AmTrust Financial, a privately held regional bank holding company based in Cleveland, has just filed for bankruptcy. With well over $10 billion in assets, AmTrust Bank is fairly large. The circumstances surrounding its failure are unusual in that the Bank Holding Company (BHC) has filed for bankruptcy but the banking subsidiary is still operating. The picture this event reveals is one of continued distress in the banking industry, especially for regionals.

Bloomberg reports:

The 120-year-old bank, once known as Ohio Savings Bank, wasn’t included in the filing. The company listed $169.5 million in debt and more than $100 million in assets in a Chapter 11 petition filed yesterday in U.S. Bankruptcy Court in Cleveland. “In the past two years, the debtors have diligently attempted to survive the downturn in the economy,” AmTrust Chief Executive Officer Peter Goldberg said in court papers. “Deterioration in mortgage quality and availability slowed the pace of transactions and devalued homes.” The bankrupt units include AmTrust Real Estate Investment, AmTrust Insurance Agency and AmTrust Properties. The company, with bankrupt and non bankruptcy units, had assets and debt of more than $11 billion each and about 1,700 employees, it said.

Here’s what I believe happened.

Cleveland, like the larger Midwestern city of Detroit, was hit hard by the loss of manufacturing in the 1970s and 1980s. Unlike Pittsburgh, Detroit and Cleveland have never really recovered. This is reflected in the Case-Shiller Housing Index numbers. Cleveland has the lowest index numbers of the 20 cities covered outside of the apocalyptic Detroit and mega-bubble to bust city Las Vegas.

Like so many other Midwestern banks faced with poor lending environments in their home territory, AmTrust decided to jump on the Florida or Phoenix real estate bubble bandwagon.

Fifth Third in Cincinnati is another Ohio bank which comes to mind. I remember going to a wedding in Palm Beach last October at the height of the crisis. When I got off the plane to look for cash, I was met by a Fifth Third teller machine. Later I saw a bevy of Fifth Third branches in town. I wondered what a Cincinnati-based bank was doing at the West Palm Beach airport.

These bets went spectacularly pear-shaped in the housing bust, creating massive losses which were compounded by a deep, deep recession back in Ohio. No one escaped. Cleveland crosstown rival NCC was already flogged off last October to the stronger Pittsburgh-based PNC because it was going to fail. They too had expanded into Florida. I saw numerous branches in Palm Beach for example.

I reckon AmTrust was shopped around by the FDIC and no bidders were forthcoming. On Monday, the Wall Street Journal had a good article on just this phenomenon. People United Financial was looking for acquisitions:

The financial crisis has given People’s United an appetite for dying banks that nevertheless might have some valuable pieces. But of the 124 banks to fail so far this year, many of those put up for sale by regulators as part of the seizure process "are of very poor quality," said Norm Skalicky, chief executive of Stearns Financial Services Inc. "It’s not as if you can walk in and you are in business."

What does that tell you? I see it as a sign of many more busts to come. You might recall that I mentioned a growing dichotomy between the fortunes of big banks and small banks about two weeks ago. Too big to fail banks have been bailed out. Regional banks not so much. Therefore, regional banks have turned off the spigot and are holding on for dear life. This is what is behind the drop in lending.

As for AmTrust, about two years ago I met with a group of executives at AmTrust Bank at Cleveland Browns stadium for a one-day consulting engagement related to their HR strategy after changing their name from Ohio Savings Bank. While I enjoyed seeing the football stadium (and executive boxes) up close and meeting some nice people, I did not come away feeling like this was an organization in a particularly cheery mood despite the pep talk by CEO Peter Goldberg.

The Bloomberg story makes clear why:

The bank invested heavily in single- family home loans, land acquisition, development and construction loans, court papers show. The bank has been controlled by the Goldberg family since the early 1960s and the family currently owns 77 percent of its commons stock, according to the court filing. The holding company was formed in 1977.

And remember, the Goldbergs own this bank. Its not like they are profiteering professional managers with no stake in the enterprise. Clearly they did everything they could to avoid this outcome. Moreover, the bankruptcy occurred yesterday, not on Friday in the typical FDIC bank seizure fashion. The Cleveland Plain Dealer suggests the BHC bankruptcy filing is a tactic used to avoid the consequences that befell WaMu when it was seized last year. See the article AmTrust’s bankruptcy filing may be a lesson learned from WaMu.

Let’s watch what happens to the operating company. Right now, there is nothing on their website about the bankruptcy filing. The last press release is from October extolling how AmTrust Now Has Twenty-Five Branches in South Florida. What happens here could be a telltale sign of the near-term fortunes in regional banking.

Credit Suisse is upgrading the regional financial sector (including Fifth Third, First Horizon, and SunTrust) because they believe non-performing loans and charge-offs will improve in 2010. There are always two sides to every story.

See also AmTrust misses regulators’ financial demands from February and AmTrust Bank finances have gotten worse, records show from September in the Cleveland Plain Dealer. Another good article on this is Regulators Fell One Bank, Spare a Rival from April in the Wall Street Journal. It points out that the demise of NCC and AmTrust would leave Cleveland starved for lending capacity. And given the lack of funding coming from the federal government, you should expect dire economic circumstances in Cleveland in electoral swing state Ohio to match the already dire circumstances in another swing state, Michigan.