Industrial Banks or Industrial Loan Companies (ILCs) are state-chartered, FDIC-insured depository institutions subject to the same regulations as other bank charter types. Only a handful of states allow the charter. Utah in particular, has always been very open to the ILC charter and continues to be home to the majority.
The primary difference of an ILC charter is that it can be owned by a company that is permitted to engage in non-financial activities that are beyond the supervision of Federal Banking Regulators. This distinction means that federal regulators have limited financial information on the parent.
You may recall back in 2006, a moratorium was placed on ILC applications (JRN 23:30), primarily to keep Wal-Mart and Home Depot from owning banks. Under the leadership of Jelena McWilliams, however, the FDIC seems to be more open to non-traditional banks, including ILCs. In fact, the agency approved two controversial ILC applications for deposit insurance in March: Square Financial Services, Inc. and NelNet Bank (JRN 37:12). But, there are conditions.
Square Financial, a payments provider for small businesses, has been around for about a decade. It plans to use its new ILC charter to make commercial loans, presumably to the same small businesses it already services. Conditions of its FDIC insurance approval include an initial capitalization of $56 million and a minimum leverage capital ratio of 20%.
NelNet has been in the business of servicing student loans for years. With its new charter, rather than just servicing loans, NelNet will be able to originate its own student and other consumer loans. The FDIC is requiring a staggering $100 million in initial capital and a minimum leverage capital ratio of 12%.
We assume these higher than normal capital requirements are intended to provide a cushion from any trickle down problems the parent might run into. Again, since neither we nor regulators can see the complete financial condition of the parent, we can only hope that these capital levels are really enough. Don’t you worry though. Bauer’s been doing this a long time. We know how to evaluate and rate ILCs.
In fact, on page 7 you can see the current rating on all ILCs. Those that filed first quarter data on time are listed first with March 31st Star-Ratings and Data. Those that took advantage of the extension are listed next with year-end 2019 data and ratings. And at the bottom, you will see those in various stages of the de novo process.
Side-stepping a Bank Holding Company is not the only complaint people have about this breed of bank. Bauer has long been leery of certain ILCs that put a “Call” clause in their CDs. When rates are going up, a call clause is not a problem, but when rates are dropping, an ILC with such a clause can simply cancel your high-paying CD, regardless of when it matures, defeating the purpose of locking in a good long term rate. It is completely one-way. The customer has no such right.
Some Community Activist groups have also expressed concerns that ILCs may not be held to the same Community Reinvestment Act (CRA) standards as other banks. As you can see on page 7, most ILCs operate through a single branch so this is a valid concern. We do believe, though, that just as the OCC brought internet banks into the fold (see last week’s issue), that ILCs will also be brought in.
That isn’t a problem for all ILCs. One in particular, 4-Star Finance Factors Ltd., Honolulu, acts more like a community bank than an industrial bank. Although it is owned by Finance Enterprises Inc., an assets management firm (and not a bank holding company), the bank’s leadership and staff are community minded in both thought and deed.
Through its Finance Factor Foundation, the company provides financial support to many charitable and community based organizations on the Hawaiian Islands. Its employees take active roles. Whether through its annual events, like an annual charity breakfast or its annual charity golf tournament, or any of its varied cultural events, Finance Factors is dedicated to enriching its community, its schools, and its people. Finance Factor volunteers have raised over $345k for local charities over the past 15 years. Finance Factors is the shining example of what an ILC can bring to the table.