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Chicago Community Mourns Loss of Local Bank

This story was updated on Dec. 23.

On the last Friday in October, Treasury Secretary Tim Geithner stood at a podium in Chicago and extended $50 million in federal tax credits for community development projects to Park National, a community bank based in the West side neighborhood of Oak Park.

The awarding of tax credits, say those who attended the ceremony, was a recognition of Park National’s nearly three decades of investment in the local community and a belief that it would continue to be a major source of small business loans, banking for low-income households, and local philanthropy.

But just hours after Geithner awarded the bank millions in credits, officials from the Federal Deposit Insurance Corporation, at the behest of the Office of the Comptroller of the Currency and other bank regulators, walked into Park National’s branches, as well as the branches of its eight sister banks around the country, and seized its assets.* It was nine more banks to add to the FDIC’s list of failed institutions, which stands at 140 for the year as of Dec. 18, compared to just 26 in all of 2008. The next day, the nine banks owned by Oak Park-based FBOP Corp., including Park National, reopened under the management of U.S. Bank, a subsidiary of U.S. Bancorp based in Minneapolis, Minn.

In the weeks since the failure of FBOP, and with it Park National, residents of diverse West Chicago neighborhoods like Oak Park, Austin, and Garfield Park have responded with a mix of grief and outrage. A Coalition to Save Community Banking has been founded to protest what residents contend is a deep loss for the area.

“[FBOP CEO] Mike Kelly, unlike most bankers, really cared about the community,” says Elce Redmond of the South Austin Coalition, a grassroots community group for the area’s low-income residents. “He understood that to encourage and support vitality in the community, you have to invest money in the community.”

As President Obama meets with community bank representatives at the White House Tuesday to encourage them to increase lending to the nation’s small businesses, Oak Park residents say they have lost a model community bank.

“Here’s a bank that probably did everything the president will recommend today,” says Rev. Marshall Hatch of New Mount Pilgrim Missionary Baptist Church on Chicago’s West side. “It’s an incalculable loss for us.”

Over the years, community bank coalition members say, Park National waived banking fees for local non-profits, extended zero interest loans to build new schools, and sponsored a 10K race that bridged the racially diverse Oak Park and Austin neighborhoods.

The bank was also widely praised for extending its services into previously unbanked areas. In 2006, Park National partnered with a local community development organization to launch the Community Savings Center, a bank branch with customized bank products for low-income residents, a match savings program, and financial literacy resources.

“If people had $300 in the bank, they were treated the same as someone who had $1 million,” says Redmond. “They knew your name.”

But troubles began for its parent, FBOP, in September 2008, when Fannie Mae and Freddie Mac, the government-sponsored mortgage giants, were taken over by the U.S. government after steep losses in the subprime housing market. Preferred shares in Fannie and Freddie went from attractive investments to worthless paper; FBOP took a $855 million hit, leaving a huge hole in its balance sheet.

Seeking to increase its capital holdings, FBOP applied for – and was awarded – Troubled Asset Relief Program rescue funds from the U.S. Treasury. Shortly after, however, the Treasury delayed sending the money, saying it had no plan in place for smaller, privately held banks like those owned by FBOP. When changes were made to the TARP program in February, FBOP was ruled ineligible for assistance.

This summer, with just two of FBOP’s nine banks adequately capitalized, FBOP was ordered by federal regulators to raise more capital. It was days away from striking a deal with private equity groups, coalition members say, when the statutory time period for raising money expired on October 30.

That day, the FDIC took over FBOP’s operations, using an infrequently invoked authority dating to the Savings and Loan crisis in the late 1980s, in which the health of all affiliated entities are considered when deciding the fate of the parent company. “You don’t want to see a parent company isolate an unhealthy institution” and cost the FDIC insurance fund as a result, says David Barr, an FDIC spokesman.

In the end, FBOP’s two adequately capitalized banks — Park National and Citizens National of Teague, Texas — could not support the losses of the seven other banks. Most of those losses, beyond the major losses with Fannie and Freddie, came from real estate investments gone sour.

FBOP assets were transferred to U.S. Bank, with a cost to the FDIC of $2.5 billion. “U.S. Bank’s acquisition of all the deposits was the ‘least costly’ resolution for the FDIC’s DIF [Deposit Insurance Fund] compared to alternatives,” the FDIC said in a statement at the time.

Some community residents remain upset, however, that FBOP was not given more time to raise additional capital from local private equity groups. Members of the community banking coalition are lobbying their local representatives to hold a congressional hearing on the matter in the new year.

In the weeks since the sale, new owner U.S. Bank has met with and reached out to a number of local community groups. “We are trying to hear from all members of the community [about] what they need,” says U.S. Bank spokesperson Steve Dale. “Some might have new [community development] initiatives. We want to hear what we can do.”

But some of Park National’s former customers remain fearful that U.S. Bank will not uphold its predecessor’s legacy of local investment.

“It’s just a matter of scale,” says coalition member Jackie Leavy. “It can’t be the same as face-to-face banking. [Nothing replaces] being grounded in the community….We have to have an alternative to the big boys.”

“Life goes on, our accounts are safe,” says Roberta Raymond, the former executive director of the non-profit Oak Park Regional Housing Center and a lifelong Oak Park resident. “But to lose what we have lost – it’s just a huge loss.”

*Clarification: This sentence has been updated to more fully describe the process of identifying a failed bank and placing it into receivership with the FDIC.