Only two black-owned banks remain in Chicago, and the oldest is in need of a rescue.
Illinois Service Federal Savings & Loan, a thrift founded by 13 African-American men in 1934 as a depositor-owned lender serving credit-starved Bronzeville, is seeking a $7 million lifeline. A federal consent order issued April 16 puts the pressure on the $110 million-asset lender to shore up its capital or face “corrective action” from the U.S. Office of the Comptroller of the Currency. Without an infusion, Illinois Service risks closure and transfer of its deposits and loans to another bank.
Illinois Service’s woes follow the failure five months ago of Highland Community Bank, a black-owned lender on the South Side. Regulators closed Covenant Bank, an African-American-owned bank on the West Side, in 2013.
CEO Norman Williams says Illinois Service is taking steps to raise the money, including transforming from a depositor-owned thrift to a shareholder-owned bank. That “demutualization” is a necessary first step before new investors can provide an infusion.
Assessing Illinois Service’s chances of survival, Williams says in an interview that he’s “as confident as anyone can be, having had the (economic) shock of the last four years.”
But, he adds, “I would be naive not to recognize that 1,000 other bankers in my shoes (whose banks ultimately failed) in the last decade have felt the same way.”
If a rescue of Illinois Service fails, it will leave Seaway Bank on the South Side as the only black-owned bank in the city.
Illinois Service traces its origins to the Great Migration, when African-Americans moved to Chicago and other Northern cities from the segregated South in search of economic opportunity. After blacks had become established in Chicago, many were denied loans by incumbent banks. So other black-owned banks, including the recent failures, followed in the 1960s and 1970s to make business loans to African-Americans.
Despite these storied roots, Illinois Service has operated in near-obscurity from its headquarters on South King Drive in Bronzeville. It functions much as it did at its beginning, mainly by making mortgages to homeowners. About $30 million of the $50 million in loans on its books are home loans. More than 14 percent of those mortgages are seriously delinquent, according to filings with the Federal Deposit Insurance Corp.
Illinois Service also lends to churches and nonprofits.
In the three years ended last year, Illinois Service suffered nearly $9 million in net losses. The losses wiped out about two-thirds of its capital.
Williams attributes the bank’s woes to persistently high unemployment on the South Side and property values that haven’t recovered much from the depths to which they sunk in the recession. Unlike many other banks, Illinois Service keeps all the mortgages it makes on its own balance sheet rather than selling at least some of them in the secondary market. “We’re exposed to a direct hit from the effects of the recession,” he says.
A PERSONAL STAKE
For Williams, saving the bank is personal. The 63-year-old South Side native owns a Bronzeville funeral home that his father started in the 1930s. He has served on Illinois Service’s board for 40 years, 14 of those as chairman.
In many ways, Illinois Service is remarkable for how little it has changed while the banking industry around it has been transformed. It’s a sort of African-American version of the Bailey Building & Loan from the 1946 movie “It’s a Wonderful Life.”
“They’re an important cog in the wheels of the communities they serve,” says Richard Abrams, former chief operating officer of Seaway Bank. “They need to find a champion to save them. It would be a shame to lose them.”
Indeed, a conventional investor likely won’t be interested in Illinois Service, Williams acknowledges. If the bank’s model is to be preserved at all, a large return on investment isn’t likely, he says.
Instead, other banks wanting regulatory credit for helping disadvantaged neighborhoods or foundations trying to make a difference are Illinois Service’s best bet, he says. Williams says he already is talking to potential investors but won’t identify them. As part of its rescue effort, Illinois Service has hired investment banking firm Stifel Nicolaus and law firm Vedder Price, both in Chicago.
Williams doesn’t discount the possibility that Illinois Service could remain black-owned if it survives. That would require new African-American owners to invest alongside whatever institutions came in. “That’s been the preferred desire on our part,” he says. “It’s been the expressed desire of our regulators.”
Abrams, who left Seaway in 2014 after 34 years, worries about Illinois Service’s prospects. Seaway, even with a potentially more profitable business model as a commercial bank, tried for a time to attract new investors and struggled to do so, he says. (Like Illinois Service, Seaway is operating under a consent order, but its leaders say it doesn’t have to raise capital to survive.)
“Illinois Service is so sleepy,” Abrams says. “I don’t know that they’re going to find people who will invest in it just to help it stay sleepy.”
But Williams says the bank’s old ways can be a virtue as well. “The size (of the investment) is not insurmountable,” he says. “The risk is fairly measurable. The business model is not exotic.”