8 ms·

Dream First Bank Assumes All of the Deposits of Heartland Tri-State Bank

29 points by gregimba 3y ago

petarb 3y ago
What caused this bank to go under?
- bob1029 3y ago
  I'd say that asset size is small. There are a lot of things that could trip up a bank that scale. Bad IT/compliance, etc.
  - kikokikokiko 3y ago
    I think the most obvious explanation is that this bank may be another victim of the "sudden" rise in interest rates we're seeing in the last couple of years. This time it was 300 million in assets plus deposits, and the FDIC allegedly will lose 50 million on the rescue operation. The US have thousands of banks of similar size to this one. May be down the road the number of 50 million losses will become unbearable, who knows.
    - toomuchtodo 3y ago
      FDIC can surcharge remaining banks through their assessments (FDIC insurance premiums). It’s a broadly distributed tax on bank customers in aggregate. So long as US banking exists, there will be banks to charge to keep the fund solvent. They just need to kick the can long enough to give impairments caused by rapid rate increases time to burn off.
      - kikokikokiko 3y ago
        And what happens if these impairments start to gradually become more and more realized losses, as their due dates come? I can't see the FED making a 180 anytime soon, in fact I've been buying treasuries for the most part. Everybody in the world may want (and need) lower rates, but it's like fighting against the sunrise, if it's time for it it's time and that's it. What will happen when it's not Heartland Bank from Bumf*ck Arkansas that is going under from betting on the wrong macroeconomic path, but let's say, Bank of America? Would the other banks have the cash to bail this one out? Or will the FED in the end have to print piles and piles of colored paper, raising inflation and then having to raise rates, bla bla bla. It's going to be interesting to see what happens in the next few years.
        deleted 3y ago
        [deleted]
        berbec 3y ago
        My naive, and cynical, understanding of this type of policy, is the point is to kick the can down to the next generation. It didn't start this way (I hope), but I view it as an accepted solution to make sure the bomb's timer is my_age+1yr. See [social security] & [climate change], et. al.
        dylan604 3y ago
        > but let's say, Bank of America? 4 simple words: Too big to fail. We've already seen this play. It looked like TAARP bailouts. I'm sure congress will be lobbied and something similar will play out if it comes again
        landemva 3y ago
        Silicon Valley Bank marked their debt to maturity, until they ran out of liquidity and were shut down. But rising rates does not affect fixed rate loans.
        ruds 3y ago
        In many of these bank failures, the problem has been that they are holding very safe loans at an interest rate that is too low for today's environment. In practice, if they are allowed to survive until the loans mature, they will get all the principal back, so there won't be a realized loss there. Unfortunately, the rate is so low that if you need to sell the loan today it will be at a substantial discount to face value. The losses that the banks would actually realize are that the cost of deposits have gone up: People want a higher interest rate on their deposits. If they don't get that rate, people pull their deposits, and banks aren't allowed to hold their safe loans to maturity because they need cash now. Historically, rising rates have been good for banks because deposits are sticky and the banks can raise their customers' interest rates more slowly than they raise the rates on the loans they make. It seems that customers are more fickle now, and many banks weren't prepared for that.
- LapsangGuzzler 3y ago
  > The FDIC and Dream First Bank, National Association, are also entering into a commercial shared-loss agreement on the loans it purchased of the former Heartland Tri-State Bank. Sounds like they had some bad loans on the books, smaller banks in rural communities often struggle to adequately assess loan risk because talent is hard to find.
  - SoftTalker 3y ago
    Crop loans that went bad due to storm damage? Seems possible in that part of the country. Though I'd presume those are insured?
    - dylan604 3y ago
      It wouldn't surprise me if insurance weasels out of payouts either though which would leave the farmers no way of paying the note.
    - User23 3y ago
      Crop insurance isn't an economically viable thing for any of the small farmers that I personally know anymore. It might still be feasible if you qualify for the beginner subsidies.
    - landemva 3y ago
      Rural does not mean crop loans, and that does not seem to be in the press release. Loans against property is different than a planting loan.
  - User23 3y ago
    Another problem is the cash flow that can be generated from farmland varies wildly. You might lease it out for $100 an acre, On the other hand you might be making $5,000 an acre if you're farming something specialized.
  - landemva 3y ago
    Rural people, whatever that means, can be smart and crafty. And there should be a risk management committee and there are services to help provide insights. I was on a rural BoD and don't recall ever seeing a crop loan.
hansjorg 3y ago
You've got to appreciate the preciness of the language, and the assuredeness it's meant to instill, in press releases like this.
taeric 3y ago
Would love to see how these numbers square up. 139 million in assets over 130 million in deposits. And costing the insurance 54 million. Naive read is that the bank just had 54 million in withdrawals that it couldn't cover? Guessing that isn't correct. Curious on details. Was this a surprise?
- deleted 3y ago
  [deleted]
- wbl 3y ago
  The bank that acquires does so with a haircut and a hit to the balance sheet from the overall entity having all the liabilities of the combination and the assets. So the insurer throws in some money to recapitalize. Remember everyone needs this deal to be smooth and the new entity toppling is not smooth.
  - landemva 3y ago
    The buyer gets to sniff around and accept the offer for the accounts and balance sheet. The insurer, FDIC or sometimes NCUA, takes the difference.
  - taeric 3y ago
    Right, but that is only needed if the assets don't cover the liabilities. Numbers given were covered. Naive reading of that is that they were not liquid?
    - wbl 3y ago
      The ratio of assets to liabilities has to be greater than one, and generally quite a bit greater for regulators to be happy.
      - taeric 3y ago
        It was greater, per story? That is why I quoted them.
kasey_junk 3y ago
Worth noting this bank is an order of magnitude off of the 250th biggest bank in the US. It’s actually small enough that it’s hard to figure out where in the ~4K US banks it is, but it’s in the backend. Also, this year is still small on the “number of failed banks” list. Banks fail fairly often and this one failing would be no news normally.
- pard68 3y ago
  For this reason, this is actually big news. Small banks are the back bone of the US financial system. They are conservative where big ones are not. They are historically the ones that keep afloat. Too early to call, but this might be a signal of things to come.
  - kasey_junk 3y ago
    That’s literally the opposite of the truth. Look at the failed bank list: https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/ https://www.fdic.gov/resources/resolutions/bank-failures/fai... Small banks fail. Big banks don’t. If anything this year is abnormal in that big banks have failed.
  - AYBABTME 3y ago
    Small banks are less regulated than large ones, as a result of lobby from them to loosen the rules so that they can eek out some profits using less-conservative strategies. They also tend to serve localized and correlated customers, so local events can have an outsized impact on them, versus big banks that are widely diversified.

29 points by gregimba 3y ago

petarb 3y ago

What caused this bank to go under?

bob1029 3y ago
I'd say that asset size is small. There are a lot of things that could trip up a bank that scale. Bad IT/compliance, etc.
- kikokikokiko 3y ago
  I think the most obvious explanation is that this bank may be another victim of the "sudden" rise in interest rates we're seeing in the last couple of years. This time it was 300 million in assets plus deposits, and the FDIC allegedly will lose 50 million on the rescue operation. The US have thousands of banks of similar size to this one. May be down the road the number of 50 million losses will become unbearable, who knows.
  - toomuchtodo 3y ago
    FDIC can surcharge remaining banks through their assessments (FDIC insurance premiums). It’s a broadly distributed tax on bank customers in aggregate. So long as US banking exists, there will be banks to charge to keep the fund solvent. They just need to kick the can long enough to give impairments caused by rapid rate increases time to burn off.
    - kikokikokiko 3y ago
      And what happens if these impairments start to gradually become more and more realized losses, as their due dates come? I can't see the FED making a 180 anytime soon, in fact I've been buying treasuries for the most part. Everybody in the world may want (and need) lower rates, but it's like fighting against the sunrise, if it's time for it it's time and that's it. What will happen when it's not Heartland Bank from Bumf*ck Arkansas that is going under from betting on the wrong macroeconomic path, but let's say, Bank of America? Would the other banks have the cash to bail this one out? Or will the FED in the end have to print piles and piles of colored paper, raising inflation and then having to raise rates, bla bla bla. It's going to be interesting to see what happens in the next few years.
      - deleted 3y ago
        [deleted]
      - berbec 3y ago
        My naive, and cynical, understanding of this type of policy, is the point is to kick the can down to the next generation. It didn't start this way (I hope), but I view it as an accepted solution to make sure the bomb's timer is my_age+1yr. See [social security] & [climate change], et. al.
      - dylan604 3y ago
        > but let's say, Bank of America? 4 simple words: Too big to fail. We've already seen this play. It looked like TAARP bailouts. I'm sure congress will be lobbied and something similar will play out if it comes again
      - landemva 3y ago
        Silicon Valley Bank marked their debt to maturity, until they ran out of liquidity and were shut down. But rising rates does not affect fixed rate loans.
      - ruds 3y ago
        In many of these bank failures, the problem has been that they are holding very safe loans at an interest rate that is too low for today's environment. In practice, if they are allowed to survive until the loans mature, they will get all the principal back, so there won't be a realized loss there. Unfortunately, the rate is so low that if you need to sell the loan today it will be at a substantial discount to face value. The losses that the banks would actually realize are that the cost of deposits have gone up: People want a higher interest rate on their deposits. If they don't get that rate, people pull their deposits, and banks aren't allowed to hold their safe loans to maturity because they need cash now. Historically, rising rates have been good for banks because deposits are sticky and the banks can raise their customers' interest rates more slowly than they raise the rates on the loans they make. It seems that customers are more fickle now, and many banks weren't prepared for that.
LapsangGuzzler 3y ago
> The FDIC and Dream First Bank, National Association, are also entering into a commercial shared-loss agreement on the loans it purchased of the former Heartland Tri-State Bank. Sounds like they had some bad loans on the books, smaller banks in rural communities often struggle to adequately assess loan risk because talent is hard to find.
- SoftTalker 3y ago
  Crop loans that went bad due to storm damage? Seems possible in that part of the country. Though I'd presume those are insured?
  - dylan604 3y ago
    It wouldn't surprise me if insurance weasels out of payouts either though which would leave the farmers no way of paying the note.
  - User23 3y ago
    Crop insurance isn't an economically viable thing for any of the small farmers that I personally know anymore. It might still be feasible if you qualify for the beginner subsidies.
  - landemva 3y ago
    Rural does not mean crop loans, and that does not seem to be in the press release. Loans against property is different than a planting loan.
- User23 3y ago
  Another problem is the cash flow that can be generated from farmland varies wildly. You might lease it out for $100 an acre, On the other hand you might be making $5,000 an acre if you're farming something specialized.
- landemva 3y ago
  Rural people, whatever that means, can be smart and crafty. And there should be a risk management committee and there are services to help provide insights. I was on a rural BoD and don't recall ever seeing a crop loan.

hansjorg 3y ago

You've got to appreciate the preciness of the language, and the assuredeness it's meant to instill, in press releases like this.

taeric 3y ago

Would love to see how these numbers square up. 139 million in assets over 130 million in deposits. And costing the insurance 54 million. Naive read is that the bank just had 54 million in withdrawals that it couldn't cover? Guessing that isn't correct. Curious on details. Was this a surprise?

deleted 3y ago
[deleted]
wbl 3y ago
The bank that acquires does so with a haircut and a hit to the balance sheet from the overall entity having all the liabilities of the combination and the assets. So the insurer throws in some money to recapitalize. Remember everyone needs this deal to be smooth and the new entity toppling is not smooth.
- landemva 3y ago
  The buyer gets to sniff around and accept the offer for the accounts and balance sheet. The insurer, FDIC or sometimes NCUA, takes the difference.
- taeric 3y ago
  Right, but that is only needed if the assets don't cover the liabilities. Numbers given were covered. Naive reading of that is that they were not liquid?
  - wbl 3y ago
    The ratio of assets to liabilities has to be greater than one, and generally quite a bit greater for regulators to be happy.
    - taeric 3y ago
      It was greater, per story? That is why I quoted them.

kasey_junk 3y ago

Worth noting this bank is an order of magnitude off of the 250th biggest bank in the US. It’s actually small enough that it’s hard to figure out where in the ~4K US banks it is, but it’s in the backend. Also, this year is still small on the “number of failed banks” list. Banks fail fairly often and this one failing would be no news normally.

pard68 3y ago
For this reason, this is actually big news. Small banks are the back bone of the US financial system. They are conservative where big ones are not. They are historically the ones that keep afloat. Too early to call, but this might be a signal of things to come.
- kasey_junk 3y ago
  That’s literally the opposite of the truth. Look at the failed bank list: https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/ https://www.fdic.gov/resources/resolutions/bank-failures/fai... Small banks fail. Big banks don’t. If anything this year is abnormal in that big banks have failed.
- AYBABTME 3y ago
  Small banks are less regulated than large ones, as a result of lobby from them to loosen the rules so that they can eek out some profits using less-conservative strategies. They also tend to serve localized and correlated customers, so local events can have an outsized impact on them, versus big banks that are widely diversified.