MATERIAL LOSS REVIEW

OF 

SUPERIOR BANK, FSB

OIG-02-040 February 6, 2002

Office of Inspector General

*******

The Department of the Treasury
Contents

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 1

Audit Report....................................................................................................... 3

Results in Brief.................................................................................................. 4

Background....................................................................................................... 8

Findings and Recommendations......................................................................... 11

Finding 1 Causes of Superior’s Failure .......................................................... 11

Finding 2 OTS’ Supervision of Superior......................................................... 18

Finding 3 Prompt Corrective Action.............................................................. 30

Recommendations ....................................................................................... 36

Appendices

Appendix 1: Objectives, Scope, and Methodology......................................... 41

Appendix 2: Superior’s Securitization Structure and Process.......................... 45

Appendix 3: CCFC and Superior’s Organization Structure.............................. 47

Appendix 4: Chronology of Significant Events............................................... 48

Appendix 5: Glossary of Terms .................................................................... 55

Appendix 6 Management Comments ........................................................... 58

Appendix 7: Major Contributors To This Report............................................. 60

Appendix 8: Report Distribution.................................................................... 61

Abbreviations

AFC Alliance Funding Company 

ALLL Allowance for Loan and Lease Losses

CCFC Coast-To-Coast Financial Corporation

CFR Code of Federal Regulations
Contents

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 2

Abbreviations continued

DOS Division of Supervision 

DRR Division of Resolutions and Receiverships 

FAS Financial Accounting Standards

FASB Financial Accounting Standards Board

FDIA Federal Deposit Insurance Act

FDIC Federal Deposit Insurance Corporation

FFIEC Federal Financial Institutions Examination Council

FR Financial Receivable 

FSB Federal Savings Bank

FSLIC Federal Savings and Loan Insurance Corporation

GAAP Generally Accepted Accounting Principles

IMCR Individual Minimum Capital Requirement

OC Overcollateralization

OIG Office of Inspector General 

OTS Office of Thrift Supervision

PCA Prompt Corrective Action

SAIF Savings Association Insurance Fund

SHI Superior Holding Incorporated

TFR Thrift Financial Report

USC United States Code 
OIG Audit

Report

The Department of the Treasury

Office of Inspector General

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 3

February 6, 2002

James E. Gilleran

Director

Office of Thrift Supervision

As mandated under section 38(k) of the Federal Deposit Insurance 

Act (FDIA), we reviewed the failure of Superior Bank, FSB 

(Superior) of Oakbrook Terrace, Illinois. On July 27, 2001, the 

Office of Thrift Supervision (OTS) declared Superior insolvent after 

its principal owners failed to implement a Capital Restoration Plan 

(capital plan) that would have, in part, required a cash infusion of 

$270 million. In December 2001, the Federal Deposit Insurance 

Corporation (FDIC) estimated that Superior’s failure would cost the 

Savings Association Insurance Fund (SAIF) $350 million. 

The FDIA-mandated review essentially requires us to (1) ascertain 

the cause(s) of Superior’s failure; (2) assess OTS’ supervision of 

Superior; and (3) where applicable, recommend how such failures 

might be avoided in the future. We conducted detailed fieldwork at 

OTS headquarters in Washington, D.C., and OTS’ regional office in 

Chicago, Illinois. We also met with FDIC’s Division of Supervision 

(DOS) supervisory officials in Chicago, Illinois, and FDIC’s Division 

of Resolutions and Receiverships (DRR) and Division of Finance 

(DOF) in Dallas, Texas. We reviewed the supervisory files and 

interviewed key supervisory officials, such as examiners and others 

involved in regulatory enforcement matters. 

Although this report largely addresses the three FDIA-mandated 

areas of review, we were unable to fully assess certain aspects of 

OTS’ supervision of Superior. This is due, in part, to delays by 

OTS in providing us with documents it obtained through 24 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 4

subpoenas issued after July 27, 2001. We intend to continue 

reviewing these documents, and issue a subsequent report should 

any material findings arise from that review. A detailed discussion 

of the review objectives, scope, and methodology is provided in 

Appendix 1. 

Results in Brief

Superior was originally established in 1988 when the Pritzker and 

Dworman interests acquired Lyons Savings Bank of Countryside, 

Illinois. Renamed Superior in 1989, the acquisition entailed an 

investment of $42.5 million and assistance by the former Federal 

Savings and Loan Insurance Corporation (FSLIC). The corporate 

structure consisted of Superior being wholly owned by Coast-ToCoast Financial Corporation (CCFC), the holding company, with the 

Pritzker and Dworman interests each owning 50 percent of the 

holding company. At the time of its closing in July 2001, Superior 

had just over $1.9 billion in recorded assets, which had been 

largely funded through FDIC insured deposits of about $1.5 billion.

Beginning in 1993, Superior embarked on a business strategy 

marked by rapid and aggressive growth into subprime1 home 

mortgages and automobile loans. Superior transferred the loans to 

a third party, who then sold “asset-backed securities” to investors. 

The repayment of these securities was supported by the expected 

proceeds from the underlying subprime loans. For Superior, the 

securitization of subprime loans created what is referred to as a 

residual asset arising from the sold securities and a portion of the 

loan proceeds that were to flow back to Superior. Securitization of 

subprime loans generated large non-cash profits and overstated 

capital levels due to applicable accounting conventions at the 

time.2 Along with profitability came rapid growth. Superior more 

 

1

 “Subprime lending” generally refers to extending credit to borrowers exhibiting significantly higher 

credit risk than prime borrowers. 

2

 Issued in June 1996, Financial Accounting Standard (FAS) No. 125, Accounting for Transfers and 

Servicing of Financial Assets and Extinguishments of Liabilities, provided for the immediate recognition 

of a gain or loss on the sale on the date of the transaction (known as “gain-on-sale accounting”). FAS 

No. 125 also permitted the recording of the anticipated future income derived from the residual assets 

as capital. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 5

than doubled in asset size from about $974 million in 1993 to $2.3 

billion in 2001.

Properly valuing and recording the residual assets were critical 

thrift management judgments. It largely depended on 

management’s ability to accurately estimate several factors 

affecting the underlying residual assets’ cash flows, such as 

default rates (credit risk) and loan prepayments. Superior’s large 

non-cash earnings generated from the subprime loan securitizations 

likely masked, for a period of time, its actual losses caused by 

flawed valuation assumptions and calculations. Superior also 

assumed credit losses when the actual cash flows from the 

underlying loans were less than estimated. Eventually Superior had 

to make significant write-downs of the residual assets. Appendix 2 

provides a graphical description of Superior’s securitization of 

subprime loans and the resulting creation of residual assets. 

On December 10, 2001, Federal regulators and the Pritzker and 

Dworman interests entered into a settlement, which provided for 

them to eventually pay FDIC $460 million. As of 

December 31, 2001, the FDIC adjusted the estimated cost of 

Superior’s failure to $350 million taking into account the 

settlement. This also factors in the financial impact of several 

resolution transactions, such as asset sales that FDIC had 

completed and planned. 

Causes of Superior’s Failure

The events precipitating Superior’s insolvency in July 2001 were 

essentially a series of accounting adjustments resulting in losses 

and capital depletion. When the principal owners failed to 

implement the capital plan that would have entailed a capital 

infusion of $270 million and removal of substantially all of the 

$841.8 million in residual assets from the thrift’s books, OTS 

deemed Superior equity insolvent by $125.6 million.3 The

accounting adjustments were necessitated after OTS and FDIC 

examiners determined that Superior needed to write-off a $36.7 

million receivable from the holding company, and had overstated 

 

3

 Adjusted Tier 1 (Core) Capital was a negative $201.9 million after the disallowance of combined 

deferred tax and servicing assets of $76.3 million. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 6

the value of residual assets by $150 million. Contributing to the 

negative capital position were continued operating losses resulting 

from loan originations and discontinued business operations. 

While the immediate causes of Superior’s insolvency in 2001 

appear to be improper accounting and inflated valuations of 

residual assets, the root causes of the thrift’s failure could be 

attributed to a confluence of factors going back as early as 1993. 

Indeed, we believe that Superior exhibited many of the same red 

flags identified with problem banks of the 1980s and early 1990s. 

These included (1) asset concentration, arguably the most 

dominant factor to Superior’s failure, (2) rapid growth into a new 

high-risk activity, (3) deficient risk management systems relative to 

validation issues, (4) liberal underwriting of subprime loans, 

(5) unreliable loan loss provisioning, (6) economic factors affecting 

asset value, and (7) non-responsive management to supervisory 

concerns. 

OTS’ Supervision of Superior

In the early years, much of OTS’ supervision of Superior appeared 

incongruous with the institution’s increasing risk profile since 

1993. It was not until 2000 that OTS expanded examination 

coverage of residual assets and started meaningful enforcement 

actions. By then, however, it was arguably too late given 

Superior’s high level of, and concentration in residual assets. At 

times, certain aspects of OTS examinations lacked sufficient 

supervisory skepticism, neglecting the increasing risks posed by the 

mounting concentration in residual assets. OTS’ enforcement 

response also proved to be too little and too late to curb the 

increasing risk exposure, and at times exhibited signs of 

forbearance. We believe that it was basically Superior’s huge 

residual assets concentration and OTS’ delayed examination 

coverage of residual assets valuations that primarily negated the 

early supervisory intervention provisions of Prompt Corrective 

Action (PCA).4

 

4

 PCA is a framework of supervisory actions under 12 United States Code (USC) §1831o for insured 

thrifts that are not adequately capitalized. These actions become increasingly severe as a thrift falls 

into lower capital categories. The capital categories are: “well capitalized,” “adequately capitalized,” 

“undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.”
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 7

We believe OTS’ supervisory weaknesses were rooted in a set of 

tenuous assumptions regarding Superior. Despite its own 

increasing supervisory concerns, OTS: (1) persistently assumed 

that the Pritzker and Dworman interests would not allow Superior 

to fail and would always provide any needed capital, (2) assumed 

that thrift management was experienced in and had implemented 

sufficient controls to safely manage the complexities and high-risks 

of asset securitizations, and (3) unduly relied on the external 

auditors to attest to Superior’s residual asset valuations. All three 

critical assumptions ultimately proved wrong. 

Table 1

 Overview of OTS Supervisory History

Examination 

Started

CAMELS

Ratings5

Enforcement Action 

(Type: I=Informal, F=Formal)

July 1992 2/22232 None

July 1993 2/22221 None

Aug. 1994 2/22222 None

Sept. 1995 2/22212 None

Oct. 1996 2/22211 None

Oct. 1997 1/211121 None

Jan. 1999 2/222121 None

Sept. 1999 Follow up field 

visit

None

Jan. 2000 4/434221 1. 7/00 Part 570 Safety & 

Soundness Notice (I)

2. 7/00 Supervisory letter (I)

Oct. 2000 Follow up Field 

visit 

1. 2/01 PCA Directive (F) 

2. 2/01 Cease & Desist to 

Holding Companies (F).

Mar. 2001 5/554544 1. 5/01 Individual Minimum 

Capital Requirement Directive 

(IMCR) (F)

2. 5/01 PCA Directive (F)

3. 7/01 Formal Examination and 

Investigation

 Source: OTS examination files

 

5

 The first number is the composite number. A rating of 1 through 5 is given, with 1 having the least 

regulatory concern and 5 having the greatest concern. Individual components of the CAMEL rating 

system are Capital adequacy, Asset quality, Management administration, Earnings and Liquidity. 

Effective January 1997 an additional component addressing Sensitivity to market risk was added to the 

examination ratings.
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 8

Recommendations

This report contains nine recommendations aimed at enhancing the 

supervisory and examination process. Five are directed at 

improving examiner coverage of accounting and valuation issues. 

Another covers the need for examiners to follow-up on previously 

reported problems. The remaining three address PCA, including the 

need for Federal Financial Institutions Examination Council (FFIEC) 

interagency deliberations over current deposit restrictions. 

OTS Response and Office of Inspector (OIG) Comments

OTS generally concurred with the OIG’s findings and 

recommendations as noted in a January 31, 2002 written response 

to our draft report. OTS intends to implement the 

recommendations within six months, and has already begun 

working on a number of initiatives. For the full text of OTS’ 

response to the draft report, see Appendix 6. 

Background

Superior was originally established in 1988 when the Pritzker and 

Dworman interests acquired Lyons Savings Bank of Countryside, 

Illinois. At that time, Lyons was a failing thrift with assets of $1.5 

billion. Renamed Superior in 1989, the acquisition entailed an 

investment of $42.5 million and assistance by the former FSLIC. 

The corporate structure consisted of Superior being wholly owned 

by CCFC with the Pritzkers and Dwormans each owning 50 

percent of the holding company. In 1999, Superior Holdings, Inc. 

(SHI), a second-tier holding company, was created between CCFC 

and Superior. Superior operated 17 retail branches in the Chicago 

metropolitan area and maintained the accounting functions and 

corporate offices in Oakbrook Terrace, Illinois. See Appendix 3 for 

the corporate organization structure.

Beginning in 1993, Superior embarked on a business strategy 

marked by rapid and aggressive growth into subprime home 

mortgages and automobile loans. This strategy was facilitated 

through the acquisition of Alliance Funding Company (AFC), a 

mortgage-banking company located in Orangeburg, New York. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 9

AFC provided its nationwide network of brokers to support the 

subprime mortgage-banking program, including loan originations.

The credit risks associated with subprime lending were ostensibly 

lessened by removing the loans from Superior’s balance sheet 

through a process known as asset securitization. Simply stated, 

the process entailed Superior transferring the loans to a third party, 

who then sold “asset-backed securities” to investors. The 

repayment of these securities was supported by the expected cash 

flows from the underlying subprime loans. For Superior, the 

securitization of subprime loans generated large non-cash earnings 

and inflated capital levels due to applicable accounting conventions 

at the time. Superior securitized subprime loans on a quarterly 

basis, and, in about 10 years, securitizations totaled $9.4 billion. 

Superior’s reported earnings far exceeded its peers, with a 7.5 

percent return on assets, or 7.5 times higher than its peers in 

1998. 

Accumulation of Complex and High-Risk Assets

Superior’s profitable growth through subprime loans and 

securitizations did not come without risks. The securitization 

process created what is referred to as a residual asset arising from 

the sold securities and a portion of the cash flows that was to flow 

back to Superior after obligations of the “asset-backed securities” 

had been met. The residual assets are comprised of two

component parts, which illustrate the associated financial and 

accounting complexities. One part is comprised of a financial 

receivable (FR) known as the interest only strip portion, the other 

part is a credit enhancement for the issued securities known as the 

overcollateralization (OC) portion. Each component is accounted 

for separately. 

The methods and assumptions used to properly value the residual 

assets were critical judgments by thrift management. For example, 

management needed to consider factors such as the default rate of 

the underlying loans (credit risk), the rate borrowers might prepay 

loans (prepayment risk), and the interest rate used to discount the 

expected cash flows to obtain an accurate present value. These 

factors, in turn, were affected by other factors such as economic 

conditions and interest rate changes. Both the residual asset 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 10

values and imputed gains from the securitizations might not fully 

materialize if the underlying estimated factors were overly 

optimistic, erroneous, or actual cash flows materially differed from 

estimates. 

Besides the risks associated with accurately valuing residual 

assets, Superior incurred additional risks from securitizing subprime 

loans. Superior provided investors and the security underwriters 

explicit recourse on the underlying loans. In fact, Superior retained 

100 percent of the first loss position to cover credit losses up to a 

predetermined amount. 

Along with profitability came significant growth. As Chart 1 

shows, Superior’s assets more than doubled from 1993 to 2000, 

and its dependency on residual assets similarly grew at an 

increasing rate. 

Chart 1 

Source: Superior’s audited financial statements

Years of imputed gains and inflated capital from the subprime loan 

securitizations masked Superior’s true operating results and 

embedded losses from flawed valuation assumptions, inaccurate 

prepayment rates, and unsupported discount rates. These 

Residual Assets Represent a Greater Percentage of Total 

Assets Each Year

2% 4% 9%

15% 27%

34%

40%

44%

$0

$500

$1,000

$1,500

$2,000

$2,500

1993 1994 1995 1996 1997 1998 1999 2000

Years

in millions

Residual Assets Total Assets
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 11

practices eventually led to the significant accounting write-downs 

that contributed to Superior’s insolvency and closure. In 

August 2001, FDIC estimated Superior’s failure would cost the 

SAIF between $426 and $526 million. However, on 

December 10, 2001, Federal regulators entered into a settlement 

with the Pritzker and Dworman interests, which provided for them 

to pay FDIC $460 million. The first $100 million was immediately 

paid and the remaining $360 million is to be paid over 15 years. 

As of December 31, 2001, the FDIC had adjusted the estimated 

cost of Superior’s failure to $350 million by taking into account the 

settlement.

Findings and Recommendations

Finding 1 Causes of Superior’s Failure

As previously noted, Superior’s insolvency in July 2001 occurred 

after the owners failed to implement a capital plan that would have 

provided a capital cash infusion of $270 million. This set in motion 

a series of accounting adjustments that examiners had identified 

earlier in the year. The massive asset write-downs appeared to 

have been due to Superior’s improper accounting and valuation 

practices. OTS’ supervisory records, however, revealed that the 

underlying causes of failure could be attributed to thrift practices 

starting possibly as early as 1993. These earlier red flags and 

indicators of accumulating risks and associated problems were 

reminiscent of problem banks in the 1980s and early 1990s. 

Accounting Adjustments and Asset Write-Downs Depleted Capital 

As noted previously, when the principal owners failed to implement 

the capital plan in July 2001, OTS deemed Superior’s equity to be 

insolvent by $125.6 million. The adjustments were necessitated 

after OTS and FDIC examiners determined earlier in the year that 

Superior had overstated the value of residual assets by $150 

million due to overly optimistic assumptions used in the valuation 

models. Superior understated expected credit losses and used a 

lower discount rate than warranted, given the assets’ risk profile. 

Another material adjustment arose from a $36.7 million receivable 

due from the holding company, CCFC. In the second half of 2000, 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 12

Superior sold loans to the holding company. CCFC, in turn, sold 

the loans at a higher price than that paid to Superior. OTS deemed 

the sale transaction as a violation of 12 Code of Federal 

Regulations (CFR), Section 563, which requires that transactions 

with affiliates be on terms and conditions similarly offered to a nonaffiliated company. OTS required CCFC to repay Superior, but 

payment was delayed reportedly due to a cash shortage at CCFC. 

Ultimately, recouping the $36.7 million had become dependent on 

the owners implementing the capital plan, which did not 

materialize. This and the aforementioned write-down of residual 

assets depleted Superior’s capital from “significantly 

undercapitalized” to the “critically undercapitalized” PCA category. 

The need for large accounting write-downs actually arose earlier 

than 2001. Beginning in August 2000, examiners questioned 

whether Superior had properly followed FAS No. 125 in accounting 

for the OC portion of the residual assets. Examiners determined 

that Superior had not discounted the OC accounts as required, and 

accelerated the recognition of cash flows by recording it at par 

value. By March 2001, Superior realized that the improper 

accounting would require a $270 million adjustment, thus depleting 

capital from “adequately capitalized” to the “significantly 

undercapitalized” PCA category. The impact of the accounting and 

valuation adjustments on capital was extensive and occurred in a 

short period of time. Superior’s capital fell three PCA categories 

from “adequately capitalized” in March 2000 to substantively 

“critically undercapitalized” by March 2001.

Rapid Growth Resulting in an Extreme Concentration

Such a large capital depletion from a single asset type clearly 

reflected an unsafe and unsound practice, a condition due to an 

asset concentration. As Table 2 shows, Superior’s concentration 

in residual assets existed as early as 1993 totaling $18 million for 

33 percent of tangible capital, and grew to over $996 million for 

352 percent of tangible capital as of June 30, 2000. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 13

Table 2

Rapid Growth and Concentration in Residual Assets

Fiscal Years Ended June 30

(Dollars in millions)

Year

Residual 

Assets

Residual Assets to 

Tangible Capital (%)

1992 $0 0%

1993 $18.4 33%

1994 $37.1 72%

1995 $80.0 122% 

1996 $155.2 149% 

1997 $292.3 203% 

1998 $470.4 233% 

1999 $718.7 268% 

2000 $996.9 352% 

Source: Superior’s Audited Financial Statements

Generally, an asset concentration of 25 percent of tangible capital 

would warrant examiner attention. The adverse impact of the 

accounting adjustments on capital was magnified, given the sheer 

size of Superior’s concentration. Superior’s overall risk was even 

greater in that the residual assets derived from the sale of subprime 

loans were a relatively new product and thus lacked the support of 

a broad liquid market, should the need arise to quickly sell the 

residual assets. The concentration risk also magnified Superior’s 

exposure to credit risk given the less than normal credit quality of 

the underlying subprime loans. Despite the heightened risks due to 

the concentrations, Superior generally maintained capital levels 

equivalent to thrifts with less risky traditional lending activities.

Deficient Risk Management Systems

Despite the large and growing risk exposure, Superior apparently 

lacked certain controls and systems commensurate with its highrisk business activities. For example, Superior lacked established 

goals for diversification or pre-set exposure limits established by 

management and approved by the board. Rather than establish risk 

limits, management appeared to encourage growth based on 

compensation incentives tied to loan volume. 

According to examiners, Superior also lacked financial management 

information systems to support its complex business strategy. For 

example, monthly operating results could not be readily generated 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 14

which would have facilitated the identification and monitoring of 

unprofitable activities. Furthermore, the financial management 

systems were not fully integrated, and actually relied on manual 

inputs to generate financial information. Daily account balances 

could be obtained for each general ledger account, but substantial 

interdivisional transactions were not eliminated until the 

consolidation process was completed through a myriad of 

spreadsheets at month-end. 

Controls and systems over the valuation of residual assets were 

also weak. Superior relied on a third party for the securitizations 

and residual asset valuation models rather than performing these 

functions internally. Specifically, Fintek, Inc., a unit of CCFC, 

located in Orangeburg, New York performed these critical thrift 

functions. Supervisory records show that Superior paid inadequate 

attention to Fintek and lacked sufficient controls to ensure that key 

valuation functions were reliable. For example, Superior could not 

provide examiners with a “well-documented independent review of 

Fintek’s model integrity.” Even fundamental “stress” testing 

incorporating varying discount rates, default rates, and prepayment 

rates were either lacking or deficient. 

Superior also filed inaccurate regulatory Thrift Financial Reports 

(TFR) that differed materially from its audited financial statements. 

For example, at one time residual assets were reported on a gross 

basis with an associated credit reserve included in the Allowance 

for Loan and Lease Losses (ALLL). This not only overstated the 

residual assets and the ALLL, but also regulatory capital. In part, 

many of these management system deficiencies served to mask 

and/or contributed to the eventual large asset write-downs leading 

to Superior’s insolvency.

Liberal Underwriting 

Credit risk was one of the key factors that ultimately affected the 

residual asset valuations given the dependency on the expected 

cash flows from the underlying loans. Credit risk also arose from 

the recourse provisions that Superior provided to investors to 

enhance the sale of “asset-backed securities.” In many instances, 

Superior had been in a first loss position, having committed to 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 15

absorb 100 percent of any underlying loan losses supporting the 

issued securities. 

Although exposed to credit risk from several fronts, the supervisory 

records indicate Superior had liberal underwriting practices, 

inadequate review procedures to detect inflated appraisals, and 

indications that employee bonuses may have been tied to loan 

volume. Examination records show that Superior increased the risk 

with its securitization activities by reducing lending quality 

standards beginning in 1998 and continuing through 2000. This 

was accomplished by originating more “C” and “D” credit quality 

loans than in prior years.6 In 1997, these lower quality loans 

accounted for 15 percent of all originations, and by 2000, had 

doubled to 31 percent. 

The resulting securitized loans, large in size and lower in credit 

quality, resulted in high delinquencies with actual loss experience 

exceeding Superior’s expectations, especially those originated 

through wholesale channels. 

The liberal underwriting was especially evident with Superior’s 

subprime automobile loan business, which began in 1994. 

Superior’s strategy was to build this lending activity in a similar 

fashion as the subprime mortgage-banking area by originating, 

securitizing, and selling the loans. Automobile loan originations 

went from $38.7 million in 1995 to nearly $350 million (mostly for 

used cars) in 1999, a nine-fold increase. Delinquencies and loan 

losses mounted and the subprime automobile program was 

discontinued in 2000, but not until Superior had lost an estimated 

$100 million. 

Unreliable Loan Loss Provisioning

Examination files characterized Superior’s understanding of the 

ALLL provisioning process as seriously deficient. Superior’s 

provisioning appeared confusing and inconsistent across the 

different business units. At times examiners would note material 

excess provisioning, at other times material excess shortfalls. 

 

6

 The cited credit rating scale was internal to Superior and went from “A” to “D”, with “A” being the 

highest. For example, “A” loans might include borrowers with a discharged bankruptcy over 5 years 

ago, whereas “C” loans might include borrowers with a discharged bankruptcy within days. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 16

In its 1994 and 1995 examination reports, OTS advised Superior of 

the improper inclusion of $1.6 and $2.6 million, respectively, of 

residual reserves in the ALLL. The excess provisioning effectively 

overstated the risk-based capital levels because regulations allow 

thrifts to include a portion of the ALLL. It was unclear from 

subsequent examination reports whether Superior’s excess 

provisioning ever resulted in overstating risk-based capital beyond 

the “adequately capitalized” category, i.e., masking an 

“undercapitalized” position. 

However, there were indications that the overstated capital levels 

may have benefited Superior in two areas. According to OTS 

records, the overstated risk-based capital levels enabled Superior to 

pay dividends of about $11.3 million in excess of Superior’s own 

dividend policy and capital level goals. The overstated risk-based 

capital also may have allowed Superior to avert PCA brokered 

deposit restrictions as early as 1995, a time when Superior 

undertook significant growth.7 These PCA restrictions are intended 

to curb or reverse growth by limiting an institution’s funding 

sources. OTS analysis revealed the excess ALLL may have 

overstated risk-based capital for at least three quarters between 

August 1994 and January 1999. It was not until 2000 that the 

bulk of the excess ALLL provisioning was finally eliminated in the 

amount of $126 million. 

OTS also found in 2000 that Superior’s ALLL for automobile loans 

had a material shortfall. OTS reported that the thrift’s ALLL policy 

did not cover all the associated risks, lacked specificity, and would 

not result in adequate allowances. At the time, Superior’s available 

ALLL balance totaled $2.6 million to cover the auto loan portfolio 

of $578.9 million. Examiners determined that Superior needed at 

least $14.1 million, in effect, a five-fold provisioning shortfall in the 

ALLL. 

Economic Factors Affecting Superior

One reason subprime lending is considered a high-risk activity is 

that an economic slow down will tend to adversely affect subprime 

 

7 Brokered deposits are funds obtained, either indirectly or directly, by or through a broker, for deposit. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 17

borrowers earlier and more severely than standard-risk borrowers. 

Given Superior’s focus on subprime lending and concentration in 

residual assets supported by subprime loans, economic and market 

factors would have presented added risks and greater management 

challenges to ensuring a safe and sound operation. 

As noted previously, Superior’s profitability was dependent on the 

cash flows of the subprime loans supporting the residual assets. 

One factor affecting cash flows is loan prepayments. For subprime 

loans, prepayments occur more frequently than for prime loans 

both when interest rates decline and credit worthiness improves. 

Credit improvement is typically the most important determinant of 

subprime prepayment rates as borrowers can refinance at a lower 

rate, and qualify for conforming standard loans after the typical 

12-month credit-curing period. Increased competition in the 

subprime markets also increases prepayments as margins narrow 

and as borrowers prepay loans to refinance at more favorable 

terms. 

Examinations in 2000 revealed that Superior had experienced 

greater than expected prepayments and default rates, which 

adversely affected residual asset valuations. As with other 

subprime lenders, Superior was subject to economic and market 

fluctuations beyond its control. However, given Superior’s weak 

systems, polices, and controls, these external factors may have 

contributed to Superior’s failure to a larger degree than for other 

institutions. 

Non-Responsive Management

Many of the aforementioned red flags and indicators of developing 

problems were raised by OTS as early as 1993. However, the 

supervisory record reflects a pattern whereby thrift management 

promises to address supervisory concerns were not fully responsive 

or were not implemented. Of note were supervisory concerns 

regarding the growing residual assets in 1993 when AFC became a 

division of Superior. 

Prior to acquiring AFC, Superior’s management provided OTS oral 

assurances that it would move the risk out of the thrift by 

up-streaming the residual assets to CCFC. However, Superior only 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 18

up-streamed $31.1 million of residual assets out of at least $996 

million through 2000. Thrift management also assured OTS that 

thrift resources would not be used to fund AFC’s mortgage-banking 

activities. However, the mortgage activities continued to be 

funded using Superior’s deposits instead of higher cost funding 

sources. 

Besides the growing concentration in residual assets, OTS warned 

Superior that it needed to establish prescribed exposure limits 

based on risk considerations, such as anticipated loan sales and 

capital support. Again, thrift management and the board did not 

establish such limits or guiding policies covering concentration 

risks. As noted previously, OTS had also expressed concerns in 

1994 and 1995 about the improper inclusion of residual assets 

reserves in the ALLL. Despite this, Superior continued this practice 

until 2000. 

The pattern of non-responsiveness by Superior’s management 

continued into the later years. In 2000, examiners determined that 

Superior had swapped $12 million in defaulted automobile loans 

with an external third party vendor in return for advertising credits. 

OTS determined the credits were worthless and subsequently 

received written assurances from management that the transaction 

would be reversed and the associated loans written-off. OTS’ 

subsequent 2000 field visit determined that neither of the promised 

corrective actions had been taken. Similar incidents of nonresponsive management surfaced in 2001 concerning improper 

loan classifications, questionable transactions with the holding 

company, and the need to correct previously filed TFRs. 

Finding 2 OTS’ Supervision of Superior

In the early years, much of OTS’ supervision of Superior appeared 

incongruous with the thrift’s increasing risk profile since 1993. It 

was not until 2000 that OTS expanded examination coverage of 

residual assets and took meaningful enforcement actions. By then 

it was arguably too late given Superior’s high concentration in 

residual assets. At times, certain aspects of OTS’ examinations 

lacked sufficient supervisory skepticism, neglecting the increasing 

risks posed by the mounting concentration in residual assets. PCA 

was not designed to prevent all financial institution failures. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 19

However, we believe that OTS’ delayed examination coverage of 

residual asset valuations, coupled with Superior’s large 

concentrations, effectively negated the applicability of PCA’s early 

supervisory intervention provisions. 

Examination History and Enforcement Actions 

Table 3 below summarizes the results of OTS’ annual safety and 

soundness examinations, and enforcement actions. Also, see 

Appendix 4 for a detailed chronology of significant events 

regarding Superior.
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 20

Table 3 

OTS Examination Issues and Enforcement Actions

Date Residual Assets

Started

CAMELS 

Ratings

In millions

% to 

Tangible 

Capital

Other Significant Safety and Soundness Issues Enforcement 

Actions 

7/20/92 2/22232 $0 0% •Inadequate due diligence reviews of purchased loans to ensure 

underwriting standards were met

• Understated classified assets

• Inadequate loan loss reserves 

NONE

7/06/93 2/22221 $18 33% •Understated classified assets 

•Inadequate loan loss reserves 

•Concerns with residual assets’ risk 

•Improper TFR reporting of residual assets 

•No comprehensive dividend policy 

NONE

8/8/94 2/22222 $33 64% • Improper TFR reporting of residual assets 

• Allowances for residuals credit losses included in risk- based capital

• Dividends exceeded Superior’s policy

• Recent mortgage-banking losses

• No investment limit for residual assets 

• Fintek and AFC intensively involved in management 

NONE

9/11/95 2/22212 $66 100% • Allowances for residuals credit losses included in risk-based capital

• Concerns with underwriting appraisal values 

• Delays in responses to OTS because decisions are divided between 

home office, Fintek and AFC 

• Residual asset concentration presents risk to capital 

NONE

10/7/96 2/22211 $148 142% • TFR inaccurate for classified assets, capital, and brokered deposits NONE

10/27/97 1/211121 $334 218% • Understated classified assets 

• Residual asset concentration presents risk to capital 

• Sale of residual assets to holding company considered 

• Inaccurate prepayment assumptions used to value residual assets 

• Violations of minimum overall liquid asset requirement 

NONE

1/25/99 2/222121 $521 242% • Understated classified assets 

• Inaccurate prepayment assumptions used for residual assets 

• Unacceptable auto loan delinquencies 

NONE

9/21/99 Field Visit n/a n/a • Understated classified assets NONE

1/24/00 4/434221 $869 308% • No investment limit for residual assets 

• Improper prepayment and loss rates overstated residual assets 

• No fair market valuation performed for residual assets 

• Understated classified assets 

• Overstated loan loss reserves on TFR 

• Improper TFR reporting of residual assets 

• Delays in providing documentation to OTS 

7/5/00

Part 570 

Notice

7/7/00 

Supervisory 

Letter

10/16/00 Field Visit $977 345% • Improper accounting and discount rate overstated residual assets 

• Capital and classified assets not adjusted as agreed upon 

• Delays in providing documentation to OTS 

• Inadequate loan loss reserves

2/14/01

PCA Directive

2/14/01 C&D

3/19/01 5/554544 $842 2043% • Inaccurate discount and loss rate overstated residuals

• Residual assets’ concentration presents risk to capital

•Out of balance accounts and the collectibility of advances unknown 

• Inefficient and unprofitable lending platform

• Complex accounting system and reliance on quarterly reports 

• Understated classified assets 

• Inadequate loan loss reserves 

• Transactions with affiliate violations 

•Improper “right of setoff” used on TFRs which reduced assets and 

liabilities, and thus lowering required capital 

5/24/01 

PCA 

Directive

5/24/01 

IMCR

7/24/01 

Formal 

Examination/ 

Investigation

Source: OTS Reports of Examination
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 21

The examination ratings and enforcement response did not reflect 

supervisory concern over Superior’s increasing risk exposure until 

2000. From interviews with examiners, it appears any concerns 

they had over the mounting risks prior to 2000 was largely 

alleviated by Superior’s high earnings and the resulting capital. 

Additionally, examination staff believed that thrift management had 

the expertise to adequately manage and monitor the activity. 

However, in hindsight some examiners admitted that closer 

scrutiny was warranted had they taken into account the quality of 

earnings and capital, i.e., core earnings from operations as opposed 

to the imputed gains afforded by gain-on-sale accounting. 

Delayed Supervisory Response to Asset Growth and 

Concentrations

As previously noted, the high concentration levels of residual 

assets magnified the adverse effects of the accounting and 

valuation adjustments leading to Superior’s insolvency. As early as 

1993, OTS examinations reflected some concerns about the risks 

associated with residual assets, at the time totaling $18 million, or 

about 33 percent of tangible capital. Yet, as shown in Table 3, 

OTS did little to either curb the rapid growth or concentrations, 

which reached $977 million for over 345 percent of capital as 

reflected in the 2000 examination.

It was not until December 1999 that Federal banking regulators 

had uniform guidance over asset securitizations and related residual 

assets (referred to as “retained interests” in the guidance).8 

Additionally, the associated accounting complexities for this 

activity are reflected by the absence of any standard accounting 

guidance until the issuance of FAS No. 125 in 1996, and a series 

of subsequent clarifying guidance in 1998, 1999, and ultimately 

the replacement guidance, FAS No. 140, in 2000. As for the 

underlying subprime loans supporting Superior’s residual assets, 

Federal regulators had not issued uniform guidance on subprime 

lending until March 1, 1999. 

 

8

Interagency Guidance on Asset Securitization Activities, Federal Financial Institutions Examination 

Council (FFIEC), December 13, 1999.
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 22

Notwithstanding the absence of regulatory and accounting 

guidance over asset securitizations, we believe other existing 

supervisory guidance for concentrations may have provided the 

basis for OTS to have responded earlier to limit Superior’s growth 

and risk accumulation. OTS’ regulatory handbook alerts examiners 

to concentration risk when it exceeds 25 percent of core capital, a 

level Superior exceeded in 1993 at 33 percent. And as shown in 

Table 3, this concentration continued to grow, at times doubling 

from one year to the next, to a high of 345 percent of capital as 

reflected in the 2000 examination. 

Besides the rapid growth, there were other indicators that should 

have alerted examiners that Superior’s activity was high-risk: 

• The level of Superior’s residual assets clearly surpassed all 

other OTS supervised thrifts. For example, by May 2000 

Superior’s interest strip component of the residual assets 

stood at $643 million, more than the combined total for the 

next highest 29 OTS supervised thrifts across the country. 

In terms of capital support, Superior’s interest strip 

amounted to 223 percent of capital as compared to 71 

percent for the next highest institution. 

• The underlying subprime loans supporting the residual assets 

were high-risk. OTS’ own internal documents to field offices 

in 1997 advised supervisory officials that subprime loans 

were considered high-risk and warranted additional examiner 

guidance. 

• A pattern of improper TFR reporting of residual assets by 

Superior beginning as early as 1993. 

Unfulfilled commitments by Superior’s management and board to 

OTS to address the residual asset risks were perhaps the most 

telling supervisory risk indicator. OTS originally expressed concern 

with the residuals in 1992 when Superior acquired AFC to expand 

its mortgage-banking business. In response, thrift management 

gave OTS oral assurance that either selling or up-streaming the 

residual assets to the holding company would control the risk. But 

in the following years, residual assets continued to grow with only 

minor transfers to the holding company. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 23

OTS continually recommended but did not require Superior to 

reduce its residual asset levels. Instead, OTS generally accepted 

Superior’s assurances that residual assets would be sold or 

up-streamed to the holding company and, if not, the residual assets 

would be properly managed. Besides relying on management 

commitments, examiners and senior OTS officials believed that the 

principal owners would provide financial assistance should the risks 

adversely affect Superior. 

Ineffective Enforcement Action

It was not until 2000 that OTS actively pursued enforcement 

action to limit Superior’s residual asset growth. In July 2000, OTS 

directed Superior to submit an acceptable Part 570 Safety and 

Soundness Compliance Plan (also known as a Part 570 notice).9 

This Part 570 notice required, in part, that Superior reduce its 

residual assets to no greater than 100 percent of core capital 

within a year. By this time, however, it was arguably too late 

since Superior’s residual assets were over 300 percent of capital; 

Superior had already exceeded 100 percent 5 years earlier, in 

1995. 

Upon closer review, we question whether the Part 570 notice was 

a sufficient sanction given management’s prior unfilled 

commitments to address the residual asset risks. The Part 570 

enforcement process entails an institution submitting to OTS an 

acceptable Safety and Soundness Compliance Plan to meet 

prescribed safety and soundness banking standards. Technically, 

the Part 570 notice is not in effect until a plan has been submitted 

and found acceptable by OTS. Thus additional delays might arise 

should a plan warrant subsequent amendments and revisions. 

This was, in fact, the situation with Superior. Superior submitted 

an amended compliance plan in September 2000 and again in 

November 2000. In effect, this delayed the Part 570 process an 

additional 4 months. The Part 570 notice never took effect 

because OTS did not officially accept the plan, and eventually the 

action was taken over by subsequent supervisory events. Certain 

 

9

 12 USC § 1831 and 12 CFR § 570. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 24

provisions of the Part 570 notice were eventually incorporated into 

another enforcement action in February 2001. 

We asked why the Part 570 notice had been used rather than an 

equivalent enforcement action available under 12 USC § 1818, 

such as a Temporary Cease and Desist order. By using this 

enforcement action, many of the same provisions and corrective 

actions would have taken effect sooner. Two OTS senior 

supervisory officials told us that the Part 570 notice is not subject 

to public disclosure until it becomes an order, whereas other 

actions are subject to public disclosure when final. It was felt that 

public disclosure might impair Superior’s ability to obtain needed 

financing to continue generating loans for sale. It should be noted 

that the FDIC, in a July 2000 memorandum, raised no objections to 

OTS initiating the Part 570 notice and that this was a good first 

step in addressing Superior’s risk. 

OTS was apparently still attempting to work cooperatively with 

Superior to resolve safety and soundness concerns. However, we 

believe that Superior’s risk profile and management’s prior record 

of not addressing OTS concerns warranted a more forceful 

enforcement action. 

Aside from the timing and forcefulness of the enforcement action, 

we also observed that the Part 570 notice attempted to reduce the 

concentration risk partly by reducing residual assets to no greater 

than 100 percent of core capital. However, there were no 

provisions to further mitigate risks by requiring additional core 

capital coverage. This latter enforcement aspect was not 

addressed until 2001 with the issuance of additional enforcement 

actions, discussed later in the report. 

We recognize that it is somewhat speculative to conclude that 

earlier and more forceful enforcement action would have lessened 

Superior’s losses or prevented its failure. Nevertheless, Superior’s 

mounting concentrations, the presence of several other high-risk 

indicators, and thrift management’s unfilled prior commitments 

strongly suggests earlier enforcement action was warranted. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 25

Examination Weaknesses Over Valuation and Accounting Problems

Superior’s residual asset exposure was clearly growing beginning in 

1993. From a safety and soundness standpoint, the risks were 

evident given the amount of residual assets relative to total assets 

and core capital. Yet, OTS examinations of the residual asset 

valuations lacked sufficient coverage during the rapid growth years 

up through 1999. Examiners did not exhibit the supervisory 

skepticism normally shown over traditional loans. Instead 

examiners appeared to have unduly relied on others to attest to the 

carrying value of Superior’s residual assets, despite noted TFR 

reporting errors since 1993. 

One specific examination weakness was the lack of on-site 

coverage of the third party service provider that provided the basis 

for Superior’s residual asset valuations. Superior used Fintek Inc. 

of Orangeburg, New York, which was an affiliate unit through the 

holding company, CCFC. Fintek provided Superior with consulting 

services including treasury services, valuations, and modeling for 

the residual assets, and represented Superior in the capital 

markets. Fintek provided Superior the basis for the valuation 

models, underlying assumptions, and calculations. 

OTS examiners did not conduct meaningful on-site examination at 

Fintek until 2001. Most of the prior examination coverage of the 

valuation process was not conducted at Fintek’s offices in 

Orangeburg, New York, but instead at Superior’s offices in 

Oakbrook Terrace, Illinois. The examination coverage at Oakbrook 

Terrace was comprised largely of a document review provided by 

Fintek and Superior’s external auditor. It was not until March 2001 

that OTS expanded its examination coverage and performed testing

at Fintek. It was that on-site examination that ultimately led to the 

$150 million write-down of Superior’s residual assets in July 2001. 

We believe the lack of meaningful on-site examination coverage at 

Fintek is attributable to several factors. 

• OTS lacked detailed examination procedures covering third 

party service providers such as Fintek. While an internal 

1991 OTS examination bulletin describes some of the risk 

when a thrift uses a third party service provider, such as a 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 26

consultant, it does not outline the supervisory obligations of 

an examiner in this area. 

• Securitized assets were relatively new and complex, and 

examiners may not have had sufficient related expertise 

needed to readily recognize the risks and implications of 

inaccurate valuations, and thus determine when closer 

scrutiny was warranted. Indeed, even OTS’ expanded onsite coverage at Fintek in 2001 was seemingly undertaken at 

FDIC’s urging. 

• Contrary to internal guidance, OTS examiners unduly relied 

on Superior’s external auditors to attest to the residual asset 

valuations recorded on Superior’s financial statements. 

Examiner reliance placed on the external auditors was not 

unique to OTS. We also found undue reliance placed on 

external auditors by the Office of the Comptroller of the 

Currency during our material loss review of the First National 

Bank of Keystone.10 

A senior OTS official stated that prior to 2000 there was no 

compelling reason to be concerned with the residual asset 

valuations. And examiners we interviewed expressed confidence in 

Superior’s management who appeared knowledgeable of the asset 

securitization business. Notwithstanding examiner judgment at the 

time, we believe there were indications that closer on-site 

examination coverage over the valuation process was warranted 

earlier. 

By outsourcing the valuation function to Fintek, Superior decreased 

its direct managerial control over a critical function, and thus 

intensified the need for oversight. One commonly recognized 

control is audit coverage of a third party service provider by the 

thrift’s internal audit group. OTS records, however, show that 

Superior did not provide sufficient internal audit coverage of the 

valuation area. In fact, it appears that the internal auditor’s 

independence had been compromised or unduly influenced by 

 

10 Material Loss Review of The First National Bank of Keystone, OIG-00-067, March 10, 2000. The 

FDIC OIG also reported a related condition dealing with external auditors in the Material Loss Review –

The Failure of Pacific Thrift and Loan Company Woodland Hills, California, Report No. 00-022, 

June 7, 2000. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 27

senior thrift managers and board members. Audit committee 

meetings were infrequent and Fintek operations were “off-limits” to 

the internal auditors despite the many critical services that were 

provided to Superior. In the absence of internal audit coverage, 

examiners were effectively placing even greater reliance on the 

external auditors.

As for Superior’s managerial competencies, OTS apparently had 

not been aware that two of Superior’s senior financial officials had 

previously held senior financial management positions at two other 

financial institutions. These banks had either failed or had material 

financial problems. One official had purportedly been terminated 

for cause by the failed institution prior to joining Superior. We 

were unable to determine, however, whether the two officials’ 

affiliations with the two problem banks would have raised earlier 

questions or concerns over their managerial competencies. 

Nevertheless, the supervisory files do not indicate that OTS ever 

considered the two senior officials prior banking experience, but 

instead persistently believed in, and relied on Superior’s 

management. 

Undue Reliance Placed on External Auditors

Besides valuation issues, OTS examiners unduly relied on the 

external auditors to ensure that Superior was following proper 

accounting standards for the residual assets. According to OTS’ 

1995 Regulatory Handbook on Independent Audits, examiners 

“may rely” on an external auditor’s findings in ”low-risk” areas. In 

high-risk areas, examiners should conduct a more in-depth review 

of the external auditors’ work, including a review of the underlying 

workpapers. OTS recognized that Superior’s asset securitization 

and the underlying subprime loans were both high-risk areas. But, 

an in-depth examiner review of the auditor’s workpapers did not 

occur until late 2000, many years after Superior had built up a 

large risk exposure. 

We believe the events leading up to the examiners eventually 

discovering the accounting error resulting in the $270 million writedown suggest that examiners may not have had sufficient 

expertise and familiarity with the complexities surrounding the 

accounting and/or valuation issues for residual assets. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 28

Shortly after the joint OTS and FDIC examination in January 2000, 

an FDIC analyst noticed that other institutions’ financial data had 

reflected downward adjustments that had been made to conform 

to the 1998 FAS No.125 clarifying guidance (known as Questions 

and Answers). Simply stated, the FAS issuance clarified how the 

residual asset OC component should be recorded using a present 

value rather than a par value basis.11 The absence of this 

downward adjustment in Superior’s financial statements prompted 

the FDIC analyst to urge OTS to include in its October 2000 field 

visit a more detailed review of the audited financial statements and 

the external auditor’s underlying workpapers. 

OTS’ October 2000 field visitation eventually led to the 

determination that Superior had incorrectly recorded residuals by as 

much as 50 percent. Supervisory records also show that the 

external auditors could not provide sufficient support for Superior’s 

fair value modeling or accounting interpretations. These would 

have been reflected in Superior’s audited financials for the 

preceding fiscal year ending June 30, 2000. 

One of the provisions of the Part 570 enforcement action of July 

2000 further illustrates the undue reliance placed on the external 

auditors. Due to valuation concerns, Superior was required to 

obtain an independent valuation for sampled residuals to validate 

the results produced by Fintek. Superior used the same accounting 

firm that had audited its financial statements ending 

June 30, 2000. We found no indication that OTS considered the 

implications of Superior relying on the same firm to validate a major 

area that it covered in its audit. In effect, Superior was asking the 

firm to validate its financial statement audit work. 

We acknowledge that current auditing standards do not preclude 

using the same firm for valuation services and financial statement 

audits. We also recognize that two different offices of the same 

accounting firm conducted the valuation versus financial statement 

audit. But the supervisory record does not indicate that examiners 

questioned this particular arrangement or attempted to assess 

 

11 The 1998 Questions and Answers specifically clarified the conditions for recognizing residual cash 

flows under a “cash-in” versus “cash-out” basis. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 29

whether the external auditor’s validations might warrant further 

examiner review. Additionally, OTS records show that the required 

independent validation had not been fully completed as specifically 

required by the Part 570 enforcement action, and there was no 

indication that OTS ever raised this issue with Superior as being 

non-responsive to the Part 570 notice. 

Given the risk indicators previously mentioned, we believe much of 

OTS’ earlier year examinations that lacked normal supervisory 

skepticism to test, validate, and verify Superior’s valuations and 

procedures can be attributed to a combination of reasons. The 

supervisory files and interviews with supervisory officials lead us to 

believe that examiners may not have been fully sensitive to the 

complexities of a new product for which there was little guidance 

to assess risk. The apparent supervisory indifference to Superior’s 

mounting risks through 1999 was partly sustained by OTS’ belief 

in thrift management’s expertise, coupled with examiners’ undue 

reliance on the external auditors to attest to Superior’s valuations 

and accounting practices. 

Provisioning Issues Not Followed-Up

As previously noted in Finding 1, the supervisory records surfaced 

several problems regarding Superior’s provisioning processes for 

loan losses. In its 1994 and 1995 examinations, OTS reported 

that Superior improperly included a portion of the residual asset 

reserves in the ALLL. The potential effects include overstating 

Superior’s risk-based capital levels, which in turn may have allowed 

Superior to pay excess dividends. Overstated capital may have 

also negated the PCA brokered deposits limitations during 

Superior’s rapid growth years through 1999. 

The supervisory record is silent on the excess provisioning issue 

until the 2000 examination, at which time OTS required Superior to 

reduce the ALLL by $126 million. We asked examiners why the 

1994 and 1995 deficiencies had not been followed up in the 1996 

examination. The examiners could not recall why they did not 

follow up, but assumed that the issue had been resolved. 

However, we could not determine from the supervisory files that 

the issue had even been considered for follow-up purposes, and 

there were no notations to the supervisory files that the issue had 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 30

been resolved. The 1996 and subsequent examination reports up 

to 2000 show an increasing ALLL, including a portion for the 

residual assets. 

Besides the normal practice of following-up on a previously 

reported deficiency, there was another indicator suggesting the 

need for examiner follow-up. Superior’s reported reserves and 

provisions for generally accepted accounting principles (GAAP) 

purposes differed from that reported for regulatory purposes (i.e., 

TFR). In 1998, the reported regulatory levels were about double 

over that reported under GAAP, even though TFR reporting 

instructions would not suggest there should have been a 

difference. Again, this type of reporting difference with an excess 

ALLL could have resulted in overstated risk-based capital. 

A senior OTS official, in a December 21, 2001, letter to the FDIC 

Office of Inspector General stated that the lack of follow-up was 

due to the complexities of the associated accounting standards. 

Furthermore, according to the OTS official, the 1996 FAS clarifying 

guidance took the accounting community an additional 3 years to 

fully understand and apply consistently. The OTS official further 

pointed out that other non-thrifts continue to report this item in a 

similar manner as Superior. 

Finding 3 Prompt Corrective Action

Enacted in 1991, Prompt Corrective Action (PCA) provides Federal 

banking regulators an added enforcement tool to promptly address 

“undercapitalized” banks and thrifts. PCA consists of a system of 

progressively severe regulatory intervention that is triggered as an 

institution’s capital falls below prescribed levels. PCA does not 

replace or preclude the use of other available enforcement tools 

(e.g., cease and desist orders, removal actions, civil monetary 

penalties) that address unsafe and unsound banking practices 

before capital becomes impaired. PCA aims to minimize losses to 

the FDIC deposit insurance fund by providing for a quick regulatory 

response to troubled institutions. 

OTS used PCA in response to Superior’s problems. But some of 

the PCA early intervention provisions may have been negated by 

OTS’ delayed supervisory response in detecting problems. OTS 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 31

also appeared to have exercised regulatory forbearance by delaying 

the recognition of Superior’s true capital position in early 2001. 

OTS may also have failed to enforce one of the PCA restrictions 

over senior executives’ bonuses. Superior’s ability to quickly 

replace brokered deposits with insured retail deposits possibly 

raises an aspect of PCA that may warrant further regulatory 

review. 

Prompt Regulatory Intervention Slowed by Delayed Detection

PCA’s progressively severe mandatory enforcement provisions are 

triggered as a thrift’s capital is depleted below prescribed capital 

categories. As such, PCA is dependent on a lagging indicator 

because capital depletion or the need for capital augmentation 

occurs only as quickly as thrift management or regulators recognize 

problems. As previously noted, Superior’s recorded capital fell 

precipitously in just one year’s time, from “adequately capitalized” 

in March 2000 to substantively “critically undercapitalized” by 

March 2001. 

The supervisory record and the aforementioned audit findings 

suggest several instances where supervisory delays likely resulted 

in not recognizing Superior’s true capital position. As a result, 

these likely delayed the automatic triggering of certain PCA 

provisions. For example, the delayed examiner follow-up on the 

1994 and 1995 reported ALLL deficiencies effectively resulted in 

overstated capital levels as early as 1996, and again in 1997 and 

1999. Had Superior’s true capital level been known, perhaps the 

PCA restriction over the use of brokered deposits could have been 

invoked sooner to stem the growth and buildup of risky residual 

assets. As noted in Finding 1, Superior’s most significant 

mounting risk exposure occurred from 1993 through 2000. 

Other instances where delayed supervisory detection negated PCA 

include the $270 million accounting adjustment initially detected in 

October 2000 and the $150 million valuation write-down originally 

determined in late May 2001. Both of these events surfaced when 

OTS expanded its examination coverage of the external auditor’s 

workpapers in late 2000 and at Fintek in 2001. The $270 million 

adjustment effectively lowered Superior’s capital to the 

“significantly undercapitalized” level. The associated adjustments 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 32

had been based on Superior’s financial statements for the fiscal 

year ending June 30, 2000. However, the applicable accounting 

standard had been issued in late 1998, and thus its application 

could have been verified against Superior’s audited fiscal year 

1999 financial statements. Had that been done, the accounting 

error would have been detected a year earlier, and Superior would 

likely have been required to submit a PCA capital plan to address 

an “undercapitalized” PCA level. 

The $150 million valuation write-down was due to overly optimistic 

assumptions used in Superior’s valuation models. The external 

auditor’s inability to validate Superior’s valuation models, 

Superior’s inability to provide documentation of the underlying 

assumptions, and the lack of stress testing all likely existed prior to 

OTS’ discovery of these deficiencies in late 2000. Of importance 

was that this adjustment lowered Superior’s capital to the 

“critically undercapitalized” level, at which time PCA’s 90-day 

closure rule would start. 

We recognize that it is somewhat speculative that had OTS 

detected problems earlier, PCA’s early intervention provisions 

would have, in turn, been triggered sooner. Nevertheless, we 

believe that Superior’s mounting risk exposure since 1993 provided 

OTS the basis for expanding examination coverage sooner than 

2000. And while no single problem alone would have conclusively 

prompted an earlier PCA trigger, given the large number of different 

problems that led to Superior’s insolvency did little to evoke the 

notion that PCA as an enforcement action had been diminished. 

Rather, OTS’ delayed detection of so many critical problem areas 

suggests that the advantage of PCA as an early intervention tool is 

as much dependent on timely supervisory detection of actual, if not 

developing problems, as it is on capital. 

Indications of Regulatory Forbearance

The supervisory files suggest that OTS on several occasions 

extended to Superior regulatory forbearance. The nature of the 

observed forbearance relates to the additional time OTS provided 

Superior to obtain additional capital after it was readily apparent 

the thrift was near insolvency. The forbearances took the form of 

either delaying the recognition of known write-downs or providing 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 33

liberal regulatory interpretations of transactions that effectively 

allowed Superior to remain above certain PCA capital levels. 

Valuations Delayed

Shortly after determining that Superior had improperly accounted 

for the residual assets, OTS continued looking into Fintek’s 

valuation models. The accounting problem resulted in a writedown of $270 million, effectively lowering Superior’s capital 

position to the “significantly undercapitalized” level. In 

February 2001 OTS issued Superior a PCA directive, which 

included requiring Superior to submit a capital plan. By 

May 7, 2001, examiners had clear indications that Superior’s 

overly optimistic valuation assumptions would necessitate an 

additional write-down of at least $100 million. This additional 

write-down would have effectively lowered Superior’s capital 

below the 2 percent “critically undercapitalized” level, at which 

time PCA’s severest mandatory restrictions would have been 

triggered. Eventually, a $150 million write-down occurred in 

July 2001 after the principal owners failed to implement the capital 

plan. Based on the supervisory files, it appears that the additional 

write-down had not been immediately made due to OTS’ 

acceptance of Superior’s proposed capital plan on May 24, 2001. 

Assets Not Recorded

Another instance of delayed supervisory action relates to Superior’s 

application of an accounting standard (i.e., “right of set-off”) that 

allowed it to exclude certain assets from being reported in the 

March 2001 TFRs. The assets consisted of loans that Superior 

committed to sell, and Superior’s accounting treatment effectively 

served to keep its regulatory capital above the “critically 

undercapitalized” level. The substance of the sales transaction did 

not meet either regulatory or accounting standards for the “right of 

set-off” treatment. As with the earlier delayed write-down, OTS’ 

approval of the capital plan in May 2001 became the overriding 

consideration precluding the needed adjustment to the March 2001 

TFR.
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 34

Non-Cash Capital Contribution

In another instance, Superior included in the March 2001 TFR a 

non-cash capital contribution from CCFC. The contribution 

consisted of the beneficial interests of $81 million of residual 

assets, which effectively served to keep Superior’s capital above 

the “critically undercapitalized” level. OTS’ Regulatory Handbook 

does not generally permit the inclusion of non-cash assets for 

determining core capital. The OTS handbook does provide some 

flexibility on a case-by-case basis, but Superior’s tenuous financial 

condition at the time seemed to have merited closer adherence to 

the prescribed regulatory policy. OTS raised objections to this 

previously and did not officially allow Superior to include the noncash contribution. Instead, OTS requested on May 3, 2001 that 

Superior provide additional documentation in the form of legal and 

accounting opinions in support of the transaction. This request for 

additional documentation became part of the approved capital plan. 

Aside from the additional time accorded Superior, it also seemed 

incongruous to allow Superior to accept the residual asset 

contribution at a time it needed to reduce, not increase, its residual 

asset exposure. The July 2000 Part 570 notice required that 

Superior’s residual assets not exceed 100 percent of core capital, 

so the residual asset contribution seemed inconsistent with OTS’ 

earlier enforcement efforts. It should be noted that the supervisory 

files do not show an adjustment was made to remove the non-cash 

contribution from Superior’s financial reports. 

Preferential Application of Risk-Based Capital Requirements

Superior’s capital plan conditionally approved by OTS on 

May 24, 2001, included provisions to sell and pledge assets to 

finance a part of the underlying capitalization arrangement. At 

issue is OTS’ assessment as to how much capital Superior would 

need to apply against the sold loans and pledged assets. The level 

of capital that OTS approved under the capital plan may have been 

less than needed by as much as $148 million according to FDIC 

calculations.

This short fall arises from OTS allowing Superior relief from 

existing risk-based capital standards. The capital required against 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 35

the pledged assets would not have been based on a single scale 

(i.e., risk weight of 100 percent) but rather a graduated scale 

extending over 9 years. The graduated scale started out at 50 

percent less than the existing capital requirement, and increasing 

each subsequent year. The existing capital requirement would not 

have been reached until June 2005. The other preferential capital 

treatment was the absence of any capital Superior would need 

against the loans sold with recourse. According to a FDIC 

memorandum to OTS, the relief afforded Superior was not 

consistent with existing capital treatment by the other regulatory 

agencies on recourse arrangements. 

Violation of a Mandatory PCA Restriction

Superior may have violated the PCA mandatory restriction against 

paying excessive bonuses to senior executives. The restriction 

was part of the PCA Directive of February 2001. Under this 

restriction, Superior was required to limit payments to senior 

executives to the base salary over the preceding 12 months. From 

March to July 2001, a total of $220,000 in bonuses was paid to 

10 senior executives. An OTS official was not aware of the 

bonuses. 

Brokered Deposit Restrictions

Under PCA the use of brokered deposits and the rates paid on 

deposits are automatically restricted when an institution’s capital 

falls below the “well capitalized” category. At that point, a waiver 

must be obtained from FDIC for the continued use of brokered 

deposits, and retail deposit interest rates cannot exceed 75 basis 

points (0.75 percent) above comparable market rates. These PCA 

restrictions serve to curb or reverse growth, and thus risk, by 

limiting an institutions’ funding sources. For Superior these 

restrictions were automatically triggered in April 2000. 

OTS’ thrift financial monitoring reports showed that the intended 

restriction did not appear particularly effective for Superior. 

Superior did not obtain an FDIC waiver, but instead replaced 

brokered deposits with insured retail deposits. At June 2000, 

brokered deposits totaled $367.2 million, which dropped to $80.9 

million by June 2001, a month before Superior’s closing. Insured 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 36

deposits at June 2000 totaled $1.1 billion and by June 2001 

totaled $1.5 billion, effectively replacing the drop in brokered 

deposits.

It should be noted that Superior’s reported funding was within the 

limits of the regulation, but perhaps not necessarily the intent with 

respect to limiting FDIC’s exposure.

OTS agreed that the cited financial data reflects the replacement of 

brokered deposits with retail insured deposits. However, OTS 

believed that most of the reported brokered deposits had been 

insured, so the retail deposit replacements may not have exposed 

FDIC by the cited amounts. OTS suspected that Superior had not 

accurately reported its deposit composition, although OTS could 

not provide documented support showing the extent of the 

reporting error or the actual levels of insured brokered deposits. 

Aside from the specific amounts, OTS nevertheless agreed that the 

ability of institutions to readily replace uninsured deposits, whether 

brokered or not, with insured deposits was an area warranting 

regulatory review. 

Recommendations

In Finding 1, we noted that improper accounting and inflated 

valuations of residual assets appeared to be the immediate causes 

of Superior’s insolvency in July 2001. But a major contributing 

factor was Superior’s high concentration in residual assets 

exceeding 350 percent of tangible capital that had exacerbated the 

magnitude of losses.

In Finding 2, we noted that OTS neglected to address Superior’s 

growing concentration by either limiting the concentration or 

requiring capital coverage. We do not have a recommendation 

addressing this aspect of Superior’s failure because in 

November 2001 the joint banking regulatory agencies issued new 

regulations covering residual interests in asset securitizations. The 

new regulations require a 25 percent core capital limitation and 

dollar-for-dollar capital allocation for exceeding the 25 percent limit. 

Had this regulation been in effect earlier, we believe it would have 

greatly mitigated Superior’s risk as early as 1993. 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 37

Recommendations 1 – 5

In Finding 2, we also noted several concerns over OTS’ 

examination coverage of Superior’s critical accounting and related 

valuation activities. Accordingly, we recommend that the Director 

of the Office of Thrift Supervision:

1. To better ensure adequate examination coverage of third 

party service providers, as in the case of Fintek, issue 

further detailed examiner guidance in this area. 

Consideration should be given to either expanding the 

1991 Thrift Bulletin or establishing additional examination 

procedures for the Regulatory Handbook, which includes 

detailed guidance on the supervisory obligations of 

examiners. Suggested areas of coverage include:

• Assessing the adequacy of thrift management and 

board controls to identify, monitor, and manage the 

risks associated with third party relationships.

• Determining risk factors and conditions, which 

warrant direct on-site examination coverage, and 

include the frequency and areas subject to mandatory 

coverage.

• Determining expected documentation for an 

examiner’s risk assessment of the nature and extent 

that third party relationships may threaten a thrift’s 

safety and soundness.

2. To ensure that sufficient examination coverage is 

provided to geographically dispersed operating units (a) 

assess the adequacy of existing OTS monitoring controls 

over examinations of thrifts whose critical functions are 

geographically dispersed, and (b) provide for additional 

quality assurance reviews of these examinations. We 

believe that this additional emphasis is needed because 

we recognize other thrifts may house internally key 

functions at dispersed locations, such as with Fintek and 

AFC.
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 38

3. To better ensure examiners adhere to the Regulatory 

Handbook on Independent Audits, require that quality 

assurance reviews cover examinations where an 

expanded review of the external auditor’s workpapers 

would have been warranted. As an interim measure, 

supervisory examination officials should emphasize with 

examiners the requirements of the handbook, and 

consideration should be given to having OTS regional 

offices conduct a risk assessment in this area for their 

existing supervisory portfolio.

4. To better ensure adequate examination coverage of 

thrifts’ proper application of new accounting 

pronouncements and standards, reassess existing 

examination guidance in this area. We recognize that the 

examination function should not duplicate the external 

auditor’s work. However, given the nature and extent of 

Superior’s accounting write-down adjustments in 2001, 

we believe a reassessment of OTS examination coverage 

is warranted. OTS examinations should focus on those 

new accounting policy areas that would present a 

material risk to thrifts’ financial condition and capital 

adequacy. As an interim measure, consideration should 

be given to OTS regional offices conducting a risk 

assessment in this area for their existing supervisory

portfolio.

5. To better ensure that examiners sufficiently cover thrifts’ 

valuation policies and practices for residual assets, 

establish minimum testing procedures in addition to 

assessing the adequacy of thrift management policies, 

procedures, and controls in this area.

Recommendation 6

In Finding 2, we also reported the lack of timely examiner follow-up 

of a previously reported concern dealing with Superior’s 

inappropriate inclusion of residual asset reserves in the ALLL. 

Because we do not know whether this is a systemic deficiency, we 

recommend that the Director of the Office of Thrift Supervision:
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 39

6. Ensure that planned quality assurance reviews of 

examinations cover the adequacy of examiner follow-up 

on previously reported problems.

Recommendations 7 – 8

In Finding 3 we also reported that Superior may have violated a 

PCA restriction when it paid senior executives approximately 

$220,000 bonuses in 2001. Accordingly, we recommend that the 

Director of the Office of Thrift Supervision:

7. Assess whether appropriate enforcement sanctions 

should be pursued.

8. Assess the adequacy of existing supervisory controls 

used to ensure thrift compliance with PCA restrictions.

Recommendation 9

In Finding 3 we observed how readily Superior replaced brokered 

deposits with insured retail deposits, seemingly negating the 

deposit funding restrictions under PCA. Although this was 

technically not a violation of PCA, it may have likely increased the 

cost of Superior’s failure to the insurance fund, and negated any 

intended PCA funding restrictions. Accordingly, we recommend 

that the Director of the Office of Thrift Supervision:

9. Raise before the FFIEC the need to assess whether 

legislative or regulatory revisions to PCA are warranted 

with respect brokered deposit restrictions. This 

evaluation should focus on the relative ease at which 

institutions can replace non-insured with insured deposits. 

Management Response and OIG Comments

In its January 31, 2002, written response to our draft report, OTS 

generally concurred with our reported findings and 

recommendations. OTS intends to implement the 

recommendations within six months. In August 2001, in 

connection with their own internal review, OTS had already begun 
Material Loss Review of Superior Bank FSB (OIG-02-040) Page 40

working on a number of initiatives in line with our 

recommendations.

We believe OTS’ commitment to take corrective action is 

substantively responsive to the recommendations in light of their 

ongoing initiatives beginning in August 2001. Although specific 

corrective actions were not noted in the OTS response, the OIG 

will continue to monitor OTS’ progress in addressing the reported 

findings and recommendations. The full text of OTS’ written 

response is included in Appendix 6. 

*******

We would like to extend our appreciation to OTS for the 

cooperation and courtesies extended to our staff during the audit. 

Major contributors to the report are listed in Appendix 7.

Benny W. Lee

Regional Inspector General for Audit
Appendix 1

Objectives, Scope, and Methodology

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 41

We conducted this material loss review of Superior Bank in response to 

our mandate under Section 38(k) of FDIA, 12 USC § 1831o(k). This 

section provides that if a deposit insurance fund incurs a material loss 

with respect to an insured depository institution on or after July 1, 1993, 

the inspector general for the appropriate Federal banking agency shall 

prepare a report to the agency, which shall:

• ascertain why the institution’s problems resulted in a material 

loss to the insurance fund;

• review the agency’s supervision of the institution; and

• make recommendations for preventing any such loss in the 

future.

As defined by Section 38(k) of FDIA, a loss occurring after 

June 30, 1997, is considered material if it exceeds $25 million or 2 

percent of the institution’s total assets. FDIA also requires the inspector 

general to complete the report within 6 months after it becomes apparent 

a material loss has been incurred.

We initiated a material loss review of Superior based on the loss estimate 

by the FDIC. As of August 6, 2001, FDIC estimated that Superior’s 

failure would cost the SAIF between $426 and $526 million. On 

December 10, 2001, the regulators and the former principal owners 

entered into an agreement to pay FDIC $460 million. As of 

December 31, 2001, FDIC adjusted the estimated cost of Superior’s 

failure to $350 million taking into account the settlement. This also 

factors in the financial impact of several resolution transactions such as 

asset sales, that the appointed conservator has completed and planned. 

To accomplish our review, we conducted fieldwork at OTS Headquarters 

in Washington, D.C., and its Regional Office in Chicago, Illinois. 

Additionally, we visited FDIC’s Division of Supervision (DOS) in Chicago, 

Illinois and the Division of Resolutions and Receiverships (DRR) and the 

Division of Finance (DOF) in Dallas, Texas. 

Our review covered the period from 1989 until Superior’s failure on 

July 27, 2001. We conducted our fieldwork from August 2001 to 

January 2002. 
Appendix 1

Objectives, Scope, and Methodology

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 42

To assess the adequacy of OTS’ supervision of the thrift, we attempted 

to determine (1) when OTS first identified Superior’s safety and 

soundness problems, (2) the gravity of the problems, and (3) the 

supervisory response OTS took to get the thrift to correct the problems. 

Additionally, we attempted to determine whether OTS (1) might have 

discovered problems earlier, (2) identified and reported all the problems, 

and (3) issued comprehensive, timely, and effective enforcement actions 

that dealt with any unsafe or unsound activities. Specifically, we:

• Assessed OTS actions based on its internal guidance, 

legislative guidance provided by Financial Institutions 

Reform, Recovery, and Enforcement Act of 1989, FDIA, and 

interagency banking guidelines on subprime and 

securitization activities. We also considered changes in the 

regulators’ and industry’s policies and guidance throughout 

the years and compared these policies to current ones.

• Reviewed supervisory and enforcement files and records for 

Superior and its holding companies from 1989 through 2001 

that were maintained at OTS Headquarters, and the Chicago 

Regional Office. We analyzed all examination reports, 

supporting workpapers, and related supervisory and 

enforcement correspondence. We performed this analyses 

to gain an understanding of the problems identified, the 

approach and methodology OTS used to assess the thrift’s 

condition, and the regulatory action used by OTS to compel 

thrift management to address the deficient conditions found. 

We did not conduct an independent or separate detailed 

review of the external auditors work or associated 

workpapers, other than those incidentally available through 

the supervisory files. 

• Reviewed files, workpapers, and examination reports 

maintained by FDIC’s Chicago DOS to determine the nature, 

scope, and conclusions regarding its reviews of Superior.

• Interviewed and discussed various aspects of the supervision 

of Superior with OTS officials, examiners, capital market 

specialists, attorneys, an analyst, and an accountant to 

obtain their perspective on the thrift’s condition and the 
Appendix 1

Objectives, Scope, and Methodology

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 43

scope of the examinations. We also interviewed FDIC 

officials and DOS examiners who had participated with OTS 

on two examinations at Superior, or who were responsible 

for monitoring Superior for Federal deposit insurance 

purposes. 

• Interviewed the FDIC DRR and DOF personnel who were 

involved in the receivership process and in the due diligence 

reviews, which were conducted prior to and after Superior’s 

closure and appointment of the conservator.

• Discussed the progress of FDIC’s investigative efforts with 

FDIC DRR investigators in Dallas, Texas. 

We conducted our review in accordance with generally accepted 

government auditing standards. However, we were unable to fully 

assess certain aspects of OTS’ supervision of Superior. This is 

due, in part, to delays by OTS in providing us with documents 

obtained through 24 subpoenas issued after July 27, 2001. OTS 

issued the subpoenas as a result of Superior’s failure, in part, to 

determine the need for any subsequent enforcement action. We 

specifically requested the information to determine their relevancy 

in assessing OTS’ supervisory efforts in promptly identifying unsafe 

and unsound banking practices, and pursuing available enforcement 

action as appropriate. 

We initially discussed the contents of the 24 subpoenas with OTS 

on November 19, 2001, and requested copies of the subpoenas 

from OTS Chief Counsel’s office on November 29, 2001. We 

again requested the information in a memorandum to OTS dated 

December 17, 2001. In response to the memorandum, we were 

provided access to the requested information on 

December 21, 2001. 

We subsequently determined that the 24 subpoenas had generated 

numerous documents that exceeded the volume of documents in 

support of the original supervisory files that we reviewed in 

Chicago. Due to the legislatively mandated timeframes for this 

report, there was insufficient time to review this information. It is 

our intention, however, to continue reviewing these documents, 
Appendix 1

Objectives, Scope, and Methodology

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 44

and issue a subsequent report should any material findings arise 

from this review. 
Appendix 2

Superior’s Securitization Structure and Process

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 45

Superior’s loan securitization activity consisted of originating and purchasing subprime 

loans, pooling the loans together, packaging them as “asset-backed securities”, and 

selling the securities to investors. The thrift relied on two securitization structures. 

The first type used a senior/subordinated multi-class structure in which Superior 

retained the most subordinated securities. The second type, OC, used an excess 

spread and a 100 percent surety wrap structure to support the issuance of the “assetbacked securities”. Chart 2 shows the securitization structure, and notes on the next 

page explain the process:

Chart 2

Superior’s Securitization Process

Source: based on Superior’s securitization documents

• Servicer

• Underwriter

• Surety Company

Superior Bank

Trust

Senior Class A 

Securities

“AAA” Rating

(3)

Subordinate Securities

(4)

Overcollateralization

Amount

(5)

Excess Spread

Investors

Proceeds

Higher 

potential loss

Reduced risk

of loss

Transferred assets are 

collateral for newly 

created securities sold 

to investors

(2)

Transfer of assets Proceeds

(1)
Appendix 2

Superior’s Securitization Structure and Process

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 46

(1) Superior generated subprime loans for resale through real estate mortgage 

investment conduits (REMIC) issuances and sold the principal and interest 

securities to third party investors using underwriters and a third party trust. 

(2) Superior transferred the loans as collateral for the securities to a third party trust, 

who then sold the “asset-backed securities” to investors. 

(3) The securitization process provided a method for Superior to convert pools of loans 

into a mix of “AAA” grade marketable securities and lower grade subordinate credit 

risk securities. The principal and interest of the securities are paid from the 

expected cash flows from the underlying subprime loans. The cash flow from the 

pool loans was applied to the interest and principal payments to the investors in 

the order of their seniority. In essence, the cash flows from the entire pool created 

a waterfall effect. Principal and interest payments to senior security holders were 

met first, with remaining cash, if any, cascading down to pay more subordinate 

securities in order of their priority. 

(4) When a loan securitization was sold, Superior retained the subordinate securities 

that held the excess spread account. The excess spread represents the right to 

receive future cash flows that result from the difference (i.e. spread) between the 

interest paid by the loan borrowers, and the interest rate paid to the securities 

holders. A residual asset, referred by Superior as a financial receivable, was 

created by recording the imputed present value of excess spread cash flows on the 

REMICs sold, after deducting the applicable expenses (i.e. fees paid for credit 

insurance, trustee services, loan servicing, etc.). Superior was in a “first loss” 

position to cover credit losses in the loan pool up to a predetermined amount. 

Superior received cash flows only after absorbing 100 percent of the future credit 

losses incurred through defaults or prepayment of the underlying loans. 

(5) To obtain an “AAA” rating for the security certificates, Superior also established 

another form of credit enhancement to the securities known as an OC account. 

The OC on the securitization was pledged to the REMIC security insurer and 

trustee, to provide cash collateral as a cushion to absorb any credit losses before 

the insurance company had to cover the losses. The insurance company calculated 

the OC cash amount level required for this cushion. These cash flows were held 

by the trustee and used to prepay the senior security investors up to the targeted 

OC level. Excess cash flow was released to Superior only after the OC targets 

were met and maintained. These cash flows were not received by Superior until 

much later in the life of the trust. 
Appendix 3

CCFC and Superior’s Organization Structure

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 47

Source: OTS Supervisory files

UBH, Inc.

(Dworman Family

Interests)

Coast Partners

(Pritzker Family

Interests)

Coast-To-Coast

Capital Corporation

Superior Insurances

& Financial Services

Retail Banking

Superior Direct

(Inbound Retail

Direct Origination)

Universal Lending

Division

(Telemarketing)

Alliance Funding

Division

(Wholesale Origination

and Purchase)

 Mortgage Banking Servicing Automobile

Finance

Non-Operating Subsidiaries

Superior Bank

FSB

Superior Holdings, Inc. Fintek, Inc.

Coast-To-Coast Financial Corporation
Appendix 4

Chronology of Significant Events

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 48

The following chronology describes significant events in Superior’s history including: 

examinations conducted, major problems identified, and enforcement actions taken by 

OTS.

12/30/88 Pritzker and Dworman families acquire Lyons Savings Bank, a FSB 

through a federally assisted supervisory merger. 

4/14/89 Lyons Savings Bank changes name to Superior Bank, FSB. 

6/9/89 Federal Home Loan Bank Board of Chicago, predecessor to OTS, 

conducts a special limited examination and determines that Superior’s 

financial reports accurately reflect the thrift’s financial condition. 

12/18/89 OTS a conducts a safety and soundness examination. CAMELS 

Ratings: 3/32233N. Exam completed 3/30/90. 

1/19/90 FDIC conducts a regular examination. FDIC Ratings: 4/41334. Exam 

completed 3/30/90. 

3/28/91 OTS conducts a safety and soundness examination. CAMELS Ratings: 

2/12222N. Exam completed 5/6/91. 

3/29/91 FDIC conducts a concurrent Tier II examination. FDIC Ratings: 

3/32333. Exam completed 4/26/91. 

10/91 Fintek, Inc., an affiliated management company, is formed. Fintek 

provides Superior with treasury services, valuations, and modeling for 

the residual assets and represents the thrift in capital markets. 

4/4/92 FDIC conducts a Tier III Examination, limited scope examination. FDIC 

Ratings: 3/32232. Exam Completed 4/24/92. 

7/20/92 OTS conducts a safety and soundness examination. CAMELS Ratings: 

2/22232N. Exam completed 8/28/92. 
Appendix 4

Chronology of Significant Events

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 49

12/92 With the approval of OTS, Superior acquires AFC, an affiliated 

wholesale lender that originates subprime mortgage loans. With this 

acquisition, Superior’s focus shifts to nationwide subprime mortgagebanking, packaging and securitizing loans in the secondary market.

3/31/93 Superior executes its first securitization and sale of mortgage loans, 

reports its first gain-on-sale income, and accumulates residual assets 

retained from the mortgage securitizations.

7/6/93 OTS conducts a safety and soundness examination. CAMELS Ratings: 

2/22221N. Exam completed 8/12/93. 

1994 Superior begins its automobile lending division. Auto loans are to be 

securitized and sold in a manner similar to the mortgage-banking 

division.

8/8/94 OTS conducts a safety and soundness examination. CAMELS Ratings: 

2/22222. Exam completed 9/9/94.

12/15/94 President of Fintek unanimously elected chairman of Superior’s Board. 

9/11/95 OTS conducts a safety and soundness examination. CAMELS Ratings: 

2/22212. Exam completed 10/31/95

6/28/96 Financial Accounting Standards Board (FASB) issues FAS No. 125, 

Accounting for Transfers and Servicing of Financial Assets and 

Extinguishments of Liabilities, which recognizes gain-on-sale accounting 

for economic interests retained in assets sold. 

10/7/96 OTS conducts a safety and soundness examination. CAMELS Ratings: 

2/22211N. Exam completed 11/20/96.

1/1/97 FAS No. 125 becomes effective. 

10/27/97 OTS conducts safety and soundness examination. CAMELS Ratings: 

1/211121. Exam completed 12/5/97. 
Appendix 4

Chronology of Significant Events

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 50

12/98 FASB issues a second edition of Questions and Answers to FAS

No. 125, which recommends use of the “cash-out” method to value 

gain-on-sale assets. 

12/28/98 FDIC sends OTS a written request to participate in the next examination 

of Superior due to residual asset concerns identified during FDIC’s offsite monitoring. 

1/15/99 OTS verbally denies FDIC’s request to participate in the January 1999 

examination, but arranges for FDIC to meet with OTS examiners to 

review OTS workpapers. 

1/25/99 OTS conducts a safety and soundness examination. CAMELS Ratings: 

2/222121. Exam completed 3/1/99.

6/4/99 FDIC notifies OTS that it is downgrading Superior’s overall CAMELS 

rating from “2” to “3.” The downgrade is due to the thrift’s extremely 

high exposure to subprime credit and residual assets. FDIC CAMELS 

Ratings: 3/333122 

6/30/99 CCFC transfers 100 percent of its ownership in Superior to SHI in the 

form of a capital contribution. SHI is a wholly owned subsidiary of 

CCFC. 

7/99 FASB issues the third edition of Questions and Answers to FAS

No. 125, which further clarifies it. 

9/17/99 FDIC sends a letter to OTS to confirm that FDIC will participate in the 

next examination. OTS concurs. 

9/21/99 OTS conducts a field visit examination as follow-up to deficiencies in 

reporting of classified assets found in the 1/25/99 full-scope 

examination. 

12/13/99 Federal banking regulatory agencies issue Interagency Guidance on 

Asset Securitization Activities, which emphasizes that any 

securitization-related retained interest will be supported by 

documentation of the interest’s fair value. 
Appendix 4

Chronology of Significant Events

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 51

1/24/00 OTS conducts safety and soundness examination with FDIC 

participating. CAMELS Ratings: 4/434221. Exam completed 3/30/00. 

2/17/00 OTS and FDIC review the 6/30/99 external auditors audited 

workpapers. 

6/30/00 Superior ceases its securitization activities but continues to originate 

subprime loans for sale to affiliates, with the servicing retained by 

Superior. 

7/5/00 OTS issues a Notice of Deficiency and Requirements for Submission of 

a 12 CFR, Part 570 Safety and Soundness Compliance Plan to Superior. 

As part of the 570 notice, OTS directs Superior to reduce the level of 

residual assets to no greater than 100 percent of Tier 1 capital within a 

one-year time period. 

7/7/00 OTS issues a Supervisory Letter that officially notifies Superior it is 

designated a “problem association” and an association in “troubled 

condition.” 

8/4/00 Superior submits a safety and soundness compliance plan to OTS. 

8/22/00 OTS suggests to external auditors that the external auditors contact its 

national office to verify that the accounting treatment of the OC asset 

is correct. 

9/00 FAS No. 140, Accounting for Transfers and Servicing of Financial 

Assets and Extinguishments of Liabilities, a Replacement of FAS 

No. 125 was issued, which revises the standards for accounting for 

securitizations but carries over most of FAS No. 125’s provisions. 

9/1/00 OTS requests additional information from Superior on its safety and 

soundness compliance plan. 
Appendix 4

Chronology of Significant Events

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 52

9/29/00 Superior submits response to OTS the 9/1/00 request for additional 

information on the safety and soundness compliance plan. 

10/16/00 OTS and FDIC conduct a field visit examination and find that residual

assets are inflated by an estimated $200 to $300 million due to the 

absence of acceptable valuation procedures and improper accounting 

treatment. Exam completed 1/16/01. 

10/27/00 OTS requests additional information on Superior’s safety and soundness

compliance plan. 

10/30/00 OTS and FDIC visit the external auditors’ office to assess the level of 

support in the June 30, 2000 audit workpapers for the accounting 

treatment and validation of the residual assets. 

11/09/00 OTS and FDIC meet with external auditors to review the cash flow 

models for Superior’s residual assets and how the external auditors 

validated the models. Regulators request that the thrift and external 

auditors provide support for carrying the OC asset on a non-discounted 

basis. 

11/13/00 Superior submits a response to OTS 10/27/00 request for additional 

information on the safety and soundness compliance plan. 

11/22/00 OTS directs Superior to write-down the OC account and amend the 

6/30/00 and 9/30/00 TFRs. 

12/14/00 Superior ceases its subprime auto lending operations. 

12/19/00 OTS and FDIC meet with Superior and external auditors to discuss 

accounting treatment of the OC asset. Management and external 

auditors continue to disagree with the regulators’ position that OC asset 

must be recorded using cash-out method. External auditors are given 

additional time to provide written support for their position. The Chief 

Accountant at OTS Headquarters is made aware of the situation. 

12/20/00 OTS Central Region notifies Superior that it is extending the time for its 

review of Superior’s safety and soundness compliance plan because of 

the outstanding issue regarding accounting treatment of the OC asset. 
Appendix 4

Chronology of Significant Events

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 53

the outstanding issue regarding accounting treatment of the OC asset. 

1/11/01 The external auditors’ national office acknowledges that the accounting 

treatment applied to the OC asset is improper and proposes a 

revaluation of the residual assets. The revaluation ultimately results in a 

$270 million downward adjustment in the fair market value of the OC 

assets. 

2/12/01 OTS deems Superior to be “significantly undercapitalized” as of 

December 31, 2000. Superior is required to file a capital plan with OTS 

no later than March 14, 2001. 

2/14/01 OTS issues a PCA Directive to Superior, which prohibits asset growth 

and requires weekly sales of all loans originated during the prior week. 

In conjunction, SHI and CCFC consent to a Consent Order to Cease and 

Desist which requires the holding companies to maintain an escrow 

account at Superior for coverage of any losses incurred from required 

weekly loan sales. 

2/15/01 OTS terminates its review of Superior’s safety and soundness 

compliance plan based upon the issuance of the PCA Directive. 

3/02/01 Superior amends its 12/31/00 TFR to reflect a $270 million downward 

adjustment of the OC account. 

3/14/01 OTS conducts an off-site monitoring examination to review the recent 

changes in Superior’s capital, earnings, liquidity, and sensitivity 

positions. CAMELS ratings 5/5NN552. 

3/14/01 Superior submits a capital plan to OTS. 

3/19/01 OTS and FDIC conduct a safety and soundness examination which 

includes a visit to Fintek in Orangeburg, New York. An in-depth review 

of Fintek’s asset valuation model and the performance of the loans 

underlying the securitizations reveals that credit loss and discount rate 

assumptions are not adequately supported. An additional $150 million 

write-down of the residual assets appears warranted at 12/31/00. 

Examiners determine there is a $36.7 million receivable owed to 

Superior by CCFC, which represents a transaction with affiliates 

violation. CAMELS Ratings: 5/554544. Exam completed 07/09/01. 
Appendix 4

Chronology of Significant Events

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 54

3/30/01 CCFC makes a temporary capital infusion to keep Superior above the 

“critically undercapitalized” PCA category by down-streaming its 

beneficial interest in $81 million of residual assets. 

4/30/01 Superior submits an amended capital plan. 

5/7/01 OTS demands that CCFC repay the $36.7 million receivable owed to 

Superior. 

5/15/01 Superior submits a second amended capital plan to OTS. 

5/18/01 Superior submits a third amended capital plan to OTS. 

5/24/01 OTS issues an IMCR Directive that allows the thrift to hold less capital 

than the requirements established under PCA.

5/24/01 OTS conditionally approves Superior’s capital plan.

5/24/01 OTS issues a PCA directive that incorporates the provisions of the 

earlier PCA directive and gives OTS enforceability of the capital plan.

7/16/01 Pritzkers inform OTS that they are not prepared to support the capital 

plan because future cash flows from Superior’s residual assets will be 

materially less than projected in the plan. 

7/24/01 OTS deems Superior to be “critically undercapitalized” and authorizes a 

formal examination and investigation into matters at Superior, its 

holding companies, and its external auditors. 

7/25/01 OTS recommends the appointment of FDIC as conservator or receiver 

for Superior, and Superior’s Board consents. OTS deems Superior to be 

insolvent based on the results and required adjustments of the 3/19/01 

examination and the failure to implement the capital plan. 

7/27/01 OTS appoints FDIC as receiver for Superior. 
Appendix 5

Glossary of Terms

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 55

Allowance for Loan and 

Lease Losses

A valuation reserve established and maintained 

by charges against a bank’s operating income. 

As a valuation reserve, it is an estimate of 

uncollectable amounts that is used to reduce the 

book value of loans and leases to the amount 

that is expected to be collected.

Asset Quality The quantity of existing and potential credit risk 

associated with the loan and investment 

portfolio, other real estate owned, and other 

assets, as well as off-balance sheet 

transactions.

Brokered Deposits Funds, which a bank obtains, either directly or 

indirectly, by or through a broker, for deposit 

into a deposit account. Brokered deposits 

include both those in which a single depositor 

holds the entire beneficial interest and those in 

which the deposit broker sells participations to 

one or more investors. Under 12 CFR. § 337.6, 

only “well capitalized” banks may accept 

brokered deposits without FDIC approval.

CAMEL/

CAMELS

The OTS and other bank regulators use the 

Uniform Financial Institution Rating System to 

evaluate a bank’s performance. CAMEL is an 

acronym for the performance rating 

components: Capital adequacy, Asset quality, 

Management administration, Earnings and 

Liquidity. An additional component addressing 

Sensitivity to market risk was added effective 

1/1/97. CAMELS.

Capital Markets Includes investments such as mortgage-backed

securities, dealer activities, foreign exchange, 

off-balance sheet items and other related 

activities.
Appendix 5

Glossary of Terms

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 56

Cease & Desist Order A formal enforcement action issued by the OTS 

to a thrift to stop an unsafe and unsound 

practice or violation of a law or regulation 

pursuant to authority under 12 USC §1818. A 

Cease & Desist Order is terminated when the 

thrift’s condition has significantly improved and 

the thrift has substantially complied with its 

terms.

Individual Minimum 

Capital Requirement

OTS may establish the minimum level of capital 

for an association at such amount or at such 

ratio of capital to assets as the OTS Director 

determines to be necessary or appropriate 

considering the particular circumstances of the 

association. This enforcement action is a 

special capital requirement set case-by-case for 

associations with unacceptably high-risk profiles.

Informal and Formal 

Enforcement Actions

Informal enforcement actions are documents 

that provide a bank with guidance and direction 

in addition to that provided by the Report of 

Examination. Informal actions are those 

instances where it is desirable to have written 

commitments from a bank’s management and 

board of directors. Formal enforcement actions 

are reserved for significant safety and 

soundness or compliance problems that, unless 

corrected, constitute a present or future threat 

to the survival of the bank or otherwise pose a 

serious threat to the bank’s safety and 

soundness.
Appendix 5

Glossary of Terms

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 57

Prompt Corrective Action A framework of supervisory actions for insured 

thrifts, which are not adequately capitalized. 

These actions become increasingly severe as a 

thrift falls into lower capital categories. The 

capital categories are: Well Capitalized, 

Adequately Capitalized, Undercapitalized, 

Significantly Undercapitalized, and Critically 

Undercapitalized (12 USC § 1831o).

Securitization The process by which loans with similar 

characteristics are pooled and reconstituted into 

securities that may then be sold to investors.

Subprime The term refers to the credit characteristics of 

the individual borrowers. Subprime borrowers 

typically have weakened credit histories that 

include payment delinquencies, and possibly 

more severe problems such as charge-offs, 

judgments, and bankruptcies. They may also 

display reduced repayment capacity as 

measured by credit scores, debt-to-income 

ratios, or other criteria that may encompass 

borrowers with incomplete credit histories. 

Subprime loans are loans to borrowers 

displaying one or more of these characteristics 

at the time of origination or purchase.

Thrift Financial Report 

(TFR)

This report collects detailed information to 

provide consistent and uniform information on all 

savings associations, to facilitate supervision by 

OTS, and to collect uniform information on 

industry activities. Each insured savings 

association is required to file the TFR with its 

regional office quarterly. The TFR discloses the 

savings association’s financial condition, the 

results of its operation, and other supplemental 

data.
Appendix 6

Management Comments

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 58
Appendix 6

Management Comments

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 59
Appendix 7

Major Contributors To This Report

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 60

Office of Inspector General, Office of Audit

Delores V. Dabney, Co-Project Manager

Garrett W. Gee, Co-Project Manager

Joseph K. Eom, Auditor-in-Charge

Aldon K. Hedman, Auditor

Kathleen G. Hyland, Auditor

Ronda R. Richardson, Auditor
Appendix 8

Report Distribution

Material Loss Review of Superior Bank FSB (OIG-02-040) Page 61

U.S. Department of the Treasury

Office of the Under Secretary for Domestic Finance

Office of the Assistant Secretary for Public Affairs

Office of the Assistant Secretary for Financial Institutions Policy

Office of Strategic Planning and Evaluations, Departmental Offices

Office of Accounting and Internal Control, Departmental Offices

Office of Thrift Supervision

Director

Regional Director, Central Region

Audit Liaison

Office of Management and Budget

OIG Budget Examiner

U.S. General Accounting Office

Comptroller of the United States

Federal Deposit Insurance Corporation

Chairman