Small and Smart
How Chelsea State Bank survived
by Josie Schneider
Though banks come in all sizes, there's a considerable distinction between the multinational heavy hitters and small community banks. The big names--Bank of America, Wells Fargo, WaMu--and nonbank financial companies like Lehman Brothers--were deeply complicit in the economic downfall of 2008. Events of the past five years have led to the attrition of their numbers and a reduction of our respect for them.
The smaller, homier community banks want everyone to know they are not aligned with those fallen-from-grace institutions. "What happened in 2008 was not a result of what Chelsea State Bank or any other community banks were doing," points out John Mann, president of Chelsea State Bank.
The financial crisis had its origins in subprime mortgages, the so-called "no-doc" or "liar" loans that were pushed on the public by loan aggregators like Countrywide. Then large financial institutions invested heavily in mortgage-backed securities, which were basically bundles of pieces of those subprime loans. When the housing bubble burst, the value of those securities collapsed, triggering a global financial crash.
The blame for those shortsighted decisions falls evenly over several sectors, but not on community banks. "Mortgage-backed securities were first presented to us in the 1990s as an investment vehicle," says Mann. "But Chelsea State Bank never bought any." He says he was never satisfied with answers to his questions about the securities and was dubious about their value. And according to Mike Kus of the Community Bankers of Michigan, (CBM), none of the 120 member banks in his association invested in mortgage-backed securities, either.
Since the crisis of 2008, all of the state's community banks have been hit, however, and thirteen have closed their doors. The financial losses stemmed mostly from commercial real estate loans. When mortgage lending dried up, subdivisions were left unfinished, and eventually the developers couldn't make their loan payments to the bank.
"We had a significant number of charge-offs," Mann admits.
Innovation took over at that point, as some of the players looked for creative fixes.
When several foreclosed lots came back into Chelsea State Bank's hands, the bank partnered with Ann Arbor-based builder Norfolk Homes for a solution.
"I don't know who contacted who," says CSB vice-president Jim Wolfington. "But they said they have a new model to build, so we worked together. We're not in the business of holding land. And our experience with foreclosed properties was rare prior to 2008."
Norfolk built homes on the foreclosed lots and was able to sell them, getting the land off the bank's books. While CSB remains wary of making large loans to new developments, at the same time, its leaders know business must go on.
"We understand the market's going to be slower," Wolfington says. "We have to be prepared to accept something much less. In the past if a project was budgeted to sell one house a month, we might say, 'I'm not sure I want to get involved with that.' But today we're saying, 'That's not a bad project.'"
Community banks, says Kus, are "going back to basic banking. Back to good credit underwriting standards." They're not taking chances, and they're happy about it. Some might say conservative.
"I'm proud of that label," says Mann. "Being conservative means you have loan underwriting standards, and we stick to them."
[Originally published in March, 2013.]