On the last Friday in July, residents in the Florida panhandle city of Apalachicola started to buzz as federal bank examiners descended on two of the area’s venerable financial institutions.
“Word of mouth spreads pretty fast when a jet plane flies in with 22 government people on it, carrying briefcases,” said Jerry Thompson, a St. George Island resident. He soon found out that struggling Apalachicola State Bank, where he and his wife had checking accounts, was being sold by the feds to an Arkansas financial institution along with its parent Coastal Community Bank.
“They had been here for over 100 years and were a big part of this area,” said Thompson, 68, a real estate agent. “It’s a real sadness to see so many community banks going away.”
So far in 2010, 110 banks across the nation have been taken over by the Federal Deposit Insurance Corporation. Florida heads the “top five” list of states hardest hit by this year’s tide of bank failures, followed by Illinois, Georgia, Washington and Minnesota.
Nearly every Friday, the federal list of failed banks grows and more consumers learn abruptly that their accounts are being moved to a new financial institution—or paid out in cash if no buyer for their bank has been found. The FDIC steps in to salvage assets and negotiate the sale of banks that are low on cash or otherwise deemed unsafe to stay open.
The FDIC considers another 775 institutions to be “troubled,” according to its most recent quarterly report. That means nearly 10 percent of the 7,932 financial institutions covered by the FDIC are considered at some risk. About a fifth of banks on the watch list end up failing, according to FDIC chief economist Rich Brown. That suggests another 100 or more could go under by the end of 2010.
Independent research group BauerFinancial has an even bleaker outlook. It counts 1,077 banks as troubled.
Contrast that to 2007, when only three banks failed nationwide. Failures were virtually unknown earlier in the decade—even in 2008, well after the start of the recession, the FDIC took over only 25 banks, compared with 140 in 2009.
Experts trace much of the current financial industry instability to the nation’s real estate woes.
“The large number of foreclosures and defaults on home mortgages has snowballed throughout the United States,” said Dennie Emmans, executive director of the Bank Holding Company Association, a trade group representing more than 500 banks in the upper Midwest.
With home values down drastically, regulators are asking banks to write off the difference between loan amounts and the real property values, or to boost their bad debt reserves in case borrowers walk away from homes they can’t sell to cover their loans. More than one in five mortgage borrowers are “under water,” meaning the borrowers owe more than their property is worth, according to the research firm Zillow.
“And commercial loans are the next shoe to drop,” said Emmans. “It’s already falling in many areas of the country. Buildings are sitting idle and occupancy rates are going down.”
That bodes ill for currently struggling banks. All told, FDIC analysts say the agency is expected to be tapped for $100 billion between 2009 and 2013 to protect consumers.
Some good news
The good news: No one has lost money on insured deposits at banks that have been shuttered or merged with more stable companies, and consumers are considered safe for the foreseeable future. Regulators say the FDIC has adequate funding to cover expected bank losses for the next five years, and a long-term plan is in place to boost reserves.
When bank examiners decide a bank must be closed, they discreetly try to find a healthy bank to buy the failed property. The buyer absorbs the failed bank’s patrons and issues new instruments like debit cards and checks to account holders. Direct deposits like Social Security and Veterans Administration checks will continue uninterrupted.
If a deal can’t be struck, the FDIC simply starts shutting down the bank and issues payments to depositors for the balance of their accounts, but regulators say that’s rare.
The takeovers always occur on a Friday to give FDIC staff the weekend to complete the transition.
“It’s not an overnight process—it takes several steps before a regulator goes in to close a bank,” said Flora Beal, spokeswoman for Florida’s Office of Financial Regulation. “Every Florida bank that was closed on Friday opened their doors for business on the following Monday.”
The key for consumers: Make sure your accounts meet the guidelines for FDIC coverage.
Martha Prince had a five-figure CD with Crescent Bank and Trust Co. in her home city of Jasper, Ga., until the FDIC seized Crescent in late July.
“One of my [clients] said ‘The feds came in and took over the bank,’ ” recalled the 58-year-old businesswoman. “I had heard they had been having financial troubles. But it didn’t concern me too much because I knew I was insured.”
Higher FDIC coverage limits
The financial regulatory reform bill passed in July permanently raises FDIC coverage maximums from $100,000 to $250,000. Generally, that means the total of all of your accounts in a single bank—checking, savings, certificate of deposit, money market—is insured up to that limit. Joint accounts usually have double the coverage.
Additional coverage is afforded for deposits in retirement accounts such as IRAs. But the rules are complicated so it’s important to investigate them thoroughly and double-check to be certain you’re covered.
Investment accounts that trade in stocks and bonds are not insured even if you opened them through your bank. The FDIC coverage extends only to cash deposits. There also are complicated rules regarding accounts held within living trusts.
Amelia Monsour thought her $143,000 certificate of deposit at IndyMac Bank was fully insured because she held it in a trust and her niece was the beneficiary. That was before the coverage maximum was raised to $250,000—but Monsour believed that, as with many joint accounts, she had double the standard $100,000 protection because her niece was named in the trust.
Then IndyMac failed in July 2008, and Monsour learned that FDIC coverage didn’t apply when nieces and nephews were named as trust beneficiaries, meaning Monsour’s account was entitled to just $100,000 of coverage. In an instant, the Hollywood, Calif. resident was out $43,000.
“It was such a shock,” said Monsour, 85, a part-time travel agent who said the CD was the bulk of her nest egg. “I got a letter from the bank saying that was the law and there was nothing they could do.”
Her story has a happy ending—the financial reform act signed into law in July backdated the higher FDIC coverage limit to January 2008, meaning the accounts of Monsour and thousands of other IndyMac customers could be restored in full. But she feels it’s a stern lesson to other consumers to double-check the advice they get from bank employees.
“About 10 days ago they sent me the rest of the money,” said Monsour. “I never really thought I’d get it back.”
Another IndyMac depositor, Agnes Huff, 57, nearly lost $55,000.
“Just the week before the bank failed I spent an hour on the phone with them and they told me I was fully covered,” said Huff, who owns a public relations firm in Los Angeles. She also received a payout in July but since the IndyMac failure has changed the way she banks. “I now feel that the best way we can protect ourselves is to never have more than $250,000 in any institution, no matter what they say or how attractive an interest rate is.”
Valuable online tools
The FDIC offers an online tool, the Electronic Deposit Insurance Estimator, as a convenient way for depositors to check their coverage.
Chris Carey is an investigative business journalist who now heads BailoutSleuth.com, a website that tracks how banks use federal bailout funds and also keeps an eye on failing financial institutions. Consumers who want to be proactive in keeping tabs on their banks’ health may want to review quarterly and annual reports, looking for their banks’ exposure to mortgage loans and commercial real estate development, he said.
And while the FDIC does not publicly name troubled banks for fear of creating a downward spiral, it does publish on its website—under the “Industry Analysis” tab—enforcement actions like the cease-and-desist letters that serve as warnings from regulators to banks. Consumers are free to read those letters as well as consent orders and other agreements between banks and regulators.
“It’s safe to say, banks that get cease-and-desist orders aren’t necessarily heading for failure, but all banks that have failed likely have received cease-and-desist orders first,” said Carey.
He also recommends BankTracker. The website’s easy-to-use search function pulls up financial data, including “troubled assets” information, for banks nationwide.
Melissa Preddy is a freelance writer in Michigan.