Dedicated to Deposits: Deals, Data, and Discussion

Two Illinois Banks Fail, Impact to CD Customers and the FDIC Special Assessment

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Two small Illinois banks failed today: Strategic Capital Bank in Champaign and Citizens National Bank in Macomb. These were small banks compared to BankUnited that was seized yesterday. The combined assets of these two banks were only $937 million which is just about 7% of BankUnited's $12.8 billion in assets.

Both closures were similar. The FDIC arranged for another bank to assume all regular deposits, even deposits over the FDIC limits. One difference was the handling of brokered deposits. For the Strategic Capital Bank, all brokered deposits were transferred to the assuming bank. For Citizens National Bank, all brokered deposits will be funded and paid out directly by the FDIC.

Impact to CD Customers

CD customers will have to worry about losing their rate lock. For both cases the assuming banks will be "reviewing the rates." Depositors will have the option to close the CD without an early withdrawal penalty. Unfortunately, the assuming bank can take a while to decide, and the FDIC doesn't report on the decision. If you're a customer of a failed bank, please leave a comment about what the assuming bank decides.

One reader commented in my post on Westsound Bank's closure about the decision of the assuming bank, Kitsap Bank. Kitsap Bank sent letters dated 5/15/09 informing customers that the rates would change as of 5/11/09. I've seen cases in which the assuming bank delayed the notification even more. As you might expect, they decided to cut rates. Westsound Bank had been offering 5.65% APY 5-year CDs in 2007. The highest new rates will only be 3% APY.

So for CD depositors, the most worrisome issue this year for bank closures hasn't been lost money, but the loss of CD rate locks.

Special Assessment on Insured Depository Institutions

Before these closures, the FDIC issued this press release regarding its final rule on special assessments on insured institutions as part of its efforts to rebuild the Deposit Insurance Fund (DIF). With this special assessment, the FDIC projects that the DIF will remain low but positive through 2009 and then begin to rise in 2010. Unfortunately, it sounds like the FDIC Chairman, Sheila Bair, expects the continuation of the very-low deposit rates will make it easier for banks to pay the assessment:
And backed by deposit insurance, deposit funding costs have fallen significantly, approaching historic lows. Indeed, the unique ability of banks to access low-cost, government-backed deposits has contributed to the recent increased profitability of many banks.

There's no mention about how the extension of the $250K coverage limit to 2013 will affect the DIF. If the FDIC can continue to have the assuming banks take over all of the failed banks' deposits, the $250K coverage change may not have a major impact on the DIF. However, as more banks fail, the FDIC may have a harder time finding banks willing to assume all deposits.

Here's a summary of the two failures:

35th Bank Failure of 2009
  • FDIC Press Release
  • Closed Bank: Strategic Capital Bank
  • Location: Champaign, Illinois
  • Size: 1 office, $537 million assets, $471 million deposits
  • Possible Uninsured Deposits: All deposits transferred
  • Assuming Bank: Midland States Bank, Effingham, IL
  • Estimated Cost to Deposit Insurance Fund: $173 million
  • Financial Ratings: 0 star (lowest) at BauerFinancial, 1 star (lowest) at Bankrate.com
36th Bank Failure of 2009
  • FDIC Press Release
  • Closed Bank: Citizens National Bank
  • Location: Macomb, IL
  • Size: 8 offices, $437 million in assets, $400 million in deposits
  • Possible Uninsured Deposits: All deposits transferred, excluding brokered deposits
  • Assuming Bank: Morton Community Bank, Morton, IL
  • Estimated Cost to Deposit Insurance Fund: $106 million
  • Financial Ratings: 0 star (lowest) at BauerFinancial, 1 star (lowest) at Bankrate.com
References:
Thanks to the readers who emailed me and commented on these closures.

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Comments
7 comments.
Comment #1 by Anonymous posted on
Anonymous
I find the list of troubled banks from thestreet.com
(http://www.moneyandmarkets.com/files/documents/banking-white-paper.pdf)
very useful ... you can just watch the banks with the lowest ratings fail one by one.
The banks with an E- or E rating have indeed been the ones biting the dust. I'm not sure whether this list has been updated since September 2008.

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Comment #2 by Anonymous posted on
Anonymous
You can find the Bauer ratings for banks here: http://www.bauerfinancial.com/btc_ratings.asp

and for credit unions here: http://bauerfinancial.com/btc_ratings.asp?q=cu

Interesting stuff. I wish they had an easier way to get a list of the poorly rated banks without clicking on each state.

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Comment #3 by Anonymous posted on
Anonymous
To Anon at 12:51 AM - That is a great white-paper about the 250K FDIC insurance in "Dangerous Unintended Consequences: How Banking Bailouts, Buyouts and Nationalization Can Only Prolong America’s Second Great Depression
and Weaken Any Subsequent Recovery", esp. pg. 28 to 30. I agree with the author.

Where can I find a list of "banks with an E- or E rating"? - Patty

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Comment #4 by Anonymous posted on
Anonymous
Does an assuming bank just change the rate of an existing CD while keeping the CD maturity date?

1
Comment #5 by Banking Guy (anonymous) posted on
Banking Guy
Changing the CD rate while keeping the existing maturity date appears to be common. I've also seen cases in which the assuming bank closed existing CDs. That happened to a few readers when NetBank failed and ING Direct assumed NetBank's deposits.

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Comment #6 by Anonymous posted on
Anonymous
Patty ... you can find the banks with an E or E- rating at the end of the white paper I referenced in the first comment. The white paper has ratings from 3Q2008.

For updated ratings, you can check any bank you like using the screener at
http://www.thestreet.com/screener/index.html?src=ratingsindex&tab=3

I've found this list very predictive of FDIC closures. They are systematically going after the lowest rated E- and E financial institutions ... then they'll get around to the much larger list of D- rated ones. Of course, each quarter the ratings change a bit, but it's more likely for a bank's ratings to fall than to rise in this environment.

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