Financial Services Company of the Year: The Loan Rangers

It was a long, quiet ride from Madison, Wisconsin, to Milwaukee. For nearly 90 minutes, Margaret Henningsen, Shirley Lanier, and Deloris Sims rode in the car in silence, numb from what they’d just heard in their meeting at Wisconsin’s Department of Financial Institutions. It was the spring of 1998, and the three women had traveled to the state capital to present a bold idea: to create a commercial bank that would help breathe life into their struggling central Milwaukee neighborhood. But the obstacles they encountered that day surprised even the three savvy businesswomen.

Their meeting in Madison that day was, the trio thought, the final phase of the long bureaucratic process. The women had already filled out reams of applications for the Federal Reserve and state regulators. They had been fingerprinted. And the FBI had called friends and family to conduct thorough background checks.

But the hard part was yet to come. Wisconsin regulators grilled Henningsen, Sims, and Lanier. “Some of the things they said were very upsetting,” fumes Henningsen. She recalls officials asking questions such as “Why does the neighborhood need another black-owned bank; isn’t there one nearby?” and “What about crime?”

“Nobody ever says, ‘You don’t need another white bank,’” says Henningsen, who, in hindsight, has a sense of humor about the meeting. “We presented statistics that showed that our location was actually one of the safest places in the city.”

By the end of the meeting, the regulators told the women that if they wanted to launch their bank, they’d need to do three things. First, they would each have to invest $150,000 of their own money into the operation. Second, they would need to show that a market of potential business borrowers actually existed in their neighborhood—with a list of 300 prospective customers. Then the officials delivered the final crushing blow: The women would need to raise $5 million, more than double what they had planned to put up. “I felt when we left the room they thought they’d never see us again,” says Henningsen. “We were stunned.”

After the long car ride home, Henningsen, Lanier, and Sims began the process of raising the money. What kept the trio going were hopes that their proposed bank could counter Milwaukee’s notorious discriminatory lending practices. Over the next year the women peddled their plan to African American churches, community groups, other banks, and wealthy Milwaukee residents. They would not only raise the required amount, but exceed it: Henningsen, Lanier, and Sims gathered up a total of $6.9 million.

This singular act of capitalist activism gave birth to Legacy Bank (No. 13 on the be banks list with $224.5 million in assets). Despite scores of hurdles and early detractors, the financial institution will celebrate its 10th anniversary this July. Today, at a time when the entire global finance industry is suffering because of risky bets that turned into “toxic assets,” Legacy’s business is booming. For instance, the institution has seen deposits jump an average of 21% during each year of operation to $188 million. In 2008, Legacy’s assets grew by 21% to $224.5 million, while its loan portfolio expanded by 22% to $176.8 million. Legacy—with its historic 1928 stone edifice—is a pillar in its community. The U.S. Department of the Treasury and Congress have recognized Legacy as a model for funding inner-city business growth. The bank proves that lending in underserved communities can be profitable. “I love to put people in business,” asserts Chairwoman and CEO Deloris Sims, of Legacy’s focus on providing seed capital for new ventures in the working-class, African American community where she and the other founders have lived and worked since their youth. More than 6,000 jobs have been created, Sims maintains, through small businesses and community development projects funded by the bank. Because of its consistent deposit and asset growth, in addition to its role as a catalyst for economic development, Black Enterprise has named Legacy Bank its Financial Services Company of the Year.

THE FIERCE BATTLE TO CREATE A BANK

For Henningsen, the notion to start a commercial lending operation came to her shortly after a 1988 newspaper investigation showed that 24% of black mortgage applicants in Milwaukee were turned down for loans versus just 6% of white loan applicants. That four-to-one ratio was the country’s greatest racial disparity. The study pointed to problems within the banking system that Henningsen had seen up close as a mortgage officer and later as a Community Reinvestment Act compliance officer at Republic Capital Bank, which later became TCF Bank.

Sims too had made her career in banking. She began as a part-time teller with the city’s Firstar Bank, and over the course of 28 years had risen to vice president. Even at the executive level, however, Sims couldn’t change the negative perceptions her colleagues held when it came to lending to people in her neighborhood. “You couldn’t get a loan anywhere around here,” says Sims.

For those living outside of central Milwaukee’s Fond du Lac and North neighborhood, also known as “Fondy,” a lack of lending seemed to be the least of the area’s problems. The inner-city, African American district had been losing residents since the mid-1970s, when Milwaukee County began building the Park West Freeway, an expressway that cut directly through the neighborhood. County officials bought land, relocated residents, and cleared homes across entire swaths of Fondy. After years of protests and opposition, the freeway was never built, but the damage was already done. The newly depopulated neighborhood, once largely made up of black homeowners, changed to an area of mostly renters. The area’s decline hastened and commerce virtually dried up.

By the early 1990s, the downward trend in the neighborhood hadn’t changed—nor had its shameful lending statistics. In 1990, state, county, and city officials convened a gathering of top banking executives and neighborhood leaders in an attempt to spur lending activity and investment in Fondy. The meeting was a disaster. “The rancor in that room was unbelievable,” says Henningsen. “I was sitting there with all these white guys in gray suits. [An attendee who was] head of one of Milwaukee’s oldest banks said, ‘Nobody’s going to force me to jeopardize my inheritance.’ That’s what he really thought about lending to minorities.”

There were other eye-opening moments along the way. During the bank’s initial fundraising period, the businesswomen were sometimes amazed by the sources in which they gained support—and where it was denied. Sims is proud to point out that the first $2 million came from small investors in the community. “Ninety-nine percent of them were former customers of mine from Firstar Bank.” But, some black church elders, for instance, didn’t believe three women could pull off such an endeavor and refused to let them pitch their plan to their congregations. On the other hand, Henningsen, Lanier, and Sims found willing investors within some of the very same banking institutions that had refused to lend in Fondy, including the outspoken man at the meeting, who eventually became a supporter of Legacy. What drove Legacy’s founders during the grueling fundraising process, says Henningsen, was “temporary insanity over the way black people were being treated by banks in the city.”

That sense of outrage spurred others to join in too. “My financial adviser told me not to invest in this bank, but I had to be a part of it whether it succeeded or failed,” says Jeanette Mitchell, program director of the Leadership Center at Cardinal Stritch University and a Legacy Bancorp board member since 2006. Mitchell initially agreed to invest $25,000, but after speaking with the women, she was so convinced about the project, she decided to plow in $50,000. Other investors were attracted by the audacity of the idea. Ulice Payne Jr., a prominent local attorney and former CEO of the Milwaukee Brewers, helped Legacy’s founders ease their way through legal red tape and political circles. Sims explains with a laugh that Payne helped them because he considered the concept of three black women starting a bank in the inner city as being “just sexy.”

Sally Peltz, an early investor and decade-long board member, maintains that the women’s plan reminded her of the communal teachings of her Jewish upbringing. “They were talking about good old-fashioned banking,” she says. “Any Jewish person will tell you that we help our own. I loved that Margaret and Dee [Deloris] were promoting that among African Americans.”

The seed capital gathered was also enough to purchase Legacy’s building at the intersection of Fond du Lac and North Avenues. Buying the building from Firstar Bank was an emotional milestone for Sims. It was the very same building where, nearly 25 years earlier, she had begun her career as a part-time bank teller.

THE ENGINE FOR BLACK BUSINESS DEVELOPMENT

In many ways, Sims and Henningsen are the perfect team to manage a bank with an underlying social mission. (Lanier left the company in 2004.) Sims, 65, has served as the bank’s CEO since its founding. She is a hard-nosed, by-the-book numbers cruncher who has been around banks her entire working life. In contrast, Henningsen, 62, has a more soft-hearted approach. She serves as the bank’s vice president in charge of community reinvestment activities, but she also finds time to teach classes on entrepreneurship and banking.

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What sets Legacy apart from other banks is its strong support of its clients’ businesses. Henningsen and Sims often serve as mentors to the burgeoning entrepreneurs to whom they lend funds. Six years ago, Stella Love wanted to open a Ponderosa Steakhouse franchise with her husband, Henry. Love, who sought funding from Legacy, conceived of a new twist to appeal to locals: She wanted to serve Southern cuisine—including collard greens, pinto beans and rice, steamed okra, and peach cobbler—in her restaurant. Offering Southern food in Northern states was unheard of at Ponderosa, where the menu was issued directly from the company’s Plano, Texas, headquarters. The company had also never opened a franchise in an urban market. “Dee got on the plane with me,” says Love. “We went down to Plano and she told them, ‘We can’t afford to have a failure in this neighborhood. We’re going to make it work.’” Ponderosa approved the menu and Love opened her franchise in 2002. The restaurant is a frequent lunch destination for the bank’s employees.

Sims’ philosophy includes encouraging her workers to support clients such as Kosmik Kare Day Spa, Upper Cutz barber shop, and Lena’s, a five-store chain of local supermarkets. “With large national banks you’re a number, not a name,” says Bruce Martin, senior vice president at Lena’s. “We have a relationship with Deloris that goes back to her Firstar days. She has intellectual capital that we gain from. In fact, we talk every day.”

Sims, however, admits “I practice tough love” when dealing with loan clients. Both Sims and Henningsen reinforce the firm’s mantra: “no margin, no mission,” telling staffers that in order for Legacy to remain profitable, the institution must adhere to traditional lending standards.

Lately, Legacy has been forced to tighten those standards even further. As a result of the ongoing financial crisis, the company has had to cut certain lines of credit for its real estate investor clients. Sims has also changed the way loans get approved. Rather than allowing loan officers to make independent decisions, all applications and approvals now go before a loan committee made up of top management and board members. Although the bank has experienced fewer loan losses than its community banking peers across the country—for every dollar in loans outstanding in 2008, it lost 3.3 cents to loans that went bad, versus 5.3 cents for its peers—the bank’s net credit losses (the amount of money yet to be recovered on defaulted loans) jumped from $110,000 in 2007 to $546,000 in 2008. Some of the pain associated with loan defaults is mitigated by the Small Business Administration, which backs 80% of all business loans issued by Legacy. The bank also applied for and received a $5.4 million infusion of capital through the Troubled Asset Relief Program. Legacy expects that the Obama administration’s new $15.4 billion infusion into the national SBA loan program will spur more business lending.

While the federal money helps, it doesn’t ease the pain of watching some businesses fail. For example, in 2008, despite some reservations, Legacy approved a loan for Finesse Jazz Club. (“I usually don’t like funding bars,” says Sims.) The club generated a good following until a gunfight broke out near the establishment. The club began to steadily lose business. The owners fell behind on loan payments and were forced to close down. “That sort of thing really breaks my heart,” says Henningsen, who says other delinquent customers have seen her in the neighborhood and avoided contact. Even so, she says, Legacy must keep its eye on the larger social mission to revitalize the neighborhood.

As for Legacy’s plans for the future, the bank has no designs on expansion at this time. Neither Henningsen nor Sims has set a date for retirement (even though Sims groomed Jose Mantilla, who took over the duties of bank president this spring; she will stay on as chairwoman and CEO). The founders say they simply “want to keep doing what we’re doing”—that is, continue their crusade to spread capital.

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