The financial condition of Chicago's ShoreBank Corp., which anxiously awaits word on a lifeline from the Treasury Department, has become precarious after a disastrous second quarter.
The $2.2 billion-asset community development bank has lined up roughly $140 million in private investments from some of the nation's largest financial institutions, which remain in escrow. The money has been there since May, but it cannot be tapped unless the Treasury approves a $75 million investment from the Community Development Capital Initiative.
The investors have given ShoreBank until Friday to secure the Treasury money. Sources say ShoreBank has not received a firm indication of whether it will get a bailout.
As ShoreBank waits, it languishes — as of June 30 it had only $4 million left in equity.
"I suspect that the reason the deal has not closed is because ShoreBank doesn't need $200 million. They probably need $300 million," said Michael Iannaccone, president of MDI Investments, a Chicago capital advisory firm. "I don't think Treasury would give them $75 million if they knew they needed more than that. They've learned that lesson from the banks that received money and still failed. They want to make sure they can get their money back."
ShoreBank is perhaps the nation's best-known community development bank, serving low-income communities on Chicago's South and West sides. The economic downturn has punished the company, particularly its construction portfolio. According to its second-quarter call report, its Texas ratio, which compares problem assets with reserves and capital, was 354%. Analysts say a ratio of 100% or higher calls into question an institution's viability.
ShoreBank's investors — which include Citigroup Inc., Goldman Sachs Group Inc., General Electric Co.'s GE Capital, Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and U.S. Bancorp — came together in May when former Comptroller of the Currency Eugene Ludwig, who is now chief executive of Promontory Financial Group, made ShoreBank's survival his personal cause. The goal was to raise at least $125 million. The consortium raised more than $140 million.
Investors have remained committed and have been patient, giving ShoreBank several extensions to secure a $75 million infusion from the Treasury program, which is part of the Troubled Asset Relief Program earmarked for community development banks. It is unclear whether investors will accept further extensions beyond the Friday deadline.
Also, the Treasury program itself is set to close at the end of September.
ShoreBank declined to comment. The Treasury does not comment on individual institutions.
Ludwig would not say where the deal stands. Yet he explained by e-mail Thursday why he decided to assist the bank in its capital-raising efforts for free.
"It would be unfortunate if ShoreBank's mission supporting low and moderate income communities comes to an end," Ludwig said.
ShoreBank's diminished capital isn't helping its case. In March, the Federal Deposit Insurance Corp. and the state of Illinois gave the bank 60 days to boost its leverage ratio to 9% and its total risk-based capital ratio to 12%. As of June 30 it had a total risk-based capital ratio of 0.66% and a leverage ratio of 0.18%.
In fact, the bank now falls under the FDIC's prompt corrective action framework, making it a candidate for seizure if it is not rescued soon, Iannaccone said.
Meanwhile, even if ShoreBank received the $75 million from Treasury, alongside the $140 million from the banks, it is unclear whether this would give the bank enough capital to meet the targets spelled out in the March consent order. That is another reason to think a Treasury bailout might not come through, Iannaccone said.
"I don't think the Treasury is going to give them anything if it is not enough to comply with the consent order," Iannaccone said.
The potential Treasury investment has caught the attention of several Republican lawmakers who have accused the Obama administration of putting political pressure on big banks to come to the rescue of a bank from Chicago. ShoreBank has denied asking the administration to assist in the rescue efforts.
Community development bank advocates have lauded the big bank-led rescue of ShoreBank and worry that it could unravel without Treasury's support.
"As a general proposition, my biggest concern is for the communities served by our banks," said Jeannine Jacokes, chief executive and policy adviser for the Community Development Bankers Association. "It is not a foregone conclusion that there would be someone else that would step in and provide access to those communities."