Banking on change

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 cofounded 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." Scott Reeder, a staff writer for Illinois Times, can be reached at [email protected].