FDIC Issues Unusual Order to Utah Bank: Sell or Liquidate – A Last-Ditch Effort to Avoid Receivership
Federal regulators are forcing a tiny bank in Utah to either sell itself or liquidate, an unusual step that appears to be a last-ditch effort to avoid placing it into receivership. The order from the Federal Deposit Insurance Corp. (FDIC), which the agency made public last week, is similar to the sell-or-merge directives that regulators used after the 2008 financial crash to force troubled banks to take action, industry lawyers say. But this time, the FDIC order is more akin to sell-merge-or-liquidate — effectively shutting down the bank if another institution can’t get it out of its problems.
A Surprise Move by the FDIC
The bank in question, Liberty Bank in Salt Lake City, is one of the smallest in the country, with just $13 million of assets. The action was surprising to several bank lawyers and regulatory experts contacted for this story. They pointed to issues the FDIC laid out with the bank’s bookkeeping, a requirement that the bank get the value of its premises appraised, and even a directive to figure out who owns a parcel of land used for extra parking. Most surprising was the public nature of the FDIC’s repudiation, an escalation from what likely was behind-the-scenes pressure from agency officials, the experts said. A public rebuke raises the risk that depositors could pull their money.
The Concerns Raised by the FDIC
“It’s unusual,” said Bob Hartheimer, a senior advisor at the consulting firm Klaros Group who, in the early 1990s, oversaw the sale of some 200 failed banks as a top FDIC official in charge of resolutions. The bank and its board likely heard the same message privately “for multiple quarters, if not more,” Hartheimer added. The bank has not been consistently profitable since 2007, according to an American Banker review of regulatory data on its quarterly performances.
The FDIC’s order cites a “deterioration” of the bank’s capital cushion, operating losses, the “inaccuracy of books and records,” and “deficiencies in management and board oversight.” It requires the bank to raise some $1.25 million of capital within 90 days, more than double its current capital stock of $1.06 million. The FDIC is also requiring the bank to merge with another institution or sell itself to an approved buyer within 90 days. If it fails to do so, the consent order forces Liberty Bank to liquidate itself immediately.
Potential Impact on Deposit Insurance Fund
For the FDIC, a forced sale or liquidation would avoid an even messier alternative — putting the bank into receivership and subjecting the Deposit Insurance Fund to a hit, even if it’s small. The fund took five hits last year, most notably with the failures of Silicon Valley Bank, First Republic Bank, and Signature Bank. Two smaller banks also failed last year due to bad loans and a cryptocurrency scam. A sixth bank, Silvergate Capital Corp., announced in March that it would self-liquidate after the collapse of a crypto exchange it served.
The FDIC is jointly overseeing Liberty Bank with the Utah Department of Financial Institutions, which did not participate in the FDIC action. The Utah regulatory agency declined to comment, saying it does not comment on operating institutions. The FDIC also declined to comment beyond the enforcement action, which is dated Nov. 21.
A Troubled History for Liberty Bank
Liberty Bank is no stranger to regulatory troubles. In 2017, the FDIC penalized it for inadequate management, capital maintenance, liquidity policies, loan administration, and auditing. Then in 2021, the FDIC flagged violations of several consumer lending laws, including the Truth in Lending Act, the Equal Credit Opportunity Act, and the Community Reinvestment Act. The bank has stated it has fixed its practices since then.
The bank, founded in 1956, previously found an acquirer in 2021, but the deal fell through after consumer groups raised objections to the buyer, which was the parent company of CreditNinja, a high-cost lender. The FDIC told American Banker that the application to buy Liberty Bank was withdrawn two weeks after the companies announced the deal.
Frequently Asked Questions
1. Why is the FDIC ordering Liberty Bank to sell or liquidate?
The FDIC has raised concerns about the bank’s financial stability, including a deterioration of its capital cushion, operating losses, and deficiencies in management and board oversight. To avoid placing the bank into receivership and protect the Deposit Insurance Fund, the FDIC is urging the bank to find a buyer or liquidate itself.
2. Will Liberty Bank be able to find a buyer in the given timeframe?
The FDIC has given Liberty Bank 90 days to merge with another institution or sell itself. If it fails to do so, the consent order requires the bank to liquidate immediately. It remains uncertain if the bank will be able to secure a buyer within the given timeframe.
3. What are the potential impacts on depositors?
The public nature of the FDIC’s order raises the risk that depositors could withdraw their money from Liberty Bank. However, the bank has expressed its commitment to cooperating with regulators and seeking a successful resolution for its depositors and customers.
4. How does this order relate to previous regulatory troubles faced by Liberty Bank?
Liberty Bank has faced previous penalties and violations of consumer lending laws in the past. The FDIC’s current order is a result of ongoing concerns and issues with the bank’s financial stability and management. The FDIC expects the bank to address these issues promptly to ensure a positive outcome for its depositors and customers.
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