Anyone who’s tried to finance a car, house or business expansion recently knows that the recession is hitting banks hard. Some have folded, and the U.S. government is doling out billions of dollars to help others stay afloat.

Ten of the 13 biggest funding recipients from the U.S. Treasury Department’s Troubled Asset Relief Program saw their outstanding loan balances decline by a total of about $46 billion, or 1.4 percent, between the third and fourth quarters of 2008, according to the Wall Street Journal.

The story’s much the same in Central Ohio, where the four biggest banks all lost money last year. Modest increases in 2008 loan volumes at Huntington (1.6 percent), KeyBank (2 percent) and Fifth Third (4.1 percent) weren’t enough to offset losses, and reflect the ongoing credit crunch. National City saw its volume shrink 11.3 percent.

But while the Goliaths are struggling, many community banks are faring much better—especially those that managed to dodge the subprime bullet. Some of the largest local institutions, including Park National, Commerce National and Heartland, even managed to turn a profit in 2008.

Still Lending

Banks today fall into one of two categories, says Columbus First Bank Chairman and CEO Rhett Huddle. First are the banks that have been forced to write off too many bad loans, resulting in a shortage of capital. “So they’re not making loans, and they’re actually shrinking their balance sheets,” Huddle says. On the other hand are banks with low charge-off ratios, strong capital and the opportunity to grow. Huddle says most community banks fall into the second group.

Columbus First, which opened its doors 18 months ago, experienced rapid loan volume growth in its first full year of operations. As of Dec. 31, the bank had a little more than $78 million in outstanding loans, up from just over $30 million the year before, Huddle says.

Columbus First’s results aren’t an anomaly. According to a survey by the Independent Community Bankers of America, 40 percent of community banks increased their loan origination volume in 2008; just 11 percent believed the economic crisis significantly curtailed lending capabilities.

Twenty of 29 community banks in a 12-county region around Central Ohio saw at least slight loan growth last year, according to Harold Hanley, managing director in the Columbus office of investment bank Keefe, Bruyette & Woods. Fifteen of those 20—all of which have less than $1 billion in assets—had growth exceeding 4 percent. Average loan growth was 18.2 percent.

While the economic climate is more challenging this year than last, many institutions are faring well, Hanley says. “I think they have stuck to their community bank focus. They know their customers, and they know who they’re lending to,” he says.

Three-year-old First Bexley Bank saw loans increase by 83.6 percent between 2007 and 2008, says President Dave Mallet. He attributes the boost to the bank’s size ($110 million in assets) and tenacity. “We aggressively go after business. We knocked on lots of doors and tried to meet new people,” Mallet says.

Benchmark Bank grew its loan volume by 23.5 percent last year. The bank will celebrate its fourth anniversary in August, says Jerry Caldwell, chairman and CEO. “As a new organization, you have the opportunity to grow at a higher percentage rate because your base is smaller,” he says.

Still, the increase is encouraging, Caldwell says: “I don’t think you’re going to find many banks in America that grew their loan portfolios to that degree in 2008.”

Park National Bank and Heartland Bank both saw loan growth of about 6 percent last year. “Throughout our history, we’ve had years much better and other years not quite as good,” says Tom Button, Park’s senior vice president. “Part of it is context. Six percent in the environment we were working in, we feel pretty good about that.”

Heartland President and CEO Scott McComb agrees. “Historically, we can profit in the 8 to 9 percent range year-to-year. Finding quality credit remains a challenge,” he says.

Community banks have become more cautious in light of the downturn; some have tightened lending standards to avoid getting saddled with bad debt. “As this economic problem persists, it’s not just the people who caused it who get into trouble,” Caldwell says. Even longtime customers who haven’t missed a payment in 20 years may run into trouble if they get laid off.

Huddle says Columbus First is scrutinizing not only past payment history, but also the likelihood of future default if the recession persists. “We’re looking at historical numbers—what somebody did over the last one to three years—and we’re projecting forward asking, ‘How will they be able to do in a softer economy if their revenues are down a little bit? Are they still strong enough to survive?’ ”

“What we’re trying to do is prepare for the worst and hope it doesn’t happen. We’ve built up our loan-loss reserves dramatically, as every bank in America has,” Caldwell says. Benchmark doubled its reserves during 2008.

But while lending was up, so were charge-offs (write-offs of assets that are deemed unrecoverable). After all, even the best lenders end up with a few bad loans in their portfolio. Park, for example, had a 2008 charge-off ratio of 1.3 percent, an increase of 140 percent from 2007. “That is part of the business,” Button says. “When risk is higher, we will absorb losses. We haven’t changed our approach to the market, and we are growing loans notwithstanding the fact that the economy is not great right now.”

First Bexley is also staying the course. “We didn’t tighten standards. We’ve been a fairly conservative bank from the start,” says Mallet, noting the bank wrote off just one bad loan in 2008. “So yes, the economy did impact us, but we didn’t buy any of those silly mortgage-backed securities; we didn’t get involved in that kind of stuff.”

Influx of Borrowers

For banks that have capital available to lend, the current market has presented new growth opportunities. Huddle says Columbus First has seen a “migration” of customers from troubled banks to institutions such as his that have excess capital. “Not only are [troubled banks] not growing, in some cases their capital has been so damaged that they have to shrink their loan portfolio. So everybody is being invited to leave,” he says.

“In October and November, when some of the worst news was out there and Lehman Brothers was allowed to fail, we had people who were getting their deposits out of the largest banks in town and bringing them to one of the smallest banks in town: us,” Huddle says. “It is something I thought I would never see.”

John Smiley, Columbus First’s president, says the bank saw an influx of potential borrowers soon after the economy tanked late last year. “At the end of the third quarter, we had just so much turmoil, and that helped the fourth quarter tremendously in getting a lot of new deposits over here,” he says. The fourth quarter was Columbus First’s best, with loan growth up more than 64 percent.

Park, Heartland, First Bexley and Benchmark are seeing similar results. “It’s fairly well-known that there are banks in our market that are not as aggressive as they were. In some cases, we are speaking to those borrowers,” says Park’s Button.

“We are seeing a lot of consumers—good, quality borrowers—that the large banks aren’t able to accommodate. So the community banks have a wonderful opportunity to pick up some of those relationships,” says Benchmark’s Caldwell.

Amid all the turmoil, some customers want to be seen as more than just an account number: They want to forge personal relationships with their banker to give them a sense of security. Charles Moon, who owns Westerville-based Moon Rental Trust and Moon Restoration, switched his accounts to Benchmark soon after the bank opened. “I think of Benchmark as my financial partner in the growth of my business. In previous associations with larger banks, I felt like a customer instead of a partner,” Moon says.

“I think more people are re-evaluating their banking relationship with all that’s happened in the past 12 months,” Smiley says. “Most of the clients we deal with are business owners looking for personal attention.”

“When you’re dealing with a person at a community bank, you’re usually dealing with a decision-maker, so you get a quick response,” Caldwell says. “At a larger bank, they always to go to Atlanta or New York or Timbuktu, and that lengthens the process,” he says.

Back to Basics

Community bankers say their institutions can be counted on for consistency as well as simplicity. Underwriting stan-dards rarely change, says Robert Palmer, president and CEO of the Community Bankers Association of Ohio. “The lending philosophy has always remained consistent. That consistent underwriting will work both in a warm and hot economy as well as a subdued and cold economy,” he says.

“Community banks’ balance sheets are very simple,” Caldwell says. “Their investment portfolios are very vanilla, and they’re making their living supporting the community.”

“We get our deposits from the communities we’re in, and we lend that out to people in the community,” says First Bexley’s Mallet. “You do what you know. Don’t lend money if you don’t understand the business.”

Bankers say that principle is the reason why few community banks became entangled in the subprime and mortgage-backed securities mess. Such investments just don’t fit their portfolios. “Community banks are not connected to Wall Street,” says Heartland’s McComb. “There are over 8,000 community banks that don’t have any issues that would be happy to take on some of the 94 percent market share that bigger banks take up.”

Huddle agrees. “We have been sticklers for old-time principles, like if you buy a house you should make a down payment. Document your income; if you say you make $30,000 a year, show me tax returns that support that,” he says.

Beyond uncomplicated balance sheets, customer service is essential to any financial institution’s success, says Button. “We staff our organization with very well-rounded bankers who have broad skill sets. When the economy is having difficulties, people want to talk to people who have experience and know what they’re talking about,” he says.

Caldwell tries to keep his staff—and accountholders—well-informed. “We’ve spent a lot of time educating our customers either one-on-one or through seminars with prospective customers,” he says. At a recent event, he says, “Virtually every one of them had no idea that they could have multiple accounts, legally and properly titled, that get a husband and wife up to $2 million fully insured at one institution. The big banks don’t train their people to convey that to the customer.”

Cra-Co Investments owner Errol Kahoun borrows from Benchmark because of its knowledgeable and helpful staff. “When you call a small bank, you talk to the people who can make a decision and have flexibility to move and make your request a viable request. If you talk to a larger lending institution or bank, they really tie your hands,” he says. “There’s no flexibility, whether you’re a good customer or not.”

Dianne Einstein, a partner at the law firm of Einstein & Poling, also had communication problems with a larger, national bank. For several months after her bank was involved in a merger, $22,000 of her firm’s money went missing. The bank never noticed the problem. When it was discovered internally, “The firm spent thousands on a bookkeeper in order to find the money and put it in the right place,” Einstein says.

Now, Einstein & Poling is a Columbus First customer. “It’s just one phone call and then the result,” Einstein says. The bank also offers a remote capture service for business customers, which offsets the disadvantage of having just one branch. “I never have to go to the bank. I get a check, run it through the machine and it goes into my computer. It’s great for record keeping,” Einstein says.

Huddle says many customers are realizing that bigger isn’t always better. “I tell people when they come to us for a $350,000 loan, to put it in perspective, that we’re a $100 million bank. That $350,000 is meaningful to us. At that big bank, it’s not even close to a rounding error,” he says.

“Community banks have strong relationships with their customers,” Palmer says. “Customers are coming to community banks because of the upheaval that is occurring in the larger, regional banks. We sort of refer to it as a safe haven.”

Michelle Davey is an editorial assistant for Columbus C.E.O.