A Utah bank is gone after 16 years of losses. Why did it survive so long?

One of the country’s smallest banks has been bleeding money since 2008. It’s finally been put out of its misery.

The achingly slow demise of Liberty Bank in Salt Lake City is not technically a bank failure, a bankruptcy-like process where the Federal Deposit Insurance Corp. seizes an insolvent bank and sells off its assets.

But experts say the bank was headed in that direction long before regulators forced its sale — and some question why the regulators let it live so long. Regulators just approved the bank’s takeover by Cache Valley Banking Company, a Utah lender that’s bought failed banks in the past. Liberty Bank will remain operational under its new holding company’s umbrella.

“It’s amazing that it stayed open as long as it had,” said Bert Ely, a bank consultant who predicted the collapse of hundreds of savings & loan institutions, also known as thrifts, in the 1980s and 1990s.

Liberty Bank started as a thrift in 1956, and unlike many peers it survived the S&L crisis. Its luck turned in 2008, when the family-run bank’s real estate loans flopped, prompting losses that it never fully overcame.

A series of regulatory crackdowns failed to turn the bank around. Past takeover attempts fell through. A pivot to offering loans for “tiny homes” didn’t bear fruit. And recently, regulators flagged an “illegal credit practice” when reviewing the bank’s track record with consumers.

“I have been a student of failed banks for over 40 years,” Ely said. “This is an especially weird situation.”

The FDIC and Utah’s Department of Financial Institutions, which shared oversight of the bank, declined to comment. 

George Daines, who chairs Cache Valley Banking Company, declined to talk about Liberty’s past struggles. But he did say that his company will work with regulators on the issues they’ve previously flagged in enforcement orders. Daines did not say how much Cache Valley paid for the acquisition.

Few will notice Liberty’s near-failure. It has just one branch and had 11 employees at the end of 2023. It has only $12.5 million of assets, making it one of the smallest of the country’s roughly 4,600 banks. Silicon Valley Bank, whose collapse last year sparked a short-lived crisis, was more than 16,000 times bigger with $209 billion of assets.

Former regulators and policy experts say the outcome in this case — Liberty Bank being bought in a private transaction — was far less messy and cheaper than the FDIC taking over.

The FDIC will generally “work to find other solutions” before taking over a bank, said Bob Hartheimer, a former top FDIC official who oversaw the sale of roughly 200 failed banks in the early 1990s. The agency is required to find the least costly resolution for a failed bank. But no matter how small the bank is, the process itself isn’t cheap. It requires lots of manpower and involves setting up an auction of the bank’s assets.

Failures aren’t pretty, either. If a bank can make it to the weekend, the FDIC often waits until its branches close on Friday, at which point its resolution staffers swoop in.

“I’ve been on failures. They’re not fun for the ownership, for the employees,” said Hartheimer, who’s now an advisor at the consultancy Klaros Group. “It’s a very gut-wrenching experience, and the fact that this is tiny doesn’t change that.”

Hartheimer applauded regulators for working with Liberty to find a private-sector solution to Liberty’s troubles, though he expressed surprise at “how long this took.” Regulators “let the situation fester for 16 years,” said Todd Baker, the managing principal at Broadmoor Consulting who also teaches at Columbia University.

It’s yet another instance of regulators being “too scared and fearful” to close a bank that has little hope left, said Aaron Klein, a former Treasury Department official who’s now a senior fellow at the Brookings Institution.

By letting the bank stay open for so long, regulators effectively enabled its allegedly illegal mortgage lending practices, Klein said. The FDIC’s finding about the alleged misconduct came in a 2022 exam of the bank’s track record in the community. The vast majority of banks pass those exams, some with flying colors. Liberty Bank had the rare distinction of flunking twice in a row.

“The consequence of the regulator failing to close the bank sooner were illegal credit practices that could potentially harm lower-income consumers,” Klein said. “That’s what the regulators are there to prevent happening. So it shows the consequences of regulatory forbearance can fall upon the most financially vulnerable.”

Liberty Bank told American Banker last year that it had since fixed its lending practices with the help of regulators and auditors. Regulators did not explain what the allegedly illegal practices were.

The bank’s longtime CEO, Kendall Phillips, did not respond to requests to comment for this story. He’s the son of the late Ray Philllips, who founded Liberty Bank in 1956 and was its chair when the 2008 financial crisis hit.

That crisis wiped out a few Utah banks, but Liberty Bank clung on. Even so, mounting losses prompted the FDIC to crack down in May 2009. In an enforcement order at the time, the agency said Liberty had a “large volume of poor quality loans” and ineffective oversight by its board of directors. 

The bank made some improvements, prompting the FDIC to issue a less stinging order in 2017. Utah regulators issued a similar order around the same time.

None of those crackdowns fixed Liberty’s core problem: its lack of profits. The bank’s shareholders kept it afloat by routinely pumping in more capital, but it remained a money-losing enterprise.

The bank “has been structurally unprofitable since June 30, 2008,” Utah regulators said last week in a document approving its acquisition by Cache Valley. Its buyer’s “financial strength is more than sufficient” to absorb and improve Liberty Bank, wrote the agency’s head, Darryle Rude.

The Federal Reserve, which oversees Cache Valley’s holding company, also signed off on the merger.

Cache Valley is an experienced buyer of banks in trouble, having bought three failed banks from the FDIC since 2009. Daines, the holding company’s chair, said that owning a separate Utah bank charter could let the Logan, Utah-based company branch out a bit beyond its traditional model of community banking.

“We have a successful community bank, and we think that a separate charter may give us the opportunity to explore some other areas in banking,” Daines said, though he declined to specify those potential paths.

Others had tried to buy Liberty Bank before, but those efforts fizzled out. In 2010, a New York City investment firm proposed buying it as part of a strategy to build a new regional bank powerhouse out West. The fund was led by former top executives at Morgan Stanley Bank, Deutsche Bank and Merrill Lynch Bank.

Kendall Phillips, the longtime Liberty Bank CEO, said in 2010 that the group had “the integrity, experience and capital to expand our platform and build a great regional bank.” The deal never happened.

Then in 2021, the parent company of the high-cost digital lender CreditNinja sought to buy Liberty Bank. The company, led by the former CEO of a payday lender, faced immediate pushback from consumer advocates, who noted that CreditNinja charged low-income borrowers annual interest rates as high as 249%.

In a statement to American Banker at the time, Kendall Phillips said the experience of CreditNinja’s parent company in building financial technology products would help Liberty Bank “enter the digital age and continue to serve our customers in new and innovative ways.”

The deal fell through two weeks later, when the proposed buyer pulled the application it filed with the FDIC.

Late last year, the FDIC appeared to have had enough. Rather than waiting any longer or taking over the bank, the agency forced it to either find a buyer or liquidate. The order flagged concerns that the bank’s books weren’t accurate and asked the bank to restore them. The FDIC even sought a determination on who owns an extra parking lot outside the bank, an unusual request that signaled further mistrust of the bank’s recordkeeping.

More substantively, bank lawyers and regulatory experts said the FDIC’s 2023 order was similar to the forced-sale orders that regulators issued to troubled banks after the 2008 crisis. 

But this one was even tougher than those earlier orders, requiring the bank to liquidate if it couldn’t find a buyer. Over the decades, the FDIC has at times made such desires known behind the scenes. But this rebuke was public, raising the risk that its depositors would panic and pull their money — prompting the kind of messy failure the FDIC prefers to avoid.

“You’re almost publicly announcing that this institution is in distressed condition,” said John Popeo, an advisor at The Gallatin Group who arranged more than 40 failed bank deals during an earlier stint at the FDIC.

A bank’s clear distress would cause the value of its assets to plummet, as would-be buyers of the bank know they “can get a deal” and buy distressed assets cheap, Popeo said. 

After a brief spell of no U.S. bank failures, five institutions failed last year. Three of the collapses — Silicon Valley Bank, Signature Bank and First Republic Bank — now rank among the four largest bank failures since the FDIC was created in the 1930s.

The other two failures were far less noticeable. A small Iowa bank went down after its loans to trucking companies soured. And a community bank in Kansas failed after its CEO allegedly embezzled money to buy cryptocurrencies.

Higher interest rates and worries about banks’ commercial real estate loans are making the environment for banks trickier than it was two years ago. The number of institutions on the FDIC’s “problem bank” list grew from 44 in October to 52 at year-end, though that’s still far below the post-crisis peak of nearly 900 in 2011.

If more banks hit trouble, Popeo said the sell-or-liquidate ultimatum that Liberty received last year could become a “larger part of the FDIC’s playbook.” But he cautioned that the gambit could backfire by causing a “distressed institution to fall into further distress.”

“It is a risky tactic,” Popeo said.