US: FDIC closes bank

Hume Bank of Hume Missouri was closed on 7th March 2008. The assets and operations of the bank have been transferred to Security Bank of Rich Hill, Missouri. Hume Bank had one main office and one branch. Banking operations will open as normal this morning, but Hume has, to all intents and purposes, already been subsumed into Security.

When issuing notices about the takeover of failed banks, it makes no comment on the reasons for failure. Hume is a tiny bank. It had only USD12.5 million of insured deposits - and just over one million in uninsured deposits. In January this year another small Missouri bank - Douglass National Bank - collapsed. It had insured deposits of just USD58 million.

But Missouri's financial regulators are less reticent about the reasons. They allege mismanagement and fraudulent reporting as the reasons for failure: "The demise of the bank is a direct result of alleged improprieties by former bank management, which resulted in past-due loans not being reported and the true condition of the bank being misrepresented," Eric McClure, Missouri's commissioner of finance, said in a statement. "Most of these loans were poorly conceived and inadequately serviced, resulting in losses which exhausted the bank's capital and ultimately resulted in its failure." At the end of December last year, it reported USD18.7 million in assets and 13.6 million in deposits.

The bank's position was already becoming untenable: in August last year, the Missouri Division of Finance issued an Order of Prohibition against the then President of the bank.

Although McClure said that the recent failures do not reflect on the strength of the state's financial system, the failures are not the only problem: in August last year, Jenny R Gentile, formerly a Vice President with Bank of Belton in Belton, Missouri. Gentile pleaded guilty to federal charges of theft from her bank employer. Gentile embezzled the relatively small sum of USD105,000 which she spent on things such as credit card payments, vehicle purchases, property tax payments and other expenses related to to property purchases over a period from August 2005 to June 2006.

No action was taken against the bank.

However, the number of banking problems in Missouri seems small, when taken against the number of institutions in the state: according to the regulator, as of September 2007, there were 292 banks in the state which has a population of about 6 million, many of whom live in rural areas. The state covers an read of almost 70,000 square miles. To put this into perspective, Hong Kong has a similar population, a high proportion of undeveloped land (a surprise to many who only know the northern part of the Island and the southern tip of Kowloon) an a total land area of just 420 square miles.

Missouri's economy took a turn for the worse in the 2006/7 winter when conditions deteriorated to the point that parts of it were declared a federal disaster area following severe storms.

Locals point at a range of problems preventing the state making more effective economic progress including that land ownership is in many small parcels, making the development of large projects a complex, expensive and uncertain venture. Small developers have, said the Lieutenant Governor Peter Kinder in July 2007, made some progress in deprived areas but even so, larger projects are needed if regeneration is to take effect.

All of this feeds into economic uncertainty in the state and, combined with a substantial poor population, banks are under pressure to make lending and then exposed when that lending turns out to be poor quality.