The rate of banks taken into receivership by the FDIC has dropped significantly since the financial crisis. Even though the number of failed banks has slowed considerably it hasn’t ceased completely.
This post is the first in a series that examines failed banks. Success derives from a variety of factors that are both person and situation dependent. But failure can be repeated and can often be tied back to a handful of general issues that are reproducible and avoidable.
The first bank I wanted to look at is Northern Star Bank. Northern Star Bank was taken into FDIC receivership on December 14th 2014. BankVista of Sartell, MN acquired Northern Star Bank’s deposit accounts.
The bank was established on January 25th of 1999 in Mankato, MN. They operated two branches, Mankato and St Cloud, MN, which was established in 2001. The bank’s Mankato branch held $11.6m in deposits as of June 30 2014, and their St. Cloud branch held $8.18m in deposits as of June 30 2014.
The survival of a bank rests on their ability to earn a profit, and adequate capital. If a bank isn’t able to break even or earn a very small profit each quarter losses will reduce their capital. When capital starts to disappear the clock begins to tick. Either management needs to reverse the profit decline or they need to raise more capital extending their runway.
The reason Northern Star Bank failed is they failed to achieve the scale in their banking operation that would allow them to operate profitably. The last time the company earned a profit on an annual basis was in 2003. Since then there have been a few sporadic quarters of profitability, but nothing sustainable.
The bank’s income statement is shown below for 2005-2013:
If the financial crisis never happened it’s possible Northern Star Bank might have been able to grow into enough assets to cover their fixed expenses. But unfortunately history wasn’t kind to them. The bank was started at the beginning of the real estate boom and it appears they rode a portion of the wave. Their day of reckoning came in 2010 when they were forced to set aside $1.33m in reserves for potential losses on loans. This loan loss provision was 35% of their capital at the time.
At the end of 2009 the bank was considered well capitalized with an 10.14% Tier 1 ratio. Their Tier 1 ratio dropped to 6.51% in 2010 with their outsized loan loss provision and continued to decline from there. When the bank failed they had a Tier 1 ratio of 3.31%, well below what is considered adequate.
Northern Star Bank is owned by Northern Financial Inc, a bank holding company. The bank holding company held a substantial amount of short term debt, which most likely limited their ability to raise capital.
Northern Star Bank’s continued losses and eroding capital led to an FDIC take-over. But the story would have been different if the bank had been able to grow. Bad lending and thin capital is always problematic. But in my view the failure of Northern Star Bank started back in the early 2000’s when they failed to grow to a scale that overcame their operating expenses. Without sufficient scale and high operating costs the bank ran out of time and became another statistic on the FDIC failed bank list.
You can access Northern Star Bank’s financials here: https://www.completebankdata.com/banks#details/bank/2729604