Regulator: Failed Kansas bank 'victim of a scam'

The Federal Deposit Insurance Corp. said that Kansas-based Dream First Bank was acquiring all deposits and most of the assets of shuttered Tri-State Bank.

Al Drago/Bloomberg

The failure of Heartland Tri-State Bank in Elkhart, Kansas, was hastened by fraud, according to a state official.

“The bank fell victim to a scam,” Kansas Banking Commissioner David Herndon told American Banker Friday. 

Herndon said that he was not privy to details such as who perpetrated the scam, but it was his understanding that a federal investigation was ongoing. He said Heartland self-reported the incident. 

Kansas regulators seized Heartland last Friday and appointed the Federal Deposit Insurance Corp. as receiver. It marked the fourth failure of 2023. The FDIC entered into a purchase and assumption agreement with Dream First Bank of Syracuse, Kansas, to assume all of the deposits and many of the assets of Heartland.

The FDIC on Friday declined to comment on the cause of the failure. 

Herndon, in an earlier interview, said that the $139 million-asset Heartland’s failure was a “very sudden” event unrelated to the failures of the much larger Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year.   

“This wasn’t about a loan failure or unrealized losses,” Herndon said. “There was no run on deposits. Unfortunately, businesses fail. This time it was a bank, but it wasn’t in the shadow of the banks that failed in March, or anything like that.”

Herndon reiterated Friday that Heartland had historically been a financially sound bank and was not previously in state regulators’ crosshairs.

The downfalls of the larger regional banks were caused in part by deposit runs. The FDIC said that, as of late July, Heartland had $130 million of deposits. The bank reported the same amount in its most recently posted quarterly report with the FDIC, covering the first quarter. That report also showed no major credit issues or outsized securities losses.

The call report with the FDIC “contained no indicators that the bank was on the verge of failing, much less such an expensive failure given the size of the bank,” said Bert Ely, a principal at bank consulting firm Ely & Co. 

Heartland’s failure cost the FDIC’s deposit insurance fund $54.2 million — about 39% of the bank’s total assets.

“That is a very high loss percentage, which suggests that the bank had some serious financial issues that were not reflected in recent call reports or that some event occurred after March 31 that tanked the bank,” Ely said.

Still, the failure was miniscule relative to the regional bank failures from earlier this year. The Silicon Valley Bank and Signature failures represented an estimated $15.8 billion loss to the FDIC’s insurance fund, while First Republic’s sale to JPMorgan Chase resulted in a $13 billion loss. 

Dream First Bank and former Heartland CEO Shan Hanes did not respond to interview requests. The FDIC struck a loss-sharing agreement with Dream First on the loans it purchased from the now-dissolved bank.

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