The closure ended a 12-year run for Legacy after it was founded by Delores Sims, Margaret Henningsen and Shirley Lanier. The three African American women raised $5 million in capital to start the bank in 1999 and focused on providing financial services to the under served in Milwaukee. Their approach worked as Legacy became one of the nation’s fastest-growing black banks in the last decade, earning the distinction of becoming the BE Financial Services Company of the Year in 2009.

“The founders of Legacy were phenomenal women and they had a vision and mission that we hope to blend with Seaway in Milwaukee,” Grady says.

The recent recession and hefty loan losses, however, hurt Legacy’s financial standing. Last November, federal regulators ordered the bank to boost capital to sufficient levels or sell to another institution in 60 days.

On March 11, the Wisconsin Department of Financial Institutions closed Legacy and appointed the Federal Deposit Insurance Corp. as receiver. FDIC spokesman David Barr says Seaway bought nearly $166 million of the bank’s assets and the FDIC assumed the remaining $24 million.

Efforts by BE to reach Chairwoman and CEO Sims and the other founders for comments on Legacy’s closure and Seaway’s takeover proved unsuccessful.

Seaway, Chicago’s largest black-owned bank, absorbed all of Legacy’s more than $183 million in deposits and its one branch in downtown Milwaukee, adding roughly 4,400 individual and business accounts. Grady says the deal will boost Seaway’s assets to about $630 million and give it $500 million plus in deposits which would place it among the nation’s five leading black banks. Seaway operates 10 branches mainly in the Chicago metropolitan area and has ATMs at O’Hara and Midway airports.

He says Seaway plans to launch a corporate trust department and a 1 percent down home mortgage program, products geared to businesses and low to moderate income individuals in Milwaukee. The institution currently has no plans to add more branches in Milwaukee but may consider an expansion if demand was there.

The FDIC’s Barr said Legacy’s closure was due to significant losses in its commercial real estate and industrial commercial lending portfolios over the past 18 months. “Legacy Bank unfortunately was one of the almost 350 banks [nationally] that fell since the financial crisis begin in 2008,” Barr said.

Legacy’s shutdown continues a diminishing trend for black-owned banks. There were 28 US banks owned by African Americans as of Sept. 30, 2010, down from 33 for the same period in 2009, according to Federal Reserve Bank data. William Michael Cunningham, social investment adviser at Creative Investment Research Inc., a Washington D.C. firm specializing in minority banking, maintains that the 2010 number is actually closer to 25 because three black-owned banks have closed since September.

Legacy becomes the fifth black-owned bank forced to close in the past year. Cunningham says the other banks include American State Bank in Tulsa, Oklahoma; Imperial Savings and Loan Association in Martinsville, Virginia; Ideal Federal Savings Bank in Baltimore; and Dwelling House in Pittsburgh

Cunningham further says the loss of those banks means black consumers and churches in those communities will find a harder time gaining access to financial services, including obtaining small business loans and mortgages as well as opening checking accounts. “That’s more critical now because of the poor economy and weak state of the banking industry in general,” Cunningham says, citing that existing institutions need to review strategic plans and raise capital before being required to do so by regulators.

Although he called Legacy’s closure a “tragedy,” Cunningham says the good news is the institution is being seized by another black-owned bank: “A black bank is needed there because the credit needs of that community has a history of not being met by mainstream banks.”

The annual statistics, compiled last month by William Michael Cunningham, senior investment adviser at Creative Investment Research Inc., a Washington D.C. firm specializing in minority banking, illustrated a major decline as some black owned banks suffered big losses tied to securities-related investments.

Buddy Howard, president and banking analyst at Equity Research Services Inc. in Raleigh, North Carolina, said black owned banks, much like the majority of banks, were under intense profit pressures in 2008, and these pressures have extended into 2009. “It was one of the most challenging years the entire industry has had in many years, with earnings pressured by tighter margins, severe asset quality problems and anemic loan demand, which has negatively impacted earning asset growth,” Howard said.

Profits at 44 black-owned banks fell to a collective net loss of $27 million last year, down from a profit of nearly $24 million in 2007 and the lowest level since 2000, according to Cunningham’s analysis. He said the data was based on call reports the banks’ flagship banks – not their parent companies – filed with the Federal Deposit Insurance Corp. for the year ending Dec. 31. He said 22 of the banks had a net loss.

Kevin Cohee, CEO of OneUnited Bank (No. 2 on the BE Banks list with $636 million in assets) acknowledged that the investment losses in the two mortgage giants hurt the bank’s earnings last year. But he said the bank continues to be well capitalized and has returned to profitability in 2009. “It’s a testimony to the strength of OneUnited that it was able to lose over $50 million tied to investments in Freddie Mac and Fannie Mae and narrow that lost to $29 million by year end shows the company’s earnings capacity,” Cohee said. “The fact that the bank is now well capitalized shows the financial wherewithal of the bank’s shareholders.”

However, the news was not all bad. The number of black owned institutions that survived last year was at a substantially higher rate than U.S. banks overall and their growth in assets rose at nearly the same level as their mainstream peers. According to Cunningham, there were 44 black owned banks or banks controlled by a black board in 2008, three fewer than in 2007. Those institutions had assets of $7.6 billion in last year, up 5.5% from in 2007. In contrast, the number of FDIC-insured banks and thrifts totaled 8,305 of last year, down from 8,534 two years ago, according to the FDIC. Their net income totaled $10.2 billion in 2008, down from $100 billion in 2007. Those institutions’ assets reached $13.8 trillion, up 6.1 percent from 2007.

At Newark, N.J.-based City National Bank of New Jersey (No. 3 on the BE Banks list with $495 million in assets), CFO Ed Wright said the bank last year earned $1.1 million, down from $1.9 million the prior year.  He said profits plunged as the bank had $2.7 million in write-downs from investment in its securities portfolio that lost their value. The bank also set aside $1.6 million last year to cover problem loans, double the amount it set aside the prior year. “Black-owned banks (in general) were largely hurt by customers losing their jobs and businesses, reducing their ability to repay loans, make deposits and maintain their savings,” Wright said.

Wright said the reduced profitability and deterioration in credit quality has prompted federal regulators to put more pressure on already well capitalize minority banks to boost their capital ratio given the weak economy. He said his bank continues to get such pressure even though it was recently granted $9 million in capital from the U.S. Treasury Department’s Troubled Asset Relief Program (TARP).

According to James E. Young, CEO of Citizens Bancshares Corp. (No. 8 on the BE Banks list with $348.1 million in assets), the bank earned $1.2 million last year, down from $3.3 million in 2007. The decline, he says was mainly because it set aside $2.5 million to cover potential loan losses, compared with making no provision for loan losses in 2007. “The bottom line is the weak economy hurt our individual and business customers’ ability to repay loans,” He says, adding that many banks were confronted with the worst recession in more than 40 years, resulting in a big decline in loan demand and increased loan loss provisions for those institutions.

CEO Paul C. Hudson of Broadway Federal Bank (No. 4 on the BE Banks list with $407.9 million in assets) said his bank boosted profits by increasing its volume of loan originations and expanding net interest margin by driving down liability costs at a faster rate than the decrease in loan yields. He said it also managed credit risk in its loan portfolio through active loan service management and sound loan underwriting.

The entity, MBF LP, would be designed to make capital investments in and own parts of new and existing black-owned U.S. banks, said William Michael Cunningham, senior investment adviser at Creative Investment Research Inc., a Washington D.C. firm specializing in minority banking.

Cunningham, MBF general partner, said the company would be an equity fund based in Washington. The company has applied for bank holding company status and is seeking capital from the U.S. Department of the Treasury’s Troubled Asset Relief Program (TARP).

Cunningham said MBF partners and management team members would include Elrick Williams, chairman and CEO of Allston Trading L.L.C., a Chicago-based firm that specializes in electronic trading of stocks, Treasury bonds and other securities, and Glenn Harvey, former president and CEO at Broadway Federal Bank.

Cunningham said the MBF is needed because black-owned banks have few sources for investment capital. A typical investment in a black-owned bank might total $5 million to boost the bank’s capital base, allowing it to leverage that money to make new loans of up to $50 million, he added.

“We will provide capital on better terms than those provided by the few limited sources currently available,” he said.

Joe Gladue an equity analyst specializing in banking at B. Riley & Co. L.L.C. in Philadelphia, had mixed reaction about MBF.

He said the company could be helpful in providing capital to black-owned banks because it’s harder for those institutions to raise capital than their larger rivals, particularly in the current economic environment.

But Gladue also said MBF could have a hard time getting cooperation from black-owned banks because those banks typically are closely held and very independent minded.

Cunningham said the Federal Reserve, which would be MBF’s regulator, does not have a requirement on how much capital has to be raised to form the holding company.  MBF submitted its application earlier this month.

He said MBF would encourage participating banks to offer home mortgages, small business loans, and several other new types of financial products and loans it developed. He said MBF would make its money by receiving a dividend from the banks it invest in.

“We may factor in social returns as part of our approach, but our goal will be to clearly maximize returns,” Cunningham said.

He also said he doesn’t know of any other bank holding companies now similar to the proposed company in the banking industry.

Cunningham said another factor behind the formation of the holding company is to pump capital into black-owned banks that might not get an investment from the Treasury as part of the $700 billion rescue package.

To date, Cunningham said he knows of only one black-owned bank, Los Angeles’ Broadway Financial Corp., to get funding. Broadway Federal last month received $9 million from the Treasury as part of its effort to bail out U.S. bank’s impacted by the financial crisis.

TARP was initially implemented to buy bad mortgage-related assets, but was changed last month to invest money into banks in a move to help revive the economy and spur bank lending.

As of mid-December, the Treasury has invested nearly $168 billion
into primarily mainstream banks.

Cunningham said the effort for MBF was launched in 2007, but the fund has not been able to raise a lot of capital. He said its application to TARP reflects a changed market environment.

“What we’re saying is if [the Treasury] not going to invest in the black-owned banks, than do it through us,” Cunningham said.