The Federal Deposit Insurance Corp. said the 2012 failure of Chicago’s New City Bank has resulted in at least $6.6 million in losses for the financial regulator.
On Friday, the FDIC sued 14 decision-makers at what had been a $71 million-asset bank to try to “recover damages of at least $6.6 million caused by the negligence, gross negligence and breaches of fiduciary duty” of the former officers or directors of the bank. Eleven of 13 “high risk” loans made from March 2006 to September 2008 were commercial real estate loans, and their approval violated the bank’s own loan policy and didn’t properly vet borrowers, the FDIC said.
The 29-page lawsuit was filed in U.S. District Court in the Northern District of Illinois. Defendants include William Beavers, a former Cook County commissioner. In 2013, he also was convicted of tax evasion. Beavers was on the bank’s board of directors from December 2006 to February 2012, according to the FDIC lawsuit.
“New City was established in 2003, and its original operating plan was to serve the needs of small- and mid-size businesses in downtown Chicago,” the FDIC lawsuit said. “Soon after opening, however, the bank’s target lending area expanded, and its commercial real estate loan” portfolio grew rapidly, with the institution focusing much of its lending in that sector.
“Defendants knew, or should have known,” that commercial real estate lending is a “specialized field with unique risks that require thorough understanding and close management,” the FDIC said. “Defendants ignored the proper credit-risk management and underwriting practices necessary to ensure that the growth of the bank’s” commercial real estate loan portfolio was safe, including whether the borrower had the ability to repay the loan and whether the collateral was sufficient in case the borrower defaulted.
A lawyer for the defendants said in a statement that they were “distinguished professionals experienced in commercial real estate lending.” The bank’s directors once included the late former Illinois Supreme Court Justice Mary Ann McMorrow, said John George, a Katten & Temple lawyer who is among the lawyers representing the defendants.
“Nearly three years after taking over the bank and all the records of its extensive loan portfolio, the FDIC now second-guesses the directors’ approval of a handful of real estate loans made in 2006-2008,” said a statement from the defendants’ lawyers. “The FDIC thus ignores not only the true causes of New City’s loan losses — namely the Great Recession and its disproportionate impact on the South Side community served by New City — but also the repeated high marks the bank received from state and federal banking regulators, including the FDIC itself.”
When most banks fail, another institution steps in to acquire its assets and deposits. The FDIC couldn’t find a buyer for New City.
The FDIC initially estimated that New City’s failure would cost it $17 million.
“New City directors believed in the bank’s mission and made substantial investments in its success, all of which they lost when the bank failed,” the defendants’ lawyers said. “The FDIC’s hindsight attack on their business judgment adds insult to injury.”
From December 2008 to December 2011, seriously delinquent loans as a percentage of total loans at New City rose from 2.4 percent to 27.8 percent, the FDIC said in its lawsuit.
The board met monthly and typically considered 20 to 30 loans at each meeting, the FDIC said, noting that loan proposals were usually two to three pages long.
“With few exceptions, loan presentations were not provided to the board members in advance of the board meetings,” the FDIC lawsuit said. “Board members typically did not have time to review all of the information in a loan presentation prior to voting on the loan under consideration.”
The lawsuit details shortcomings in various loans.
A March 2006 loan for $1.25 million was made to build six residential condominiums and retail space on two vacant lots in Chicago. The FDIC said the bank approved the loan despite lacking sufficient financial information about the borrower. In its lawsuit, the FDIC is seeking damages of $1.1 million on that loan.
