Second Federal Savings and Loan in Chicago views itself as the ShoreBank for its surrounding Hispanic community and hopes prospective investors will see it that way, too.
The $220 million-asset mutual thrift, based in the predominantly Hispanic neighborhood of Little Village, is in a similar situation to the struggling ShoreBank, a community development bank in Chicago that persuaded some of the nation's largest institutions to make an investment to save it. Second Federal's customers also have been acutely affected by the collapse of the residential real estate market and, as a result, problem loans have spiked, losses are rising and capital is running thin.
Second Federal executives said the ShoreBank investment — which is still pending — gives them hope that they may be able to strike a similar deal.
"We are watching it closely. If it gets done, it can only help us," Hunter Westbrook, who became Second Federal's chief executive last July, said in an interview. "We are looking for socially conscious investors that are interested in helping us preserve a bank that has been the gateway to financial services for a lot of our community."
Second Federal originally served the Czech and Polish immigrants who largely populated the neighborhood until the 1970s. As the neighborhood's composition shifted, so did the bank's focus — to serving the area's growing Hispanic population.
Among the telltale signs that it serves a largely Hispanic market: The Mexican flag flies alongside the U.S. flag outside its branches. Its tag line is "el banco del pueblo" — "the bank of the people" in Spanish. Second Federal was among the first institutions to offer bank accounts to undocumented Mexican immigrants.
"They are very well known in the community as a Mexican-American bank," said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick in Washington. "Although they don't have the name recognition, they are a lot like a small ShoreBank and probably deserve to be rescued, too."
Observers said Second Federal's chances of finding investors are enhanced by a growing focus on socially conscious investing.
"We are hearing and seeing more minority investor groups looking at these sorts of opportunities,"said William Michael Cunningham, founder of the minority bank fund MBF LP in Washington.
John Vasquez, chief executive of Newport Capital Bancorp LLC, a minority-owned bank holding company in California that is looking to invest in community development banks and minority banks, said more investors are seeing the value of putting their money in institutions with a strong community focus. (Vasquez said he is not familiar specifically with Second Federal.)
"Banking is going back to a community banking model of know your customer, know your customer," Vasquez said. "Generally speaking, with minorities, when you earn their business they tend to be loyal customers."
Still, Jeannine Jacokes, chief executive and policy adviser for the Community Development Bankers Association, said the most likely investors will be those familiar with Second Federal's story.
Those players, according to Westbrook, are many of the same investors participating in the ShoreBank rescue.
In May, ShoreBank received $140 million of capital commitments from a consortium of banks, including Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., U.S. Bancorp, Morgan Stanley, Northern Trust Corp., PNC Financial Services Group Inc., Goldman Sachs Group Inc. and General Electric Co.'s GE Capital. It is trying to leverage those funds to get a $75 million infusion from the Treasury Department.
Westbrook said the thrift is looking at every possible angle for an investment. To some extent, it has time as it was still considered well capitalized at the end of the first quarter, with a leverage ratio of 6.40% and a total risk-based capital ratio of 10.40%. The Office of Thrift Supervision, though, wanted those ratios to stand at 8% and 12%, respectively, by March 31.
Also, it must find a way to convert to a stock organization. Westbrook said a standard conversion is unlikely, given the thrift's troubled condition. Yet its health would need to deteriorate much further before it would be eligible for a supervisory conversion. "We are in capital purgatory," he said.
Weissman, whose firm specializes in mutual conversions, said that though supervisory conversion rules call for a thrift to have less than 2% tangible capital, Second Federal could likely make a compelling case for approval in its current state. Once it converts, Westbrook said Second Federal will seek as much as $20 million.
The thrift has engaged Loan Workout Advisers and MDI Investments Inc. to help it determine the loss content of its portfolio. Its loan portfolio is overwhelmingly made up of mortgages, and loans to undocumented people were one third of its portfolio in 2006. Westbrook said the OTS has ordered it to lower that concentration of undocumented borrowers, so the thrift has stopped making those kind of loans.
Experts, though, said the loans shouldn't serve as hindrance to raising capital, but as a reaffirmation of Second Federal's commitment to its community.
"These guys are in Little Village in Chicago," Cunningham said. "Any willing investor is going to understand that they serve their demographics."