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Red flags emerge after Chicago bank's failure

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Red flags emerge after Chicago bank's failure

Regulators shuttered a Chicago bank with a clean balance sheet and healthy capital levels two weeks after the CEO committed suicide.

Federal regulators closed Washington Federal Bank for Savings on Dec. 15 and entered into a purchase-and-assumption agreement with Royal Savings Bank to take over the insured deposits and some of the assets. The Office of the Comptroller of the Currency said it seized the bank, a unit of Washington Bancshares Inc., "after finding that the bank had experienced substantial dissipation of assets due to unsafe or unsound practices, and that the bank's assets were less than its obligations to its creditors and others." The regulator declined to comment beyond the press release. The failure will cost the Federal Deposit Insurance Corp.'s deposit insurance fund $60.5 million, a steep price relative to total third-quarter assets of $166.3 million. When comparing the cost to the FDIC fund to the bank's total assets, it is among the top 20% of most expensive failures to date.

The failure is unusual in part because by any financial measure, Washington Federal Bank for Savings appeared to be a success. Call reports showed pristine asset quality, high capital and liquidity levels, and there was no history of public enforcement actions.

The failure came two weeks after the death of bank Chairman, President and CEO John Gembara. The death was a suicide, according to Becky Schlikerman, public information officer for the Cook County Bureau of Administration.

Gembara and his family controlled a sizable minority of the bank, according to the bank's 2017 proxy statement.

S&P Global Market Intelligence tried unsuccessfully to contact firms connected with the failed bank and its remaining directors. Messages to director William Mahon were not returned. Attempts to reach director George Kozdemba were also unsuccessful. Messages at corporate counsel Vedder Price, special counsel Kilpatrick Townsend LLP and independent auditors Bansley & Kiener LLP and Wipfli LLP were also not immediately returned.

Bank failures have become increasingly rare in the years of benign credit following the financial crisis and Great Recession. Regulators treat them as last-resorts if a bank cannot resolve asset quality and capital issues or is running out of liquidity. In the case of Washington Federal Bank for Savings, the FDIC found that selling only the insured deposits to Royal posed the least cost to the deposit insurance fund; there was a balance of $11.6 million in uninsured deposits. The FDIC will also deal with resolving and selling most of the failed bank's assets, given that Royal Financial Inc. said that neither the company nor the bank acquired any assets, common stock, preferred stock or debt, or assumed any other obligations of the bank. It did acquire about $23.7 million of the closed bank's assets and around $132.4 million in insured deposits offset with cash, according to a news release. Royal Savings Bank did not return requests for comment, and Royal's financial and legal advisers in the deal declined to comment.

The FDIC also retains the ability to bring forward lawsuits against directors and officers of a bank as well as other professional liability suits. FDIC spokesman David Barr said that it is "standard operating procedure" for the regulator to review practices from professionals both inside and outside the bank following a failure. Those reviews take about 18 months, and the FDIC has three years to bring a suit. Because the cost to the deposit insurance fund exceeds $50 million, the Treasury Department will be required to issue a review that examines the causes of failure at Washington Federal Bank for Savings and what regulators could have done differently.