(Crain's) — Broadway Bank, the troubled Chicago lender owned by the family of Illinois Treasurer and U.S. Senate candidate Alexi Giannoulias, has entered into a consent order with banking regulators requiring it to raise tens of millions in capital, stop paying dividends to the family without regulatory approval, and hire an outside party to evaluate the bank's senior management.
The Jan. 26 consent order with the Federal Deposit Insurance Corp. and the Illinois Division of Banking comes less than a week before Mr. Giannoulias, Broadway's chief lender until 2005, must face voters in the Democratic primary for the Senate seat previously held by President Barack Obama.
He's faced criticism, principally from former city Inspector General David Hoffman, who's running against him, for his past role at the bank and the $70 million in dividends the family took out of the bank in 2007 and 2008 as the real estate crisis was becoming apparent.
In a letter Wednesday to employees, Broadway Chief Financial Officer Kaushik Pancholi wrote, "For thirty years, we have been a proud part of this community and this city. Traditionally, we have been one of the most profitable banks in Illinois, and we hope to return to those days. . . .We have seen difficult times before, and we have always found a way forward."
Mr. Pancholi noted that many other small banks are suffering similar problems. "According to a search of online regulatory databases, there were over 700 consent orders or similar enforcement actions issued nationwide by bank regulatory agencies in 2009," he wrote.
Under the terms of the consent order, Broadway must add at least $19 million to its reserves for losses from mounting delinquent loans. Subtracting that $19 million from the bank's capital as of Sept. 30, it must raise $50 million or more within 90 days to achieve the capital ratios the order requires.
Among the ways to restore the bank's fiscal health, the order lists "the direct contribution of cash by the directors and/or shareholders of the bank." The Giannoulias family owns 100% of the bank's shares.
Neither Mr. Giannoulias nor his older brother Demetris, CEO of Broadway, have commented to date on the family's willingness to put their own money into the bank to save it.
In addition, the bank must hire an outside consultant to evaluate "all senior executive officers to determine whether these individuals possess the ability, experience and other qualifications required to perform present and anticipated duties, including adherence to the bank's established policies and practices, and restoration and maintenance of the bank in a safe and sound condition."
For several consecutive years in the 2000s, Broadway was the Chicago area's most profitable bank and also one of the fastest-growing.
Established three decades ago as a lender to small businesses in Chicago, many of them Greek-owned, Broadway evolved into an aggressive commercial real estate lender, making development loans all over the U.S. and funded mainly by high-rate brokered deposits.
When the real estate markets tanked, Broadway saw its loan quality deteriorate rapidly.
"Although we have been working diligently with our borrowers, accounting rules have forced us to write down the value of many of our loans and real estate assets," Mr. Pancholi wrote in his letter. "Additionally, we have purchased certain investments that were rated triple-A by rating agencies when purchased, but have lost significant value over the past year."
The consent order requires the bank to overhaul its investment practices to reduce risk.
It also requires the board to develop a system to identify and address conflicts of interest "concerning executive officers, board members and shareholders."
This is not the first time the bank has been a source of embarrassment for Alexi Giannoulias. Three years ago, bank loans to several organized crime figures came to light. The bank foreclosed on properties held by two of those borrowers last year.
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