Security Bank of Springfield is seeking approval from the
federal government to change its ownership structure so that it is owned by
investors rather than by the financial institution’s depositors.
A recent bank filing with federal regulators also indicated
the financial institution is deeply involved with state-licensed cannabis
businesses.
Bank president and CEO Stephan Paul Antonacci said he is not
allowed to comment while the proposed ownership change is pending before the
Securities and Exchange Commission.
But the application the bank filed with the SEC showed that
about 27% of the bank’s deposits come from the marijuana industry and 19% of
its outstanding loans fund cannabis businesses.
The proposed holding company for the bank, Security Midwest
Bancorp Inc., wrote in the filing, "In 2018, we implemented a
cannabis-related business ("CRB") Program, offering deposit and
cash-management services to licensed cannabis-related businesses. We currently
offer depository accounts to customers operating licensed cannabis businesses
in the states of Illinois, Michigan and Ohio. In December 2022, we initiated
lending to cannabis organizations and their associated real estate
entities."
As of June 30, Security Bank had received $54.8 million of its
deposits from CRB customers. About $20.3 million of its loans were to CRB customers.
One customer, who is unidentified in the filing, accounted
for just over half of the CRB deposits. Also, fee income related to CRB deposit
accounts has made up more than 50% of total non-interest income during the last
18 months.
The bank said in the filing that it intends to grow the CRB
program "modestly” going forward.
Security Bank is the only mutual savings bank located in
Springfield and either it or one of its business forebears has been serving the
community for 144 years.
Doug Faucette, who co-founded America’s Mutual Banks, a
Washington, D.C.-based lobbying group, told Illinois Times that today’s banking
regulations do not favor mutuals. He said regulators overemphasize
profit-making while many mutuals minimize profits and focus on community
betterment.
Because of this regulatory environment over the past several
decades, the trend has been for mutual banks to convert to stockholder-owned
institutions, he said.
“They want to grow with their community. And if you can't
grow with your community, you get left behind. Most of the conversions originally,
I think, were motivated by the need to grow,” Faucette said. “They could raise
capital; therefore, they could grow off their capital. That soon became a false
hope. A couple of studies were done showing that after 10 or 15 years, over 80%
– closer to 90% – of all mutuals that converted were acquired within seven
years. …. Once they convert … they would
sometimes more than double their capital.
Of course, that would make them fat acquisition targets.”
Those who have deposits with a mutual bank at the time of a
conversion have first dibs on purchasing stock in the reorganized institution,
he said. Because of this, some professional investors open accounts in mutual
banks across the county in hopes of having a leg up in purchasing stock if a
conversion were to take place.
Security Bank has sought to combat this by limiting
depositors to residents of Sangamon County and its adjacent counties. Faucette
said at other banks such protections have often been sidestepped by determined individuals.
“After three years an investor can put a group together and
take control of a (former) mutual and sell it,” he said. Such sales often reap
a 400% profit for investors, Faucette said.
But why would a small mutual bank in Springfield have become
so involved in the cannabis industry?
Springfield-based cannabis entrepreneur Chris Stone
said it can be a lucrative niche for banks because there isn’t as much
competition from other financial institutions.
“I think that there are banks that are resistant to get into
that realm. I think there is still the
stigma of cannabis, even though I think that that stigma has changed a lot in
the last 10 years,” he said.
Although recreational marijuana is legal in Illinois and
some other states, it remains illegal on a federal level. This has kept many national
banks from becoming involved in the industry.
“Banks are conservative,” Stone said. “They deal with a lot
of regulators and a lot of regulations. Combining all of that makes banks very
apprehensive about getting involved in depositing cannabis (money).”
Stone said that he once used Security Bank for his
cannabis-related businesses, but he has since switched financial institutions.
“Our accounts are actually with Illinois National Bank when
it comes to the cannabis business that I'm involved in,” he said. “That doesn't
mean that I don't do business with Security Bank, but it's just not on the
cannabis side of things.”
Stone’s wife, Erin, a local physician, is on the board of
directors for Security Bank.
Faucette said as the nation’s marijuana laws continue to
loosen it is likely more banks will become involved in the marijuana industry
and that could be to the detriment of pioneering banks already in the sector.
“You have a little bit of an angle because you're the only
guy that does it,” he said. “And then everybody else starts doing it. You lose
your edge. And then whatever advantage you have
vanishes pretty quickly. It's kind of like casinos. When
they first started Atlantic City, it was booming. And then everybody got
casinos and the bloom is off the rose.”
