Dedicated to Deposits: Deals, Data, and Discussion

Review of the 2009 Bank Failures and What Depositors Experienced


We ended up with 140 bank closures in 2009 which was a big increase from 2008 when only 25 banks failed. From a depositor's point of view, there were two aspects of the 2009 bank closures that stood out. The first aspect is good news: very few uninsured deposits were lost. The second, however, has been onerous: many depositors have lost their high CD rates.

Large Banks That Failed

In 2009 we didn't see any banks larger than WaMu fail. WaMu's 2008 failure remains the largest U.S. bank failure on record. Nevertheless, several large banks failed. Seven had over $5 billion in assets. These included:
  • Colonial Bank (AL) $25 billion
  • Guaranty Bank (TX) - $13 billion
  • BankUnited, FSB (FL) $12.8 billion
  • United Commercial Bank (CA) $11.2 billion
  • AmTrust Bank (OH) $8 billion
  • Corus Bank, N.A. (IL) $7 billion
  • First Federal Bank of California (CA) $6.1 billion
States with the Most Failures

Out of the 140 bank failures in 2009, 77 of these occurred in just four states:
  • GA 25
  • IL 21
  • CA 17
  • FL 14
Five other states had between 4 and 6 failures:
  • MN 6
  • TX 5
  • AZ 5
  • MI 4
  • MO 4
Nevada only had 3 bank failures in 2009 which is a little surprising considering it's one of the states that has been hit especially hard by the real estate bust. In addition to 3 banks, 3 federally insured credit unions have also been closed in Nevada. It should also be noted that Nevada has several credit unions with only private ASI deposit insurance. None of these failed in 2009, but there are concerns that some of these may fail and put serious strain on ASI.

Failed Banks That Weren't Acquired by Other Banks

The FDIC was able to find buyers for the vast majority of banks that failed. It was very common for the buyers to assume all deposits from the failed banks, even deposits over the FDIC limit. Out of the 140 bank failures, only 10 banks weren't taken over by another bank. Most were small banks. Only 4 had at least one billion in deposits. These included:
  • Silverton Bank, NA in GA, $3.3 billion in deposits, No uninsured deposit (only served other banks)
  • New Frontier Bank in CO, $1.5 billioin in deposits, $4 million of possibly uninsured deposits
  • Community Bank of Nevada, $1.38 billion in deposits, $4.2 million of possibly uninsured deposits
  • First Bank of Beverly Hills in CA, $1 billion in deposits, $179,000 of possibly uninsured deposits
Out of these four banks, only about $8.4 million in deposits were potentially uninsured out of total deposits of $7.18 billion. That's just over 0.1% of the total deposits. 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. That's over 100 times more uninsured deposits than these four banks combined.

Most with Uninsured Deposits Were Lucky in 2009

As can be seen above, very few depositors with uninsured deposits lost money in the 2009 bank failures. I wouldn't assume depositors will be this lucky for 2010. With the potential of many more bank failures, the FDIC may have a harder time finding buyers. Thus, it's wise to stay below the FDIC limit. The basic coverage limit is $250,000. It's important to note that this is scheduled to end on December 31, 2013 which means any CDs with terms of 4-years or longer that you get will mature after this date. If you decide to use different ownership categories to insure above the basic coverage limit, make sure the bank follows the FDIC rules (see #5 of my 2008 bank failure review).

Accessing Your Money if the FDIC Can't Find a Buyer

If another bank takes over your failed bank, you should continue to have access to your money with little change. However, if the FDIC can't find a buyer, the FDIC will mail you the check for your CD (insured principal and interest to the date of closure). It can take more than a week before you receive the check. An example of this happened at Community Bank of Nevada. One of this blog's readers had a CD at the bank before it was closed. The FDIC tried to mail him the check, but they used the wrong address. It took several weeks before he was able to get his money. Another reader was more fortunate. The check for his CD arrived just one week after the closure. He said he deposited the check into his Chase account, and Chase placed a 7-day hold on it.

The Loss of High CD Rates When Your Bank Fails

Depositors may have been lucky in avoiding the loss of uninsured deposits, but they weren't lucky with interest rates. With interest rates being very low this year, most buyers of failed banks chose not to honor existing CD rates to maturity. When a bank fails and is acquired by another bank, the buyer is allowed to lower rates on existing CDs at the date of the closure. Some depositors in 2009 had their CD rates cut from 5% to less than 2%.

If a bank does lower CD rates, depositors are allowed to make a penalty-free early withdrawal. This penalty-free early withdrawal doesn't help much in this awful interest rate environment. There was no way depositors could find CDs paying close to the rates there were getting.

The buyers of Irwin Union Bank, Mutual Bank and Imperial Capital Bank were examples of banks that decided to cut existing CD rates. A few banks did agree to honor existing CD rates. Three examples include NYCB which took over AmTrust, BBVA Compass which took over Guaranty Bank and East West Bank which took over United Commercial Bank.

Not All Bad News for Depositors

A failed bank is not always bad news for depositors. There have been cases in which the buyers of failed banks have offered some good deposit deals after the closures. The bad press of the closure can chase away depositors, so a buyer will occasionally offer very competitive deposit rates at the branches of the failed bank. Some example of this in 2009 included CD specials offered by BB&T at Colonial branches, CD specials offered by BBVA Compass at Guaranty Bank branches and competitive CD rates at BankUnited after a group of investors acquired the bank.

Credit Union Closures

Banks weren't the only institutions to fail. 15 federally insured credit unions were liquidated in 2009. The NCUA announced the last one on New Year's Eve. There was also one privately insured credit union that was liquidated (insured by the ASI).

What To Expect for 2010?

My guess for the number of 2010 bank failures is 300. This is just a quick guess on my part. Here's a guess that was mentioned by a banking expert in this Philly.com article:
Experts characterized the Federal Deposit Insurance Corp.'s closure of 140 banks across the country last year as a warm-up for the agency, whose board last month authorized a 55 percent increase in the FDIC budget and a 23 percent increase in staffing to 8,653.

This year, "on a conservative basis, you're going to have two, three, four times" last year's total of bank seizures, said Charles Wendel, founder of Financial Institutions Consulting Inc., of Ridgefield, Conn

I think it's safe to say we'll see more bank and credit union failures in 2010. So make sure you keep under the FDIC and NCUA coverage limits. Refer to the following references for more details:

References to Help Keep Your Deposits Safe:
List of 2009 Bank and Credit Union Failures:
Avoid a CD Rate Cut By Sticking With Safe Banks:
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Comments
Comment #1 by Anonymous posted on
Anonymous
Thx for the excellent work you do for us. We have accounts at Imperial Bank, San Diego, they needed a week before we could transfer our money, by this coming Friday, the 9th.I advise to switch into a senior money market checking account, thereby you get some checks, that way, to transfer your IRA to another financial instit, you can write a check, and deal with the application over the mail/online/fax... we have found intra-bank IRA transfers are subject to delays. If you have a check, you can mail it, and they can't make up excuses for sitting on your intra-bank IRA transfer.
I don't know if this blog accepts other yield investment ideas, but we met with our Ameritrade rep, & these are ideas to consider(most are NOT FDIC protected)
Morgan Stanley and other banks have 20-yr notes, that stepup every 5 years, starting at 5% for the 1st 5 years, they are callable every 3 months.Some of these might be available in Jan.
Wells Fargo and other banks are issuing 6-yr CDs, my Ameritrade guy says some new ones will be offered this month, this one is tied to the UBS Commodities Index, you can NOT lose principal, that is, you will get your $10K back (I think this is the minimum) every year, this will pay out according to the index, with a 60% cap over 10 years, so you can only make 10% per year, even if the UBS Commodities index goes up more.(I like the UBS Commodities Index because it's weighting in oil products is only about 30%)Again, on this, you CAN'T lose principal.
California General Obligation bonds 5-yr paying 4.3%, 10-yr paying 6%.Gen Obligations are the safest municipal bonds,( but my wife doesn't like our situation here in CA)
Southwest Airlines bonds maturing 2016 5.35%
Petrobras (Brazilian Oil symbol: PBR) 7yrs paying 4.6%
hope this helps...I am not a broker, I have cash but will not risk it and am very conservative,
I am more interested in return "of" principal, but maybe these ideas help if you want to go out 6 years, I think 5-7%yield is worthy of study/, just my opinion.

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Comment #2 by Anonymous posted on
Anonymous
" A 55 percent increase in the FDIC budget and a 23 percent increase in staffing to 8,653 "

What FDIC is up to, close 90% of all banks?
Something is not right here, many from FEDs are saying the banking system has stabilized and the TARP will be phased out by this summer.
This leaves more doubt than answers for the future of the banking system or FDIC has some hidden addenda, hm.....!?

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Comment #3 by Anonymous posted on
Anonymous
To poster at 6:13 PM, you are barking to a wrong tree.
Most of us here are conservative investors and would never touch bonds or exotic CDs.
California bonds are junk so are the airliners. Commodities are at pick and they can only go down from here.
Most importantly, none of your suggestions are FDIC insured and most of us will not go near them, even just reading your post makes me shiver.

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Comment #4 by Tsunami Cid (anonymous) posted on
Tsunami Cid
How many banks are there TO close? If the "conservative" estimate is correct, we can expect over 400 FDIC-insured institutions to fail in 2010? How many FDIC-insured institutions ARE there in the US?

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Comment #5 by Anonymous posted on
Anonymous
You seriously asked how many banks there are? There's like 3 banks every block in almost every big city and they aren't the same one

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Comment #6 by Anonymous posted on
Anonymous
"Most of the failures happened in just four states: Georgia, Illinois, California and Florida. The causes varied widely, but the mortality rate was particularly high among thrifts that specialized in mortgage lending, and among banks that funded real estate development in the sprawling Sun Belt."

www.washingtonpost.com/wp-dyn/content/article/2010/01/01/AR2010010101799.html

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