Friday, May 22, 2009

This Week in Bank Failures

I wrote about the biggest bank failure of the year so far last night. Florida-based BankUnited failed and was taken over by a Wall Street investment consortium, which will be keeping the BankUnited name.

AIG announced that its CEO will be stepping down as soon as a replacement can be found. Edward Liddy was recruited last fall to stabilize the insurance company after its financial collapse. His departure apparently signals the beginning of the liquidation phase for what was previously the largest insurance company in the world. AIG is hoping to spin off or sell its insurance units so that they will not have to use the tainted AIG name nor participate in its likely bankruptcy. But even with new names, the insurance operations cannot expect to regain the customers they have lost over the past year. Although most of AIG’s employees work in insurance, the company’s fortunes were ruined by its trillion-dollar gambles in the banking business, involving guarantees of bank loan derivatives and similar financial instruments.

There were two more bank failures of significant size tonight, both in Illinois, along with new developments in deposit insurance.

Strategic Capital Bank and Citizens National Bank each had roughly half a billion dollars in assets. The FDIC estimates combined costs of $279 million for the two closures.

Strategic Capital Bank was founded in 1999 and had its one office in Champaign, a small city in east central Illinois. The bank had been operating under a cease-and-desist order since August, and three executives had departed during that time. It had been roughly breaking even in recent quarters, but regulators apparently felt that it had little chance of raising capital or making a profit over the next year or two.

Midland States Bank is taking over the deposits and nearly all the assets of Strategic Capital Bank, with the FDIC providing partial loss protection on most of the assets. Midland States Bank is a commercial bank operating mostly in west central Illinois, near St. Louis, Missouri. It recently acquired Commercial State Bank, but has had considerable difficulty integrating the Commercial State Bank customers into its operations.

Citizens National Bank had several offices in the the area west of Peoria, Illinois. It was founded in Macomb, Illinois, in 1890, and had been managed by members of the same family for its entire history, but was sold to new owners three years ago. It should not be confused with the many other banks that use the Citizens name.

Morton Community Bank, based in the Peoria suburb of Morton, is acquiring half the deposits and purchasing 55 percent of the assets of Citizens National Bank, with the FDIC providing partial loss protection on most of the assets. The other half of the deposits are brokered deposits, and the FDIC will pay those amounts directly to the brokers involved.

Morton Community Bank had two dozen branches already, with the branches outside of Morton operating under other names to emphasize the bank’s local character. The new branches it acquired tonight allow it to extend its territory to the west.

There were two significant events at the FDIC this week. An act of Congress, signed by the President on Wednesday, continues the expanded deposit insurance through 2013. Under the temporary expanded deposit insurance, deposits are insured up to $250,000 per depositor, rather than the usual $100,000. The extension does not apply to the temporary unlimited deposit insurance for non-interest bearing accounts, which expires at the end of this year.

Today, the FDIC announced the final form of its special assessment coming this summer, which will be:

five basis points on each FDIC-insured depository institution's assets, minus its Tier 1 capital, as of June 30, 2009.

Previously, the FDIC had proposed a special assessment of 20 basis points on deposits. The decision to assess assets rather than deposits was based on the recognition that banks’s high-risk loans, which are the source of most of the stress in the banking system, are more related to a bank’s assets than its deposits. The revised special assessment will result in about the same level of assessment at the largest banks, but more traditional banks, including most smaller and community banks will pay much less. That’s because at traditional banks there is a more direct connection between the amount of a bank’s deposits and the size of its assets.

The special assessment is a lot for banks to pay all at once, but probably not enough to keep the Deposit Insurance Fund from running out of money. The FDIC will almost certainly have to begin borrowing money from the Treasury later this year. Congress has authorized a large line of credit for the FDIC, but seems ready to expand that at the drop of a hat if need be.