Largest Bank Failure of 2014 – The National Republic Bank of Chicago

Illinois has been a tough place for banks this year.  A third of all bank failures during 2014 have occurred in Illinois and the collapse of The National Republic Bank of Chicago also gives Illinois the distinction of having the nation’s largest bank failure.

The National Republic Bank of Chicago, Chicago, Illinois, (TNRBC) was shuttered today by the Office of the Comptroller of the Currency.  The FDIC, appointed as receiver for the failed bank, was able to enter into a purchase and assumption agreement with State Bank of Texas, Dallas, Texas, which will assume all deposits of The National Republic Bank of Chicago.

Total assets of all 15 banks that failed prior to today amounted to $2.03 billion and total losses to the FDIC Deposit Insurance Fund amounted to $276.6 million.  The largest bank failure prior to today was Valley Bank, also located in Illinois, which had $456.4 million in total assets.  TNRBC had total assets of $954.4 million and resulted in losses of $111.3 million to the FDIC.

National Republic is the largest Indian-American owned bank in the country and lends mainly to (yes, you guessed it) hotels, gas stations, and motels owned by Indian-American borrowers.  Local mortgage brokers have commented that National Republic always seemed able to approve loans that no other banks would touch and the results speak for themselves.  Bad debts soared at National Republic despite a broad recovery in the hotel and motel industry as the economy improved and travel increased over the past five years.  Including National Republic, four out of five Indian-American owned banks in Illinois have now failed.

On July 2, 2014, The Office of the Comptroller of the Currency issued a prompt corrective action directive (PCAD) to The National Republic Bank of Chicago.  A PCAD is the most serious enforcement action that can be taken against a bank and requires immediate correction action to be taken by the ban.  Most banks fail after being issued a PCAD since if they could have raised capital previously they would have.

TNRBC had a huge amount of troubled assets on its books as a result of making loans that later defaulted.  Typically, once the troubled asset ratio exceeds 100% failure becomes almost inevitable.  The failed bank’s level of troubled assets has been soaring since late 2012 until finally reaching 327% in June 2014.  Why regulators took so long to close this insolvent bank is unknown but the FDIC and other regulators seem to allow problem banks to remain operating even after it becomes obvious that they have no chance of recovery (see Regulators Let Zombie Banks Remain Open).

Courtesy banktracker.com

The two branches of TNRBC will reopen as branches of State Bank of Texas and all depositors will have uninterrupted deposit insurance coverage up to the applicable limits.  Customers of National Republic will have continued access to their money over the weekend through the use of debit cards, checks, and ATMs.

At June 30, 2014 National Republic had total assets of $954.4 million and total deposits of $915.3 million.  The State Bank of Texas agreed to purchase only $626.1 million of National Republic’s assets, implying that loans totaling $328 million are probably close to worthless and not worth reworking.  The FDIC will retain the assets not purchased for later disposition.

The cost to the FDIC Deposit Insurance Fund for the failure of National Republic is $111.6 million.  The National Republic Bank of Chicago becomes the 16th bank failure of 2014.  A total of five banks have now failed in Illinois this year.