Local Banks Feel Pacman Effect

IF the banking industry were a lavish buffet, Slade's Ferry Bank and Trust would be a crouton - but a good one.

With only eight branches and assets of less than $200 million, it has rarely warranted attention from anyone outside this town of 17,000 - until now.

With loyal customers and rock-solid bottom lines, small banks like Slade's Ferry are sensing hot breath on their necks from large regional banks hungry to expand.

What happens when local mom-and-pop banks sell out?

Some experts say their communities are penalized. ``When a big bank buys in, they are not looking out for the best interests of the community,'' says Dave Thomas, a bank consultant from Boston. Purse strings shift from local loan officers to those in distant cities, Mr. Thomas says, and ``the issue of what the community needs is left in the dust'' - including jobs and local control.

New England, with one of the densest concentrations of banks in the country, provides a case study of the impact of consolidations on small towns. Some 25 percent of the region's lenders have disappeared since 1980.

Here in Somerset, Mass., near the Rhode Island border, the story is the same: Six banks have been acquired by larger ones in the last four years. Fewer banks mean fewer options for small businesses, says Warren Heller, president of an information service called Veribanc. ``The inefficiencies of competition are always better than the efficiencies of an oligopoly,'' he contends. ``When there are fewer lenders to choose from, lenders have less cause to go after small loans.''

While banks have been consolidating rapidly since the recession in the late 1980s, the Interstate Banking Bill, approved by Congress in September, has quickened the pace. The legislation gives banks the freedom to operate more freely across state lines: a move that portends the aggressive expansion of a handful of national banks.

``The interstate bill will definitely consolidate the industry further,'' says Kenneth Gunther of the Independent Bankers Association in Washington. As national powers look to buy, he says, medium-sized regional banks will continue to bid on small lenders, in an attempt to boost their market share and look more attractive.

About 10 truly national banks will emerge in the coming years, Mr. Gunther says, and the ranks of community lenders will thin from nearly 8,000 to as few as 5,000. Most small-business owners in this town of 17,000 agree that big banks are more difficult to work with. George Duclos, owner of a shipbuilding company here, banked with the Bank of New England for 30 years until it folded in 1988 and Fleet, a regional banking giant based in Rhode Island, took it over.

``This big new bank,'' as Mr. Duclos refers to it, did not retain his loan officer, and it began demanding extensive documentation about his company's cash flow, information he calls ``irrelevant'' to the shipbuilding business.

``It was no fun at all,'' Duclos remembers. ``They made demands on our bookkeeping that were difficult to manage. We lost a lot of big jobs because of it, and it shook our confidence.''

After switching to Slade's Ferry a year later, Duclos says he has finally found the kind of individual attention and continuity that his company needs.

``They're an excellent bank because they listen,'' he says. ``They know my business almost as well as I do.''

This notion was corroborated last year by economists from the Massachusetts Institute of Technology (MIT), who completed a study on small-business lending in Southeastern Massachusetts.

The study found a widening gap between small-business-loan supply and demand over the last five years here, due, in part, to the rate of bank acquisitions.

Big banks are less inclined to make small business loans, the study concluded, because their extensive internal regulations make a $1 million loan as expensive to process as a $25,000 one.

In addition, they hardly ever know the applicants personally - and are rarely inclined to take character into account.

Underscoring the importance of community banks, the MIT report called Slade's Ferry the only bank in the Fall River area that ``productively'' made small business loans under $50,000.

``We get the impression that Slade's understands who its small business clients are, and that this knowledge is central to their business,'' the report said. ``Slade's ... reflects the community.''

But officials at large banks insist that as they grow, they are initiating programs to keep small businesses afloat. Mary Quinn, spokeswoman for Fleet, says that her bank has set aside $8 billion for in-city development programs, including ``easy business banking,'' a simplified procedure for acquiring loans under $100,000.

At the end of September, Ms. Quinn says, Fleet had received 5,200 applications and loaned out $232 million in the Northeast.

In addition, the federal Small Business Administration (SBA) has initiated low-documentation programs designed to make the application process swifter and simpler for government-backed borrowing.

Yet officials at the SBA say privately that as national banks start to buy more local banks, the small-business-loan market will most likely continue to be under-served.

For community banks, this fact is both an opportunity and a curse. While the market for small loans will be less competitive, opportunities for growth will be limited. And the megabanks, armed with discount brokerage services, mutual funds, retirement plans, glitzy television spots, and ATM kiosks in every village, will likely continue to lure away upscale customers.

While small banks are doing well from a profit standpoint, the Federal Reserve reports that over the last three years, banks with assets of more than $6 billion are doing better.

Still, the folks at Slade's Ferry remain confident that their niche is secure and their customers will not abandon them.