By Becky Yerak | A federal autopsy into the recent failures of Worth-based Founders Bank and Oregon, Ill.-based Rock River Bank found that bad investments in collateralized debt obligations, as well as deterioration in their commercial real estate portfolios, doomed the lender.

Both banks were among nine institutions owned by the Lyle Campbell
family. Founders, Rock River and four other Campbell banks were seized
by regulators on July 2.

“Founders and Rock River failed primarily because their boards and
management did not effectively manage the risk associated with
significant investments in risky CDOs,” according to a report released
today by the Federal Deposit Insurance Corp.’s Office of Inspector
General.

The FDIC’s inspector general conducts such audits when the insurance
fund suffers a “material loss” on a bank failure. Founders’ total assets
at closing were $911 million, and its estimated loss to the insurance
fund was $173 million. Rock River’s assets at closing were $73 million,
and the estimated loss to the deposit insurance fund was $27 million.

“Also contributing to the failures of Founders and Rock River was a
deterioration in the institutions’ CRE and acquisition, development and
construction loan portfolios” for which the banks hadn’t performed
proper due diligence, the report said.

“Weaknesses in the ADC loan participations, together with a
concentration in CRE loans, made both institutions vulnerable to a
sustained downturn in the real estate market.”

Also, though not a primary cause of failure, Founders and Rock River
also funded poorly underwritten loans to insiders of the Campbell Group
and to outside officers of the failed Strategic Capital Bank. Those also
added to the institutions’ losses, the report said.

Champaign-based Strategic Capital was shut down last May. Founders was
acquired by Chicago-based PrivateBancorp Inc. in a loss-sharing deal
with the FDIC.

Here’s a copy of the inspector’s 32-page report into the two banks’ failures.