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Review of the 2010 Bank Failures and Their Effects on Depositors

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Review of the 2010 Bank Failures and Their Effects on Depositors

This year ended with 157 bank closures which was 17 more than failed last year. The number bank failures grew considerably when the financial crisis began in 2008. The number of failures went from 3 in 2007 to 25 in 2008. It's hard for me to remember the days before 2008 when bank failures were rare.

Depositors with large savings have a little less to worry about in terms of bank failures. The FDIC $250K coverage limit became permanent when the Dodd-Frank Wall Street Reform and Consumer Protection Act became law in July. This same coverage limit also applies to NCUA-insured credit unions.

The higher coverage limit was nice, but it didn't make a difference for the vast majority of bank failures this year. In these cases the FDIC was able to find buyers for the failed banks that assumed all regular deposits.

Large Banks That Failed

One thing that changed quite a bit from 2009 was that most of this year's failures were small banks with assets under $1 billion. In 2009 we had large regional banks like Colonial, Guaranty and BankUnited that failed. All had assets over $12 billion. The largest bank that failed in 2010 was Westernbank Puerto Rico which had $11.94 billion in assets. The largest bank based on the mainland that failed was Amcore Bank, N.A. which had $3.8 billion in assets. It's interesting to note that Puerto Rico had both the largest and second largest bank failure of 2010. R-G Premier Bank of Puerto Rico which had $5.92 billion was the second largest. The three Puerto Rican bank failures cost the FDIC Deposit Insurance Fund (DIF) an estimated $5.28 billion.

Below is a list of all the banks with at least $1 billion in assets that failed in 2010. The list is sorted by size. The total number of these banks is 23. As I was making the list I noticed the vast majority of these failures occurred in the first half of the year. Only 4 banks with at least $1 billion in assets failed in the second half of the year.

  1. Westernbank Puerto Rico, Mayaguez, PR - $11.94 billion
  2. R-G Premier Bank of Puerto Rico, Hato Rey, PR - $5.92 billion
  3. Amcore Bank, N.A., Rockford, IL - $3.8 billion
  4. La Jolla Bank, FSB, La Jolla, CA - $3.6 billion
  5. Frontier Bank, Everett, WA - $3.50 billion
  6. Riverside National Bank of Florida, Fort Pierce, FL - $3.42 billion
  7. Midwest Bank and Trust Company, Elmwood Park, IL - $3.17 billion
  8. TierOne Bank, Lincoln, NE - $2.8 billion
  9. Eurobank, San Juan, PR - $2.56 billion
  10. First Regional Bank, Los Angeles, CA - $2.18 billion
  11. ShoreBank, Chicago, IL - $2.16 billion
  12. CF Bancorp, Port Huron, MI - $1.65 billion
  13. Hillcrest Bank, Overland Park, KS - $1.65 billion
  14. Advanta Bank Corp., Draper, UT - $1.5 billion
  15. Horizon Bank, Bellingham, WA - $1.3 billion
  16. Community Bank and Trust, Cornelia, GA - $1.21 billion
  17. Charter Bank, Santa Fe, NM - $1.2 billion
  18. Broadway Bank, Chicago, IL - $1.2 billion
  19. Premier Bank, Jefferson City, MO - $1.18 billion
  20. City Bank, Lynnwood, WA - $1.13 billion
  21. Columbia River Bank, The Dalles, OR - $1.1 billion
  22. Crescent Bank and Trust Company, Jasper, GA - $1.01 billion
  23. Appalachian Community Bank, Ellijay, GA - $1.01 billion

States with the Most Failures

In 2009 Georgia's 25 bank failures topped the list. This year Florida takes the top spot with 29 bank failures. That's more the double the number of failures Florida saw in 2009. Georgia was second this year with 21 failures. One thing I found interesting is that neither Nevada nor Arizona were near the top of the list. Both had only four failures. Since both were hit hard by the real estate bust, I expected we would see more failures. However, I did a search for the number of banks with headquarters in these states, and I found that there are not many banks: only 30 in Nevada and 42 in Arizona. As a comparison, there are 616 in Illinois.

Below is a graph showing the number of banks that failed in each state during 2010:

# State Number of 2010 bank failures
1 FL 29 *****************************
2 GA 21 *********************
3 IL 16 ****************
4 CA 12 ************
5 WA 11 ***********
6 MN 8 ********
7 MO 6 ******
8 MI 5 *****
9 SC 4 ****
10 NV 4 ****
11 MD 4 ****
12 AZ 4 ****
13 UT 3 ***
14 PR 3 ***
15 OR 3 ***
16 NY 3 ***
17 KS 3 ***
18 WI 2 **
19 PA 2 **
20 OH 2 **
21 NM 2 **
22 VA 1 *
23 TX 1 *
24 OK 1 *
25 NJ 1 *
26 NE 1 *
27 MS 1 *
28 MA 1 *
29 LA 1 *
30 AR 1 *
31 AL 1 *

Failed Banks That Weren't Acquired by Other Banks

Just like in 2009, the FDIC was able to find buyers for the vast majority of banks that failed. Out of the 157 failures, I counted only 8 banks that were not acquired. In these cases the FDIC mailed checks to depositors for their insured deposits. Anything above the insured limits were not included. The FDIC typically posted the estimated uninsured amounts. Fortunately, the amounts were generally small. The largest estimated uninsured amounts were at First Arizona Savings which had $5.8 million and Centennial Bank in Utah which had $1.8 million. As a comparison to the IndyMac failure in 2008, the FDIC estimated that there was $1 billion of potentially uninsured deposits held by approximately 10,000 depositors (This went down after the $250K coverage limit was made permanent since it was retroactive to 2008). Below is the list of the banks that failed in 2010 that weren't acquired by other banks:

  1. Advanta Bank Corp., UT - $1.6 billion in assets
  2. Barnes Banking Company, UT - $827.8 million in assets
  3. First Arizona Savings, A FSB, AZ - $272.2 million in assets
  4. Centennial Bank, UT - $215.2 million in assets
  5. Waterfield Bank, MD - $155.6 million in assets
  6. Lakeside Community Bank, MI - $53.0 million in assets
  7. Arcola Homestead Savings Bank, IL - $17.0 million in assets
  8. Ideal Federal Savings Bank, MD - $6.3 million in assets

Some of the above banks were noteworthy for depositors. You might not recognize Waterfield Bank, but this affected many savers who had deposits at UFB Direct and the AARP Financial Savings Center. Both of these had offered top rates on internet savings accounts in previous years. These companies used Waterfield as their bank for deposits, and when Waterfield was closed, both of these institutions appeared to have ended operations. It's interesting to see their websites continue to say they're "down for program maintenance".

Another interesting thing to note is that Centennial Bank of Ogden, UT had operated CBDirect.com which offered a nationwide 3% reward checking account without a balance cap.

Most People with Uninsured Deposits Were Lucky in 2010

As you can see above, the vast majority of banks that failed were acquired by another bank with help from the FDIC. For the vast majority of these cases, all non-brokered deposits were assumed by the acquiring banks. This included the amounts that exceeded the FDIC insurance limits. So those who had over the FDIC limits were lucky in these cases.

This was not the case for brokered deposits. Most of the time the acquiring banks did not assume these deposits. The banks probably didn't see any benefit from assuming these types of deposits since there are no relationships with the depositors.

In December there were some additional types of deposits that were not assumed by the acquiring banks. This first happened when Earthstar Bank in PA failed on December 10th. The FDIC stated that certain out-of-state CDs were not assumed by the acquiring bank, Polonia Bank. One thing unique about Earthstar Bank was that it did market CDs nationwide with online applications. It appears Polonia Bank considered these out-of-state CDs similar to brokered CDs.

This non-assumption of certain CDs happened again on December 17th. The bank that acquired Appalachian Community Bank in Georgia did not assume certain CDs. The FDIC gave examples of these CDs as "out-of-state non-IRA CD or QwickRate CD." Quickrate CDs are not considered brokered CDs, but they have many similarities.

So in December a trend started in that certain out-of-state CDs are not always being assumed by acquiring banks. Thus, it's another reason to stay below the FDIC limit.

The Loss of High CD Rates When Your Bank Fails

The main issue for depositors when banks fail is the loss of the high interest rate on their existing CDs. By law the acquiring banks are allowed to lower the interest rates on existing CDs. Many of the acquiring banks did make use of this allowance. The depositors are free to close the CDs without a penalty, but in today's interest rate environment, it's impossible to replace those CDs with new ones with the same high rates.

The most unfortunate example of this rate cut happened to customers at Darby Bank & Trust Co in November. This bank had offered very attractive 3-year and 18-month CDs, and for a while these were available nationwide. Some of these CDs were earning 4.00%, but after Darby failed the acquiring bank decided to cut the rates for many of these CDs down to a pathetic 0.25%.

Credit Union Closures

The credit unions didn't get hit nearly as bad as the banks. There were only 19 credit unions that were liquidated in 2010. That's up from 15 in 2009. Many of these were tiny credit unions with under $10 million in assets. There were a few sizable credit unions. These included Beehive Credit Union in Utah that had $145 million in assets and Norbel Credit Union in Colorado that had $120 million in assets.

The main news with credit unions this year was the bailout of the corporate credit unions which serve other credit unions. Many of these corporate credit unions had invested in toxic mortgage securities. The bailout that's being done by the NCUA will be costly, and that cost is being passed on to the consumer credit unions in the form of assessments. This will likely be another headwind for deposit rates.

What To Expect for 2011?

We may see fewer bank failures in 2011. According to regulators quoted in this WSJ article, the "failures have passed their peak." Also, we saw fewer closures in the fourth quarter of 2010 compared to previous quarters. There were 41 closures in Q1, 45 in Q2 and 41 in Q3. But in Q4 the number of failures went down to 30. So based on this trend, I would expect to see fewer closures in 2011. However, in the latest unofficial problem bank list from the Calculated Risk Blog, there are 935 banks operating under enforcement actions from regulators. Several of these banks may fail next year.

So based on these factors, my guess for the number of bank failures in 2011 is 130. My guess last year for the number of 2010 failures was way off. I had predicted 300. So I'm being more conservative this time.

References to Help Keep Your Deposits Safe:

List of Bank and Credit Union Failures:

Avoid a CD Rate Cut By Sticking With Safe Banks:



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Comments
5 Comments.
Comment #3 by Anonymous posted on
Anonymous
Erwin, your link to what's obviously a for-profit site promoting payday loans (and other banking services) doesn't belong here.

Beware payday loans, folks. It's legalized extortion.

Now back to your regular channel after a much needed dose of sanity...

6
Comment #6 by Anonymous posted on
Anonymous
Ally doesn't have anyone to spin off from.  It's a private company, although the American people are, by far, the largest shareholders.
 
As long as they still have ResCap and continue to make car loans, Ally will need money but will have trouble getting it from the usual places.  Deposits have been reliable for them.
 
Expect rates at Ally to continue to fall, as they have everywhere.

8
Comment #7 by Anonymous posted on
Anonymous
Why will Ally "have trouble getting it from the usual places"?

1
Comment #8 by Anonymous posted on
Anonymous
Their credit is poor.  That's why they had to go to the government for help.

Our deposits, on the other hand, are backed by the FDIC.  So, we should have no fear, as long as we stay within the limits.

8