It is fitting that a bank with an environmental bent would start its life by recycling a troubled bank.
Last week, a Chicago start-up venture called GreenChoice Bank announced that it has entered into an agreement to acquire the undercapitalized Family Federal Savings of Illinois through a supervisory conversion, an old method to recapitalize ailing mutual thrifts that is being rediscovered.
The deal marries a green-focused management team with a tiny mutual that has been racked by asset quality issues and has few ways to bring in capital given its structure. GreenChoice had received approval to charter its own thrift in June 2009, but could not raise the capital required by regulators.
"It is really hard to start a new bank, but it is also hard to raise the extra money, too," said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick. "And the capital they do have might go further in an existing bank. So I think we will see more looking in other directions."
Steve Sherman, the chief operating officer of GreenChoice, said the acquisition presented an opportunity to "get started much faster" than under the company's original plan of chartering a new thrift. He expects the simultaneous acquisition and conversion to be approved by regulators and investors by June 30.
Sherman said the Federal Deposit Insurance Corp. wanted the management team to boost its planned start-up capital from the roughly $16 million it had raised to somewhere closer to $25 million.
GreenChoice spent several months trying to find the additional capital, Sherman said, when MDI Investments Inc., its capital advisory firm, suggested acquiring, rather than building.
"It was a great marriage. Regulators only approve supervisory conversions for stellar management teams, and here we had a group that had already been vetted by the [Office of Thrift Supervision] but just couldn't get the capital it needed," said Michael Iannaccone, the president of MDI.
At the same time, MDI, along with Loan Workout Advisers, was working with the struggling, $60 million-asset Family Federal to find capital. However, as a mutual thrift, its options are extremely limited since it lacks stock. The best option is finding someone willing to buy and recapitalize the sickly bank through a supervisory conversion.
"The vehicles to raise capital at a mutual are rare. You can raise Tier 2 capital, but regulators want Tier 1. You can do a regular conversion, but for a truly troubled thrift, that is unlikely," said Frank Guerino, who became Family Federal's chief executive in mid-2009. "That leaves the supervisory conversion. They were popular 20 years ago, but we haven't seen too many recently. I think they are going to become more common."
Guerino said the thrift's problems stem from a combination of poor lending oversight and the economic travails of its market. Cicero and neighboring Little Village are working-class areas. At Dec. 31, 23.19% of the thrift's loans were noncurrent.
"We were lending in our local community. We didn't do subprime, but the problem in markets like this was the preponderance of loans that were subprime. Where property values in other areas have dropped 20% to 30%, our values went down 50% to 60%," Guerino said.
Sherman and Guerino declined to say how much it will take to shore up Family Federal's capital and cover the problem loans, but Weissman said that given Family Federal's small size and some existing equity, the amount GreenChoice raised should be sufficient.
"There is something to start with, so that is a positive. I think for the investors, it will ultimately be a better deal," Weissman said.
Sherman said once the thrift is recapitalized, attention will go toward implementing the company's green focus on Family Federal's existing infrastructure. That includes things like creating a website for the thrift so it can introduce Internet banking to its customers in a push to become more paperless.
Sherman said GreenChoice will also roll out deposit and loan programs that encourage its customers to become more environmentally focused. Depositors who opt out of paper statements would get a better interest rate on their accounts. On the lending side, borrowers could get better rates, too. For instance, a commercial real estate borrower could get a better rate for installing a more efficient heating system.
"We are really trying to build the culture around sustainability," Sherman said.
Some experts were skeptical that such a strategy would be effective in Family Federal's markets.
"Being concerned with your carbon footprint is a luxury of the mass affluent," said Kevin Travis, a director at Novantas LLC. "I don't know if a working-class suburb is going to be the best place for that."
GreenChoice is not completely sticking to Cicero, though. The company is planning its first de novo branch to be part of a planned green business community in a former lamp factory on Chicago's decidedly more-affluent north side.
In any case, the green strategy should be successful in Cicero, Guerino said. "I think a green mission can certainly fit in everywhere," he said. "It is something that we are all going to have deal with. We all need to become more conscious of sustainability."
