Illinois thrift failure could be among costliest ever

Northwestern Financial Review, Sep 1, 2001

In what is expected to be one of the costliest failures in years, the Office of Thrift Supervision closed Superior Bank, FSB of Hinsdale, Ill., on July 27. The thrift opened July 30 as the newly chartered Superior Federal Bank, FSB and is being operated by the Federal Deposit Insurance Corp. The failure of the $2.3 billion institution came just as Congress was beginning hearings on deposit insurance reform.

Superior Bank had been losing money for several quarters and as early as last spring industry consultant Bert Ely warned the institution would fail. Regulators apparently knew the institution was in trouble as early as January 1999.

The FDIC hopes that by operating what is called a "bridge bank," it will be able to stabilize the institution and prepare it for sale by the end of the year. The FDIC is providing a $1.5 billion line of credit to Superior Federal to help it meet its operational obligations.

Superior Bank has $1.6 billion in deposits. Approximately 1,000 depositors hold $42.9 million in uninsured deposits. The bank has 18 offices in the Chicago metro area.

Superior was the third failure of an FDIC-insured institution this year and the first to fail this year that is insured by the Savings Association Insurance Fund. The loss is expected to cost the SAIF $500 million to $1 billion dollars. At $500 million, the failure would be the 11th costliest since 1980; at $1 billion, it would be the sixth costliest since 1980.

The Pritzkers of Chicago - the multibillion-dollar family that owns the Hyatt Corporation - had major ownership in Superior Bank, as did Alvin Dworman, a New York developer. According to new reports, the ownership group had come up with a plan last May to re-capitalize the bank with $325.5 million, but the plan fell through.

Superior Bank generated substantial profits during the 1990s making subprime loans but that business apparently changed in recent years. According to information on the FDIC's Web site, the bank lost $7.2 million in the third quarter of 2000; lost $5.6 million in the fourth quarter, and lost $69.9 million in the first quarter of 2001, the most recent quarter for which information is available. The bank's equity capital to assets ratio fell during that time to 3.15 percent from 13.25 percent.

The Office of Thrift Supervision said the thrift suffered from poor lending practices, improper record keeping and accounting, and ineffective management. Superior became critically undercapitalized largely due to incorrect accounting treatment and aggressive assumptions for valuing residual assets, the OTS said.

Meanwhile, the U.S. Senate began hearings on deposit insurance reform on August 2. Sen. Tim Johnson, (D-S.D.) said the Superior Bank failure proves the system needs major changes.