FDIC’s Unusual Order against Liberty Bank: Sell Yourself or Liquidate
Federal regulators have taken the extraordinary step of forcing Liberty Bank, a small bank in Utah, to either sell itself or liquidate. This move by the Federal Deposit Insurance Corp. (FDIC) appears to be a last-ditch effort to avoid placing the bank into receivership and protect depositors.
A Last-Resort Measure
The FDIC’s order, made public recently, is similar to the directives given to troubled banks after the 2008 financial crash. However, this time it goes a step further by giving the bank the option to sell, merge, or liquidate. Liberty Bank, with just $13 million in assets, is one of the smallest banks in the country.
Bank lawyers and regulatory experts have expressed surprise at the public nature of the FDIC’s action. The agency has raised concerns about the bank’s bookkeeping, the valuation of its premises, and ownership of a parcel of land used for extra parking. The public rebuke raises the risk of depositors withdrawing their funds.
“It’s unusual,” says Bob Hartheimer, a senior advisor at Klaros Group and former FDIC official. The bank likely received the same message privately for quite some time. Liberty Bank’s financial performance has been consistently unprofitable since 2007.
Liberty Bank’s Response
Liberty Bank’s President and CEO, Kendall Phillips, states that the bank is fully cooperating with regulators and actively seeking a successful resolution for depositors and customers through a sale or merger. The bank has hired Piper Sandler as a financial advisor and the law firms Hunton Andrews Kurth and Ray Quinney Nebeker to comply with the FDIC order.
Avoiding the Receivership Alternative
For the FDIC, a forced sale or liquidation of Liberty Bank would help avoid the messier alternative of placing the bank into receivership. This would also protect the Deposit Insurance Fund from taking a hit, even if it’s a small one. In 2021, the fund was affected by the failures of several banks, including the tech-focused Silicon Valley Bank and the cryptocurrency-involved Signature Bank.
The FDIC jointly oversees Liberty Bank with the Utah Department of Financial Institutions, which did not participate in the FDIC’s action. The regulatory agency declined to comment on operating institutions.
The Consent Order and Capital Requirements
The consent order issued by the FDIC notes the bank’s deteriorated capital cushion, operating losses, inaccuracies in books and records, and deficiencies in management and board oversight. Liberty Bank is required to raise $1.25 million of capital within 90 days—more than double its current capital stock of $1.06 million.
The FDIC is giving the bank 90 days to merge with another institution or find an acceptable buyer to avoid liquidation. If no successful resolution is achieved within the given timeframe, the consent order forces Liberty Bank to liquidate immediately.
The Uncommon Use of the Term “Liquidate”
The term “liquidate” rarely appears in public FDIC actions. Since 2000, the FDIC has only directed a bank to create liquidation plans five times. It is an uncommon step but not unprecedented, according to Cliff Stanford, a partner at Alston & Bird.
Regulatory Troubles and Consumer Lending Violations
Liberty Bank has faced regulatory troubles in the past. In 2017, the FDIC penalized the bank for inadequate management, capital maintenance, liquidity policies, loan administration, and auditing. In 2021, the FDIC flagged violations of consumer lending laws such as the Truth in Lending Act, the Equal Credit Opportunity Act, and the Community Reinvestment Act (CRA).
The FDIC’s report from last year stated that Liberty Bank was substantially noncompliant with the CRA and had identified an illegal credit practice. The bank claims, however, to have resolved these issues since then.
Previous Acquisition Attempt
In 2021, Liberty Bank had found a potential acquirer, but the deal fell through after consumer groups raised objections. The buyer, the parent company of CreditNinja (a high-cost lender), faced criticism for its loans targeting consumers with poor or limited credit histories. The FDIC confirmed that the application to buy Liberty Bank was withdrawn shortly after the deal was announced.
Conclusion
The FDIC’s order for Liberty Bank to either sell itself or liquidate is an unusual move, uncommonly seen in public actions. The bank’s compliance with the order will determine its future, with the FDIC seeking to protect depositors and the Deposit Insurance Fund. Liberty Bank is actively working to resolve the situation, hiring financial and legal advisors to comply with the requirements set forth by the FDIC.
Frequently Asked Questions:
1. What is the FDIC order for Liberty Bank in Utah?
The FDIC has ordered Liberty Bank to sell itself or liquidate, a highly unusual move to avoid placing the bank into receivership.
2. Why did the FDIC take this action?
The FDIC took this action due to concerns about the bank’s bookkeeping, the valuation of its premises, and ownership of a parcel of land used for extra parking.
3. Is Liberty Bank in compliance with the FDIC’s order?
Liberty Bank is fully cooperating with regulators and actively seeking a successful resolution through a sale or merger. The bank has hired financial and legal advisors to comply with the FDIC’s requirements.
4. What are the capital requirements set by the FDIC?
Liberty Bank is required to raise $1.25 million of capital within 90 days, more than double its current capital stock.
5. What happens if Liberty Bank fails to comply with the FDIC’s order?
If Liberty Bank fails to merge with or find an acceptable buyer within the given timeframe, the consent order forces the bank to liquidate immediately.
To learn more about banking regulations and compliance, visit VisBanking. Explore their services and pricing here, and request a demo here.
0 Comments