Covenant Bank, Chicago, IL, was closed today by the Illinois Department of Financial and Professional Regulation and the FDIC was named as receiver. The FDIC sold the failed bank to Liberty Bank and Trust Company, New Orleans, Louisiana, which will assume all deposits of Covenant Bank.
Established in 1977 as the Community Bank of Lawndale, the Bank changed its name to Covenant Bank in May 2008 after being acquired by Covenant Bancshares, Inc, the current holding company for Covenant Bank. Covenant Bank’s website describes itself as “a Christian bank founded on Judeo-Christian principles and culture where we draw our ethical compass; and define our social responsibility to revitalize communities and pursue business goals of profitability.” It is unknown if the Bank was ever able to revitalize the community it served but there is no doubt that the Bank was a dismal failure at achieving profitability.
An avalanche of defaulted loans that increased almost geometrically since the middle of 2011 made failure inevitable. At September 30, 2012, Covenant had a troubled asset ratio of 334% compared to a national average of 11%. Statistically, once a bank exceeds a troubled asset ratio of 100%, recovery becomes virtually impossible as was the case with Covenant Bank.
Although not publicly traded, Covenant Bancshares has over 770,000 shares issued and owned by the public, all of which are now worthless. On February 13, 2013, Covenant Bancshares filed the December 31, 2011 Form 10-K with the SEC. Any shareholder reading the document could not have been surprised that regulators closed Covenant Bank.
Serious factors listed in the 10-K that could have a material adverse effect on Covenant Bank were numerous, including:
- uncertainty about continuing as a going concern;
- failure to obtain funds to restore its financial condition to the “adequately capitalized” threshold;
- inability to satisfy the requirements of a Prompt Corrective Action Directive issued by the FDIC;
- sufficiency of the allowance for loan losses;
- management’s inability to manage credit and interest rate risk;
- security breaches to the Bank’s information system;
- inability to recruit and retain key employees’
- capital ratios that were below the “critically undercapitalized” level set by regulators
The sole branch of Covenant Bank will reopen as a branch of Liberty Bank and Trust. Deposits will continue to have full FDIC insurance coverage up to the applicable limits. Over the weekend, depositors of Covenant are able to access their money through the use of checks, ATMs and debit cards.
Covenant Bank was relatively small with total assets of $58.4 million and total deposits of $54.2 million at September 30, 2012.
In addition to assuming all deposits, Liberty Bank and Trust will purchase all of the assets of failed Covenant Bank. Liberty Bank and Trust previously acquired two other failed banks during 2008 and 2009.
The loss to the FDIC Deposit Insurance Fund for the failure of Covenant Bank is $21.8 million. Covenant Bank becomes the third bank failure of 2013 and the first in Illinois since November 2012.