Material Loss Review of First Chicago Bank and Trust

First Chicago Bank and Trust (First Chicago) was created following the merger of Labe Bank and Bloomingdale Bank and Trust in November 2006. Labe Bank was a savings bank established in 1905 in Chicago, Illinois, and became a state member bank in 2006. Bloomingdale Bank and Trust was a state member bank established in 1991, and it operated in Bloomingdale, Illinois. First Chicago was supervised by the Federal Reserve Bank of Chicago (FRB Chicago), under delegated authority from the Board, and by the Illinois Department of Financial and Professional Regulation (State). The State closed First Chicago on July 8, 2011, and appointed the FDIC as receiver. The FDIC OIG notified our office that First Chicago's failure would result in a $284.3 million loss to the Deposit Insurance Fund (DIF), or 29.9 percent of the bank's $950.8 million in total assets at closing.

First Chicago failed because its board of directors and management did not adequately control the risks associated with the bank's aggressive lending strategy, which focused on commercial real estate (CRE) loans, including construction and land development (CLD) loans. The bank's business strategy included loan growth through CRE lending, supported primarily by noncore funding sources, and resulted in a CRE concentration. The 2006 merger that led to the creation of First Chicago reduced the bank's CRE concentration and helped diversify the bank's loan portfolio. Management planned to further reduce the bank's concentration through loan diversification by increasing lending in commercial and industrial loans. However, management's subsequent efforts failed to reduce and adequately manage the bank's credit concentration risks. First Chicago's CRE loan concentration, particularly in CLD loans, made the bank especially vulnerable to real estate market declines. First Chicago's board of directors' and management's failure to effectively manage the bank's CRE and CLD credit risk, coupled with a declining real estate market, led to significant asset quality deterioration. Mounting losses depleted the bank's earnings and eroded capital, which prompted the State to close First Chicago and appoint the FDIC as receiver on July 8, 2011.

With respect to supervision, FRB Chicago complied with the examination frequency guidelines for the 2007--2011 time frame we reviewed and conducted regular off-site monitoring. Our analysis of FRB Chicago's supervision of First Chicago revealed that FRB Chicago had a number of opportunities to deliver a stronger supervisory response. We believe a stronger supervisory response related to the credit risk management of concentrations was warranted as early as its April 2008 examination. In addition, while we recognize that FRB Chicago downgraded First Chicago's management CAMELS component rating in a June 2009 examination, we believe that an April 2009 supervisory assessment presented an opportunity for stronger criticism of management's performance related to the bank's deteriorating condition. Further, we believe that First Chicago's condition and management's inability to timely address identified deficiencies called for stronger criticism in a June 2010 examination, including a management component downgrade.

We believe that First Chicago's failure offers lessons learned that can be applied to supervising banks with similar characteristics and circumstances. First Chicago's failure illustrates the importance of (1) timely implementation of a robust credit risk assessment program designed to facilitate the identification and management of concentrations, (2) closely monitoring and assessing management performance, and (3) appropriately assigning management CAMELS ratings commensurate with the issues identified during the examination.

The Director of BS&R concurred with our conclusions and lessons learned.