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I thought with the support of Goldman Sachs, BofA, Citibank, JPMorgan and others, that ShoreBank would survive. But, on Friday, the Illinois Department of Financial and Professional Regulation closed the well-known Chicago-based community development bank, which had been operating under a cease and desist order for about a year. Here is the FDIC press release. That bank long had been trying to raise capital, and in the second quarter it reported a $39.5 million loss.

You might remember that last May, many of the nation’s largest banks made large public commitments to the bank in an effort to raise $200 million in additional capital. With such an infusion, it was anticipated the bank would receive an additional $75 million in TARP money and it would survive. Media reports say the bank raised a little over $140 million, the TARP money never came and the bank didn’t make it.

The FDIC announced on Friday that the deposits and assets of the failed bank will be taken over by the newly-chartered Urban Partnership Bank, which is being capitalized to the tune of $120 million by some of those same large companies –American Express, BofA, Citi, GE Capital, JPMorgan, Northern Trust, Goldman Sachs, Wells Fargo and others. David Vitale, a former First Chicago executive who recently joined ShoreBank, is chairman of Urban Partnership; Bill Farrow is president/CEO. This story explains that the new bank will continue the community development mission of ShoreBank.

Urban Partnership Bank paid the FDIC a premium of 0.50 percent to acquire ShoreBank’s $1.54 billion in deposits and most of its $2.16 billion in assets. Urban Partnership Bank obtained a loss-sharing agreement with the FDIC on $1.41 billion of the assets.

ShoreBank was founded in 1973 when Ron Grzywinski, Mary Houghton, James Fletcher and Milton Davis bought South Shore Bank and created a community development bank that served low-income customers and focused on unbanked neighborhoods. I read about Grzywinski and Houghton in Muhammad Yunnus’ book, Banker to the Poor. Yunnus founded Grameen Bank in India, and came to the United States to see whether micro-lending could help the American poor. He found Grzywinski and Houghton, who latched onto the micro-lending concept and found it to be valuable.

Anne Arvia was president and CEO of ShoreBank in 2005 when NorthWestern Financial Review magazine honored her as an “Outstanding Woman in Banking.” In 2006, she became CEO of Nationwide Bank, a subsidiary of Nationwide Insurance of Chicago.

The Commerce Department closed the Community Security Bank of New Prague, Minn., on Friday — a day on which regulators closed seven banks bumping the year-to-date total of closed banks to 103. Last year at this time, regulators had closed 64 banks in a year when they closed 140 total.

Community Security Bank lost $1.8 million in the first quarter, and reported equity capital of 3.09 percent as of March 31, 2010.

Roundbank of Waseca, Minn., purchased most of the assets and assumed the deposits of the closed bank. Roundbank paid the FDIC a premium of 0.89 percent to assume all $99.7 million in deposits and most of its $108 million in assets. In its press release, the FDIC does not mention a loss sharing agreement on the assets.

The FDIC estimates the resolution will cost the deposit insurance fund $18.6 million.

It is interesting to note that this is the seventh bank failure in Minnesota this year, while no surrounding state — North Dakota, South Dakota, Iowa or Wisconsin — has experienced any bank failures this year. I understand the rural nature of those states compared to the Twin Cities, where most of the Minnesota bank failures have occurred. Nonetheless, housing markets have been strong in Madison, Wis., West Des Moines, Iowa, and Sioux Falls. Real estate has caused a lot of troubles in the banking industry, but apparently the effects have been minimized in those markets.

Some pundits would suggest that Minnesota is simply over-banked, with a bank for every 12,652 citizens. That’s certainly a valid argument compared to Wisconsin, which has a bank for every 20,000 citizens. But South Dakota has a bank for every 9,783 people; Iowa has a bank for every 8,174, and North Dakota has a bank for every 7,021.

Economic conditions are generally getting better, but bank conditions are a lagging indicator, so we will see trouble in some banks for months to come. Bank failures will continue to be in the news throughout 2010 and probably through 2011.

People who follow banking were anticipating the failure of TierOne Bank for months, and on Friday regulators closed the $2.8 billion, Lincoln-based bank. It was the largest bank failure in Nebraska’s history. The bank’s troubles were no secret. I wrote last Friday about its miserable first quarter earnings and its dismal capital position; last month, people were talking at the annual convention of the Nebraska Bankers Association about the bank’s imminent demise.

A curious twist on the closing, which took place June 4, is the Cease and Desist order issued by the Office of Thrift Supervision on June 3. The order gave TierOne until July 15 to file a capital restoration plan. The bank already had missed an earlier-established deadline of May 31 to shore up its capital.

When the OTS closed the bank, it reported “TierOne incurred operating losses since mid-2007 with negative earnings in 10 of the prior 11 quarters. The losses, resulting from increasing levels of non-performing assets and loan loss provisions, depleted capital. Since March 31, 2009, core capital declined 74 percent while real estate owned more than doubled and non-performing assets tripled…The growth in TierOne’s problems assets resulted from concentrations in construction, land, and commercial real estate loans in markets with significant declines in real estate values, including Florida, Nevada, and California.”

Great Western Bank, Sioux Falls, S.D., is purchasing the failed bank’s $2.2 billion in deposits and nearly all of its $2.8 billion in assets. It paid the FDIC a 1.5 percent premium on the deposits. Great Western is getting a loss-share agreement on $1.9 billion of the assets. Great Western is owned by National Australia Bank.

Ironically, Great Western had a deal with TierOne Bank about a year ago to buy 32 of its offices but the transaction fell apart. Now, through this deal with the FDIC, Great Western is getting TierOne’s 69 offices, including 59 in Nebraska, nine in Iowa and one in Kansas. The FDIC says the deal will cost the Deposit Insurance Fund $297.8 million.

TierOne is the only bank so far this year to fail in Nebraska. The last closing in the state was Sherman County Bank, Loup City, in February 2009.

TierOne Bank was organized in 1907 as Fidelity Savings and Loan Association. In 1935, its name was changed to First Federal Savings and Loan Association of Lincoln. In 1995, it obtained a federal savings bank charter and changed its name to First Federal Lincoln Bank. In February, 2002, it changed its name to TierOne Bank.

We sent this post from Bank Lawyer’s Blog around yesterday with our weekly email. At every opportunity, we who care about the banking industry should ask the regulators, “What is your goal?”

I think it is amazing that in all the debate that went on in Congress about financial reform we never got a clear answer about what the goal of regulation should be. Maybe the goal by some people in power is a smaller industry. If so, why? We need to have this discussion, and it needs to happen in an open forum.

I think most regulators would tell you they want a safe and sound industry. But what does that mean? Does that mean no bank failures? I would argue that it does not mean that. No failures could mean the industry is not innovative enough. Remember, the most effective way to never fail is to never try. A certain amount of failure is symptomatic of a healthy industry.

It is easy to understand where some might assume the regulators want a smaller industry. Raising capital requirements is a way to weed out weaker institutions that are unable to raise new capital. But why would we want a smaller industry? From a macro level, we want a diverse system for credit allocation. We do not want a highly concentrated system, as exists in Europe and Canada. The more decentralized the system, the more opportunity there is for start-ups, entrepreneurs and non-traditional borrowers. More centralization just means less opportunity. Sure, it might be easier to supervise an industry with only 6,000 players, but it might not be better for people who need to borrow money.

I hope this is the kind of discussion that is going on at the highest levels of government. What kind of credit allocation system is best for the country? How can government, through Congress and the regulatory structure, encourage that kind of system? Is “number of institutions” an effective way to measure the industry’s size? What about non-regulated companies that allocate credit? How do they figure into the issue?

We need to define our goal. If we are not clear on our goal, then it really doesn’t matter what’s in the financial reform legislation, because if you don’t know where you are going, any road will take you there.

Pinehurst Bank, the $61 million bank with its only office in the Highland Village neighborhood of St. Paul, was closed Friday by Kevin Murphy’s team at the Minnesota Department of Commerce. 

Last year, Pinehurst reported a $3.3 million net loss. In the first quarter, the state’s 243rd-largest bank suffered a net loss of $1.2 million and by March 31 it was showing an equity capital ratio of negative 0.73 percent. It was the sixth Minnesota bank to fail this year.

Tom Palmer, who worked for years at Franklin National Bank in Minneapolis and then First National Bank in River Falls, Wis., has devoted his career recently to helping banks work with regulators as they near termination. He was president of St. Stephen State Bank near St. Cloud when regulators closed it on Jan. 26, and he was president at Riverview Community Bank in Otsego, which regulators closed Oct. 23. He had been president of Pinehurst since February.

Coulee Bank of La Crosse, Wis., gains a foothold in the Twin Cities market as a result of the Pinehurst failure. The bank, headed by Dirk Gasterland, paid a 1.33 percent premium to the FDIC to pick up Pinhurst’s $58.3 million in deposits and nearly all of its $61.2 million in assets.  The FDIC press release makes no mention of any kind of loss-share agreement on the purchased assets.

Will there be more bank failures in Minnesota this year? No one can say for certain. Data released by the FDIC at the close of the first quarter shows that two of Minnesota’s 411 banks have equity capital ratios between 3.0 and 3.6 percent. These are the lowest in the state at this time. Access Bank of Champlin, Minn., which was closed May 7, reported a negative 0.31 percent equity capital ratio at the end of the first quarter.

A tough day in Illinois for bank closings last Friday. Regulators closed seven banks, including Amcore Bank of Rockford, which had $3.8 billion in assets and 52 branches in Illinois and Wisconsin, and Broadway Bank, the bank associated with U.S. Senate candidate Alexi Giannoulias. Broadway Bank, based in Chicago, had $1.15 billion in assets and four offices. The total hit to the FDIC fund for the resolution of all seven banks is estimated to be $973.9 million.

The failure of the Amcore Bank is particularly striking to us at NorthWestern Financial Review. For the last 10 years, we have been running short news items about the bank’s new branch openings and new hires. It was a growing bank. In 2001, the bank announced a branch expansion program that seemed to excite investors. One analyst noted that the bank had branches in the fastest growing markets in northern Illinois and southern Wisconsin.

Lately, the bank ran into capital trouble. On Jan. 5, it announced it was selling 12 branches to Midland States Bank of Effingham, Ill. (See the cover story on the April 15 NorthWestern Financial Review magazine.)

“The sale of these branches, when completed, demonstrate that our rebuilding efforts continue to move forward and remain on track,” commented Amcore Chairman and CEO William McManaman at the time. The sale of the branches was one of several moves the bank took to strengthen its position. On Jan. 5, it also announced it recently had sold $135 million in what it called “non-strategic, non-relationship loans,” and completed the sale of four rural Wisconsin branches. It also said recent tax legislation would result in a $25 million to $30 million tax refund for the company.

“As the result of those combined actions to improve capital, we would expect that the bank will no longer be deemed significantly undercapitalized for regulatory purposes at the end of 2009,” McManaman said in the Jan. 5 press release. “Assuming economic conditions in our markets stabilize, and that the transaction with Midland States Bank closes at the end of the first quarter  [it closed March 29] and its benefits are fully realized, we expect that the bank would be adequately capitalized and approaching well-capitalized.”

But on Friday, it all came to an end when the Comptroller of the Currency closed the bank and the FDIC facilitated a resolution with Harris National Association. Harris is the Chicago-based subsidiary of a Canadian company. About five years ago, Harris announced it wanted to double its American branches by 2010. At the time, it had about 200 branches. It had increased that total to 280, and now it will add the 52 from Amcore.

It is interesting how public this stuff is. Crains Chicago business ran this story the day before the banks were closed.

For as long as I have been covering this industry, bankers have told me that the OCC is really not interested in small banks. “They are focused on the big banks,” I have been told many times. OCC leadership obviously has heard this message and they clearly don’t like it. Many speeches delivered by the Comptroller begin with some clarification about all the community banks under OCC supervision.

“Despite my best efforts, I sometimes still confront the stereotype that the OCC is only concerned about big banks. Let me say again, emphatically, that that’s just not true,” Comptroller John Dugan told community bankers in a speech delivered March 19 in Orlando. He goes on to explain that two-thirds of OCC examiners are focused on community banks. He also noted that the agency reaches out to listen to community bankers through a variety of industry events and meetings. “My over-riding point here is that we at the OCC consider community bank supervision as core to our mission.”

Yet, I wonder whether Mr. Dugan really understands community banking. In the remainder of his speech, he talks about bank failures, emphasizing the disproportionate representation of community banks. “195 banks, nearly all of them community banks, have failed since the start of the crisis in 2008,” he says. Furthermore, he notes an “estimated cost to the deposit insurance fund exceeding $58 billion.”

Any community banker would find that observation a bit galling. Citi and BofA both failed on the OCC’s watch, but Treasury stepped in to prop them up so they were never closed. Had they failed, they would have wiped out the FDIC fund completely. I think it is pretty insensitive to talk to community bankers about the problems in community banking without acknowledging the far more severe problems in a sector of the industry where the OCC has much greater responsibility.

In the speech, Dugan noted four things that he believes regulators need in order to be effective: balanced judgment, to provide appropriate guidance, consistency and forthright engagement with bankers. The irony of his third item — consistency — is inescapable. There is nothing more inconsistent in bank regulation than regulators picking winners and losers. Too-big-to-fail pretty much tells community bankers they are a bunch of losers. Dugan is right to say that one of the most important things regulators can do is be consistent; to me, that means ending too big to fail. Not until this policy is ended will it make any sense to compare community banks with the rest of the industry.

More from the Sheila Bair speech in Orlando:

“Job number one must be to level the playing field once and for all and to put an end to the doctrine of too big to fail,” she said to applause. “Too often in the past … we saw large, systemically important institutions exempted from the type of supervisory sanctions that community banks face very day.” Listening, I got the sense that this really ticks her off.

In “On the Brink,” Henry Paulson described some of the conversation surrounding the rescue of Citibank in November of 2008. In his entry for Saturday, Nov. 23, he writes:

No one seemed more frustrated than Sheila, who at first suggesting using the FDIC’s normal procedure for handling Citi … That morning she said she wasn’t sure that Citi’s failure would constitute a systemic risk. She felt that Citi had enough subordinated debt and preferred stock to absorb the losses. She spoke as if Citi were just another failing bank and not a world leader. “So” she said, “why not let them go through the receivership process?”

Paulson said the suggestion made his jaw drop; of course, they didn’t go that route.

A year and a half later, clearly, Bair still doesn’t like the idea that some banks get special treatment. “It is time to get serious about establishing a credible, pre-funded resolution authority for giant banks and non-bank financial institutions,” she said in Orlando. She said she likes the provisions in the House bill and the Senate proposal for dealing with too-big-to-fail institutions. “We would finally have a mechanism under which large, complex institutions could be closed if necessary without wreaking havoc on the rest of the financial system,” she said.

The Minnesota Department of Commerce closed the State Bank of Aurora a couple of hours ago. It was one of seven banks closed today, bringing the total number of banks closed this year to 37.

The Northern State Bank of Ashland, Wis., is picking up the deposits and nearly all the assets of the failed bank, which had $28 million in assets at year-end. The FDIC provides the details here. State Bank of Aurora was the 11th Minnesota bank to fail since the bank in Staples was closed in May of 2008. If you are interested in following the failed bank situation across the country, you might appreciate this graphic.

Meanwhile, FDIC Chairman Sheila Bair was in Orlando today speaking at the ICBA convention. She spoke about the need to resolve too-big-to-fail, noting that the largest banks in the country have a distinct cost-of-funds advantage over community banks (a point we have made repeatedly at NorthWestern Financial Review). Among other things, she also said her staff is considering the implications of extending the Transaction Account Guarantee program, which is set to expire June 30. She said she expects the FDIC to make a decision soon. You can read her comments here.

More from Hank Paulson’s book, On The Brink.

His entry for September 25, 2008 gives us a glimpse of what happened when Washington Mutual failed. It was the biggest bank failure in history. Paulson explains that through an FDIC-facilitated transaction, JPMorgan paid $1.9 billion for WaMu which had $307 billion in assets. The condition of the bank had deteriorated rapidly, with depositors withdrawing $16.7 billion during the 10 days prior to closing.

Here’s the really interesting part. Paulson says six month earlier JPMorgan had wanted to buy WaMu, which was known to be having trouble even then. The Office of Thrift Supervision, WaMu’s regulator, declined JPMorgan’s overtures and worked out a deal with a private equity firm for a $7 billion capital infusion. “This decision proved to be a mistake: an acquisition by JPMorgan would have stabilized the bank,” Paulson writes.

This kind of guidance is a big black mark against OTS, and maybe a few lawmakers are keeping this in mind as they work on the industry reform legislation to merge the agency out of existence.

Here is how Paulson concludes his thoughts on WaMu:

JPMorgan’s purchase cost taxpayers nothing and no depositors lost money, but the deal gave senior WaMu debt holders about 55 cents on the dollar, roughly equal to what the securities had been trading for. In retrospect, I see that, in the middle of a panic, this was a mistake. WaMu, the sixth-biggest bank in the country, was systemically important. Crushing the owners of preferred and subordinated debt and clipping senior debt holders only unsettled the debt holders in other institutions, adding to the market’s uncertainty about government action. Banks were even less willing to lend to one another. In the future, I concluded, we were going to need to go beyond the standard FDIC resolution process for a failing bank.”

So is a $300 billion bank too big to fail? Paulson would seem to suggest it is. Later in the book, when regulators are discussing Citigroup, Paulson reports that FDIC Chairman Sheila Bair suggests they let the bank fail and handle it through the normal failed bank resolution process. Of course, they don’t take her advice. Clearly, there is tension at all levels between those who would give the largest banks special treatment and those who would treat them like any other bank.