Illinois Mutual Resuscitated by Rare Regulatory Move

A regulatory maneuver rarely used since the savings and loan crisis has saved Family Federal Savings of Illinois in the nick of time.

Last week the $56 million-asset thrift in Cicero, one of the most troubled institutions in the Chicago area and on the brink of failure, narrowly escaped death when it was taken over by GreenChoice Bank, an environmentally focused start-up.

The acquisition was made possible by the Office of Thrift Supervision's voluntary supervisory conversion, which lets ailing mutual institutions, in order to stay in business, bypass many of the hoops associated with converting to a stock organization.

Family Federal is the third mutual this year to get another chance through a supervisory conversion. Though seldom used since the S&L debacle of the late 1980s and early 1990s, this conversion method is getting attention from mutuals as they try to stay alive.

The rescue of Family Federal "shows that the supervisory conversion is a real avenue for recapitalization of weakened mutuals," said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick, which represented one of GreenChoice's equity investors. "There is an interest in these sorts of deals," he said, "and we might see more."

Of course, under the financial regulatory overhaul President Obama signed into law Wednesday, the OTS will eventually be merged into the Office of the Comptroller of the Currency. "When the OTS goes away, it could become a whole other ballgame," Weissman said. "But we assume/hope that the OCC will follow OTS' rules."

The GreenChoice deal had been in the works since April. According to an OTS document, Family Federal won approval for a supervisory conversion on June 18. The regulator gave GreenChoice, identified only as a holding company, 30 days to complete the transaction and required it to raise $8.8 million.

Last week, all the pieces fell into place as GreenChoice raised slightly more than needed.

The company had about $16 million in capital commitments when it was started in 2008 with a plan to create an environmentally focused thrift on Chicago's affluent North Side. It plans to open a North Side branch in a "green" building next year.

The group then decided to buy and retrofit an existing thrift, and it eventually chose Family Federal, which serves the predominantly Hispanic working-class suburb of Cicero.

Though it lost some of its initial investors' backing for the Family Federal deal, according to Steve Sherman, the chief operating officer, GreenChoice's plan drew many investors, both new and old. "For our investors, it wasn't a hard sell," he said. "People are excited about our vision and for the tremendous opportunity for a bank that has excessive capital."

It appears the money was raised with no time to spare. Though regulators would not comment specifically on this case, several sources said that, if the deal had not closed when it did, Family Federal was poised to fail.

David Barr, a spokesman for the Federal Deposit Insurance Corp., said last-minute saves happen, though they are rare.

"I've seen [failures] called off at the 11th hour, with our staff driving to the bank only to get the call," he said. In this cycle, "we've had the press releases written and ready to issue only to have the failure called off or put off on Friday morning."

Family Federal was among the most troubled institutions still operating in the Chicago market. Loan Workout Advisers in Chicago, which advised Family Federal, said the thrift had a Texas ratio of 737% at the end of the first quarter. Generally, a bank with a Texas ratio above 100% is considered a in danger of failing; several of Family Federal's Chicago peers with ratios exceeding 100% have failed since March 31.

Its problems have been concentrated in single-family mortgages. The thrift said it did not participate in subprime lending, but such loans have blighted its area.

The nearly $9 million in new equity markedly changes its situation. Karen Dorway, the president of BauerFinancial, a bank rating agency in Coral Gables, Fla., said the equity would boost the thrift's leverage ratio, from less than 2% on March 31, to more than 18%. "That gives them the capital they need to cover the losses," she said.

One last-minute investor in the deal was Newport Capital Bancorp LLC in Newport Beach, Calif. The minority-owned investor company, which is awaiting approval from regulators to be deemed a bank holding company, said it liked Family Federal's largely Hispanic market.

"We understand the complexity of that market and the opportunity that exists in those areas for strong banks," said John Vasquez, Newport's chief executive.

Though it is unclear how Green-Choice will ultimately balance Family Federal's existing working-class market with its aspiration to become a lender focused on environmental sustainability, Vasquez said his group appreciates the focus on filling a niche.

GreenChoice will probably need more capital eventually, Sherman said, but this round is enough to put the thrift back on track to serve its community and fulfill GreenChoice's mission.

"The ratios don't tell the whole story. We see a lot of opportunity to grow from this," he said.