On Feb. 15, the FDIC seized and closed Lawndale’s Covenant Bank – a small community bank with big ties to Forest Park. The failure of the bank itself is not unusual. Around 40 community banks in the Chicago area have failed in the past few years.
What’s unique about Covenant, whose director and CEO was Forest Park mega-church pastor Rev. Bill Winston, is the number of investors who have been wiped out — around 3,000 shareholders to be exact. Many are members of Winston’s Living Word Christian Church, as well as Forest Park residents.
Winston sent out a letter to shareholders on March 28 clarifying that share values were worthless.
“Regrettably all of our shares, including mine, presently have no value ($0),” he wrote.
All of the bank’s insured depositors were covered under $2.1 million of depositor’s insurance, according to the FDIC. The bank reopened on Feb. 16 as a branch of New Orleans-based Liberty Bank and Trust Company, which assumed all of the deposits.
“A typical community bank has a group of business people in the community and they invest larger amounts,” said Chicago Banking Attorney James Hannon of Gozdecki Del Guidice Americus Farkas, LLP.
“Typically there are between 100 and 150 investors, and they’re sophisticated people, they understand the risks,” Hannon said.
He told Crain’s Chicago Business last year that Covenant Bank’s capitalization scheme “out of the box.”
“We’re talking investments of $1000-$5,000,” Hannon said. “To a lot of those people that was a significant amount of money, their savings, or nest egg or whatever you want to call it.”
At the bank’s inception, investors could buy a minimum of 100 shares of common stock at $10 per share, or $1,000, explained Kim Clay, a spokesperson for Living Word.
U.S. Rep. Danny Davis (7th) was one of the bank’s early investors and a depositor.
“I’ve been trying to save that bank for the past 30 years,” Davis said of the bank that began in the late ’70s as Community Bank in Lawndale. “It was owned by the community. It was one of the most unique banks because the community actually owned it.”
Davis was a supporter since the bank was started by Cecil Butler of Pyramid West Development Corporation, using money financed by the feds when a development project along Roosevelt Road fell through. Butler got permission to use the money to start a bank for the area, Davis recalled.
“I started using that bank [through its various incarnations] from the day it was started,” Davis said. “I’ve watched it have its difficulties and problems.”
The bank over the years has changed leadership and personnel. At one time, one of the bank’s principals was Michael W. Scott, former Chicago Board of Education president and a friend of Davis.’ Scott committed suicide in 2009.
A group of foreign investors owned the bank by the time Winston bought it in 2008.
Davis had hope when Winston ultimately purchased the bank, which he called “the pride of the area.”
“I’m an investor,” he said. “My wife (Vera) and I bought $2,000 worth of shares. I was very excited and also very hopeful. It was a concept more than just an investment. I believe strongly in community and people coming together in unity trying to do things together.”
Community banks crippled by economy, real estate bust
But the global economy was about to sour, leaving residential development loans in a toxic state.
Holding company Covenant Bancshares, Inc. bought the ailing Lawndale Community Bank in March 2008 for $3.1 million via investments from 3,002 shareholders. At least half the investors were among Living Word’s congregation, according to Security Exchange Commission documents.
The bank couldn’t have started at a worse time, Hannon said, with a world financial meltdown only a few months away following the bank’s purchase.
Covenant directors made several missteps, including lending a number of rehab loans to owners of multi-unit buildings on the West Side as the housing crash began — loans that soon defaulted.
“That’s why so many community banks failed,” Hannon said. “The market was based on the real estate model — real estate lending and development lending. Nobody did anything wrong; the economy just turned on them.”
As the real estate crash occurred, local community banks got another blow.
New state banking accounting rules went into effect, requiring distressed properties’ mortgages issued to be written down in the bank’s accounting to reflect fair market value. This hurt Covenant and many other Illinois-chartered banks. Covenant Bancshares did not have the capital to absorb these losses.
As the bank’s woes continued, Covenant’s Board of Directors and top personnel began to resign. In 2010, John L. Sorensen, Jr., president and CEO of the Company and Senior Loan Officer for the bank, resigned. Winston then stepped in as interim CEO. Director Addie Husbands quit both the bank and holding company in February of 2012.
SEC documents filed days before the bank was seized show the bank’s auditors, McGladrey and Pullen, also withdrew their services.
At the time of the seizure, the bank’s board members included Winston and President Belinda Whitfield, who also works for Living Word Christian Church. Other members included Director Jay C. Plourde, a New York based financier, and CFO Herman L. Davis, who also served as treasurer/secretary for the board. According to the SEC, the bank employed 25 people.
A journey to bank failure
Newly-published SEC documents reveal the bank’s downward slide into failure.
As the bank stumbled, Winston himself tried to prop it up with loans and by buying shares of the bank holding company, Covenant Bancshares.
According to the SEC, in December 2010, the bank crafted the first of two unsecured, year-long debenture loans from Winston to the bank. The senior convertible note for roughly $230,000 earned 8 percent interest and could be paid pack in shares at 1.5 times the fair market value. Winston made another 8 percent loan to the bank in March 2012 for $335,000.
In April of 2011, the bank sold $350,000 worth of shares to Forest Plaza, LLC, a company controlled by Winston that owns the Forest Park Mall. Those shares too were wiped out in February.
In June of 2011, the bank was issued a “Consent Order” from the FDIC and the Illinois Department of Financial and Professional Regulation. The feds and Illinois department demanded that the Covenant board hire an “independent third party” consultant within 60 days to assess the capability of the bank’s management. The order also demanded that the board hold meetings at least monthly and develop “adequate internal routines and controls” to run the bank.
The Consent Order also gave Covenant a more difficult task: bring to at least nine percent the “capital ratio” amount of Tier 1 funds available to cover losses. The amount required was over $3 million.
Winston personally began to buy shares of the ailing-bank’s stocks. On June 30, 2011 he bought $150,000 worth of preferred stock. In October 2011 he bought $50,000 worth of shares. The following year, he bought $50,000 worth, and in August of 2012 yet another $75,000. That November, Winston injected some $775,000 into the bank — all now wiped out by the bank’s failure. All told, Winston bought or controlled $1,450,000 worth of stock, and held about $565,000 of unsecured loans made to the bank.
Covenant Bancshares was notified by the Illinois department on Aug. 28, 2012 to increase its Tier 1 leverage capital ratio to not less than 5 percent. As of Sept. 30, 2012, the bank’s reported Tier 1 leverage capital ratio was 1.19 percent. The bank was urged under a Cease and Desist order to make no further uninsured loans.
On Nov. 6, 2012, the FDIC issued a “Prompt Corrective Action (PAC),” saying the bank was “critically undercapitalized.” The federal agency demanded the bank to raise capital ratio funds, or make itself available to be acquired by another bank. The company injected $775,000 into the bank, according to SEC records.
But it was not enough.
In late November, State Rep. LaShawn Ford tried to help. Though indicted by the feds himself late last year for alleged bank fraud, Ford asked the General Assembly to give Covenant Bank more time to raise capital. The request, however, was not successful.
In February-filed SEC documents, the company acknowledged that it “failed to develop adequate internal routines and controls to allow correct information to flow between the directors, board and employees and to properly fill out documents required by the SEC.”
The bank was then seized and its assets sold to Liberty Bank and Trust on Feb. 15.
Economic vision for community
Still, Winston believes the bank was a success. In his March letter to shareholders, he points out that the bank “earned the trust and business of 75 percent of the North Lawndale deposit market.” The bank, he added, provided more than $16 million in financing for about 130 low-income homeowners, as well as worked with borrowers to keep homes from being foreclosed. Covenant created payday loan alternatives for “struggling borrowers so they wouldn’t have to choose between putting food on the table or paying back predatory loans,” Winston stated.
The bank received four Bank Enterprise awards between 2008-2011, from the Community Development Financial Institutions (CDFI) fund of the Federal Treasury Dept.
“It was about the vision,” Living Word spokesperson Kim Clay, said. “With any investment there’s risk involved.”
“Clearly, the purpose of starting the bank was to do good,” Clay added. “Pastor said he wanted to help urban areas that are experiencing economic hardship, to revitalize those communities. That was the vision of having a bank and starting a bank…Rev. Winston is still passionate about that vision.”
Congressman Danny Davis agreed.
“I think [Winston] will continue his efforts to be a religious spiritual leader and do economic good,” Davis said.
Covenant Bank shareholder letter by wednesdayjournal