Chicago Tribune

Analysis: Ranks Of Tight-Fisted Community Banks Surge

Chicago Tribune — Monday, July 9, 2012

Tim McLaughlin

(Reuters) — Union County Savings Bank in Elizabeth, New Jersey, is profitable with few problem loans and a capital ratio that would make a too-big-to-fail bank drool.

The community bank is also one of the most tight-fisted lenders in the country. The bank invests just 9 percent of its $1.3 billion in deposits in loans. It pours most of the rest into an investment portfolio. That loan-to-deposit ratio puts it near the bottom of 6,000 U.S. community banks, according to a Reuters analysis.

Community banks are often seen as kinder, gentler versions of their big-bank brethren. The Occupy Wall Street movement accused big banks of being greedy and encouraged depositors to move funds to their local community banks.

These banks trumpet the small business loans they make because they spur job creation, a big deal in an economy with an unemployment rate of 8.2 percent.

But not every community bank is the quintessential hometown lender portrayed in the Frank Capra movie "It's a Wonderful Life."

There are more than 800 community banks that are like Union County Savings: They lend less than half their deposits, a rate far below their peers.

About 14 percent of the community banks analyzed had a loan-to-deposit ratio of less than 51 percent in the first quarter, nearly double the percentage in 2006, according to an analysis of FDIC data. Meanwhile, these tight-fisted banks' investment portfolios swelled to $84 billion in the first quarter of this year. Six years earlier, similar banks held $52 billion in their investment portfolios.


Donald Sims, who has run Union County Savings Bank for 40 years, said it is a difficult time to even find a loan to make a competitive bid on. He cited keen competition from big banks, who dominate residential lending in and around Elizabeth, New Jersey, a port town of about 125,000.

His bank doesn't do business lending.

"I have not been in the position to present that face to the public," Sims said. "We don't have the infrastructure."

The lender is a mutual savings bank with $1.5 billion in assets and no direct owners. Instead, depositors have an interest in the net worth of the institution formed in 1883 to promote thrift and home ownership. But most of its $10.4 million profit in 2011 came from interest off government-backed bonds, not loans.

Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, said Union County Savings is the type of bank her group usually pressures to lend more. But the group's resources are stretched as New Jersey Citizen Action, the state's largest citizen watchdog coalition, focuses on big banks and the foreclosure crisis.

"In the past, that would be the bank we would picket."

Cross-town rival Crown Bank, meanwhile, made more money ($17 million in 2011) by lending out 95 percent of its $481 million in deposits to consumers and businesses. With $575 million in assets, Crown is less than half the size of Union County Savings. But its return on assets was 3.12 percent last year, compared with just 0.74 percent for the bigger bank.


It is a tough time to be making loans, bank executives say. Loan demand is slack, the housing market is moribund, and big banks are increasingly willing to make loans to smaller companies.

But the 812 community banks with low loan-to-deposit ratios seem to be having a tougher time than their peers. These banks loaned just 40 percent of their deposits, compared with an average of 73 percent for the overall peer group, the Reuters analysis shows.

If these 812 banks lent money at the same rate as the peer group average, there could be $50 billion more loans made in the United States.

At the other end of the spectrum, Priority Bank in Ozark, Arkansas, doesn't have any problem using its $55 million in deposits to fund loans. At the end of March, it reported a loan-to-deposit ratio of 141 percent — one of the highest in the country. The rest of its funding came from a Federal Home Loan Bank and other sources. In comparison, JPMorgan Chase & Co Inc, the biggest U.S. bank by assets, reported a loan-to-deposit ratio of 64 percent.

Nobody can force banks to lend, experts said.

But collecting deposits without making loans is not bank-like. Traditionally, a bank makes money by lending out funds it gets from depositors.

"They should just convert to a money market mutual fund and call it what it is," said Cornelius Hurley, who runs Boston University's Morin Center, which studies banking policy.

"Shouldn't it be the banks sucking up deposits from the local community" and then putting "it back into loans?"


Reuters analyzed data from the U.S. Federal Deposit Insurance Corp, focusing on community banks with assets of $50 million to $2 billion and at least $1 million in net loans. The tight-fisted group of 812 banks had net loans of $59 billion and $149 billion in deposits.

In early 2006, when the U.S. housing market was booming, there were only 483 community banks, or 7.4 percent, out of about 6,500 that had loan-to-deposit ratios of less than 51 percent, according to FDIC data. Those 483 banks had net loans of $31 billion and deposits of $84 billion.

When the housing market tanked, community banks that focused mostly on residential lending didn't have another leg to stand on. Not only were they making fewer loans to consumers looking to buy homes, but many lost mortgages on their books when customers refinanced with a bigger bank, executives say.

Nine out of 10 community banks deserve the praise they get, said Camden Fine, president of the Independent Community Bankers of America, in Washington D.C.

Fine said that while 6,000-plus community banks account for only 10 percent of the industry's assets, they make 40 percent of small business loans. That's important because small businesses generated 64 percent of the net new job growth in the United States over the past 15 years, according to research by the Federal Reserve Bank of Chicago.

"Nearly all community banks are privately owned, usually by a single family," Fine said. "If the owner is risk averse, then so is the bank. ... The FDIC can't make a bank loan money. It's a free country."

Some banks with low loan-to-deposit ratios are trying to change. Before Blue Hills Bank changed its name and management, it did very little lending in Boston's Hyde Park neighborhood, where Mayor Tom Menino lives. But under new leadership over the past two years, the loan spigot steadily opened.

"We inherited an institution that did not see lending as a core function," Blue Hills Bank President Bill Parent said. "We're trying to build a next-generation community bank that focuses on residential, consumer and commercial lending."

The bank's loan-to-deposit ratio was 40 percent in the first quarter, up from 28 percent three years ago.

But Union County Savings, a bank with $1.3 billion in deposits and an exceptionally low loan-to-deposit ratio, is an example of untapped potential. The bank has been a target of regulatory criticism dating to 1991, according to performance evaluations that the FDIC performed under the Community Reinvestment Act.

The average loan-to-deposit ratio of community banks in Union County Savings' home state of New Jersey is nearly 90 percent. If the bank approached that average, its net loans could top $1.1 billion — not the $117 million it reported at the end of March.

Instead, Union County Savings has more equity capital ($186.4 million) than loans. It reported $1 billion in securities in the first quarter. Assets totaled $1.5 billion.

The FDIC has called Union County Savings a passive lender. It doesn't have a website. In 2008 and 2009, the bank reported making just 86 home loans in its assessment area. That number drops to only 32 when excluding loans purchased from other lenders, regulators say.

"The primary reason for the limited loan activity is management's decision to allocate the substantial majority of the bank's assets into the securities portfolio," the FDIC said in a 2010 report.

Sims said he's feeling the heat to make more loans at Union County Savings. But he does not expect a rapid change.

"Am I under pressure? Yes, I am," Sims said. "But it's a long-range game that we play."

(Reporting by Tim McLaughlin; Editing by Dan Wilchins and Jan Paschal)

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