Sunday, March 9, 2008

Hume Bank Bites the Dust

The Federal Deposit Insurance Corporation (FDIC) announced very quietly the failure of a bank in Missouri:

Hume Bank Fails

As I have said before, this will be the first of many failures over the next year. The Hume Bank was founded in 1909, and survived the Great Depression, but apparently not the “Great Deleveraging.”

So let’s look at Hume and see where they went wrong. Hume is a small bank and its failure will not directly affect the financial system, except to the extent that it may go down in history as one of the first banks to fail this cycle. All the data is as of 12/31/2007.

Hume had only one branch and $13 million in deposits.

Total loans and leases 90 days or more past due plus loans in nonaccrual status, as a percent of gross loans and leases, was 6.99%.

The bank had total charge offs as a percent of loans at 1.28%.

Hume had total equity capital of $2.7 million.

Hume had total net loans of $13.6 million, with half of them in Real Estate. One interesting point about the loan portfolio is that the bank had $2.5 million in loans for “farmland,” and $ 4 million in “farm loans.” I would assume that these loans would be in great shape due to the bubble prices beginning to form for many agricultural commodities, and the strong increase in prices for farm land the last few years.

Here are the capital ratios for Hume Bank

Equity capital to assets - 14.96%
Core capital (leverage) ratio - 7.63%
Tier 1 risk-based capital ratio - 10.28%
Total risk-based capital ratio - 11.57%

All these ratios are well in excess of regulatory limits for being well capitalized. In fact, the terrifying thing is that Hume had a larger capital cushion than Citicorp, which reported the following ratios at year-end:

Tier 1 Capital - 7.12%
Total Capital (Tier 1 and Tier 2) - 10.70%
Leverage - 4.03%

So what killed Hume Bank? It’s hard to say. The FDIC press release did not go into too much detail. If I had to guess, I would say that it was a large loan that went bad, and may have wiped out much of its capital of $2.7 million. After deducting $1.4 million in good will, Hume only had $1.3 million in tier one capital, not much of a cushion.

On sad fact is that at the time of closing, Hume Bank had approximately $1.1 million in 33 deposit accounts that exceeded the federal deposit insurance limit. Those depositors need to get in line now with other unsecured creditors of the bank.


john said...

nice post

farmland values are indeed up sharply
and the contrast to C was good too.

Eric J. Fox said...

Thanks...the last I have on Farmland was this report from the Chicago Fed: