InBank of Oak Forest, Ill., went from well capitalized to insolvent in no time at all, and industry observers are pointing to the $209 million-asset bank as an extreme example of an aggressive regulatory approach to deteriorating credit quality.

"The regulatory hammer is coming down and it is coming down hard," said Michael Iannaccone, the president of MDI Investments Inc. in Chicago, referring to the industry broadly.

That's not to say regulators are wrong. Some banks have been too slow to write down loans as the economy soured, and more of these banks are being pushed to change their loan classifications and allowances for loan losses after exams.

"There is a minority group that is only now coming to the realization that a miracle is not going to save them from their poor underwriting," said Iannaccone, who would not discuss InBank specifically. "And the severity of the pain is greater because they have to recognize it all now."

Executives at the privately held InBank did not return a call to discuss the issue. But a spokeswoman with the Illinois Department of Financial and Professional Regulation, who would not comment on InBank specifically, made it clear that the agency is redoubling its efforts to ensure banks apply realistic values to their loan books.

"We are very aggressively reviewing all of the data we are getting on a quarterly basis and asking questions when something does not make sense," she said. "We also have the authority — and use the authority — to do unannounced exams when we have concerns. And from there, we are taking aggressive actions in terms of cease-and-desist and consent orders to change business practice as needed."

Regulators deemed InBank well capitalized as of March 31 and the bank reported a loan-loss provision of $549,000. But the bank adjusted its first-quarter results July 27, increasing its provision nearly 38-fold, to $20.6 million, and wiping out its capital.

InBank's revised first-quarter estimate of noncurrent loans was $20.1 million; that figure jumped 90% in the second quarter, to $38.2 million.

Though neither the bank nor its regulator would confirm it, the obvious speculation is that examiners told the bank that its valuations were way off.

Karen Dorway, the president of the bank rating agency BauerFinancial Inc. in Coral Gables, Fla., said such examiner-driven revisions are becoming more common, but that InBank stands out as an extraordinary retelling of a quarter. "After looking at this one I went back to look to see if there were others that made this dramatic of a change and couldn't find one," she said.

Nonperforming loans at InBank topped 25% of all loans at June 30, and its total risk-based capital ratio fell to negative 1.77%.

That's quite a contrast to its initial first-quarter results. Those had the total risk-based capital ratio at 12.24%.

"I presume regulators came along and said, 'Wait a minute, you need to boost your loss provisioning to reflect your problem loans,' " said Matthew Anderson, a partner at the market research firm Foresight Analytics LLC in Oakland, Calif. "That is how a bank can go from a positive and seemingly very healthy capital position one quarter to critically undercapitalized the next."

According to Foresight data, 19 banks reported negative capital ratios at June 30, and 14 of those have already failed.

Roughly half of the 19 banks had their capital depleted quickly. The Foresight data showed that 10 were well capitalized at yearend, and two (including InBank) were well capitalized when the first quarter closed.

The other one is First Security Trust and Savings Bank in Elmwood Park, Ill., whose troubles appear to stem mostly from home mortgages and commercial real estate loans. It reported a total risk-based capital ratio of 18.14% at March 31; this ratio plunged to a negative 6.51% by June 30.

A spokesman for the $205 million-asset bank said that the owners have since added enough capital for it to be deemed well capitalized again.

(By Thursday, 13 of the 81 banks that had failed this year were based in Illinois.)

InBank has been suffering from trouble with its residential construction loans. In a cease-and-desist order dated Aug. 3 and made public a week later, the state regulator and the FDIC gave InBank 90 days to boost its total risk-based capital ratio to 12%. Regulators also ousted its chief executive officer, Cynthia Grazian, and barred her from having anything to do with the bank. Neither agency would discuss InBank.

Given the graveness of InBank's condition, Dorway said she was surprised it had not received a prompt corrective action directive, which is a more severe regulatory action than a cease-and-desist order and typically imposes a short deadline to raise capital or face seizure. "With numbers like this, you would think a PCA would be in order," Dorway said. "On the other hand, we don't know what is going on behind the scenes."

Mike Heller, the president of the bank rating firm Veribanc Inc. in Woonsocket, R.I., estimated InBank's capital hole to be $31 million.

"This bank should have been shut down by now," Heller said. "Maybe they are promising that the capital is coming or something, but I am just surprised that this institution hasn't been taken over already."

Anderson said that even though its capital ratios dipped only recently, InBank has been on Foresight's watch list for the past two quarters because of its rising nonperforming assets and skimpy provisioning.

"We treat some of the reported capital ratios as potentially questionable," Anderson said. "If there is a high amount of nonperforming assets, any capital ratio is going to get an asterisk to see if they are provisioning appropriately."

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