The main culprit in last week's demise of Independent Bankers' Bank in Springfield, Ill., was not an ailing loan portfolio but poorly performing investments in other banks.
Yet industry watchers say this failure does not signal a systemic problem among the nation's other 19 bankers' banks. Unlike most of these institutions, but like several banks in its home state market, the $583 million-asset Illinois bank had invested heavily in pools of trust-preferred securities. As Independent Bankers' Bank, a subsidiary of Bankers' Bancorp Inc., marked down securities to market value, its capital was eroded.
"This is another example of the investment policies we've seen coming out of several failures in Illinois," said Ralph "Chip" MacDonald, a partner at Jones Day in Atlanta. "I don't see it as saying anything for bankers' banks overall."
Of course, many banks have investments in trust-preferred securities. The issue facing Independent Bankers', which also bedevils banks that invested heavily in construction or commercial real estate, was the concentration of its portfolio in these securities.
Independent Bankers' appears to be the first failure of a bank owned entirely by banks whose sole mission is to serve community banks. It came after the May failure of Silverton Bank in Atlanta, a bankers' bank that became a correspondent bank. Silverton's failure was tied to problem residential construction loans.
"The biggest issues seem to be a handful of banks with high construction and land exposures and high construction and land loan delinquencies," said Matthew Anderson, a partner at Foresight Analytics LLC in Oakland, Calif. "This loan type is the worst-performing for all banks — a third-quarter 2009 delinquency rate of 17.9% — and entails expected losses that are higher than other loan types."
Analysts say Independent Bankers' failure stems from problems with investments in pooled trust-preferred securities, once popular capital-raising vehicles for banks that have caused considerable heartburn in recent years. In July, five banks affiliated with the Founders Group failed as a result of writedowns on trust-preferred securities. Several other banks in Illinois have been brought down by mortgage-backed securities.
"They had invested in trust-preferred securities, and with mark-to-market they got upside down on those," said L.D. McDonald, the vice chairman and chief executive officer of Midwest Independent Bancshares Inc., a holding company with two bankers' banks in Jefferson City, Mo. "Not to say we don't all have challenges. We certainly do, but none of the rest of us are in a similar boat."
Several bankers' banks had much higher ratios of nonperforming assets to total assets than Independent reported at the end of the third quarter. Independent Bankers' reported a nonperforming ratio of 1%, compared with McDonald's Midwest Independent Bank in Jefferson City, which had a ratio of 4.4%, according to data from Foresight Analytics.
Yet Independent Bankers' was more heavily invested in securities, with 37.5% of its assets allocated to securities and 11.5% of total assets invested in non-U.S. government securities. The only other bankers' bank that has held more than a 5% asset share in non-U.S. government securities is Arkansas Bankers' Bank in Little Rock, which had 18% of its assets in corporate and municipal securities but held no trust-preferred securities, said Jimmy Thomason, the Arkansas bank's president and chief executive officer.
Data from the Federal Deposit Insurance Corp. showed that the Illinois bankers' bank recorded $24.1 million of losses on securities in the first nine months of the year. Also, in June, the Federal Reserve and the Illinois Department of Financial and Professional Regulation ordered the bank and its holding company to improve the management, concentrations and valuation of its securities portfolio, calling for it to submit a plan in 60 days.
Three other bankers' banks are operating under regulatory orders. They include two subsidiaries of Midwest Independent Bancshares — Midwest Independent Bank and Nebraska Bankers' Bank in Lincoln — and the Independent Bankers' Bank of Florida in Lake Mary.
James McKillop, the president and chief executive officer of the $475 million-asset Florida bankers' bank, said his institution's situation is also different from that of the Illinois bankers' bank. Like many Florida banks, he said, his has concentrated on construction and development loans.
According to data from the FDIC, roughly 70% of the Florida bankers' bank's portfolio is in construction loans. And though the regulatory order from the Federal Reserve does not require more capital, McKillop said the bank is in the midst of raising $15 million. Its total risk-based capital ratio was 13.19% at Sept. 30 and its leverage ratio was 6.74%.
Capital is scarce right now for many banks, making it even more difficult for the bankers' banks, which rely solely on banks for their capital support. McKillop said he has refocused his bank's capital-raising strategy on a broader swath of banks to make the investment more palatable.
"The fact is, we aren't asking our nonshareholder customers for large investments," he said. "We are asking for $100,000 for each new shareholder. It means you just have to talk to a whole lot of different banks one-on-one to make sure everybody gets the same information, and that process takes time."