In its waning hours on June 5, Bank of Lincolnwood sent a state judge an SOS.
Regulators were about to seize the Illinois bank, calling it undercapitalized, unsafe and unsound. Bank of Lincolnwood could not have disagreed more, and it wanted the judge to stay its execution.
The $214 million-asset bank knew the court action was a long shot, according to Benjamin Shapiro, its attorney, but it was the only option for buying more time.
"It was totally a Hail Mary of the first order, but remember — Doug Flutie threw a Hail Mary, too, and made it," Shapiro said. "That is why you do it."
The case is another example of how community banks are increasingly fighting back against what they say is unfair treatment from overly aggressive regulators by appealing to courts and ombudsmen. But observers said the route Bank of Lincolnwood took remains a rarity.
David Barr, a spokesman for the Federal Deposit Insurance Corp., said it knows of two other times in recent years when banks tried, in vain, to prevent seizure through temporary restraining orders. (The agency does not track court actions like Bank of Lincolnwood's, because they are brought against the primary regulator — in this case, a state agency — rather than the FDIC.)
Eric Luse, a partner at Luse Gorman Pomerenk & Schick PC, said the lack of success is to be expected.
"It would be very unusual for a court to overturn a regulator's decision," he said. "The court gives the banking agencies considerable discretion."
Shapiro, a partner with Belongia Shapiro & Hynes LLP in Chicago, said Bank of Lincolnwood knew about the regulators' imminent descent when it sought a temporary restraining order from Judge Sophia Hall of the Circuit Court of Cook County.
"They were unwilling to give more time, so this was a last-ditch effort," Shapiro said. "But it was the only thing that could be done to stop the closure of the bank."
He said the bank wanted to continue negotiations with investors who were open to infusing it with fresh capital — which it argued it would not even have needed if the Illinois Department of Financial and Professional Regulation had not been so overzealous in its most recent examination.
"The examiners were overly aggressive in forcing loan writedowns and provisions," said Shapiro, who was a regional counsel for the FDIC in Chicago in the 1970s.
In a complaint filed June 5, Bank of Lincolnwood also said regulators tried to force a liquidity crisis by making it unload accounts above the $250,000 threshold for FDIC insurance and by cutting it off from the Federal Reserve Board's discount window.
"The regulators appeared intent on closing this bank … despite evidence that the bank's condition was not as troubled as they made it appear to be," Shapiro said.
In its complaint, Bank of Lincolnwood said the department conducted its exam in the third quarter but never gave the bank the results.
On March 31 the state regulator notified the bank that it could be seized, because its capital was impaired and it was operating in an unsafe and unsound manner. The notice gave the bank 60 days to become well capitalized again.
Roughly two weeks later Bank of Lincolnwood signed a cease-and-desist order with the state regulator and the FDIC. Among other things, the order gave the bank 90 days to increase its Tier 1 leverage ratio to 8%, from 1.16% on March 31, and its total risk-based capital ratio to 12%, from 2.63%.
The bank was also ordered to increase its allowance for loan losses to $9.8 million; that produced a capital hit of $2 million to $8 million. In its complaint, Bank of Lincolnwood said that it showed regulators its own calculations of what it felt the losses would be, and that the regulators agreed with many of the calculations but remained steadfast on the reserve.
"It became very clear that the goal was to keep [the] bank's capital ratio below 2% … thus allowing the division to take control and possession of the bank," the complaint said.
The bank accused Jorge A. Solis, the director of the Illinois Division of Banking, of being "arbitrary and capricious" in the 60 days after issuing the notice. "He refused to be satisfied."
Solis could not be reached for comment. The Illinois Attorney General's Office, which represented Solis in court, referred a reporter's questions to his department.
The bank also argued that since it had already made sure all the depositors were under the limits for FDIC insurance, giving it more time would not have caused the cost of its potential failure to increase.
But according to Shapiro, the state maintained in court that more time would hurt depositors. "That was the nail in the coffin."
After the bank and the department argued their sides for half an hour, the court denied the request for a restraining order, and regulators shut the bank at 5 p.m. that afternoon.
The $1.2 billion-asset Republic Bank of Chicago in Oak Brook, Ill., assumed Bank of Lincolnwood's $202 million of deposits and took over its two branches. Republic also agreed to buy $162 million of the assets.
Chris Cole, a vice president and senior regulatory counsel for the Independent Community Bankers of America, said more banks have been challenging regulators through their internal appellate systems and the use of ombudsmen at the FDIC.
"The examiners are trying to be very careful and conservative, but we are hearing that they are being overconservative and overzealous," he said. "Of course, they should carefully scrutinize all commercial real estate loans, but from our members, we are hearing reports of overreaching: the questioning of appraisals, drastic writedowns."
Though the trade group has no stance on the Bank of Lincolnwood case, "it isn't surprising, and we will likely see more banks trying to appeal," Cole said.
Last year National Bank of Commerce in Berkeley, Ill., sued the Treasury Department, the Office of the Comptroller of the Currency and the FDIC after they denied the bank's application to participate in the Troubled Asset Relief Program. The $431 million-asset bank lost the case, and it failed in January.
Last week Frontier State Bank in Oklahoma City faced off in court with the FDIC, which is trying to force the $720 million-asset bank to change its business model.
Jeffrey Voss, the president and chief executive of the troubled First DuPage Bank in Westmont, Ill., said the best way to buy time is to engage the examiners.
"In the end, their valuation is going to be the one that counts, so it is up to us to be proactive and work with them," said Voss, whose $310 million-asset bank is working on a cease-and-desist order with regulators. "They either shut us down or let us live, so our objective is to work with them, not against them. We are not happy in the situation, but they didn't create it."
Len Rubin, a partner with Nelson Mullins Riley & Scarborough LLP, said he advises his community bank clients to address any disagreements with regulators immediately after an exam.
"By the end of the exam, they know what to expect, so my advice to them has always been to act at the earliest possible moment," Rubin said. "When it gets to the day it is expected to fail, a bank doesn't really have any reasonable redress in the court."
