Source: http://www.fdicoig.gov/reports10/10-032-508.shtml
Timestamp: 2013-05-23 12:15:23
Document Index: 23031588

Matched Legal Cases: ['art 365', 'art 326', 'art 365', 'art 215', 'art 325', 'art 325', 'art 325', 'art 325']

FDIC OIG MLR Report: Report No. MLR-10-032 - Material Loss Review of First DuPage Bank, Westmont, Illinois, May 2010
Material Loss Review of First DuPage Bank,Westmont, Illinois
Report No. MLR-10-032May 2010
On October 23, 2009, the Illinois Department of Financial and Professional Regulation (IDFPR) closed
First DuPage Bank, Westmont, Illinois (First DuPage) and named the FDIC as receiver. On November 6,
2009, the FDIC notified the Office of Inspector General (OIG) that First DuPage�s total assets at closing
were $281.5 million and the estimated loss to the Deposit Insurance Fund (DIF) was $58.3 million. As of
March 19, 2010, the estimated loss to the DIF had increased to $69 million. As required by section 38(k)
of the Federal Deposit Insurance (FDI) Act, the OIG conducted a material loss review of the failure.
The objectives were to (1) determine the causes of failure for First DuPage and the resulting material loss
to the DIF and (2) evaluate the FDIC�s supervision of First DuPage, including the FDIC�s implementation
of the Prompt Corrective Action (PCA) provisions of section 38 of the FDI Act.
First DuPage was chartered
as a state nonmember institution on June 28, 1999. The institution operated
a single office in the community of Westmont, which is located approximately
22 miles west of downtown
Chicago, Illinois. The institution�s lending activities focused primarily on
commercial real estate (CRE) within the Chicago metropolitan area, with
an emphasis on acquisition, development, and construction
(ADC) projects. Much of First DuPage�s ADC lending involved the construction
and renovation of condominiums. The institution was wholly-owned by First
DuPage Bancorp, Inc. (Bancorp), a privately-held
one-bank holding company. The Board collectively controlled approximately 25
percent of Bancorp�s outstanding stock as of September 30, 2008. No individual
shareholder controlled more than
6 percent of Bancorp�s stock and the company�s shares were widely-held. First
DuPage had no affiliates as defined under the Bank Holding Company Act
and section 23A of the Federal Reserve Act.
First DuPage failed primarily because its Board and management did not effectively manage the risks
associated with the institution�s heavy concentration in CRE loans, particularly ADC loans related to
condominium projects. Notably, much of the institution�s ADC lending was concentrated in large
borrowing relationships that consisted of a limited number of real estate developers and their related
interests. First DuPage also implemented lax loan underwriting practices with respect to its ADC loans.
Specifically, the institution required little borrower equity and guarantor support when originating many
of its large ADC loans and did not perform sufficient global cash flow analyses for some of its large
borrowing relationships. Although not a primary cause of failure, weak credit administration and related
monitoring practices added to the risk in the loan portfolio. First DuPage�s concentration in ADC loans,
together with lax underwriting practices, made the institution vulnerable to a sustained downturn in the
Weakness in First DuPage�s lending markets began to negatively affect the quality of the institution�s
loan portfolio in late 2007. By the close of 2008, the quality of the loan portfolio had become critically deficient, with the majority of
problems attributable to ADC loans. The deterioration in the loan portfolio
continued into 2009, and by September 2009, the associated losses and provisions had depleted First
DuPage�s capital, rendering the institution insolvent. IDFPR closed First DuPage on October 23, 2009
because the institution was unable to raise sufficient capital to support its operations or find a suitable
The FDIC�s Supervision of First DuPage
The FDIC, in coordination with IDFPR, provided ongoing supervisory oversight of First DuPage through
regular onsite risk management examinations, visitations, and offsite monitoring activities. The FDIC
identified risks in First DuPage�s operations and brought these risks to the attention of the institution�s
Board and management, including through recommendations. Such risks included inadequate
concentration risk management practices, lax loan underwriting practices, and weak credit administration
and related monitoring in some areas.
In retrospect, more proactive supervisory action at earlier examinations may have been prudent given the
risks in the institution�s loan portfolio. Such action could have included a visitation following the
December 2005 examination to assess the institution�s progress in addressing key risks identified by
examiners. Had the FDIC conducted a visitation, it may have identified the institution�s growing credit
concentrations and weakening underwriting practices sooner than it did. By the time of the next
examination in April 2007, the risks in these areas had increased substantially. In addition, the FDIC
could have lowered the institution�s supervisory component ratings for asset quality and/or management
below a �2� at the April 2007 examination to reflect the risks in the institution�s loan portfolio, including
the risks associated with the institution�s large borrowing relationships. Finally, the FDIC could have
implemented an enforcement action based on the results of the April 2008 visitation. By the time the
FDIC implemented an enforcement action in June 2009, the institution was at high risk of failure. More
proactive supervisory action may have influenced First DuPage to curb its lax lending practices and
strengthen its risk management controls before its lending markets deteriorated, potentially reducing the
institution�s losses.	With respect to issues discussed in the report, the FDIC recently implemented procedures to better
ensure that examiner concerns and recommendations are appropriately tracked and addressed. The
FDIC also implemented new procedures to expedite the issuance of formal cease and desist orders under
Section 38, Prompt Corrective Action, of the FDI Act establishes a framework of mandatory and
discretionary supervisory actions pertaining to all institutions. The section requires regulators to take
progressively more severe actions, known as �prompt corrective actions,� as an institution�s capital level
deteriorates. The purpose of section 38 is to resolve problems of insured depository institutions at the
least possible long-term cost to the DIF. Based on the supervisory actions taken with respect to First
DuPage, the FDIC properly implemented applicable PCA provisions of section 38.
In its response, DSC
reiterated the OIG�s conclusions regarding the causes of First DuPage�s
failure and cited several supervisory activities, discussed in the report, that
were undertaken to address risks at the institution prior to its failure.
With regard to our assessment of the FDIC�s
supervision, DSC stated that strong supervisory attention is necessary for institutions
with high CRE and ADC concentrations. In addition, DSC stated that guidance
has been issued that sets
forth broad supervisory expectations and re-emphasizes the importance of robust
credit risk management practices for institutions with concentrated CRE
exposures. DSC also stated that it
has implemented examiner training that emphasizes a forward looking approach
when assessing a bank�s risk profile. The training reinforces consideration
of risk management practices in
conjunction with current financial performance, conditions, or trends when assigning
Concentrations in ADC Loans and Large Borrowing Relationships
ADC Loan Underwriting
Credit Administration and Related Monitoring
1. Selected Financial Information for First DuPage
2. Lax Underwriting Practices for Selected Borrowing Relationships at First DuPage
3. Onsite Examinations and Visitations of First DuPage
4. First DuPage�s Capital Levels
1. Composition and Growth of First DuPage�s Loan Portfolio
2. First DuPage�s ADC Concentration Compared to Peer Group
Material Loss Review of First DuPage Bank, Westmont,
Illinois (Report No. MLR-10-032)
Inspector General (OIG) conducted a material loss1 review of the failure of First DuPage
Bank (First DuPage), Westmont, Illinois. The Illinois Department of Financial and
Professional Regulation (IDFPR) closed the institution on October 23, 2009 and named
the FDIC as receiver. On November 6, 2009, the FDIC notified the OIG that First
DuPage�s total assets at closing were $281.5 million and that the material loss to the
Deposit Insurance Fund (DIF) was $58.3 million. As of March 19, 2010, the estimated
loss to the DIF had increased to $69 million.
The audit objectives were to (1) determine the causes of First DuPage�s failure and
resulting material loss to the DIF and (2) evaluate the FDIC�s supervision2 of First
DuPage, including the FDIC�s implementation of the PCA provisions of section 38 of the
FDI Act. This report presents our analysis of First DuPage�s failure and the FDIC�s
efforts to ensure that the Board of Directors and management operated the institution in a
safe and sound manner. The report does not contain formal recommendations. Instead, as major causes, trends, and common
1As defined by section 38(k)(2)(B) of the FDI Act, a loss is material if it exceeds the greater of $25 million or 2 percent of an institution�s total assets at the time the FDIC was appointed receiver.
2The FDIC�s supervision program promotes the safety and soundness of FDIC-supervised institutions,
characteristics of institution failures are identified in
our material loss reviews, we will communicate those to FDIC management for its
consideration. As resources allow, we may also conduct more in-depth reviews of specific
aspects of the FDIC�s supervision program and make recommendations as warranted.
Appendix 1 contains details on our objectives, scope, and methodology; Appendix 2
contains a glossary of terms; and Appendix 3 contains a list of acronyms. Appendix 4
contains the Corporation�s comments on this report.	Background
First DuPage was chartered as a state nonmember institution on June 28, 1999. The
institution operated a single office in the community of Westmont, which is located
approximately 22 miles west of downtown Chicago, Illinois. The institution�s lending
activities focused primarily on commercial real estate (CRE) within the Chicago
metropolitan area, with an emphasis on acquisition, development, and construction (ADC)
projects. Much of First DuPage�s ADC lending involved the construction and renovation
of condominiums.
The institution was wholly-owned by First DuPage Bancorp, Inc. (Bancorp),
a privately-held one-bank holding company. The Board collectively controlled
25 percent of Bancorp�s outstanding stock as of September 30, 2008. No individual
shareholder controlled more than 6 percent of Bancorp�s stock and the company�s
shares were widely-held. First DuPage had no affiliates as defined under the
Company Act and section 23A of the Federal Reserve Act. Table 1 summarizes selected
financial information for First DuPage for the quarter ended September 30, 2009
the 6 preceding calendar years.
Table 1: Selected Financial Information for First DuPage	Financial Measure($000s)
Total Assets 145,051
Gross Loans and Leases 108,563
Total Deposits 110,140
Net Income (Loss) 560
Source: Uniform Bank Performance Reports (UBPR) and Reports of Condition and Income (Call Report) for
First DuPage.
First DuPage failed primarily because its Board and management did not effectively
manage the risks associated with the institution�s heavy concentration in CRE loans,
particularly ADC loans related to condominium projects. Notably, much of the
institution�s ADC lending was concentrated in large borrowing relationships that consisted
of a limited number of real estate developers and their related interests. First DuPage also
implemented lax loan underwriting practices with respect to its ADC loans. Specifically,
the institution required little borrower equity and guarantor support when originating
many of its large ADC loans and did not perform sufficient global cash flow analyses for
some of its large borrowing relationships. Although not a primary cause of failure, weak
credit administration and related monitoring practices added to the risk in the loan
portfolio. First DuPage�s concentration in ADC loans, together with lax underwriting
practices, made the institution vulnerable to a sustained downturn in the real estate market.
Weakness in First DuPage�s lending markets began to negatively affect the quality of the
institution�s loan portfolio in late 2007. By the close of 2008, the quality of the loan
portfolio had become critically deficient, with the majority of problems attributable to
ADC loans. The deterioration in the loan portfolio continued into 2009, and by September
2009, the associated losses and provisions had depleted First DuPage�s capital, rendering
the institution insolvent. IDFPR closed First DuPage on October 23, 2009 because the
institution was unable to raise sufficient capital to support its operations or find a suitable
In the years leading to its failure, First DuPage developed a significant concentration in
risky ADC loans. In addition, a significant dollar amount of these ADC loans was
concentrated in large borrowing relationships. A brief description of First DuPage�s
concentration-related risks follows.
Throughout its history, First DuPage focused its lending activities on real estate, and, in
the years leading to its failure, the institution emphasized ADC lending in response to a
strong real estate market. Specifically, First DuPage grew its ADC loans from $10 million
(or 9 percent of the loan portfolio) as of December 31, 2003 to $93 million (or 36 percent
of the loan portfolio) by December 31, 2008. Much of this ADC lending consisted of
speculative condominium construction and renovation projects in the Chicago
metropolitan area. Further, First DuPage had unsecured loans and lines of credit with
several real estate developers that, although not classified as ADC, were used to provide
capital for various real estate construction and development projects. Figure 1 illustrates
the general composition and growth of First DuPage�s loan portfolio in the years
preceding the institution�s failure.
In December 2006, the FDIC, the Office of the Comptroller of the Currency, and the
Board of Governors of the Federal Reserve System issued joint guidance, entitled,
Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices.
Although the guidance does not establish specific CRE lending limits, it does define
criteria that the agencies use to identify institutions potentially exposed to significant CRE
concentration risk. According to the guidance, an institution that has experienced rapid
growth in CRE lending, has notable exposure to a specific type of CRE, or is approaching
or exceeds the following supervisory criteria may be identified for further supervisory
analysis of the level and nature of its CRE concentration risk:
Total CRE loans representing 300 percent or more of total capital where the
outstanding balance of the institution�s CRE loan portfolio has increased by
50 percent or more during the prior 36 months; or
Total loans for construction, land development, and other land (referred to in this
report as ADC) representing 100 percent or more of total capital.
As of December 31, 2007, First DuPage�s non-owner occupied CRE loans and ADC loans
represented 553 percent and 214 percent, respectively, of the institution�s total capital.
Both of these levels are higher than the criteria defined in the 2006 guidance as possibly
warranting further supervisory analysis. Included within First DuPage�s CRE portfolio was a sub-concentration in condominium construction and conversion projects. As of March 31, 2008,	4
loans pertaining to condominium projects totaled $60.8 million,
representing 198 percent of Tier 1 Capital. Figure 2 illustrates the trend in First DuPage�s
ADC loan concentration relative to its peer group3 in the years preceding the institution�s
Large Borrowing Relationships
Adding to the risk in the loan portfolio were concentrations of credit in large borrowing
relationships. Generally, these relationships consisted of small groups of real estate
developers and their related interests that had borrowed funds from First DuPage and
many other financial institutions to finance their numerous real estate projects. The
extensive exposure that these developers had to ADC projects made them particularly
vulnerable to a sustained downturn in the real estate market. As of September 30, 2008,
First DuPage had six borrowing relationships totaling $89.8 million that individually
represented approximately 60 percent or more of Tier 1 Capital. First DuPage�s large
borrowing relationships accounted for the majority of loan quality problems that
developed when the institution�s lending markets deteriorated.
3Institutions are assigned to 1 of 15 peer groups based on asset size, number of branches, and whether the
institution is located in a metropolitan or non-metropolitan area. First DuPage was assigned to various peer
groups between 1999 and its failure. In the years preceding its failure, First DuPage�s peer group included
all insured commercial institutions with assets between $300 million and $1 billion.
Loan Portfolio Decline
At the time of the April 2007 examination, adversely classified items were a moderate
$5.6 million, or 16 percent of Tier 1 Capital and the Allowance for Loan and Lease Losses
(ALLL). In October 2007, the President and Chief Executive Officer (CEO) of First
DuPage notified the FDIC that weakness in the real estate market was causing some of the
institution�s borrowers, particularly those who had financed condominium projects, to
experience cash flow problems. As a result, the institution was beginning to experience an
increase in delinquencies and nonaccrual loans. The institution�s loan problems
accelerated in 2008, and by the November 2008 examination, adversely classified assets
had risen to $98.8 million (or 289 percent of Tier 1 Capital plus the ALLL). Notably,
more than $69 million (or 70 percent) of the $98.8 million in adverse classifications
pertained to ADC, the majority of which involved condominium projects. Further,
$65.6 million (or 66 percent) of the $98.8 million pertained to five large borrowing
First DuPage recorded net losses of $10.4 million and $26.9 million, respectively, for
calendar year 2008 and the first nine months of 2009. These losses, which were largely
attributable to ADC loans, reduced First DuPage�s Tier 1 capital to negative $7.5 million
as of September 30, 2009, rendering the institution insolvent.
Lax loan underwriting practices, particularly with respect to ADC loans, contributed to the
loan quality problems that developed when the institution�s real estate lending markets
deteriorated in 2007 and 2008. A brief description of these practices follows.
Appendix A, Interagency Guidelines for Real Estate Lending Policies, to Part 365 of the
FDIC Rules and Regulations, Real Estate Lending Standards, defines minimum borrower
equity requirements for real estate loans held by FDIC-supervised institutions. The
minimum equity requirements are defined in terms of specific loan-to-value (LTV) ratio
limits for various types of real estate loans.4 The interagency guidelines also provide that
(1) the aggregate amount of all loans in excess of the LTV limits should not exceed 100
percent of the institution�s total capital and (2) within the aggregate amount, total loans
exceeding the LTV limits for commercial, agricultural, multifamily, or other non-1-4
family residential properties should not exceed 30 percent of the institution�s total capital.
These limits are intended to reduce an institution�s credit risk in the event of a sustained
downturn in the real estate market.	4The guidelines recognize that there may be circumstances in which it is appropriate to originate or
purchase loans with LTV ratios that exceed the LTV limits in the guidelines, if justified by other credit
factors. In such cases, the loans should be identified in the institution�s records and their aggregate amount
reported at least quarterly to the institution�s Board. 6
As of September 30, 2005 and April 30, 2007, First DuPage�s LTV loan exceptions were
126 percent and 213 percent of total capital, respectively, exceeding the 100 percent limit
defined in the interagency guidelines. Furthermore, the vast majority of First DuPage�s
LTV loan exceptions were for commercial, agricultural, multifamily, or other non-1-4
family residential properties, which are subject to the 30 percent limit of total capital in
the interagency guidelines. In many cases, the loan exceptions exceeded the supervisory
LTV limits when they were originated between 2004 and 2007. Nearly $31 million (or
35 percent) of adversely classified loans in the November 2008 examination report
exceeded the supervisory LTV limits when originated by the institution. In addition,
management reports on LTV loan exceptions submitted to the institution�s Board were not
always accurate because they did not include all exceptions, thus limiting the institution�s
ability to effectively manage the risks associated with high LTV loans.
Further, examiners noted during the April 2007 examination that First DuPage frequently
originated CRE loans based on LTV ratios that were just under the specific LTV limits
defined in the interagency guidelines. Such practices introduced additional risk because a
relatively small decline in real estate values could result in increased LTV exceptions.
Based on concerns raised by examiners in April 2007, the institution began taking steps to
reduce the volume of its LTV loan exceptions. However, the institution�s success in this
regard was limited by a decline in loan collateral values caused by the deteriorating real
Many of First DuPage�s ADC loans were made to Limited Liability Companies (LLC)
that had been established by real estate developers for the purpose of managing their
properties. Developers often create LLCs for their real estate holdings because of the
benefits that the ownership structure offers, such as limited financial liability should the
LLC default on its financial obligations.5 In addition, LLCs are considered separate legal
entities for borrowing purposes. Accordingly, their owners are not constrained by state
legal lending limits that would apply if the owners borrowed the funds themselves.
Because of the limited liability nature of LLCs, it is prudent to obtain a substantial or
unlimited personal guarantee when making loans to these entities.
First DuPage accepted limited personal guarantees from developers for many of the ADC
loans that the institution made to LLCs. In some cases, these guarantees were as little as
25 percent of the loan amount. First DuPage accepted limited personal guarantees to
prevent the developers from exceeding Illinois state legal lending limits that restrict the
amount of funds any individual can guarantee at a specific institution. However, the
acceptance of limited personal guarantees increased First DuPage�s credit risk exposure
because it placed greater reliance on collateral for payment protection. Adding to the risk
in this area was First DuPage�s practice of allowing some of its largest borrowers to
guarantee loan amounts that 5 In general, owners of LLCs are only liable for their investment in the LLC and not personally responsible
for the debts and obligations of the LLC should those debts not be fulfilled.
exceeded the institution�s internal loan policy limits. Many of the ADC loans for which First DuPage accepted limited personal guarantees
subsequently became classified.	Global Cash Flow Analyses
First DuPage performed global cash flow analyses for its largest borrowing relationships.
However, these analyses were not always commensurate with the risk that the borrowing
relationships posed to the institution. For example, the institution�s largest borrowing
relationship consisted of a small group of real estate developers who had loans totaling
$23.2 million (or 109 percent of total capital) as of September 30, 2008. These developers
had financing arrangements at more than 20 other institutions to support their numerous
real estate projects and frequently refinanced their projects (often changing lenders and
loan terms) and cross-guaranteed each other�s loans. The complexity of this borrowing
relationship made it extremely difficult for First DuPage to properly assess the group�s
global financial condition, including the impact that problems on projects financed at other
institutions might have on the borrowers� repayment capacity and the completion of
projects financed by First DuPage. Further, examiners noted during the November 2008
examination that the institution�s loan files did not contain current, accurate, and complete
financial information for some of the developers in this relationship.
The lack of sufficient global cash flow analyses for some large borrowing relationships
increased First DuPage�s risk exposure, particularly when the Chicago real estate market
Table 2 identifies the five largest borrowing relationships that were classified by
examiners during the November 2008 examination and the extent to which the above loan
underwriting weaknesses affected these relationships.
Table 2: Lax Underwriting Practices for Selected Borrowing Relationships at First DuPage
Borrowing Relationship
Number of Loans Held by the Relationship
Total Loan Amounts (millions)
LTV Exceptions
Insufficient Global Cash Flow Analyses
$23.9 97%
$12.7 51%
$68.1*
Source: Reports of examination for First DuPage.
* Of the $68.1 million, $65.6 million (or 91 percent) was adversely classified in the November 2008
Although not a primary cause of failure, First DuPage�s various credit administration and
related monitoring weaknesses contributed to the ADC loan quality problems that
developed when the institution�s lending markets declined. Such weaknesses included,
Inadequate analysis and comparison of initial construction and development
projections to actual performance (including analysis of associated deviations).
Insufficient trigger points for loan risk grade changes, particularly for loans with
high risk characteristics, such as high LTV ratios and tight debt service coverage.
This resulted in some loans not being recognized as problem credits in a timely
Failure to obtain current appraisals or perform adequate appraisal reviews on some
Insufficient procedures for monitoring lending markets to enable management to
quickly react to changes in conditions (e.g., zoning, vacancy rates, absorption
rates, and economic indicators).
Lack of feasibility studies and risk analysis (e.g., sensitivity of income projections
to changes in interest rates).
The FDIC, in coordination with IDFPR, provided ongoing supervisory oversight of First
DuPage through regular onsite risk management examinations, visitations, and offsite
monitoring activities. The FDIC identified risks in First DuPage�s operations and brought
these risks to the attention of the institution�s Board and management, including through
recommendations. Such risks included inadequate concentration risk management
practices, lax loan underwriting practices, and weak credit administration and related
monitoring in some areas. As discussed below, more proactive supervisory action at
earlier examinations may have been prudent given the risks in the institution�s loan
portfolio. Such action could have included conducting a visitation in 2006 to assess key
risks at the institution; lowering key supervisory ratings6 and expressing concern regarding
the institution�s large borrowing relationships during the April 2007 examination; and
pursuing an enforcement action prior to the November 2008 examination. More proactive
supervisory action may have influenced First DuPage to curb its lax lending practices and strengthen	6Financial institution regulators and examiners use the Uniform Financial Institutions Rating System
its risk management controls before its lending markets deteriorated,
potentially reducing the institution�s losses.
With respect to issues discussed in this report, the FDIC recently implemented procedures
to better ensure that examiner concerns and recommendations are appropriately tracked
and addressed. The FDIC also implemented new procedures to expedite the issuance of
formal cease and desist orders under certain circumstances.
The FDIC and IDFPR conducted four onsite risk management examinations and two
visitations of First DuPage between January 2005 and the institution�s failure. Table 3
summarizes key supervisory information for these examinations and visitations.
Table 3: Onsite Examinations and Visitations of First DuPage
Examination Start Date Type of Examination
Contraventions and/or Violations*
Informal or Formal Actions Taken**
Visitation FDIC NA
June 2009 C&Dstill in effect.
11/10/2008 Risk Management
FDIC/IDFPR
554544/5
C&D issuedJune 16, 2009.
243321/3
222221/2 None
212222/2
FDIC 212322/2
Source: OIG analysis of examination reports and information in the FDIC�s Virtual Supervisory Information
On the Net system for First DuPage.
The only violation cited in the January 2005 examination report was a violation of Part 326 of the FDIC
Rules and Regulations pertaining to the Bank Secrecy Act.
* Contraventions and/or Violations consisted of contraventions of Part 365 pertaining to LTV loan exceptions
and apparent violations of Part 215 of the Federal Reserve Board�s Regulation O pertaining to insider loans
** Informal enforcement actions often take the form of Bank Board Resolutions or Memoranda of
Understanding. Formal enforcement actions often take the form of Cease and Desist (C&D) orders, but
under severe circumstances can also take the form of insurance termination proceedings.
*** The FDIC lowered First DuPage�s supervisory rating and issued a problem bank memorandum to the
institution on August 15, 2008.
The FDIC�s offsite monitoring procedures generally consisted of contacting the
institution�s management from time to time to discuss current and emerging business
issues and using automated tools7 to help identify potential supervisory concerns. The
FDIC initially became aware of problems at First DuPage when its President and CEO
contacted examiners on October 24, 2007 to advise that the institution was experiencing an increase in nonperforming	7The FDIC uses various offsite monitoring tools to help assess the financial condition of institutions. Two
such tools are the Statistical CAMELS Offsite Rating (SCOR) system and the Growth Monitoring System
(GMS). Both tools use statistical techniques and Call Report data to identify potential risks, such as
institutions likely to receive a supervisory downgrade at the next examination or institutions experiencing
rapid growth and/or a funding structure highly dependent on non-core funding sources.
assets. A January 2008 offsite analysis of the institution�s
September 30, 2007 Call Report identified a sharp increase in nonperforming assets and
determined that a downgrade in the institution�s supervisory composite rating of �2�
would likely occur at the next examination. A subsequent offsite analysis of the
institution�s December 31, 2007 Call Report identified further financial deterioration.
Based on the discussion with First DuPage�s President and CEO, and the results of the
offsite analyses, the FDIC conducted a joint visitation with IDFPR in April 2008 that
focused on the institution�s asset quality. During the visitation, examiners determined that
First DuPage�s asset quality had deteriorated substantially since the prior examination due
to the institution�s heavy concentration in the deteriorating Chicago real estate market. As
a result, examiners downgraded the institution�s supervisory composite rating to a �3.� By
the November 2008 examination, First DuPage�s financial condition had become critically
deficient. On June 16, 2009, the FDIC and IDFPR issued a C&D that, among other
things, required First DuPage to establish appropriate limits on its credit concentrations
and develop a plan to reduce those concentrations, where appropriate. The C&D also
directed the institution to maintain its Tier 1 Capital and Total Risk Based Capital at levels
not less than 9 percent and 13 percent, respectively. These capital ratios are higher than
the minimum levels for Well Capitalized institutions as defined in Part 325, Capital
Maintenance, of the FDIC Rules and Regulations, and reflected the institution�s elevated
On July 20, 2009, the FDIC conducted a joint visitation with IDFPR to assess the financial
condition of First DuPage. Based on the results of the visitation, the FDIC concluded that
the institution�s financial condition was dire and that it would likely fail. IDFPR closed
First DuPage on October 23, 2009 because the institution was unable to raise sufficient
capital to support its operations or find a suitable acquirer.
In retrospect, more proactive supervisory action at earlier examinations may have been
prudent given the risks in the institution�s loan portfolio.
December 2005 Examination
At the time of the December 2005 examination, economic conditions in First DuPage�s
lending markets were favorable and the institution�s adversely classified assets were a
manageable $1.28 million, or 4.4 percent of Tier 1 Capital and the ALLL. Based on this
information and management�s agreement to address the weaknesses identified during the
examination, examiners determined that the overall financial and operational condition of
the institution was satisfactory and assigned a supervisory component rating of �1� for
asset quality. Notwithstanding the financial condition of the institution at that time, the
rating for asset quality did not reflect the increasing risks in the institution�s loan portfolio.
Such risks included:
Rapid Growth. For the 9 months ended September 30, 2005, the institution
experienced growth of approximately 42 percent.
Increasing ADC Loan Concentration. ADC loans represented 140 percent of
Tier 1 Capital, up considerably from the prior examination. The institution also
lacked key concentration risk management controls, such as loan concentration
limits, adequate monitoring, and loan portfolio diversification guidelines.
Lax Underwriting Practices. First DuPage�s loan policies and practices were not
adequate. Among other things, the loan policy did not include review and
approval procedures for LTV exception loans. In addition, LTV exceptions totaled
126 percent of total capital as of September 30, 2005. The vast majority of these
exceptions were subject to the 30 percent of total capital limit defined in the
interagency guidelines.
On March 14, 2006, First DuPage provided a written response to the December 2005
examination report stating, among other things, that its concentration levels may be
reduced over time through normal loan attrition and that it anticipated a significant
reduction in its supervisory LTV loan exceptions before year-end 2006. Based on this
response, and the supervisory ratings assigned during the examination, the FDIC did not
deem it necessary to perform a visitation to assess the institution�s progress in addressing
the risks identified during the examination. In retrospect, a visitation may have been
prudent given the growing risks in the loan portfolio. Had the FDIC conducted a
visitation prior to the April 2007 examination, it may have identified the institution�s
growing credit concentrations and increasing level of supervisory LTV loan exceptions
sooner than it did. By the time of the April 2007 examination, risks in these areas had
increased substantially, making their remediation more difficult when the real estate
market began to decline later that year.
April 2007 Examination
Examiners noted during the April 2007 examination that the institution�s ADC loan
concentrations had increased to 222 percent of Tier 1 Capital and that the volume of
supervisory LTV loan exceptions had risen to an �unacceptably high� level of 213 percent
of total capital. Based on these and other risk factors, examiners lowered the supervisory
component rating for asset quality from a �1� to a �2.� Examiners also recommended in
the examination report that First DuPage improve its weak risk management practices
(including monitoring, reporting, and administering CRE loans) and develop a plan to
reduce its LTV loan exceptions. First DuPage agreed with those recommendations.
Given the increase in First DuPage�s ADC loan concentration and the lack of management
attention to prior recommendations regarding supervisory LTV loan exceptions, the FDIC
could have taken stronger supervisory action to set an appropriate tenor of expectations.
For example, the FDIC could have lowered the institution�s supervisory component
ratings for asset quality and/or management below a �2� and required the institution to
provide periodic progress reports detailing its corrective actions. In addition, examiners
were not critical of the risks associated with the institution�s large borrowing relationships.
At the time of the April 2007 examination, these relationships had significant exposure to ADC projects in the
Chicago area and the institution�s loan underwriting for these
relationships was weak. Criticism of these risks, together with lower supervisory ratings,
may have influenced First DuPage to curb its lending to large borrowers following the
April 2007 examination, potentially reducing the institution�s losses. More than
$18 million in ADC loans classified during the November 2008 examination were
originated to large borrowing relationships after July 1, 2007.
Of note, the FDIC issued guidance to its examiners on January 26, 2010 that defines
procedures for better ensuring that examiner concerns and recommendations are
appropriately tracked and addressed. Specifically, the guidance defines a standard
approach for communicating matters requiring Board attention (e.g., examiner concerns
and recommendations) in examination reports. The guidance also states that examination
staff should request a response from the institution regarding the actions that it will take to
mitigate the risks identified during the examination and correct noted deficiencies.
2008 Visitation and Examination
Based on the results of the April 2008 visitation, examiners determined that First
DuPage�s asset quality had deteriorated substantially. In an April 30, 2008 memorandum
to the FDIC�s Chicago Regional Director, the examiner-in-charge recommended that the
institution�s supervisory composite rating be downgraded to a �3� and that an informal
enforcement action be pursued. However, the rating downgrade was not processed until
August 15, 2008, at which time the FDIC and IDFPR formally notified the institution of
the results of the visitation. In addition, the FDIC decided not to pursue an enforcement
action at that time because a full-scope examination was scheduled for November 2008
and examiners had determined during the April 2008 visitation that the institution was
taking action to address known issues and concerns.
Even though the institution was taking actions to address examiner concerns during the
April 2008 visitation, pursuing an enforcement action at that time may have been prudent.
Such an action would have required the institution to formally report on its condition and
progress in addressing key risks and provided the FDIC with additional assurance that
management would continue its course of action. Although the FDIC did pursue a formal
enforcement action based on the results of the November 2008 examination, the action
was not implemented until June 2009. By that time, the institution was likely to fail
absent a large capital infusion. In this regard, the FDIC recently implemented new
procedures to expedite the issuance of C&Ds under certain circumstances.
Section 38, Prompt Corrective Action, of the FDI Act establishes a framework of
mandatory and discretionary supervisory actions pertaining to all institutions. The section
requires regulators to take progressively more severe actions, known as �prompt
corrective actions,� as an institution�s capital level deteriorates. The purpose of section 38
is to resolve problems of insured depository institutions at the least possible long-term cost
to the DIF. Part 325, Capital Maintenance, of the FDIC Rules and Regulations defines
the capital measures used in determining the supervisory actions that will be taken pursuant to section 38 for	13
FDIC-supervised institutions. Part 325 also establishes
procedures for the submission and review of capital restoration plans and for the issuance
of directives and orders pursuant to section 38.
Based on the supervisory actions taken with respect to First DuPage, the FDIC properly
implemented applicable PCA provisions of section 38. Table 4 illustrates First DuPage�s
capital levels relative to the PCA thresholds for Well Capitalized institutions for the
quarter ended September 30, 2009, and for the 4 preceding calendar years.
Table 4: First DuPage�s Capital Levels
Period Ended Tier 1LeverageCapital
Well Capitalized Thresholds
First DuPage's Capital Levels
Dec-05 9.58
10.18 11.34
Dec-06 10.65
Dec-07 9.59
Dec-08 6.29
Sep-09 -2.68
Source: UBPRs of First DuPage.
First DuPage was considered Well Capitalized for PCA purposes until December 31,
2008. On February 18, 2009 the FDIC notified First DuPage that, based on the
institution�s Call Report for the quarter ended December 31, 2008, the institution�s PCA
category had fallen to Adequately Capitalized. The FDIC�s notification included a
reminder that Adequately Capitalized institutions are restricted from using brokered
deposits absent a waiver from the FDIC. As previously discussed, the FDIC and IDFPR
issued a C&D on June 16, 2009 requiring, among other things, that First DuPage maintain
capital at a level higher than required for Well Capitalized institutions due to its elevated
On July 30, 2009, the FDIC notified First DuPage that, based on the results of the July 20,
2009 visitation, the institution had become Critically Undercapitalized. The notification
stated that First DuPage was subject to all of the mandatory restrictions contained in
section 38 and that the FDIC would be required to place the institution into receivership
on October 30, 2009, unless the FDIC determined that an alternative action would better
carry out the purposes of section 38. The notification also directed First DuPage to
provide the following by September 15, 2009: (1) a summary of actions taken to comply
with the mandatory restrictions of section 38 and (2) a capital restoration plan. On
August 13, 2009, IDFPR provided First DuPage with a written Notice of Intent to Take
Possession and Control Pursuant to Section 51 of the Illinois Banking Act. Among other
things, the notice stated that the institution was operating with an unacceptable level of
capital protection and that if First DuPage did not raise sufficient capital by October 16,
2009, IDFPR intended to take possession and control of the institution.
First DuPage explored a number of options to raise needed capital during 2008 and 2009,
including contacting various financial institutions, individual investors, and private equity
firms. The institution also applied for funds under the U.S. Department of the Treasury�s
Troubled Asset Relief Program. However, the institution subsequently withdrew its
application after it became apparent that its financial condition would prohibit it from
qualifying for funds under the program. On September 18, 2009, the FDIC contacted First
DuPage to determine the status of the institution�s capital restoration plan because one had
not yet been received by the Corporation. An institution official advised the FDIC that
management�s efforts to raise needed capital had not been successful, and that absent open
bank assistance from the FDIC, the institution would likely be taken into receivership.
First DuPage never submitted a capital restoration plan to the FDIC. IDFPR closed First
DuPage on October 23, 2009.
We issued a draft of this report on April 15, 2010. DSC management subsequently
provided us with additional information for our consideration. We made changes to our
report based on this information, as appropriate. On April 28, 2010, the Director, DSC,
provided a written response to the draft report. The response is presented in its entirety as
Appendix 4 of the report.
In its response, DSC reiterated the OIG�s conclusions regarding the causes of First
DuPage�s failure and cited several supervisory activities, discussed in the report, that were
undertaken to address risks at the institution prior to its failure. With regard to our
assessment of the FDIC�s supervision, DSC stated that strong supervisory attention is
necessary for institutions with high CRE and ADC concentrations. In addition, DSC
stated that guidance has been issued that sets forth broad supervisory expectations and reemphasizes
the importance of robust credit risk-management practices for institutions with
concentrated CRE exposures. DSC also stated that it has implemented examiner training
that emphasizes a forward looking approach when assessing a bank�s risk profile. The
training reinforces consideration of risk management practices in conjunction with current
financial performance, conditions, or trends when assigning ratings.	15
We performed this audit in accordance with section 38(k) of the FDI Act, which provides,
in general, that if a deposit insurance fund incurs a material loss with respect to an insured
apparent that a material loss has been incurred.
We conducted this performance audit from January to April 2010 in accordance with
The scope of this audit included an analysis of First DuPage�s operations from January
2005 until its failure on October 23, 2009. Our review also entailed an evaluation of the
Analyzed examination reports issued by the FDIC and IDFPR between 2005 and 2009.
Institution data and correspondence obtained from DSC�s Chicago Regional Office.
Relevant reports prepared by the Division of Resolutions and Receiverships
and DSC�s Washington, D.C. Office relating to the institution�s failure.
Interviewed DSC examination staff from the Washington, D.C. Office and the Chicago Regional Office.
Interviewed IDFPR examiners and managers to obtain their perspectives and
discuss their role in the supervision of the institution.
examination reports, and interviews of examiners to understand First DuPage�s
management controls pertaining to causes of failure and material loss as discussed in the
from various sources, including examination reports, correspondence files, and testimonial
evidence to corroborate data obtained from systems that were used to support our audit
The Government Performance and Results Act of 1993 (the Results Act) directs Executive
Branch agencies to develop a customer-focused strategic plan, align agency programs and
activities with concrete missions and goals, and prepare and report on annual performance
plans. For this material loss review, we did not assess the strengths and weaknesses of
DSC�s annual performance plan in meeting the requirements of the Results Act because
such an assessment is not part of the audit objectives. DSC�s compliance with the Results
Act is reviewed in program audits of DSC operations.
institution�s overall loan and lease portfolio will not be repaid. Boards of
directors are responsible for ensuring that their institutions have controls in
place to consistently determine the allowance in accordance with the
The report filed by a bank pursuant to 12 U.S.C. 1817(a)(1), which
requires each insured State nonmember bank and each foreign bank having
an insured branch which is not a Federal branch to make to the
Corporation reports of condition in a form that shall contain such
information as the Board of Directors may require. These reports are used
to calculate deposit insurance assessments and monitor the condition,
performance, and risk profile of individual banks and the banking industry.
A global cash flow analysis is a comprehensive evaluation of borrower
capacity to perform on a loan. During underwriting, proper global cash
flow must thoroughly analyze projected cash flow and guarantor support.
Beyond the individual loan, global cash flow must consider all other
relevant factors, including: guarantor�s related debt at other financial
institutions, future economic conditions, as well as obtaining current and
complete operating statements of all related entities. In addition, global
cash flow analysis should be routinely conducted as a part of credit
administration. The extent and frequency of global cash flow analysis
should be commensurate to the amount of risk associated with the
particular loan.
An interest reserve account allows a lender to periodically advance loan
funds to pay interest charges on the outstanding balance of a loan. The
interest is capitalized and added to the loan balance. ADC loans often
include an interest 18
reserve to carry the project from origination to completion and may cover the project�s anticipated sell-out or lease-up
Fund. Part 325, subpart B, of the FDIC Rules and Regulations, 12 Code of
Federal Regulations, section 325.101, et. seq., implements section 38,
and taking supervisory actions against depository institutions that are in an
unsafe or unsound condition. The following terms are used to describe
Undercapitalized. A PCA Directive is a formal enforcement action seeking
corrective action or compliance with the PCA statute with respect to an
institution that falls within any of the three categories of undercapitalized
325.2(v), as:
Common stockholder�s equity (common stock and related surplus,
adjustments, less net unrealized losses on available-for-sale securities with
readily determinable market values);
SUBJECT:Draft Audit Report Entitled, Material Loss Review of First DuPage Bank,Westmont, Illinois (Assignment 2010-013)
Corporation�s Office of Inspector General (OIG) conducted a material loss review of First
DuPage Bank (First DuPage), Westmont, Illinois which failed on October 23, 2009. This
memorandum is the response of the Division of Supervision and Consumer Protection (DSC) to
the OIG�s Draft Report (Report) received on April 15, 2010.
The Report concludes First DuPage failed due to the Board of Directors� (Board) and
management�s failure to effectively manage the risks associated with the institution�s heavy
concentration in commercial real estate (CRE) loans, particularly acquisition, development, and
construction (ADC) loans related to condominium projects. Much of the institution�s ADC
lending was concentrated in large borrowing relationships which were centered in a limited
number of real estate developers and their related interests. During the booming economy and
real estate market, management�s appetite for risk increased and underwriting practices
weakened. First DuPage�s concentration in ADC loans, coupled with lax underwriting practices,
made the institution vulnerable to the sudden and sustained downturn in the Chicago real estate
The FDIC, in coordination with the Illinois Department of Financial and Professional Regulation
(IDFPR) jointly and separately conducted five full-scope examinations, two visitations, and four
offsite reviews from 2003 through October 2009. First DuPage experienced significant asset
growth between 2003 and 2006, in the thriving Chicago real estate market. The Report
acknowledges that the FDIC identified risks in First DuPage�s operations and brought these risks
to the attention of the Board and management. Management responded to the noted concerns by
implementing corrective action plans. However, when First DuPage�s management and Board
were unable to sufficiently address its problems, the FDIC and IDFPR initiated a formal
Strong supervisory attention is necessary for institutions with high CRE and ADC
concentrations. Guidance has been issued that sets forth broad supervisory expectations and reemphasizes
concentrated CRE exposures. Additionally, DSC has implemented examiner training that
emphasizes a forward looking approach when assessing a bank�s risk profile. The training
reinforces consideration of risk management practices in conjunction with current financial
performance, conditions or trends when assigning ratings. Thank you for the opportunity to
review and comment on the Report.