Chicago-based Pulaski Savings Bank had deposit liabilities of at least $20.7 million unaccounted for in its core system, which depleted the bank’s capital and eventually led to its failure, according to a review by the Federal Deposit Insurance Corp.’s Office of Inspector General.

Since assets corresponding to those deposits were not identified, the recording of the deposits exceeded the bank's equity capital, leading the lender to become “critically undercapitalized,” the report said.

The estimated loss to the Deposit Insurance Fund was roughly $28 million – 62% of the bank’s $45.9 million in assets – compared to an average of 17% for other bank failures over the past five years, the report said.

The OIG called for an in-depth review of Pulaski in its report published Monday, given its findings.

Patrick Haggerty, a partner at financial services advisory and investment firm Klaros Group, called the OIG’s review “pretty amazing,” saying it highlights a need for regulators to focus on operational risk. 

“The lesson here, as I see it, is that operational risks can materialize as existential threats, especially for smaller banks that don’t have a large capital base to absorb significant unexpected losses,” Haggerty said via email. “You can’t eliminate operational risk, nor should that be the regulators’ goal. However, these risks should be prioritized in supervisory activities alongside more traditional areas of exam focus, such as credit risk and compliance.”

“Recordkeeping may seem mundane, but Pulaski Savings Bank’s failure is a fresh reminder of how important it is,” he added.

Pulaski, shuttered by the Illinois Department of Financial and Professional Regulation in January over what the agency called its “unsafe and unsound condition, along with its impaired capital position,” marked 2025’s only bank failure so far.

Millennium Bank of Des Plaines, Illinois, agreed to acquire the troubled lender in a sale facilitated by the DFPR and the FDIC, which was appointed receiver.

The FDIC, at the time, noted that “suspected fraud” brought about the relatively high $28 million loss to the DIF. 

Pulaski, a state-chartered mutual savings bank, operated from a single location in Chicago as a certified Community Development Financial Institution.

The lender was focused on single-family residential loans, which Pulaski originated internally or purchased from Mutual Federal Bank in Chicago. In 2020, Pulaski sought to expand its multifamily lending and began purchasing commercial real estate loans to enhance its earnings and mitigate interest rate risk exposure, the OIG report said.

Pulaski had been struggling since 2017, when its composite rating was downgraded from 2 to 3 due to shortcomings in management oversight, inadequate management depth and succession planning, poor earnings, and unacceptable interest rate risk exposure, according to the OIG report.

The community bank entered a memorandum of understanding with the FDIC and IDFPR in October 2017 and revised it in 2020 and 2023. Under the MOUs, Pulaski agreed to take actions to address management oversight and succession, as well as strategic and profit planning.

However, from July 2018 to December 2024, the FDIC and the IDFPR conducted seven joint review sessions that identified deficiencies related to earnings, operations and the bank’s financial condition, which made it less than satisfactory.

In September 2023, examiners found that management did not make sufficient progress in addressing the updated provisions in the MOU, including its commercial real estate risk management, succession and profit plans.

Last December, examiners confirmed the findings of a contractor hired by the bank to update its general ledger that certificates of deposit were not posted to the core banking system, which led them to downgrade Pulaski’s capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk rating.

The FDIC issued a problem bank memorandum Dec. 19 and finally, on Dec. 27, the agency determined the bank was “critically undercapitalized” and further downgraded the CAMELS rating. 

“The bank had significant unresolved and unexplained discrepancies within suspense accounts as well as large deposits maintained off the bank’s core system,” the OIG report said, adding the bank’s board failed to ensure that accurate records were maintained.