Four More Recent Bank Failure Analogs

Building on the five bank failure analogs from last week...

Banking is a sport of unforced error. Not just unforced error. But the same unforced errors over and over again. The best defense is familiarity with the common pitfalls faced by banks. With this in mind, you’ll find below the stories of four lessor-known bank failures to have occurred over the past fifteen years.

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First Chicago Bank & Trust
July 8, 2011

Labe Federal Savings & Loan opened in 1905 on a busy thoroughfare in the West Loop neighborhood of Chicago. It grew slowly for a century, reaching $397 million in assets by 2005. But then it accelerated. In 2006, a private equity firm merged Bloomingdale Bank & Trust into Labe Federal Savings. The combined banks had $1.1 billion in assets and were rebranded as First Chicago Bank & Trust.

First Chicago concentrated on commercial real estate lending, with a heavy focus on acquisition, land and development loans. Three-quarters of its loan portfolio was backed by real estate after the 2006 merger. And by 2008, high-risk ADC loans alone accounted for more than half all loans. To finance its growth, First Chicago relied on brokered deposits, which increased nearly fourfold between 2006 and 2008.

Not long after real estate markets faltered in 2007, First Chicago suffered the same fate as hundreds of other real estate-heavy banks. Nonperforming loans climbed. Earnings turned negative. Capital evaporated. Its loss in 2008 was more than its earnings over the prior fifteen years, combined.

By April 2009, regulators had downgraded First Chicago’s CAMELS composite rating to a 3, and by June, it had fallen to a 5, indicating a critically deficient condition. By March 2010, the bank was no longer considered well capitalized. In early 2011, it was deemed undercapitalized. And on July 8, 2011, the Illinois Department of Financial and Professional Regulation closed First Chicago and appointed the FDIC as receiver. The failure resulted in a $284 million loss to the Deposit Insurance Fund, amounting to nearly 30 percent of the bank’s total assets at closing.

Three lessons for bankers…

1. Failure tends to follow strategy change: First Chicago is representative of a typical bank failure, which tends to be the consequence of a strategy change implemented by management to accelerate growth.

2. Concentration kills: It is better for a bank as a general rule to put fewer eggs in more baskets than it is to put them all in one, so to speak — at least when it comes to the allocation of its loan portfolio.

3. Timing matters: Banking is a cyclical industry. Expanding at the top of the cycle, when losses are surreptitiously baked into new loans, typically leads to failure at the bottom.