Don’t worry, it was just a “scam”

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It isn’t often that an official says — with apparent relief — that a bank in their remit closed because it was scammed. 

Here’s what Alphaville was told by Kansas state bank commissioner David Herndon, when we called about the closure of Heartland Tri-State Bank:

“We declared the bank insolvent because of a scam that they fell victim to. I can’t speak to the particulars of that. Investigations are ongoing. But it had nothing to do with interest rate increases. Nothing to do with balance sheet asset quality. Nothing to do with the Fed.”

Heartland Tri-State Bank was a very small institution, with just $139mn in assets. It was purchased by Dream First Bank, a bank with $511mn in assets based in Syracuse, Kansas (and formerly known as First National Bank of Syracuse). But notably, the closure’s cost to the FDIC’s deposit insurance fund — $54mn — eclipsed the size of its entire $48mn loan book. 

Heartland’s small size may be why some news outlets didn’t look too closely, and instead settled incredibly quickly on a “Banking Crisis Continues” angle for its closure.

While Heartland was indeed the first bank in nearly three months to fail, it is difficult to find much (or really any) similarity between it and SVB, Signature, First Republic or even Silvergate. 

Here’s a helpful snapshot of Heartland’s balance sheet (h/t Bank Reg Blog):

High share of uninsured deposits? Nope. More than 70 per cent of Heartland’s were backed by the FDIC, as of March 30. 

Unrealised securities losses? Not much. Heartland had $6.7mn in unrealised securities losses at the end of March. What’s more, all of its securities were characterised as available-for-sale, and therefore marked in its capital account, which had more than $8mn in remaining equity as of the end of March. That likely grew in the second quarter, but not by much. Almost all of the bank’s securities were in mortgages secured by government-based insurers.

Deposit run? Nope. The FDIC said that at the time of its closing on Friday afternoon Heartland had $130mn in deposits, which is exactly how much the bank reported it had three months ago, as of the end of March, according to its last quarterly report with the FDIC, which showed that deposits at the bank were at an all-time high.

Crypto? No sign of it.

Heartland may have been under additional pressure that was unrelated to scams, of course. In May 2022, Heartland Tri-State’s CEO Shan Hanes was quoted in an American Banker article that a “one-two punch” of inflation and long-term drought was hurting farmers. “We are under a severe, severe drought — about as bad as we’ve ever seen,” Hanes said.

Hane was until recently the chairman of the Kansas Bankers Association. His term was supposed to end later this week, at the Kansas Banker Association’s annual meeting, which is being held later this week in Colorado Springs, Colorado. But Hanes left the Kansas Bankers Association’s board of directors in the past few months. A KBA spokeswoman declined to say exactly when, or comment as to why.

Back in May, Hanes was quoted in the American Banker on the impact SVB’s failure would have on banks in Kansas. Hanes’s answer was essentially: meh. “I think for most of us, it’s become a nonevent,” Hanes said. “This year most likely won’t be as good as 2022, but we’re open for business and generally positive.”

(P.S.: If you happen to go to the Kansas Banker Association’s annual meeting, details here, please do drop Alphaville an email. Thanks in advance.)