Small Banks, Big Beefs

By DAVID ENRICH and DAMIAN PALETTA PHOENIX -- There always is a rabid sense of the underdog at the Independent Community Bankers of America annual convention, where lenders from throughout the U.S. meet, many clad in shorts and golf shirts. Fed Chairman Ben Bernanke and FDIC Chairman Sheila Bair, below, both spoke at the Independent Community Bankers of America conference Friday, and were the target of many attendees' ire. But when Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair arrived here Friday, they encountered an unusually feisty crowd: roughly 1,000 bankers were steaming mad about the financial crisis. At panel discussions and in the halls of the Phoenix Convention Center, some bankers joked that Ms. Bair and other FDIC officials at the conference ought to wear bulletproof vests. In a cavernous room where financial companies were hawking various services and technological gizmos, one vendor handed out small foam-rubber figurines of Mr. Bernanke, next to a sign that said: "Stressed out? Give Ben a squeeze." Nearby, Charles D. Rogers, senior vice president at Tennessee Commerce Bank, passed out pink foam pigs that he said were meant for the "folks on Wall Street." Few of the bankers here ventured into subprime mortgages, instead carving out reliable niches such as catering to local businesses. These banks lacked the capital-markets operations that churned out the financial exotica now pummeling many financial firms. Of the roughly 8,300 federally insured banks in the U.S., more than 8,000 are community banks. Relatively few of them have pocketed taxpayer capital through the Treasury Department's Troubled Asset Relief Program. Among the bankers gathered in Phoenix, the No. 1 bogeyman is Citigroup Inc. A close second is Ms. Bair, whose plan to levy higher fees on banks to pay for the deposit-insurance system threatens to erode small-bank profits and capital cushions. Bloomberg News Sheila Bair Giant banks like Citigroup "have tarred and feathered us," said Bill McQuillan, chief executive of City National Bank in Greeley, Neb. A Citigroup spokeswoman declined to comment. The mood at the conference was angry, reflecting the industry's frail state overall and the guilt by association that community bankers are dealing with as larger rivals wobble. Local lenders are in relatively strong shape. More than 95% of the nation's community banks were well-capitalized at the end of last year, Mr. Bernanke said Friday. Still, most of the 42 banks that have failed since the start of last year were community institutions. Many are getting burned by loans to finance real-estate development and construction projects that have gone belly up since housing markets collapsed. Mr. Bernanke and Ms. Bair knew what they were walking into. Ms. Bair, for one, arrived at the convention center flanked by a government security detail. "It's nice to be back in America," the Fed chairman said after taking the stage, his gray suit and blue tie making him appear much more pleasant than the villainous squeeze toy that he inspired. "No doubt this frustration has been heightened by the problems caused by financial firms that are too big or too interconnected to fail," Mr. Bernanke said. Mr. Bernanke was greeted with a standing ovation. In contrast, Ms. Bair got lukewarm applause when she walked onto the stage. But the audience roared its approval every time she spoke of the need to clamp down on the nation's megabanks, saying the government should impose higher capital requirements and tougher penalties to discourage banks from becoming too big. "It shouldn't be rewarded," she said. "It should be penalized." She added that the government needs to "get these institutions to downsize." Rigorous cheers erupted -- and after the speech, she had won over some skeptics. "She does recognize the difference between the too-big-to-fail banks and the community banks," said Allie Knoll, president of Stratford State Bank in Wisconsin, wearing a bright yellow Hawaiian shirt. "I think the overall reception here was fairly positive." As Ms. Bair sat in the lobby of a nearby hotel later Friday, Shawn Davis, CEO of Carlinville National Bank, told Ms. Bair that his Carlinville, Ill., bank had recently acquired a failed bank from the FDIC in February. "We always hear bad things" about the FDIC, Mr. Davis said, but "I just have to say your staff is great." In an interview, Ms. Bair said the FDIC has been working hard to assuage the concerns of community bankers. "There's pain in this," she said. "We're listening. We're working to reduce it and make sure the pain is equitable." Write to David Enrich at david.enrich@wsj.com and Damian Paletta at damian.paletta@wsj.com