterford, Mich., which owns two, have attributed loan problems to a lack of corporate oversight and have added centralized safeguards.

The $2 billion-asset Financial Institutions Inc. in Warsaw, N.Y., abandoned the multibank holding company model in 2005 after credit problems over the previous two years caused regulators to step in.

"The benefit of the multibank approach, we think, is better market intelligence and better local business development. But the question is, does that outweigh the risks?" said Peter G. Humphrey, the president and chief executive officer of Financial Institutions and its Five Star Bank. "For us, we felt the right decision was to consolidate."

These cases could be a cautionary tale for other multibank holding companies about striking a balance between local lending and central control, particularly as the industry braces for a general deterioration in credit quality.

Fourth-quarter statistics showed net chargeoffs increased at most U.S. banks. For those with a market capitalization of $200 million to $2 billion, the median ratio of net chargeoffs to average loans rose 62% from the third quarter, to 13 basis points, according to Andrew W. Stapp, an analyst at Cohen & Co. However, he stressed that the ratio remains low by historical standards.

Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners LP, said asset quality does not vary among multibank and single-bank holding companies. As of Dec. 31 the median ratio of nonperforming assets to total assets was 32 basis points for all U.S. multibank companies with under $10 billion of assets and 31 basis points for single-bank companies of that size.

But several analysts said multibank companies without central credit oversight are more vulnerable to losses.

"Especially in a slower-growth market, a bank president might feel the need to stretch to show growth," said Damon DelMonte of KBW Inc.'s Keefe, Bruyette & Woods Inc. "It helps to have the additional layer of oversight."

Mr. Humphrey said the old lending process at Financial Institutions worked for 50 years because his company knew its borrowers. However, problems popped up when it began expanding into new markets and taking on larger, more complex loans, he said.

"Our credit process did not keep pace with that," he said. "We had not centralized credit administration — what I would call a key internal control."

Financial Institutions gave up a "connectivity" to the market by consolidating, he said, but as an offset it set up regional advisory boards to assist with business development.

Bankers and analysts agree that keeping lending decisions local is a selling point — not only with customers, but also with potential acquirers. A multibank holding company often lets the senior managers at acquired companies stay on and continue doing business as usual.

Many using that model manage to maintain stellar asset quality, including the $14.9 billion-asset Fulton Financial Corp. in Lancaster, Pa. An active acquirer, Fulton owns 14 subsidiary banks in five states. (That number will drop to 11 by midyear, after two of its New Jersey banks combine and two in Pennsylvania become part of Fulton Bank.)

R. Scott Smith Jr., Fulton Financial's chairman, CEO, and president, said his company first became the parent of more than one bank 25 years ago and evolved the lending process to include corporate oversight as it grew.

A chief credit officer oversees all the banks, and the company has a "fairly uniform" lending policy and a centralized loan review function, Mr. Smith said.

"The day we do an acquisition, we don't walk in and say, 'Everything changes.' But we evolve new affiliates toward our lending policies over time, so that the way we make loans everywhere is similar. Or, if there are exceptions, we know what they are, and we have a way of monitoring them," he said.

GB&T has made eight acquisitions since 1999. Clarkston had one bank until it opened a start-up in August 2005. Each company had loan troubles concentrated at one subsidiary.

Regulators recently alerted the $1.9 billion-asset GB&T that the president of its HomeTown Bank of Villa Rica circumvented collateral requirements and other underwriting guidelines on major loans. GB&T said it had to increase reserves and restated fourth-quarter results, swinging to a $1.9 million loss from a previously reported $4 million profit.

GB&T is tightening what had been a "very decentralized business model," said Richard A. Hunt, its president and CEO.

"Up until a couple of months ago we had allowed each bank board to commit up to the legal lending limit of that bank without holding company approval," Mr. Hunt said.

In November it filled the newly created position of chief credit officer, and soon after it began to change the lending process, he said. "We put in some controls that actually plugs our credit officer into the approval process at a certain level before the loan goes to the local board for approval. We also put in some more aggressive procedures for handling problem assets."

GB&T also is accelerating plans to centralize loan funding, Mr. Hunt said. "Disbursement of funds won't totally be under the control of the president of the bank."

Asset quality deteriorated at the $220 million-asset Clarkston shortly after it became a multibank holding company two years ago. It boosted the loan-loss reserve 34% in the fourth quarter. It also posted a $264,000 loss for the quarter, compared with a $414,000 loss in the same period a year earlier.

J. Grant Smith, Clarkston's president and chief operating officer, said his company filled a newly created position, vice president of credit administration, in November and created a central credit administration. "We believe we're turning a corner," he said.

Clarkston's two banks still have a lot of flexibility, Mr. Smith said. "The holding company doesn't give a thumbs up or a thumbs down on a loan. It's just that a central credit area does all of the credit analysis and risk ratings. They kind of do the grunt work, if you will, on a transaction."

The $578 million-asset Community Bankshares in Orangeburg, S.C., installed a chief credit officer before it, like Financial Institutions, abandoned the multibank holding company model. In September, its four banks combined into one with a new name — Community Resource Bank.

Samuel L. Erwin, the parent company's CEO, cited three reasons for the consolidation: greater efficiency, consistent marketing to boost brand awareness, and improved credit processes.

Community Bankshares reported fourth-quarter earnings of $1.2 million, compared with a loss of $2.5 million for the same period in 2005. The fourth-quarter provision shrank 84.2%, to $995,000.

Mr. Erwin said his company's credit problems were concentrated at one bank, but that a problem all four banks had in common was a lack of grading consistency. That made it difficult to judge whether the loan-loss reserve was adequate, he said.

"Prior to my arrival, there really was no centralization," said Mr. Erwin, who joined the company in January 2005. "There was a lack of oversight at the corporate level to ensure that policies were being followed, that the proper credit scores were being made, and when decisions were being made, that the information was there as provided."

So one of the initial changes he made, before the eventual consolidation, was implementing a consistent grading process across all four banks. He also had large loans go through an "extended approval chain." A loan committee at each bank still handled small loans, but larger ones required the chief credit officer's approval, he said. The largest loans went before the holding company's loan committee, and some even required the holding company's full board to sign off.

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