NORMAL -- It was noon on Tuesday, June 30, 2009, and the Bank of Illinois' six directors and other top executives gathered for a special meeting in their uptown Normal headquarters.
They were meeting weekly now. Long gone were the relaxed once-a-month sessions where BOI's leaders talked about the housing market, signed off on spec-home loans and planned for growth. The economy was unraveling, and so was BOI.
Federal regulators had found the bank to be undercapitalized and would soon issue a critical cease-and-desist order that would make BOI's problems public. The community bank with more than $246 million in assets was now giving daily financial updates to the Federal Reserve, and had just hired a consultant to help recapitalize or find a buyer.
At the meeting, three consultants told the board their review of most of the bank's substandard-labeled loans revealed "significant problems," including a lack of financial information in the files.
And apparently for the first time, the board pondered two bigger questions. The first was when to tell shareholders what was going on. Knowing that regulators would not allow them to say anything before the cease-and-desist order, they discussed the need to prevent "major leaks" of information.
Then, at the end of the meeting -- eight months before the bank failed -- the board tackled a question still unanswered today: Would the bank's officers and directors be held liable and sued by the federal government over the way they ran the institution?
The minutes of this meeting and 71 others from 2006-10 were recently obtained by The Pantagraph through a Freedom of Information Act request from the Federal Deposit Insurance Corp., which became receivor when the bank failed March 5, 2010. Heartland Bank and Trust bought BOI's assets and deposits, but the FDIC is still expected to take a $41.9 million loss in the failure.
The 244 pages of minutes reveal the behind-the-scenes workings of a bank whose concerns quickly shifted from expanding to a third Twin City location to battling delinquent borrowers and the regulators:
• Though pay for bank directors was voluntarily suspended, at least two directors sought unsuccessfully to reinstate it as late as August 2009 as their workloads soared.
• Concern about the bank's public relations and leaks. The board is told an October 2009 article in The Pantagraph about regulators disciplining the bank scared customers and cost BOI up to $2 million in deposits.
• In BOI's final meetings, a flurry of discussion about how to collect on delinquent loans from Twin City developer Larry Hundman, and speculation that his business partners are just "stalling" until BOI fails.
In good times
Bank of Illinois was historically a commercial lender. By 2006-07, before the recession and with business booming, BOI's directors routinely weighed multiple loan requests at each meeting, approving spec homes, land purchases, construction projects and working capital. Over a two-year period ending Dec. 31, 2007, the bank's loan portfolio increased by 85 percent, to $186.1 million.
The minutes show directors judging both an applicant's history with BOI and their finances. An application for an $800,000 construction loan for an apartment building in May 2006 was fairly typical: "Because of their excellent credit and deposit history with the bank," the minutes read, the loan was approved.
But even longtime customers struggle in a recession. By December 2006, the Fed issued final guidance that publicly warned banks -- especially smaller ones like Bank of Illinois -- against being too heavily concentrated in commercial real estate, or CRE, loans. The Fed set thresholds for banks that, if crossed, would raise regulatory red flags.
BOI immediately crossed one of those thresholds, according to an analysis of the bank's quarterly financial data. But the bank's meeting minutes show little big-picture discussion among directors about BOI's CRE concentrations or the Fed's CRE guidance.
By the end of 2008, the bank's delinquency rate for its CRE loans jumped to 12 percent -- double the industry average. The minutes show BOI applied for financial assistance under the federal government's Troubled Asset Relief Program, or TARP, but for unknown reasons it never received the assistance.
Recently, former bank president Larry Maschhoff told The Pantagraph the Bank of Illinois did CRE lending for 20 years, and that examiners never raised direct criticism about concentrations until mid-2009.
The guidance "sounded good in theory," Director Richard Claydon told Bank Director Magazine late last year. "But the reality is that once most banks find a niche to work with, it's difficult to change."
The minutes track a deteriorating relationship between BOI and regulators. On Oct. 6, 2009, a day after the bank's first public disciplinary actions by regulators that heavily criticized bank management, Maschhoff resigned as chief executive officer but remained as president, the minutes show. By February and March 2010, bank officials appeared to be upset by "errors" in a recent Fed review and by "inflammatory remarks" made about them, the minutes show.
Maschhoff declined to comment on why he resigned as CEO or on the alleged errors. Maschhoff is legally prohibited from revealing material from the confidential bank reviews, called examinations.
"I'm not gonna get sued that way," he said.
The end nears
Regulatory pressure made raising capital or finding a buyer the top priorities by summer 2009, but those efforts were complicated by the bank's troubled loan portfolio.
The clock was ticking, and the bank knew it. By Feb. 2, 2010, the directors were aware the FDIC had five potential bidders (other banks) visiting BOI, quietly looking at its books in case the regulators decided to shut it down.
In the bank's final month, directors appeared to be focused on one of their larger problem borrowers: Hundman and his investors. After minutes show the directors lamenting that the borrower "continuously asks for more time," they agreed to take them to court over $9.3 million in delinquent loans.
Paul O'Connor, the consultant BOI hired to help it find a buyer or capital, said most of its loan problems could have been worked through over time, but the Hundman ones were unusually large and complex.
When asked if those loans held up a sale, O'Connor said, "It certainly didn't help."
Michael Hundman, Larry's brother and a local businessman, resigned from BOI's board Feb. 16, days after the other directors voted to file legal action against Larry. Michael Hundman said recently he could not recall why he resigned, but said he was careful to avoid conflicts of interest and that his brother never got special treatment.
Indeed, the minutes show Michael Hundman leaving and returning to numerous meetings during loan requests, though borrower names are redacted in the documents.
"I don't think there was any consideration of those requests as it related to my involvement," Michael Hundman said.
Through his attorney, Larry Hundman declined to comment.
The situation deteriorated when Hundman's business partners denied they were on the hook for part of the debt, too, claiming key loan documents called guarantees were incomplete or had forged signatures.
Yet days prior to that allegation going public in a court filing, BOI directors mulled an offer by those partners to pay $300,000 to settle the dispute, according to minutes from Feb. 16, 2010. Bob Lenz, attorney for Hundman partner David K. Stark, cautioned that the offer did not imply the partners believed the guarantees were valid.
"Every lawsuit has risk and cost," he said. "If there could have been a negotiated settlement, it was worth pursuing."
In their last meeting, on March 2, 2010, BOI's directors apparently discussed their belief that Hundman's partners were "stalling" on paying up until regulators close BOI, hoping a successor bank will be easier to work with.
Lenz and attorney Bill Mueller, who represented fellow Hundman partner Richard Owen, denied that. Mueller said negotiations were serious but were hampered by difficulty getting complete documents from BOI. Lenz called BOI's record keeping "sloppy."
On March 2, with failure imminent and Heartland told it was going to take over, BOI's board talked about whether regulators would sue them. It was at least the fourth time they discussed that possibility or the bank's liability insurance coverage.
Three days later, BOI failed.
Reporter Ryan Denham can be reached at twitter.com/ryanpantagraph
Editor's note: The Bank of Illinois' sole shareholder was its holding company, BOI Financial Corp., which prior to the bank's failure received periodic dividends from the bank for the purposes of paying back a loan, according to former bank president Larry Maschhoff. The recipient of the dividends was incorrect in a previous version of this story.
A look at Bank of Illinois' final board of directors:
Larry Maschhoff: Chairman, president and chief executive officer. Joined BOI in 1987. Resigned as CEO in October 2009.
Michael Hundman: Owner of Bloomington-based Hundman Lumber Cos. Resigned Feb. 16, 2010.
Richard Claydon: Retired oral surgeon; served for 17 years on BOI's board.
Patricia Kaisner: Twin City real estate agent; joined board in 2003. Told The Pantagraph she missed some meetings after being diagnosed with ovarian cancer during BOI's downfall but was "there when I could."
Jack Guess: Retired Twin City auto dealer who owned the bank for 10 years and continued as a director.
John L. Pratt: Joined board in August 2007, replacing a retiring John Luedtke.
SOURCES: Bank of Illinois board meeting minutes, Pantagraph archives