FDIC's unusual order against tiny Utah bank: Sell yourself or liquidate

Nathan Howard/Bloomberg

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., 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. 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, they said.

"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.

In an email, Liberty Bank President and CEO Kendall Phillips said the bank is "fully cooperating with the regulators on all issues of the order."

"We are earnestly seeking a successful resolution for our depositors and customers with a sale or a merger," Phillips said.

The company has hired the investment bank Piper Sandler as a financial advisor, Phillips said. It also hired the law firms Hunton Andrews Kurth and Ray Quinney Nebeker as legal counsel as it works to comply with the FDIC order.

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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 the tech-heavy Silicon Valley Bank, the wealth-focused First Republic Bank and the crypto-dabbling Signature Bank. Two smaller banks also failed last year: one in Iowa due to bad loans to trucking companies, and another in Kansas due to a cryptocurrency scam.

A sixth bank, Silvergate Capital Corp. in California, announced it would self-liquidate in March. The move came after the collapse of the crypto exchange FTX, one of its customers.

The FDIC jointly oversees Liberty Bank with 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. 

The consent order notes 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 requiring the bank to merge with another bank, or sell itself to a buyer the agency finds "acceptable," within 90 days. If not, the consent order forces Liberty Bank to liquidate itself immediately. 

The word "liquidate" rarely shows up on public FDIC actions. Since 2000, the FDIC has only directed a bank to plot out liquidation plans just five times, according to an agency database.

"I've not seen it, though that doesn't mean it's unprecedented," said Cliff Stanford, a partner with Alston & Bird in Atlanta who has long represented banks in their dealings with regulators.

Liberty Bank is no stranger to regulatory troubles. In 2017, the FDIC penalized it for a variety of issues, including 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 latter law looks to ensure banks serve low- and moderate-income people in their area.

Last year, the FDIC released a report saying Liberty Bank was in "substantial noncompliance" with the CRA and that it "identified an illegal credit practice" at the bank. The report was from August 2022, and the bank has said it's fixed its practices since.

The bank, which was founded in 1956, did find an acquirer in 2021. But the deal was scuttled after consumer groups raised objections to the buyer, which was the parent company of CreditNinja, a high-cost lender led by a former payday loan CEO. CreditNinja's loans to consumers with poor or little credit histories charged annual interest rates between 25% and 249%. 

High-cost lenders often partner with a small group of community banks in Utah, where interest rate limitations are relatively loose. Buying a bank in the state would make the process far easier. Consumer groups have pressed Biden administration regulators to crack down on the partnerships.

The FDIC told American Banker last year that the application to buy Liberty Bank was withdrawn some two weeks after the companies announced the deal. 

At the time of the announcement, Liberty Bank said the purchase would help it "enter the digital age and continue to serve our customers in new and innovative ways."

John Reosti contributed to this story.