WASHINGTON — Regulators blame an exodus of noncore deposits for causing a liquidity failure at Columbian Bank and Trust Co. in Topeka, Kan., and forcing its closure Friday.
The $752 million-asset subsidiary of Columbian Financial Corp. in Overland Park was hurt by the departure of brokered depositors — which had made up 43% of its $622 million deposit base — and one nonbrokered customer who pulled over $1 million of funds.
"We knew that the bank was in an unsafe and unsound condition and could not meet the demands of anticipated withdrawals within a short period of time," said Judi Stork, the deputy commissioner of the Kansas Division of Banking.
In addition, Columbian Bank and Trust, the ninth institution to fail this year, showed signs that it had used brokered money to fund lending in the volatile construction and development market, a track that has tripped up other institutions and led regulators to warn against using noncore deposits for fast growth.
Columbian expanded its lending in states hit hard by the housing crisis, including Texas and Arizona, according to published reports, and its troubled loans had ballooned over the past year. A June 30 call report cited $52 million of construction loans in nonaccrual status. According to Federal Deposit Insurance Corp. data, only $7.5 million of its entire loan portfolio had been in nonaccrual status a year earlier.
Ralph F. MacDonald 3rd, a partner at Jones Day in Atlanta, said the bank's reliance on brokered funds "put it in a more fragile condition to begin with." If regulators had "restricted those brokered deposits, they may not have been able to roll them over into normal, core deposits."
The bank was the subject of a cease-and-desist order from the FDIC on July 15, which is expected to be released later this week. The Federal Reserve Bank of Kansas City separately issued an Aug. 7 written agreement with the holding company, which was released Monday. It failed despite having fairly strong capital at the end of the second quarter. According to call data, its Tier 1 leverage ratio stood at 6%, and its total risk-based capital ratio was about 9%, both above the minimums for being "adequately capitalized."
"It was a liquidity failure versus a capital failure," Ms. Stork said. "It's a matter of 'Are you going to have ample liquidity to meet the withdrawals that are anticipated?' "
Like Columbian Bank and Trust, many of the institutions to fail over the past year had a high proportion of brokered funds. The $1.9 billion-asset ANB Financial of Bentonville, Ark., which failed May 9, had an 86% concentration in brokered deposits. IndyMac Bank of Pasadena, Calif., which failed July 11 in the most dramatic closure of the year, had a 36% concentration of its $19 billion base at March 31.
Ms. Stork said brokered deposits are less stable than core funding, because brokers can switch institutions just to earn a higher yield. "They're basically looking for the highest rate, and if you're not offering it on that day, they're going to be gone," she said.
The FDIC, appointed as Columbian Bank and Trust's receiver, approved the assumption of $308 million of its insured deposits by the $1 billion-asset Citizens Bank and Trust Co., a Chillicothe, Mo., unit of Young Partners LP. Columbian Bank and Trust failed with about $46 million of uninsured deposits in about 610 accounts.
The FDIC said Citizens paid a 1.125% premium for the failed bank's insured deposits and agreed to buy $85.5 million of its assets. The failure is expected to cost the Deposit Insurance Fund about $60 million, the agency said.
The failure was the fourth since IndyMac's closure and the second this month. On Aug. 1 the FDIC closed the $259 million-asset First Priority Bank in Bradenton, Fla. A week earlier the agency responded to the failures of the $3.4 billion-asset First National Bank of Nevada in Reno and the $254 million-asset First Heritage Bank, in Newport Beach, Calif. The two banks were both subsidiaries of First National Bank Holding Co. in Scottsdale, Ariz.
