December 10, 2010 – Earthstar Bank, Southampton, PA, was closed today by the Pennsylvania Department of Banking, which appointed the FDIC as receiver. The FDIC entered into a purchase and assumption agreement with Polonia Bank, Huntingdon Valley, Pennsylvania. Polonia will assume all Earthstar deposits, excluding certain out-of-state CDs (certificates of deposit). It is likely that the CDs not being acquired by Polonia were issued at high rates of interest. Investors in these higher rate CDs will be paid off by the FDIC on Monday by check and will be forced to invest their funds at lower CD rates elsewhere.
Earthstar Bank was founded in 2001 as a community bank owned and operated by members of the Philadelphia business commuity. According to the Bank’s website, Earthstar’s mission was to provide highly personalized, traditional community banking services along with modern internet and telephone services.
At September 30, 2010, Earthstar had total assets of $112.6 million and total deposits of $104.5 million. Polonia did not pay the FDIC a premium for the deposits of Earthstar and agreed to acquire only $77.1 million of the failed bank’s assets, leaving the FDIC stuck with the remaining assets of $35.5 million. In addition, the FDIC entered into a loss-share transaction with Polonia Bank on $45.8 million of the acquired assets to limit potential future losses to Polonia Bank. The FDIC’s position is that the use of loss-share agreements limits losses by keeping the failed bank’s assets in the private sector.
The FDIC has used loss-share transactions as an incentive to facilitate the sale of failed banks. The ultimate loss to the FDIC from loss-share agreements could easily exceed FDIC projections if property markets continue to falter (see Is the FDIC Understating the Cost of Bank Failures?)
Polonia Bank, founded in 1923 by local businessmen, has approximately $250 million in assets and is well capitalized. All four branches of Earthstar will reopen on Saturday as branches of Polonia Bank, with uninterrupted FDIC deposit insurance coverage. Depositors will have full access to their funds over the weekend.
Earthstar Bank becomes the 151st banking failure of the year and the second in Pennsylvania. The cost to the FDIC Deposit Insurance Fund to close Earthstar is estimated at $22.9 million.