Community Banks, Local Credit Unions Team Up

Community Banks, Local Credit Unions Team Up

Zero-Star Second Federal S&L, Chicago, IL failed on July 20, 2012. The failure was no surprise. The thrift had a rather unique business model; it specialized in making home loans to undocumented immigrants (with taxpayer-identification) in Hispanic markets in and around Chicago. As you can imagine, with the turn of the economy went the bank’s profitability. Delinquent loans skyrocketed, nonper-forming loans as a percent of total assets reached the double digits in the fourth quarter of 2009. They never recovered.

When Second Federal was finally closed, 2½ years later, a local organization, The Resurrection Project, reportedly placed a bid, but failed to win the rights to the thrift. The Resurrection Project was established in 1990 with $30,000, one employee, and a strong desire to curtail the violence and neglect that had come to define the Pilsen community of Chicago.

By mandate, the FDIC is required to resolve banks in the least costly manner for the deposit  insurance fund. It was decided that the winning bid came from ****Hinsdale Bank & Trust, Hinsdale, IL (one of 15 Wintrust Financial banks). Second Federal’s deposits were sold for $100,000 and Hinsdale also purchased about $14.2 million of the failed thrifts assets. The FDIC held on to all loans, including consumer and mortgage loans for later distribution.

The Resurrection Project’s CEO, Raul Raymundo, posted a scathing letter on its website regarding the sale of Second Federal’s deposits to Hinsdale. According to Raymundo, his organization had teamed up with One Pacific Bank and Self Help Credit Union (One PacificCoast Bank, CA and Self-Help FCU, NC) to submit a higher bid than  Hinsdale’s.

We did find that two other bids were placed for Second Federal in addition to the winning bid: one of those was from One PacificCoast Bank. We also discovered that one bid submitted was for the whole bank and called for a 50% deposit premium plus a $130,000 discount on the total assets. (We cannot confirm that this was the bid from the Resurrection Project, Self-Help FCU and One PacificCoast Bank.)

In the months that followed, One PacificCoast Bank dropped out of the partnership leaving The Resurrection Project and Self-Help FCU to figure out how and if they could service these people who now had their deposits at one place and their loans at another. It took 14 months, but the team succeeded. Self-Help FCU and the Resurrection Project formed an alliance with Wintrust Financial and Hinsdale to get the job done. First,  the team worked with the FDIC to secure $141 million in mortgage loans. Then, the three branches and all deposits previously sold to Hinsdale were sold to Self-Help FCU.

Second Federal Credit Union, a division of Self-Help Federal Credit Union, opened (or re-opened) for business on Saturday, September 21, 2013 in Chicago.

Second Federal is not the first bank to be acquired by a credit union, but there have been relatively few up until now. That may change as regulatory costs continue to rise, smaller community banks may find it more feasible to team up with a local credit union that shares its community values than going it alone or selling out to a big bank.

Ken Braun, president of **Hartford SB, Hartford, WI agrees: “The Banking industry is rapidly being transformed by an unprecedented volley of new laws and regulations. Some of these are welcomed, while others are not… One change which I believe will be beneficial will entail the combination of Hartford Savings with Landmark Credit Union… Our employees will continue to be employed… Our customers will enjoy many new services… enjoying the same personal service they have become accustomed to.”

Other small banks may agree.