The Chicago Tribune
By: Becky Yerak
August 3, 2010
Second Federal Savings isn't your typical financial institution.
The Chicago-based lender, headquartered in a predominantly Hispanic neighborhood at Pulaski Road and 26th Street, gained national attention over the years for making loans to illegal immigrants and undocumented workers, serving as a gateway to nonpredatory financial services. The Mexican flag flies at its headquarters alongside the United States' red, white and blue.
Unfortunately for Second Federal, there's also something less exotic about it. The thrift needs to raise capital to stay afloat.
That makes Second Federal the second high-profile Chicago institution serving a minority community to face tough times. ShoreBank, which serves hard-hit South Side communities, is waiting to hear whether it will receive a federal bailout after lining up commitments of about $150 million from private sources.
But on July 21, President Barack Obama said there would be "no more tax-funded bailouts," raising questions not just about ShoreBank's future but Second Federal's too.
Second Federal's capital levels are nowhere near as low as ShoreBank's. But while $226.8 million-asset Second Federal is well-capitalized by traditional standards, regulators have increased its minimum capital requirements. The bank was about $3 million shy of meeting capital standards as of March 31.
Second Federal also was ordered to lessen its dependence on loans to undocumented and illegal immigrants. So it has stopped extending credit to those borrowers, who constitute about a third of its loan portfolio.
Top management also has been changed, and it's close to making the majority of its nine-member board Hispanic.
"That's the last missing piece to allow us to" receive a federal designation as a "minority depository institution," said Hunter Westbrook, Second Federal's new chief executive. That could open the door to socially conscious investors whose capital might not be available to other community banks.
Newport Capital Bancorp LLC, a minority-owned company formed to invest in banks and which recently invested in Cicero-based Family Federal, is "very interested in the minority communities," said John Vasquez, CEO of the Newport Beach, Calif.-based company. It likes the history of Second Federal, whose roots go back 125 years, as well as its demographics of serving a minority community.
"Second Federal is a unique institution, and we wish them luck," said Vasquez, who stopped short of saying whether he planned to invest in the thrift.
Last fall, Second Federal also was designated a community development financial institution, which could also make it eligible for the same U.S. Treasury Department funds that ShoreBank is seeking through a new program for such banks.
The designations are important because big banks are under pressure to maintain or improve their Community Reinvestment Act grades, said Michael Iannaccone, of MDI Investments, which is helping to review Second Federal's loan portfolio.
Large institutions "have money they have to designate" to community development or minority-depository-designated banks in the next few years, he said.
The Community Reinvestment Act encourages lending in low-income neighborhoods. Second Federal and ShoreBank have "outstanding" ratings for such loans; most banks get a "satisfactory" rating.
ShoreBank has arranged about $150 million in financing from private sources, hoping to make it eligible for about $75 million in low-cost financing from the Treasury's Troubled Asset Relief Program. But the federal government has been slow to give ShoreBank that money, and some believe ShoreBank will need more than $225 million in additional capital given its high level, about 25 percent, of seriously delinquent loans. The bank's newly submitted June 30 financial records to regulators show a growing capital deficiency.
In comparison, about 15 percent of Second Federal's loans were seriously delinquent as of March 31, according to the Federal Deposit Insurance Corp. But Second Federal officials say that number is closer to 9.5 percent.
Moreover, Second Federal officials and others wonder: If ShoreBank gets bailed out, what about the biggest bank in the heart of the largely Hispanic community of Little Village?
"Where is the Hispanic bank bailout?" said Justin Barr, managing principal at Loan Workout, which along with MDI has been hired by Second Federal to review its loan portfolio. "It deserves it more than ShoreBank" because Second Federal's business is one- to four-family residential properties, "the most conservative mortgage lending there is," not the riskier construction and development loans plaguing ShoreBank, he said.
Second Federal's market share in its headquarters ZIP code is 30 percent, followed by Chase at 17 percent. ShoreBank's market share in its home ZIP code is 97 percent, followed by 1 percent from Bank of America.
One complicating factor for Second Federal, which has branches on the Southwest Side and in Cicero, is its status as a mutual, meaning that the depositors basically own it. So to raise capital it needs to follow a process called a conversion.
Mike Moreno, who owns a liquor store and commercial properties that he leases to such businesses as an insurance company and a chiropractor, has taken out various loans from Second Federal over the years, including borrowing $1.2 million about five years ago. He currently owes $500,000.
"I'd come in and ask to purchase land for parking, for anything I needed to make my business grow," he said. "A lot of times you're cash strapped, and if you need to purchase anything in substantial quantities and there's a phenomenal deal, you just can't purchase it."
Ricardo Munoz, the 22nd Ward alderman, said he has worked closely with Second Federal on a number of initiatives, including citizenship drives.
"It's the quintessential community bank," he said. "It's active on both the business side with the chamber of commerce as well as neighborhood issues."