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Midwest Bank officials, FDIC in settlement for $26.5 million over loans

chicagotribune.com | August 7, 2016

By Becky Yerak

Eighteen former Midwest Bank officers and directors will pay a total of $26.5 million to the Federal Deposit Insurance Corp. to settle a 2013 lawsuit alleging that their negligence in lending to risky borrowers contributed to losses at the failed institution.

Midwest Bank, based in Elmwood Park, was a $3.17 billion-asset lender that was among the first community banks to get federal bailout funds after the financial crisis erupted. It was part of Midwest Banc Holdings, which had been a publicly traded banking company, and was seized by regulators in 2010. It was among the largest local banks to fail after the financial crisis.

The FDIC occasionally sues executives of banks that collapse. The Midwest Bank lawsuit was filed in U.S. District Court in Chicago.

Acting as receiver for the failed bank, the FDIC alleged, among other things, gross negligence and breach of fiduciary duties. The defendants "exhibited an extreme departure from the standard of care" by agreeing to lend $100 million to six "uncreditworthy" borrowers without adequately analyzing their creditworthiness, determining whether their proposed real estate projects were feasible and identifying a reliable source of repayment, the lawsuit said. "Between late 2005 and early 2008, defendants approved a number of large and grossly imprudent loans, which, combined with director defendants' gamble on declining investment securities, caused damages in excess of $128 million," the lawsuit said.

Midwest's problems surfaced in fall 2008. That's when Fannie Mae and Freddie Mac sustained huge losses in the financial crisis, and Midwest eventually suffered losses of tens of millions of dollars on its preferred shares in the government-sponsored enterprises. A few months later, Midwest received bailout funds.

Midwest Bank is unrelated to First Midwest, another publicly traded midsize Chicago-area bank.

In the settlement between Midwest Bank officials and the FDIC, the defendants denied liability but agreed to the deal to "avoid the uncertainty and expense of further litigation."

Midwest Bank was one of about 15 Illinois banks to fail in 2010.

Typically, bank failures cause a dent in the FDIC's deposit insurance fund. The FDIC receives no federal tax dollars, but instead its operations are funded by insured financial institutions.

Midwest Bank was an exception, however.

It received $85 million from the U.S. Treasury Department's Troubled Asset Relief Program, commonly called the bank bailout, but continued to have problems as a result of a downturn in the real estate market. So its failure, unlike that of many other banks, cost taxpayers money.

The settlement didn't specify who was paying how much. Bank officers and directors also often have insurance providing coverage in case of lawsuits.

Among other midsize Chicago-area banks that have failed since the financial crisis and been sued by the FDIC, the settlement involving Midwest Bank surpasses that of the previous record holder, the $17.3 million paid by former officials of $2.2 billion-asset ShoreBank.

Midwest Bank's assets, deposits and branches were taken over by Akron, Ohio-based FirstMerit.




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