It is tough enough to raise capital as a troubled community bank. Try doing it as a mutually owned thrift.
That is the task facing Lincoln Park Savings Bank, which is undercapitalized because of massive losses on construction loans.
The $215 million-asset Chicago thrift has until late March to boost its capital ratios under a cease-and-desist order from the Federal Deposit Insurance Corp. and the Illinois Department of Financial and Professional Regulation. The regulators told Lincoln Park to seek a merger with another mutual or go public.
James Kane, Lincoln Park's president, said in a brief interview that it is exploring all its options, but declined to discuss specifics. "We are considering everything," Kane said.
Industry observers said Lincoln Park's options are few. Raising capital has proven difficult for nearly all struggling companies in the banking sector, but particularly privately held ones.
Mutuals facing such a challenge may have it worst of all. They are typically restricted from selling themselves to a publicly traded company or finding an investor, since they have not issued stock. They like to say they are owned by their depositors.
"At least as a privately held company, you have a group — no matter how small it is — to go to should you need capital," said Michael Iannaccone, president of MDI Investments LLC in Chicago. "But as a mutual, your arms are kind of tied as to what you can do."
Going public is a possibility, but a remote one for a thrift with loan trouble.
For more than a year, conversions in general have had a tough time attracting investors, industry lawyers and analysts said. Though there is evidence that the market for such stock offerings is improving lately, that is only true for thrifts with pristine balance sheets, they said.
"That is really only an option for the companies that have a very low level of nonperforming assets," said Eric Luse, a partner at the law firm Luse Gorman Pomerenk & Schick PC, which is currently working on five conversions but is not involved with Lincoln Park. "If you have a high level of problems, you likely couldn't do a public offering."
Lincoln Park has had 12 consecutive quarterly losses, including $1.15 million in the third quarter, according to FDIC data.
At Sept. 30, noncurrent loans made up 15.92% of its total loans, compared with 1.28% a year earlier.
Justin Barr, managing principal of Loan Workout Advisers LLC in Chicago, said the thrift's problems are entirely related to losses on residential construction lending.
"They are completely entrenched in real estate. It is a bonanza over there," Barr said. "They lent heavily to Roger's Park condo conversion projects and that is one of the hardest-hit areas of Chicago."
Lincoln Park had a leverage ratio of 3.55% and a total risk-based capital ratio of 6.24% at the end of the third quarter. Regulators want those ratios to be 8% and 12%, according to the order, which was issued in October but made public in November.
Barr said the thrift would need $20 million to hit those targets based on its Sept. 30 data. But he estimated that the capital infusion would likely have to be double that amount to ensure a full recovery for the thrift.
Iannaccone agreed that a conversion to a public company was unlikely.
He said the chances of getting a loan from a correspondent bank also seem remote, because most of the largest players have pulled out of that business and the few remaining have toughened their criteria for borrowers.
A merger with another mutual is the most plausible scenario for Lincoln Park, Iannaccone said.
By his count, more than 200 mutuals across the country would be large enough to absorb Lincoln Park, and nine of those are in Illinois.
"The only way for mutuals to grow usually is organically, so if there is an opportunity out there I bet some would take a look at it," Iannaccone said. "For Lincoln Park, that could be their only lifeline."
Luse said there could be one other option. Though a rarity lately, a voluntary supervisory conversion enables less than adequately capitalized thrifts to sell to a willing investor or be acquired by a publicly traded company, if regulators sign off.
This option might make Lincoln Park particularly attractive to a private-equity firm, Luse said. The most likely scenario after such a conversion would be that the thrift's equity would be comprised solely of money from the investor, so there would be no other shareholders to contend with.
The risk, however, would be that any further losses would eat into that investment immediately.
"You are taking a risk as a buyer," Luse said. "So you better be comfortable with the portfolio."
Supervisory conversions were a common practice during the savings and loan crisis, Luse said.
Though Lincoln Park is a state regulated mutual, the Office of Thrift Supervision has approved a supervisory conversion at least once this year for a mutual that it oversees.
In January the OTS allowed the insurance giant Lincoln National Corp. to acquire the deeply troubled $14 million-asset Newton County Loan and Savings in Goodland, Ind., using a supervisory conversion to facilitate the deal.
The mutual had been near failing, but Lincoln wanted to do the acquisition so that it could qualify for the Treasury Department's Troubled Asset Relief Program.
In May the OTS ordered the $14 million-asset Dwelling House Savings and Loan Association in Pittsburgh to consider a supervisory conversion as part of its plan to recapitalize itself. That mutual, which had suffered large losses because of improper automated clearing house transactions, failed in August.
Theodore Kovaleff, an analyst at Horwitz & Associates Inc. and a frequent investor in converted mutuals, said that most have avoided the aggressive lending that hurt others in the banking industry.
He said mutuals generally feel little pressure to improve earnings with risky loans since they have no shareholders.
"Lincoln Park is one of the very few that has managed to get themselves into trouble," Kovaleff said. "For the most part, they are conservative."
Kovaleff's outlook for Lincoln Park was decidedly grim.
"I don't think their options include an investor coming along," Kovaleff said. "It is much more likely that a bank — mutual or stock — along with the aid of the FDIC will acquire it."