Community Bankers Association of Illinois

Chairman's Address - Dennis Hesker

Soon after becoming your chairman last year, I saw an economist on television who was asked what positions he would advise people to take to ride out the recession. He replied: "Cash and Fetal."

That sobering response removed any doubt in my mind that we were in for a prolonged period of economic and financial distress that would consume the association's full attention throughout the year.

I could lament the fact that this crisis erupted on my watch as your chairman, but its origins actually date back several years.

We are now on the receiving end of a classic bubble of unsustainable growth, pumped up by excessive greed, which exploded with a vengeance. During this roaring decade, business prosperity seemed almost uncomfortably good, and our profession reflected it. From mid-2004 to early 2007, no banks failed in the United States. Illinois had an even more impressive run of six years, from mid-2002 to late 2008, with no failures. We now know it was just too good to last.

Since last October, 17 banks have failed in Illinois, 106 have failed nationwide, and more are yet to come. That's not counting the too-big-to-fail banks that would have failed without bailouts by the federal government.

Future generations will learn about the Great Recession of 2009, an economic crisis exceeded only by the Great Depression itself. Not yet written in history are the actions taken to prevent another major crisis. We community bankers are now working to help write that history, and to get it right, we must first learn from it.

One year ago, our financial and economic system was teetering on a cliff's edge, threatening to crash upon the rocks below and potentially dash the livelihoods of millions of Americans.

In an effort to prevent a global economic catastrophe, our federal government injected massive capital into failing institutions deemed too-big-to-fail, including giant insurance companies like AIG; arranged shotgun marriages among troubled financial giants, including Merrill Lynch into Bank of America; seized outright control of Fannie and Freddie; authorized immediate bank holding company status for investment banks like Goldman Sachs so they, too, could access federal funds; and raised deposit insurance coverage to $250,000 which we have advocated for several years.

Despite these actions, community banks are now caught in a financial and economic crisis that we did not create, a crisis precipitated mainly by the exotic financial engineering of the largest financial firms that are at the epicenter of this crisis.

We steered clear of credit default swaps; we didnít create structured investment vehicles to keep assets off our balance sheets; we didn't make residential loans to people who couldn't afford them.

And although we've adhered to proven banking fundamentals, virtually all community banks are now feeling the effects of the Great Recession as personal and corporate bankruptcies rise and unemployment climbs. As a result, our loan portfolios are under increasing stress, especially loans backed by commercial real estate.

To add insult to injury, too-big-to-fail banks are being saved from failure by taxpayer bailouts and government guarantees, often leaving management in place and stockholders intact, while struggling community banks are being summarily closed, wiping out management and ownership alike.

And in appreciation for our conservative management practices, many community banks have endured overly-aggressive and harsh examinations as if we were the ones that caused the crisis. While I will never make excuses for poor management decisions, I do believe that many community banks have been victimized by the excesses of the too-big-to-fail institutions themselves, and that must end now.

How to reign in the risk-taking tendencies of the giant banks and how to resolve the too-big-to fail issue are the two greatest challenges Congress must now address. Later in this meeting Cindy Blankenship and Robin Loftus will visit with us in more detail about what we must do to resolve the too-big-to-fail dilemma.

In preparation for the financial restructuring debate that's now in full swing in Congress, CBAI strengthened its federal grassroots lobbying capabilities during the past year. Our executive staff and leadership have also seized on every opportunity to meet with reporters and conduct interviews to spread the good news about community banks, to help consumers better understand the differences between us and the mega banks, and to encourage them to do business with us.

This was the year that community banks emerged from the shadows and into the spotlight of public opinion. The stark contrast between Wall Street behavior and Main Street behavior has elevated the community banking image among the media, lawmakers, and consumers alike. There is now widespread recognition that community banks are important to our financial and economic system, that our conservative management policies and dedication to local markets have merit, and that some banks are just too big and must be made smaller.

Opportunities often arise from crisis situations. The stage is now set to enact meaningful financial reforms, and your help will be essential to our success.

While the financial crisis was unfolding, Illinois politics became the national laughingstock, as one circus act after another played out in the media. Louisiana hasn't been this happy in years.

Despite overt democratic control, our state legislature remained mired in political gridlock. Needless to say, it was extremely difficult to squeeze legislation through the Illinois sausage grinder last spring.

Our persistence paid off, however, when we completed the out-of-court settlement on state bank exam fees, thus ending a nearly five year odyssey and culminating in distribution of 20 million dollars in rebates to state chartered institutions. That's a great example of effective legislative representation and demonstrates why we must maintain a strong association for community banks.

CBAI has also been active in the legal arena on your behalf during this past year. The association financially supported one of our member banks, Forest Park National Bank & Trust, in a case against the IRS which disallowed S-Corporation banks from recognizing certain TEFRA interest expense deductions. Our position is that the disallowance of the deduction sunsets three years after the bank has become an S-Corp, but the IRS claims the penalty is permanent. Earlier this year the U.S. Tax Court ruled in favor of the IRS, and CBAI has committed additional funds to support an appeal being spearheaded by the Subchapter S Association. At stake are tens of millions of dollars in back taxes affecting most of the 240 Sub S banks in Illinois and the more than 2,000 nationwide.

CBAI also filed an amicus brief in the state appellate court in support of a member bank's security interest in the grain contracts of a failed elevator. Given the fact that the Court ruled against our position, we are now exploring a possible legislative solution for next session.

We are also closely monitoring a second court case concerning a bank's authority to use the 365 over 360 method of assessing interest on commercial loans. The first case was settled out of court, leaving the question unresolved. CBAI has offered additional legal support to the new defendant bank to preserve the 365 over 360 method that has long been accepted as a legal banking practice.

Before I close, I want to thank all the dedicated community bankers who have served on the association's boards and committees during my term. I appreciate the time and energy you have invested on behalf of our profession.

I've also come to appreciate the association staff for their dedication to our mission. They truly believe in the cause of community banking, and they work tirelessly on our behalf.

And I thank all of you for recognizing the importance of supporting an autonomous voice for community banking, one that will never be compromised by the influences of the mega banks.

I will now conclude with this personal note. We are navigating our way through an epic financial storm. Community banks have weathered many raging storms over the past 160 years, and as a profession, we have overcome them all. We may get blown off course. We may even lose some of our ships, but we never give up. We always come roaring back, recovering from our setbacks. And we will soon return to the safe harbor of prosperity.

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