Dedicated to Deposits: Deals, Data, and Discussion

33rd Bank Failure of 2009: Westsound Bank in Washington State

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I thought we may get through today without a bank failure, but there was one late closure in Washington State. Westsound Bank was closed by state regulators and the FDIC has arranged for another bank to assume all of the deposits, except those from brokers. So the typical depositor won't lose any money even if they have uninsured deposits.

CD Depositors May Lose Their Rate Lock

The main concern for those with CDs is whether the assuming bank will choose to let the original CD rates continue until maturity or choose to lower the rates. Here's what the FDIC describes in its Q&A # 13:
All interest on deposits accrued through Friday, May 8, 2009, will be paid at your same rate. Kitsap Bank will be reviewing rates and will provide further information soon.

If you deposited funds through a broker, the interest will accrue and be paid through Friday, May 8, 2009.

There may be many depositors with high CD rates at Westsound. I reported on this bank two years ago when they were offering 5.65% APY for a 5-year term. If you're one of those depositors, please let us know what the new bank decides. Also, make sure to keep checking with the new bank for their decision. If they decide to lower the rates, it may take effect on May 9th, and if the new rate is very low, you won't want the money to sit there for too long. Unfortunately, in this current interest rate environment, it's going to be hard to find high CD rates. If they do lower the rates, at least you're allowed to close the CD without an early withdrawal penalty.

Brokered Deposits and Internet Accounts

Insured brokered deposits will be paid out directly by the FDIC instead of being assumed by the new bank. Brokered deposits are often looked down upon since those deposits are often considered "hot money" that won't stick around if rates fall. So as in this case, the assuming bank may choose not to acquire these deposits. With the internet making it easy to open accounts and move money online, internet accounts could be considered hot money also. It appears there is some recognition of this. In the Q&A #5, another type of deposits are grouped with brokered deposits:
Deposits purchased through a non-DTCC broker or deposits that may have been solicited via a money desk, internet subscription service or otherwise opened through an internet account or similar program will receive an FDIC insurance check.

I'm not sure if this refers to online savings accounts, but it sounds close. Those accounts are still FDIC insured, but it appears deposits over the FDIC limits won't be covered.

Planning For More Closures

There's a new sign that Fridays will remain busy for the FDIC far into the future. The FDIC announced that it "will open a temporary satellite office in Jacksonville, Florida, to manage receiverships and to liquidate assets from failed financial institutions primarily located in the eastern states." That's probably a good location being in the middle between Georgia and Florida. The FDIC doesn't plan to even start moving in there until September, so they must be expecting an increasing number of closures for some time to come.

Here's a summary of today's bank failure:

33rd Bank Failure of 2009 in Washington State
  • FDIC Press Release
  • Closed Bank: Westsound Bank
  • Location: Bremerton, Washington
  • Size: 9 offices, $334.6 million in assets, $304.5 million deposits
  • Possible Uninsured Deposits: All deposits transferred, excluding brokered deposits
  • Acquiring Bank: Kitsap Bank, Port Orchard, WA
  • Estimated Cost to Deposit Insurance Fund: $108 million
  • Financial Ratings: 0 star at BauerFinancial, 1 star (lowest) at Bankrate.com
References:

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Comments
8 comments.
Comment #1 by Hapi (anonymous) posted on
Hapi
hello... hapi blogging... have a nice day! just visiting here....

1
Comment #2 by Anonymous posted on
Anonymous
Just talked with a rep from Kitsap Bank. The cd rates will stay the same for the time being. They will send out a letter within the next 30 days which will contain information about any rate changes. At that time you can either renew with Kitsap or close account without penalty. I currently have a cd with them paying 5.56%. Not holding my breath that they will continue paying anything close to that.

1
Comment #3 by Banking Guy (anonymous) posted on
Banking Guy
Thanks for the update. Please let us know what they decide after the 30 days.

1
Comment #4 by Mary (anonymous) posted on
Mary
Interesting note about the different treatment of brokered accounts. Has that happened before or is any rational provided on why the FDIC created a class distinction between depositors? In addition, can you speculate on the treatment given to those investing through a CEDARS account?

1
Comment #5 by Banking Guy (anonymous) posted on
Banking Guy
There have been a few past bank failures in which the assuming banks didn't agree to take over the brokered deposits. The distinction may be driven more by the bank that assumes the deposits of the failed bank. Brokered deposits are considered more rate sensitive than standard deposits and there's no chance of building customer loyalty.

Perhaps Q&A #5 which describes other types of deposits that'll treated like brokered deposits includes CDARS. I'm still not exactly sure what accounts they refer to.

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Comment #6 by Anonymous posted on
Anonymous
We received a letter 5-16, dated 5-15, saying
that rates would be changed as of 5-11-09.
This means the advance notice time was
negative! Poor show, Kitsap Bank. New rates
are: Maturities up to 2-8-10, 1.5%;
maturities 2-9-10 to 11-8-10, 2%; 11-9-10 to
5-8-11, 2.5%; maturities 5-9-11 or later, 3%.
All are APY. Terms will not change.

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Comment #7 by Banking Guy (anonymous) posted on
Banking Guy
Thanks for the info. That's a good point that Kitsap Bank should have sent letters well before the date they intend to change rates. They may not be obligated to do that, but it's much more customer friendly.

Sorry to see the new low rates. For those who were locked into 5.65% APY for 5 years, the new 3% APY is a big cut. Hope they make it easy to do the penalty-free eary withdrawal.

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Comment #8 by Anonymous posted on
Anonymous
They took the bank over one week prior, how much more advance notice could there have been? Didn't see this in the article but Kitsap Bank also covered deposits over the 400k limit they were required to cover, so those over that limit should be thanking their lucky stars they didn't just make a donation to the US Government because they didn't have to do that.

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