SEAWAY BANK’S FAILURE WAS MAINLY SELF-INFLICTED: FDIC REPORT
The failure of Seaway Bank & Trust, for decades Chicago’s largest black-owned bank, was largely due to the lender’s own mistakes, a new government report concludes.
The seeds of Seaway’s demise were sown in the bank’s acquisition of assets and deposits of two other failed banks, one in west suburban Maywood and the other in Milwaukee, according to the Aug. 15 report by the inspector general’s office of the Federal Deposit Insurance Corp. Seaway never was able to properly manage the large number of bad loans it assumed in the two transactions even though the FDIC had agreed to shoulder 80 percent of the losses from those portfolios.
It also was unable to attract qualified executives. That led to a decision in November 2015, a little over a year before Seaway failed, to bid on $65 million of South Side mortgages offered by Urban Partnership Bank. Bizarrely, Seaway submitted the bid before informing regulators, even though the bank was under a regulatory consent order, according to the report. “Upon learning of the transaction, (regulators) informed Seaway that it may not have had sufficient capital to execute the deal,” the report said.
As it turned out, Seaway pulled the plug anyway over a dispute with UPB, but it had made a $6.5 million deposit that UPB held until Seaway’s failure. That deposit now is the subject of litigation between UPB and the FDIC.
In addition, losses on the loans Seaway assumed in 2010 and 2011 from the two failed banks mushroomed. The FDIC underestimated losses from Maywood’s First Suburban Bank by 53 percent and those at Milwaukee’s Legacy Bank by 70 percent.
“This underestimation could have been attributable to the . . . assets being significantly worse than the FDIC’s original valuations and/or Seaway’s poor management of the assets,” the report said. But, the agency went on, “these results were contrary to the FDIC’s overall experience with the (loss-share) program. Program-wide, the FDIC overestimated (such) losses.”
The January failure of Seaway, whose assets went to an Indian-American-owned bank in Texas and deposits were assumed by a credit union in North Carolina,brought to a sad end a bank that had operated profitably for most of its 50-plus years, including as recently as 2013. It also left Chicago with just one black-owned lender, Illinois Service Federal Savings, after the Great Recession finished three others.
Seaway struggled to manage accounting. It didn’t file claims for losses with the FDIC in a timely way, and hundreds of thousands in claims were rejected because they weren’t properly submitted, the report said. After outsourcing the accounting for the inherited loans, Seaway decided in early 2013 to bring that in-house. “The consequences . . . were dire,” the report said.
By the time regulators figured out something was terribly wrong in late 2013, it became difficult to right the ship. Making matters harder, longtime majority owner and Chairman Jacoby Dickens died in spring 2013. His widow, Veranda Dickens, took control with little banking experience.
REVOLVING DOOR AT THE TOP
In 2014, she fired longtime CEO Walter Grady. But the new CEO, Darrell Jackson, formerly of Northern Trust, didn’t work out either. He was fired in fall 2015 after Dickens and the board decided he didn’t have the experience to fix things, the report said. After that, Dickens herself served as interim CEO. “Seaway’s board and management were largely ineffective from 2013 through its failure,” the report stated.
In that period, high-priced consultants ran much of the day-to-day operations. The costs sent Seaway’s overhead skyrocketing, ultimately hitting 11 percent of assets in 2016, the report said. Peer banks’ overhead costs average 2.8 percent.
In a statement to Crain’s, Veranda Dickens wrote: “Seaway Bank’s board . . . replaced the entire management team that caused the vast majority of problems that eventually led to the failure of the bank. . . .The management team did the best we could to continue operating so we could serve our community under trying and difficult circumstances.”
She declined to comment on the bid for UPB’s mortgages that took place under her watch “because the matter is the subject of ongoing litigation.”
As for consultant expenses, she said, “This is very common for any institution in a turnaround situation, as Seaway clearly was. . . .Seaway faced a significant recruiting challenge because of its troubled status.”
TOO MANY CHURCH LOANS
Also contributing to Seaway’s woes was an 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. Its own loan policy called for no more than 25 percent. Those loans were “risky because repayment depended on congregation contributions, and the communities that Seaway served were significantly impacted by the 2008 financial crisis,” the report said. “Further, there is typically limited marketability of the collateral (e.g., church structures) and collection efforts are often slowed because of a reluctance to foreclose.”
Dickens acknowledged the problem and said Seaway had worked hard to correct it. But, she added, “this was/is quite common with black-owned banks as it is one important way for black-owned banks to serve and be committed to their communities.”
The inspector general’s office did chide the FDIC for failing to recognize the extent of Seaway’s problems sooner. But the report pinned most of the responsibility on the bank’s leaders.