Happy New Year! Savers may not see improvements in interest rates in 2012, but there is one improvement we will likely see. That is fewer bank failures. Bank failures are trending down. The year 2011 ended with 92 bank closures. That's a big decline in the number that failed in 2010 when 157 banks failed. It's the first year since the financial crisis began in 2008 when the number of bank failures declined. It's a sign that economic normalcy is returning which will eventually lead to higher deposit rates. The summary below shows the number of bank closures per year since 2005. It's hard to believe that bank failures were so rare between 2005 and 2007.
- 2005: 0
- 2006: 0
- 2007: 3
- 2008: 25
- 2009: 140
- 2010: 157
- 2011: 92
Most of 2011 bank failures were little-known community banks. However, there were two internet banks that failed.
The parent of Virtual Bank, Lydian Private Bank, failed in August. Virtual Bank customers didn't have any problems since the FDIC arranged for Sabadell United Bank to acquire Lydian Private Bank, and Sabadell decided to continue Virtual Bank without changes.
The other internet bank that failed was Nexity Bank which closed in April. The FDIC allowed a newly chartered bank, AloStar Bank of Commerce, to assume all deposits of Nexity Bank, and like Nexity Bank, AloStar Bank operates as an internet bank.
For customers of Virtual Bank and Nexity Bank, the closures had little impact on them. That wasn't always the case for customers of other banks that failed in 2011.
Large Banks That Failed
One trend that started in 2010 and continued in 2011 is that fewer large banks are failing. In 2011 there were a total of 7 banks with assets over $1 billion that failed. The largest was Superior Bank in Birmingham Alabama that had $3 billion in assets. In 2010 there were a total of 23 banks with assets over $1 billion that failed. The largest was Westernbank Puerto Rico with almost $12 billion in assets. In 2009 there were 7 failed banks that had over $5 billion in assets with the largest being Colonial Bank with $25 billion. The largest bank that failed was in 2008 when WaMu was closed. It had $307 billion in assets.
Most of the failed banks in 2011 were small banks with assets between $100 million and $1 billion. There were 15 with assets under $100 million. The smallest had only $37.6 million in assets.
The small size of most of the 2011 bank failures helped keep down the cost to the FDIC Deposit Insurance Fund (DIF). The FDIC reported a DIF balance of negative $7.4 billion at the end of 2010. At the end of Q3 in 2011, this has increased to a positive $7.8 billion. At the end of 2008 when it was clear that many banks had to be closed, the FDIC increased the premiums it charged banks for deposit insurance. With the number and size of failed banks going down, this should lead to lower premiums which will make it a little easier for banks to offer higher deposit rates.
Below is a list of all the banks with at least $1 billion in assets that failed in 2011. The list is sorted by size. The total number of these banks is 7.
Failed Banks in 2011 with Over $1 Billion in Assets
- Superior Bank, Birmingham, AL - $3.0 billion in assets, $2.7 billion in deposits, 73 branches (closed on April 15)
- First Community Bank, Taos, NM - $2.31 billion in assets, $1.94 billion in deposits, 38 branches (closed on Jan 28)
- Integra Bank, N.A., Evansville, IN - $2.2 billion in assets, $1.9 billion in deposits, 52 branches (closed on July 29)
- United Western Bank, Denver, CO - $2.05 billion in assets, $1.65 billion in deposits, 8 branches (closed on Jan 21)
- Lydian Private Bank (including its division Virtual Bank), Palm Beach, FL - $1.70 billion in assets, $1.24 billion in deposits, 5 branches (closed on Aug 19)
- Community Banks of Colorado, Greenwood, CO - $1.38 billion in assets, $1.33 billion, 40 branches (closed on Oct 21)
- Bank of Choice, Greeley, CO - $1.07 billion in assets, $924.9 million in deposits, 17 branches (closed on July 22)
States with the Most Failures
With 23 bank failures, Georgia had far more bank failures in 2011 than any other state. Florida had the second most with 13. This was a change from 2010 when Florida had the top spot with 29 bank failures with Georgia taking the second spot with 21. Since the start of the financial crisis in 2008, there have been 74 bank failures in Georgia and 58 in Florida. The combined number of bank failures in Georgia and Florida accounted for 39% of all bank failures in the nation in 2011 and 32% since 2008.
Below is a graph showing the number of banks that failed in each state during 2011:
|#||State||Number of 2011 bank failures|
Failed Banks That Weren't Acquired by Other Banks
Just like in previous years, the FDIC was able to find buyers for the vast majority of banks that failed. In those cases, the acquiring banks assumed all regular deposits including amounts over the FDIC limit. So for most people who had deposits over the FDIC limit at these failed banks, they were lucky. No uninsured deposits were lost. The only exception was brokered deposits. It was common that the acquiring banks did not assume some brokered deposits. The banks probably didn't see any benefit from assuming these types of deposits since there are no relationships with the depositors.
Out of the 92 failures, I counted only 2 banks that were not acquired. Last year there were 8 banks that were not acquired. Below is the list of these 2 banks:
- FirsTier Bank, Louisville, CO - $781.5 million in assets, $722.8 million in deposits, 9 branches (closed on Jan 28)
- Enterprise Banking Company, McDonough, GA - $100.9 million in assets, $95.5 million in deposits, 2 branches (closed on Jan 21)
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 in 2011 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.
Most of the acquiring banks didn't publicly announced their policy on the existing CDs from the failed banks. For most of the bank failures in 2011, the FDIC just provided the following about interest rates:
Interest on deposits accrued through close of business the day the bank was closed will be paid at your same rate. Current rates will be reviewed by the new bank and may be lowered; however, you may withdraw funds from any transferred account without early withdrawal penalty until you enter into a new deposit agreement.
I found only four banks in 2011 that stated on their websites at the time of the acquisition of the failed banks that they were keeping the CD rates in effect until maturity. More banks may have decided to keep rates unchanged, but these banks may have communicated this privately to customers. Not all customers may have been given this opportunity. For example, Northbrook Bank and Trust Company posted the following on its website about its acquisition of Community First Bank:
Will my Certificates of Deposit (CDs) change? Will the rates change prior to maturity?
For local personal and IRA CDs, the simple answer is NO. These CDs will remain the same until maturity and automatically renew at the Northbrook Bank & Trust posted rates in effect at maturity. "Internet CDs" will be adjusted. Unless you're notified, rates will stay the same.
Credit Union Liquidations
The credit unions didn't get hit nearly as bad as the banks. There were only 16 credit unions that were liquidated in 2011. One of these 16 was Sacramento District Postal Employees Credit Union which was privately insured by American Share Insurance (ASI). The credit union was closed by the California Department of Financial Institutions, and the department appointed the ASI as the liquidating agent. The ASI was able to have another ASI-only credit union to assume all of the liquidated credit union's share account liabilities. So no members lost any money. There have not been many ASI-only credit union liquidations. The last one that I remember was in October 2009.
The other 15 failed credit unions were federally insured by the NCUA. Most were tiny credit unions with assets under $10 million. Only four had assets over $10 million. These include:
- BCT Federal Credit Union of Binghamton, NY - $41.3 million in deposits
- Utah Central Credit Union of Salt Lake City - $157 million in assets
- Family First Federal Credit Union of Orem, Utah - $119 million in assets
- Oakland Municipal Credit Union of Oakland, CA - $88 million in assets
For the above four credit unions, the NCUA arranged for other credit unions to assume all of the liquidated credit unions' share account liabilities. That wasn't the case for some of the tiny credit unions. One interesting example was Vensure Federal Credit Union which was closed by the NCUA without a buyer. As I reported in July, Vensure had been set up to handle poker bets for a company which was its largest depositor. The Credit Union Journal reported that 99% of Vensure FCU's income had come from processing poker bets.
What To Expect for 2012?
I think it's likely that we'll see fewer bank failures in 2012. The number of bank failures have been trending down in 2011. The average number of failures per quarter was just under 25 for the first three quarters of 2011. That fell to 18 in the last quarter. If that trend continues, the number of bank failures may be way under the 2011 total of 92.
In the FDIC's Q3 report, the number of "problem" banks declined from 865 to 844. The FDIC doesn't disclose the banks on this list or the specific criteria it uses to place banks on this list. There are ways that we can make guesses about which banks may be on this list.
There are still 973 banks on Calculated Risk's unofficial problem bank list. This list is based on publicly available enforcement actions that regulators have released or that have been reported by banks' SEC filings. Out of the 92 banks that failed in 2011, all but 7 had been on this list. However, many banks on this list may not fail. Several have been able to correct problems and get the regulator to terminate the enforcement action. Others have arranged been acquired by other banks without help from the FDIC.
In our bank health ratings page, we have a list of the banks with the worst Texas Ratios. The Texas Ratio is an industry standard for calculating the health of a bank, but is not the only factor to consider. Data is based on Q3 2011 financial data from FDIC. A Texas Ratio over 100% is considered at risk. We currently have 294 banks that have Texas Ratios over 100%.
My last year's guess for the number of 2011 bank failures was 130 which was 38 too high. My guess for 2010 failures was also way too high. So for this year, my guess is a low number of only 30.
References to Help Keep Your Deposits Safe:
- FDIC deposit insurance summary
- NCUA deposit insurance summary for credit unions
- Review of private deposit insurance for credit unions
- Verifying Your Internet Bank Deposits are FDIC Insured
- Maximize Your FDIC Coverage with Beneficiaries
- Temporary Unlimited Deposit Insurance Coverage
- Extending Coverage with Private Deposit Insurance
- Review of 2010 Bank Failures
List of Bank and Credit Union Failures:
- FDIC list of failed banks (sortable by state)
- NCUA list of credit union closures
- Full list of my bank failure posts