Market turmoil cuts two ways for community banks.

It prompts concern among depositors, leads regulators to get tougher on capital, and will eventually impose higher deposit insurance premiums.

But small banks also see opportunity in the bankruptcy of Lehman Brothers Holdings Inc., the sale of Merrill Lynch & Co. Inc., and the government takeover of AIG.

Community banks are getting more loan business as investment banks and conduits continue to retreat, and some are ramping up in retail brokerage and wealth management. Mostly, though, they cite a return to basics that could ultimately benefit small banks.

"For many banks of our size, this is good," said Bill Schenck, the president of the $674 million-asset TriState Capital Bank in Pittsburgh. "It's difficult to say that in this troubled time. But if there is a bright spot in this financial services business, it's among those banks that are doing the basic financing for America in the traditional way: gathering deposits and making loans."

At the $2.2 billion-asset Enterprise Financial Services Corp. in Clayton, Mo., loan demand continues to rise, particularly for commercial real estate and commercial and industrial loans. Its total loans increased 22% in the first half.

The added loan demand, though, brings funding challenges for small banks at a time when most are being prudent about preserving capital.

"A lot of Main Street borrowers are having difficulty getting funding from Wall Street, and the money-center banks, and the regional banks. It's putting a tremendous amount of funding pressure on the community banks," said Peter F. Benoist, Enterprise's president and chief executive officer.

Because of the growth, Enterprise's wholesale funding is now 16%, up from about 10% historically, Mr. Benoist said.

The company is raising regulatory capital through convertible trust-preferreds to support the growth, he said. "We look at this environment from the bank's perspective as being an opportunistic one. There are a lot of clients of other banks not being served well. We can get a lot of market share in a very difficult environment if we're smart about this."

Still, Mr. Benoist said he is concerned about the effect of the Wall Street turmoil on the economy.

"If the financial markets continue to be stressed and frozen — and they are — that will have an impact on the ability of the economy to respond and grow, and that could translate into credit issues in commercial and industrial loans," he said.

Several community banks said Bank of America Corp.'s deal to buy Merrill, the nation's largest retail brokerage, is an opportunity to scoop up both brokers and clients.

"People are questioning: Bank of America is taking over Merrill Lynch. What does that mean for my brokerage account? Should I stay or should I move?" said Fred Murphy, the senior vice president in charge of investment services at the $272 million-asset Countybank in Greenwood, S.C. "And we are looking to expand."

Mr. Benoist said Enterprise wants to attract talent from investment firms like Merrill and A.G. Edwards. (Wachovia Corp. bought A.G. Edwards last year.)

It is actively interviewing, with plans to double its wealth management adviser teams, to about a dozen in St. Louis and four in Kansas City, Mo. It also aims to hire wealth management advisers in the Phoenix area, where it is chartering a new bank.

On the downside of all the turmoil, several bankers said they are getting more calls from distressed depositors — though not as many as when the $32 billion-asset IndyMac Bank failed and television cameras captured images of blocks-long lines.

After awaking Monday morning to yet another Wall Street shake-up, Bill Jenkins, the marketing director at the Countybank, said he had one thought: "Oh, boy. Here we go again."

When IndyMac Bank failed in July, Mr. Jenkins spent a lot of time explaining to customers why their deposits were safe. Though the latest market upheaval does not involve retail banks, Mr. Jenkins said his bank has fielded enough inquiries from jittery depositors that it is planning to put a series of advertisements in the local paper over the next few Sundays to reassure them that their money is not at risk.

Kevin Bottomley, the president and CEO at the $1.6 billion-asset DanversBank in Massachusetts, said customers there might feel more confident that their money is safe because state-chartered banks offer depositors full coverage, on top of the amount insured by the Federal Deposit Insurance Corp.

Echoing the concerns of many community bankers, Mr. Bottomley said what he worries about most is the FDIC's deposit insurance fund taking a hit from another failure the size of IndyMac, or larger. "It would result in an increase in FDIC insurance premiums," he said. "From a community bank's standpoint, that is a concern."

Another concern is that many small banks could be forced to take writedowns on the value of any Lehman or AIG bonds they hold. This follows any writedowns on their investments in Fannie Mae and Freddie Mac preferred shares, which lost nearly all of their value after the government took over the government-sponsored enterprises this month.

Jeff Davis, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp., said Lehman has about $350 billion in debt outstanding and AIG has about $336 billion — with community banks among the investors.

Banks do not have to report those holdings, so the overall exposure is unclear. But Mr. Davis said he does not expect writedowns to be anywhere near as large as those some banks will take on other securities they hold.

"Portfolio management 101 is diversification," he said. "So most banks have very small corporate bond portfolios because they take the risk in the loan portfolio."

Mr. Davis said he expects most to file reports listing their holdings with the Securities and Exchange Commission in the coming weeks.

John Koelmel, the president and CEO at the $9 billion-asset First Niagara Financial Group Inc. in Buffalo, said he thinks the recent market upheaval will result in even more pressure to increase capital levels, even for conservative lenders.

Though a bank is considered well capitalized when its total risk-based capital is 10%, regulators are looking for higher levels, Mr. Koelmel said. "What was 10% is now 12%."

He said that could have a ripple effect of its own. "The marketplace at large will be incrementally focused on capital positions," he said.

"When you have to hold or raise capital, it makes doing business more expensive."

That is likely to result in higher loan rates and more industry consolidation, he said.

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