Friday, September 22, 2017 || By Michael Romain || @maywoodnews
A report released in August by the Federal Deposit Insurance Corporation concluded that Seaway Bank & Trust failed because of bad governance and risk management practices that flowed from the institution’s board of directors.
Among the bank’s most consequential decisions, the FDIC reports, was Seaway’s acquisition of two failed banks — First Suburban Bank in Maywood and Legacy Bank in Milwaukee — and an overexposure to loans to faith-based institutions, namely churches.
State regulators closed Seaway, once the state’s largest black-owned minority bank and the sixth largest in the country, in January, “resulting in a $57.2 million loss to the Deposit Insurance Fund (DIF),” according to the FDIC.
When it closed down, all of Seaway’s deposits and a majority of its assets were transferred to State Bank of Texas, which sold the branches and deposits it acquired from Seaway to a North Carolina-based credit union called Self-Help Federal Credit Union.
According to a recent Crain’s Chicago Business report, Seaway’s failure left the Chicago area “with just one black-owned lender, Illinois Service Federal Savings, after the Great Recession finished three others.”
The FDIC report concluded that Seaway’s failure was also rooted in its status as a Minority Depository Institution (MDI) and Community Development Financial Institution (CDFI).
“As such, Seaway’s goal was to promote the economic viability of minority and under-served communities, particularly the African American communities in Chicago and Milwaukee,” the FDIC reports.
“Seaway operated nine offices in Cook County, Illinois, within the Chicago metropolitan area and one office in Milwaukee County, Wisconsin. Eight of the bank’s 10 offices were located within one mile of a low- or moderate income census tract. These communities were significantly affected by the 2008 financial crisis.”
As an MDI, Seaway prioritized providing banking and consumer services to “unbanked or underbanked” communities over large profit margins. This meant lending primarily to individuals, families, small businesses and churches.
“In an effort to grow the bank,” the FDIC reports, Seaway acquired First Suburban and Legacy, both failed banks, through the FDIC’s Shared-Loss Agreement (SLA) program. The SLA program was designed to “resolve failed institutions in the least costly manner to the DIF.”
As part of the SLA, the FDIC agrees to absorb around 80 percent of the losses by the institution that acquires a failed bank (called an assuming institution or AI) in exchange for that institution’s prudent management of the assets acquired through the shared loss program.
In 2010, Seaway acquired First Suburban’s roughly $144 million in total assets, around $116 million of which were “subject to loss-sharing.” A year later, Seaway acquired Legacy’s roughly $166 million in total assets, $120 million of which were “subject to loss-sharing.”
According to the FDIC, Seaway failed to properly manage the risks associated with acquiring those two failed banks, which increased substantially. Between December 2009 and June 2011, Seaway’s loan portfolio increased by nearly 70 percent — from $194 million to $325 million.
A 2011 third-party management study that Seaway commissioned after acquiring Legacy “found that Seaway’s leadership team was competent and stable but it also noted that its growth by acquisition strategy had added organizational stress to an ‘already challenging business arena,'” the FDIC reports.
A chart from the FDIC’s report, released in August, on Seaway’s failure.
Seaway’s road to ruin, according to the FDIC report, started to escalate after its longtime chairman and majority owner, Jacoby Dickens, died in 2013, and was replaced by his widow, Veranda Dickens, who had “little banking experience,” according to Crain’s.
“In 2013, it became evident that the Board was not engaged or attentive to bank operations and the management structure was not effective at supervising the bank’s operational functions,” the FDIC reports. “Seaway’s Board and management were largely ineffective from 2013 through its failure.”
Seaway’s management did not properly account for the assets of the two failed banks it acquired, resulting in financial reporting that was inaccurate and misleading.
Seaway’s auditors “refused to issue financial statement audits for 2013 and 2014, and a balance sheet audit for 2015 remained open, reportedly due to management’s unresponsiveness to the auditors’ requests.”
In addition, the FDIC report listed Seaway’s inability to “fill management vacancies,” an “overreliance [sic] on consultants to manage the bank and solve its problems,” and “poor risk management practices,” as other primary factors that contributed to its failure.
Another primary factor, as Crain’s pointed out, was Seaway’s “overexposure in loans to churches.”
“Even before Seaway took on the failed banks that swamped it, the bank’s loans to churches represented more than 90 percent of its primary capital,” Crain’s reports. “Those loans were ‘risky because repayment depended on congregation contributions and the communities that Seaway served were significantly impacted by the 2008 financial crisis.”
Dickens wrote in a statement to Crain’s that the “management team did the best we could to continue operating” (read more of her response to the FDIC report in the Crain’s article here).
According to Crain’s the “inspector general’s office does chide the FDIC for failing to recognize the extent of Seaway’s problems sooner.”
Seaway Bank, which has a branch in Maywood, was once the village’s largest account holder. MB Financial now holds that distinction. VFP
Read the full FDIC report below: