A Tough Climate for Indie Banks

Written by Donald A. Elizondo    Wednesday, 21 December 2011

Independent community banks have been around Illinois for decades, lending money to shopkeepers, factories and home buyers. But the independent pharmacies and department stores that once populated small-town Main Streets largely are gone, and some in the industry wonder whether community banks might be endangered, too. Gregg Nelson, 67, has been State Bank of Geneva’s president since 1985, when he competed against three other local institutions in the far western suburb. Now he faces off against 16 banks, most of which can undercut State Bank’s prices on mortgages and certificates of deposit. State Bank, which has assets of almost $100 million, has weathered the recent financial crisis. It avoided reliance on lending to developers and builders before the recession and as a result has leverage ratios well above those required by regulators. Still, Mr. Nelson has had to invest heavily in recent years on legal help and computer systems to keep up with the changing regulatory landscape. “I don’t want to ever sell out,” says Mr. Nelson, whose father and grandfather were bankers. “But it’s getting harder and harder to make a dollar now. Our margins have gotten pretty skimpy. I really feel the competition.” Mr. Nelson says he would consider acquiring another community bank and foresees a potential advantage in getting bigger. At the bank’s current size, he’s limited to making loans of $2.4 million or less—too small for the needs of many local businesses. “If we doubled in size, we could make bigger loans and be more competitive,” he says. REGULATORY HURDLES Another community bank that has avoided the real estate calamity is Peoples’ Bank of Arlington Heights, which has assets of $120 million. Chairman and CEO Frank Appleby founded the bank in 1999 with money raised from 170 local investors. He says that he has to pay outside accountants and consultants more than $100,000 a year to comply with regulations that didn’t exist when Peoples’ got its start. “This has become the new cost of doing business as a small bank, and it’s been a lot for us to absorb,” says Mr. Appleby, 54. He concedes that industry consolidation is coming. “I get calls from private-equity investors who want to roll up my charter with those of distressed banks and build a bigger institution,” he says. “We aren’t actively looking for a deal ourselves, but we will entertain merger proposals when they come to us.” Mr. Appleby thinks there will always be a place for community banks, mainly because personal service is still a priority for many customers. Maybe so, but statistics show that today it’s the smaller banks, with assets under $1 billion, that are the most troubled. Such troubles are measured by the Texas ratio, the ratio of capital to non-performing assets, among other things, with any number above 100 considered dangerously high. Premier Bank of Wilmette (assets of $294 million), with a Texas ratio of 282, and First National Bank of Brookfield (assets of $174 million), with a ratio of 359, are reflective of the trouble that has engulfed the sector. The banks didn’t return calls seeking comment. Michael Iannaccone, president and managing partner of MDI Investments Inc. in Oak Park, blames branch banking for many of the community banks’ present woes. As bigger banks encroached on their turf in lending to small businesses with collateral, community banks turned to riskier developers and builders with little tangible collateral but a yawning need for capital. “We had smaller banks putting 40% and more of their loans into construction lending. For the 50 biggest banks in the country, the ratios were all under 15%,” Mr. Iannaccone says. “Too many community banks put all their eggs in one basket in a bid to make more money. Then the real estate market crashed. Then came new regulations and accounting costs. So now many small banks find themselves in trouble.”

Last Updated ( Wednesday, 21 December 2011 )