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More Friday Bank Closures - What Depositors Might Lose

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Two small Florida banks and one Oregon bank were closed today by regulators. That makes a total of 72 bank failures this year. These closures were similar to most of this year's closures. The FDIC was able to arrange for other banks to assume all deposits (except some brokered deposits) of the failed banks. So no regular depositors lost any money, even those with over the FDIC limit.

So what's the thing that depositors might lose? It's a high interest rate. The banks that are acquiring the failed banks may decide not to honor CD rates to maturity. The depositors are free to make a penalty-free early withdrawal, but in today's low interest rate environment, most CD holders would probably prefer to keep the money in the CD if the interest rate would remain the same.

One example of this is First State Bank in Florida which was one of the banks that was closed today. The FDIC arranged for Stearns Bank, N.A. to assume all of First State Bank deposits. I posted on First State Bank a few times back in 2006. They had been offering a 6% 5-year CD back then, and the CDs were available nationwide. So I'm afraid there may be quite a few depositors with these CDs. The FDIC states in its FAQ that "Stearns Bank, N.A. will review rates and notify you if interest rates will change." Hopefully, Stearns will honor the CD rates to maturity. If they don't, depositors will be free to withdraw funds without an early withdrawal penalty. However, it'll be painful to lose that 6% rate in today's low interest rate environment where it can be tough just to find 3% CDs.

So if you're looking for CDs, the health of the bank is important even if you are going to stay under the FDIC limits. It's not an issue of losing money that you have, it's a matter of losing future interest income. If you have a CD from one of these closed banks, please leave a comment about what the new banks decide.

Update 8/17/09: A reader reported receiving a letter from Stearns Bank regarding his First State Bank CD that was paying 6% interest rate. Stearns is not going to honor the 6% rate and is only offering 1.00%.

Update 8/18/09: Below are excerpts from Stearns Bank's letter to former First State Bank customers:
The existing interest rates on outstanding certificates of deposit will continue until August 28, 2009. The interest rate paid on outstandring certificates after that date will continue at the rates shown below. You can withdraw your existing certificate of deposit at any time without penalty.

Annual Percentage Yield effective Aug. 28, 2009 (based on original term of CD)

Term Rate APY
0 - 90 days 1.29% 1.30%
91 - 180 days 1.54% 1.55%
181 - 269 days 1.55% 1.55%
270 - 364 days 1.60% 1.60%
12 - 35 months 2.00% 2.00%
36 months and over 1.00% 1.00%

Below is a summary of today's bank closures:

70th Bank Failure of 2009 (5th in FL)
  • FDIC Press Release
  • Closed Bank: First State Bank, Sarasota, FL
  • Size: 9 offices, $463 million in assets, $387 million deposits
  • Possible Uninsured Deposits: All deposits transferred, except $8 million in brokered deposits
  • Acquiring Bank: Stearns Bank, N.A., St. Cloud, MN
  • Rate Changes: Stearns Bank, N.A. will review rates
  • Estimated Cost to Deposit Insurance Fund: $116 million
  • Financial Ratings: 0 star (lowest) at BauerFinancial, 1 star (lowest) at Bankrate.com
71st Bank Failure of 2009 (6th in FL)
  • FDIC Press Release
  • Closed Bank: Community National Bank of Sarasota County, Venice, FL
  • Size: 4 offices, $97 million assets, $93 million deposits
  • Possible Uninsured Deposits: All deposits transferred
  • Acquiring Bank: Stearns Bank, N.A., St. Cloud, MN
  • Rate Changes: Stearns Bank, N.A. will review rates
  • Estimated Cost to Deposit Insurance Fund: $24 million
  • Financial Ratings: 0 star (lowest) at BauerFinancial, 1 star (lowest) at Bankrate.com
72nd Bank Failure of 2009 (3rd in OR)
  • FDIC Press Release
  • Closed Bank: Community First Bank, Prineville, OR
  • Size: 8 offices, $209 million in assets, $182 million deposits
  • Possible Uninsured Deposits: All deposits transferred, except $31 million in brokered deposits
  • Acquiring Bank: Home Federal Bank, Nampa, ID
  • Rate Changes: Home Federal Bank will review rates
  • Estimated Cost to Deposit Insurance Fund: $45 million
  • Financial Ratings: 0 star (lowest) at BauerFinancial, 1 star (lowest) at Bankrate.com
References:
The above financial ratings are based on 3/31/09 data. Thanks to the readers who emailed me news on these closures.


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Comments
10 comments.
Comment #1 by Anonymous posted on
Anonymous
Regarding closed banks, I had accounts with Vineyard Bank in Southern California when it was taken over. Received a letter within 1 week indicating CD rates would not be honored and we had approx 5 days to either close the CDs or accept the extremely low rate.

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Comment #2 by Jim (anonymous) posted on
Jim
So, they're down to $641 million in the DIF assuming the estimated losses and the $13 billion remaining at the start of Q2. This excludes any income they have from fees, which I'm guessing is a few billion.

Still Colonial bank, Corus bank, and a few other big ones are out there that could potentially sink the fund in one shot (and make them tap the $500 billion credit line).

Or is none of this accurate?

1
Comment #3 by Anonymous posted on
Anonymous
So let's see. According to all of the stock market media on television, we have hit bottom and everyone is declaring that the recession is over. Yet banks are still closing, and banks are still only giving very, very low interest rates. Of course, the market guys equate the stock market to the economy. And since the market is up, then the economy must be up. Yet banks are still closing, and banks are still only giving very, very low interest ates. Hmmm. Something doesn't seem right. Shouldn't interest rates be uch higher since the stock market has recovered so much? Hmmm. Something seems fishy.

1
Comment #4 by Anonymous posted on
Anonymous
No, genius. The stock market is a leading indicator. People are pushing stocks up b/c they believe good times are coming. I don't think anyone has said the recession is over - but the market seems to be saying it can see the end. Right now, we're still in a recession, which is why rates are low.

1
Comment #5 by Anonymous posted on
Anonymous
So far, I haven't received any rate change notice from Mutual bank.

1
Comment #6 by Anonymous posted on
Anonymous
Mutual bank is a good example why bank ratings are a good check but
are no guarantee against the bank not being closed or taken over. A couple of years can make a big difference in their ratings. A few years ago, Mutual Bank had a 4 star rating.
I have not seen or received any notice about rate changes for Mutual's CDs either.

1
Comment #7 by Anonymous posted on
Anonymous
Fishy? No. Manipulated? Yes.
The interest rates are being manipulated by the Federal Reserve. They have been purchasing huge amounts of treasuries which helps keep interests rates artificially low.

Weren't unrealistically low interest rate a contributing factor that helped create this financial calamity to begin with?

1
Comment #8 by Anonymous posted on
Anonymous
It's interesting that I found this when I googled mutual bank.

"The president of Mutual Bank, Amrish Mahajan, and his wife, Anita, have been implicated in the alleged "pay-to-play" political schemes of former Gov. Rod Blagojevich. Mahajan was a major fundraiser for Blagojevich's campaigns, and in 2006 the governor's wife, Patti, then a real estate broker, got $113,000 in commissions from deals involving the Mahajans, according to news reports.

A Cook County grand jury indicted Anita Mahajan in April 2007 for allegedly billing the state of Illinois $2.1 million for drug tests that her former firm, K.K. Bioscience, never performed under its long-running contract with the Department of Children and Family Services. Her trial is pending. "

Full link : http://www.southtownstar.com/news/1695783,080109bankclosed.article

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Comment #9 by Anonymous posted on
Anonymous
Just received a notice today from United Central Bank and the take over of Mutual Bank concerning my Mutual Bank CD.

Effective Sept 1, 2009 the interest rate will be lowered to 2.90% on a 60 Month CD. In line with UCB's current rates.

A depositor may withdraw all or part of the balance in their CD without penalty at any time prior to the maturity date.

Disappointing, but expected. Withdrawal terms are are very acceptable.

1