Under Capitalized Banks Taking Non-Core Deposits

Many people don’t worry about the capitalization of a bank. However, it is a good harbinger of distress and if not corrected early and quickly, many under capitalized banks fail. Under capitalized banks are able to use a rate listing service to attract certificate of deposits (CDs). As it appears that no one is policing the rate listing services, banks are able to offer rates significantly above the new Rate Cap that the FDIC has put into place. Although, the law doesn’t go into effect until January 1, 2010, the FDIC has encouraged voluntary cooperation. From what I’m seeing, under capitalized banks aren’t cooperating. I have a serious problem with the law that allows banks (under or well capitalized) through a rate listing service to attract deposits and classify them as a core deposit. Anybody with any sense and logic can see that clearly, deposits placed through a rate listing service are not core.

This poses a few problems. First, rate listing services and companies such as ours are basically doing the same thing. We help banks, often times community banks, raise direct deposits to meet their funding needs. For various reasons, deposits such as ours are more attractive than local deposits. Ours may be less expensive, easier to work with, faster to obtain, etc. Those reasons aren’t really part of this post. If Credit Union A purchases a direct CD from me to go into Bank B, it is a brokered deposit. If Credit Union A purchases a direct CD from the rate listing service to go into Bank B, it is not a brokered deposit. It is the same money, the same bank. Everything is the same except for the middle man (or middle listing service). This leads to the second problem. Banks are now using rate listing services to avoid paying the new FDIC assessment on brokered deposits. I can’t really blame the banks for doing this. After all, the law allows them to. But if the FDIC’s concern is that out-of-area deposits pose more of a risk to the bank, then all out-of-area deposits should be properly supervised, managed, and assessed if appropriate.

Another problem (the meat of this post) is under capitalized banks are not allowed to take brokered deposits without a waiver from the FDIC. This is supposed to prevent unhealthy banks from running up their deposits and costing the FDIC even more money. These deposits also can cause a bank to be less valuable to potential acquirers and thus costing the FDIC money. An under capitalized bank is able to take non-core deposits from a rate listing service without a second glance. The rates they are offering are supposed to be at or below the rate cap that the FDIC has published. It appears that no one is policing this. At a minimum, rate listing services should have to build into their programs rate restrictions on under capitalized banks. Below are a couple of examples of current under capitalized banks offering high rates on a rate listing service and attracting deposits.

I’m not going to put the names because I don’t really want to cause problems for the banks. Bank A is currently under capitalized with a Total Risk Based Capital Ratio (RR) of around 5.5%. This needs to be 10% to be considered well capitalized. Their capital ratio is just over 2%. Generally, regulators like to see a 7% or above. The numbers reported on the June Call report are even worse. This bank is currently accepting deposits through a rate listing service with some of the top rates in the country. The rate cap established by the FDIC is 2.93% for a 5-year CD. They are offering around a 3.40%.

Bank B is also currently under capitalized. They have a RR of 6.9%. The capital ratio is 4.6%. These are quite low. This bank is also currently accepting deposits through a rate listing service. Their 1-year CD is around 2.00%. That is higher than many internet specials. The rate cap in place by the FDIC is 1.87%.

I could give numerous other examples. But, I would also like to point out some banks that have failed. These I can name since they have already been closed.

First conclusion: Bank A and Bank B that are currently accepting non-Core deposits are likely to fail soon. Their current ratios are in the same range as the above listed recent bank failures. Second Conclusion: only one of the above listed banks had a significant amount of reported brokered funds. However, all of the above banks at various times could be found on a rate listing service attracting deposits; some of them, within weeks of their failure. Millennium is one of the most interesting. They had $0 reported for brokered deposits, but they took in millions of dollars from rate listing services. [Side note: Union Bank, NA out of Arizona was closed by the FDIC on Friday, 8/14/09. Their RR as of 3/09 was just about 6%. Also on rate listing services quite often.]

Personally, I don’t buy the argument that brokered and/or non-core deposits cause bank failures. But, as a bank is falling into the abyss you will see them quite often offering high interest CDs or savings accounts through the internet (Washington Mutual, IndyMac) or on a rate listing service. The additional deposits didn’t cause the failure, but they certainly make it more expensive for the FDIC and ultimately us, the taxpayers. Since, the FDIC is currently assessing the brokered deposits that banks hold (based on a formula), shouldn’t they also assess non-Core deposits that in reality are the same type of funds? I think you know my answer. What is yours?

I realize my opinion probably won’t be very popular with banks, especially those on the rate listing services. But, I ask you, do you want to have to compete with the high rates being offered by banks such as those listed above? I also ask you to consider what is the intent of the law when it comes to accepting such deposits. The intent of the law is that banks do their due diligence when accepting out-of-area/non-core deposits. Rate listing services currently allow banks to disregard that step.

Mentioned in MarketWatch

Our company was mentioned in a recent Article that MarketWatch wrote. Reading the comments on the article is almost as much fun as the article itself. :O) The article mostly focuses on Discover Bank which we also advertise for. They did also get the industry standard digs against brokered deposits, but overall a good read.

A commenter even mentions a site I hadn’t heard of for CD rates before. I’ll even be nice and post the link. After all, it helps our loyal readers ,which in the big scheme of things helps us. Check-out, Bankfox. Who knows, maybe they’ll see a bunch of traffic from us and want to repay in kind. :O) They do have a 4-month CD advertised for 2.50% APY. If you want a “good” rate without locking it up too long, that maybe a good bet.

BTW, here is the link to the article. If you leave a comment, let me know. You do have to sign up for a free account in order to leave comments. I did. Market Watch Story.

Finally, just some quick commentary since I seem unable to get an actual newsletter out. Big Ben (Ben Bernanke) commented yesterday that rates would remain low for an extended period of time. That was like dropping a cup of blood in a pool of sharks. Bankers have swarmed around that tender morsel and begun to lower rates. On average, we’ve seen a 20 to 30 Basis point (0.20 to 0.30%) drop in rates. This coupled with continued weaknesses in the economy leads me to believe that even when the Fed does start to increase rates, it will be in quite a slow fashion.

We do still have a 1Y at 2.50% APY. It does require a $100,000. I can’t give out the info for free, but if you contact us from our site or the blog alert, I’ll give you a 30% discount on our fees. This is only good for non-IRA personal funds.

Have a great rest of your week.
ChrisCD :O)

FDIC closes seven banks

Last night, July 2, 2009, the FDIC closed seven banks. Last week they closed 5. The week before that was 3. Seems like they have run out of patience with underperforming banks (unless your assets are above $100 BB or so :O) ).

The banks closed last night were:

• Founders Bank, Worth, IL — FDIC 18390. Acquring Bank: The PrivateBank and Trust Company, Chicago, IL
• Millennium State Bank of Texas, Dallas, TX — FDIC 57667. Acquiring Bank: State Bank of Texas, Irving, TX
• First National Bank of Danville, Danville, IL — FDIC 3644. Acquiring Bank: First Financial Bank, National Association, Terre Haute, IN
• Elizabeth State Bank, Elizabeth, IL — FDIC 9262. Acquiring Bank: Galena State Bank and Trust Company, Galena, IL
• Rock River Bank Oregon IL 15302. Acquiring Bank: The Harvard State Bank, Harvard, IL
• First State Bank of Winchester, Winchester, IL — FDIC 11710. Acquiring Bank: The First National Bank of Beardstown, Beardstown, IL
• John Warner Bank, Clinton, IL — FDIC 12093. Acquiring Bank: State Bank of Lincoln, Lincoln, IL

Since the FDIC found buyers for all of the closures there will be no interruption in service for the customers of the closed banks. If you had CDs though, keep in eye on your mail. The acquiring bank often takes the opportunity to lower your rate. If you get such a notice, you can close your CD without penalty.

Have a great 4th of July. May Freedom Ring.
cd :O)

President Obama signs bill to increase FDIC coverage

President Obama Signs Bill – $250,000 FDIC Coverage Through 2013

President Obama signed the bill yesterday to extend the $250,000 FDIC coverage through 12/31/2013. Here is a link to the FDIC annoucement.

This will help, but it really should have been made permanent. This still makes you have to make sure your funds are maturing in the right timeframes.

cd :O)

Congress and Senate Pass Bill To Extend FDIC Insurance Limits

The US Congress and Senate passed legislation to extend the $250,000 FDIC insurance limit through 2013. We have been watching for this and saw it reported in the WSJ today. It won’t be law until President Obama signs the bill. His signature is expected in the next few days.

This will help many banks who would face losing deposits as the current deadline loomed. Many of our clients had already allowed CDs to mature and be transferred elsewhere over the last couple of months in order to keep their deposits under the original $100,000 limit.

As long as the extension is signed, the extra 4-years will be very helpful, especially for personal investors utilizing POD (Payable-On-Death) / ITF (In-Trust-For) accounts or Revocable Trusts. Who knows, maybe as the health of the banking sector improves, they’ll make it permanent.

We will send out a post as soon as we know President Obama has signed the extension.

cd :O)

First Star Credit Union – A scam

One of our clients alerted us that First Star Credit Union may be advertising for deposits. This institution is not federally insured by the NCUA or privately by ASI. I found a newstory in the LA Times that reported they have been operating a Loan scam. I also found a Ripoff Report on the same thing.

Please, Please always verify that the bank you are considering making a deposit with is FDIC insured or if it is a credit union, that they are NCUA insured.

Jumbo CD Investments, Inc.
cd :O)

Millennium Bank in Caribbean: Ponzi Scheme Shut down by SEC

I first saw this last night (burning the midnight oil for you :O) ) on bankdeals.

Many of our readers and visitors over the years have asked about Millennium Bank and I have always urged great caution. It is alledged that “only” $68 Million is in question. Although that pales in comparison to the Allen Stanford and Bernie Madoff fiascos, real people have been hurt. The question begs, why did it take so long? Certainly, questions have surround this bank for a number of years.

The old adage of “if it is too good to be true…” certainly came into play here. If you are investing in CDs because of their safety and guarantee, then stick with FDIC insured banks and NCUA insured credit unions. If your looking for higher rates of return, then look to the markets. It is just too risky, otherwise.

Bloomberg also has a story on this.

Also, please don’t confuse this Millennium Bank with any of the FDIC insured ones that reside here in the states. The following are FDIC insured banks:

• Millennium BCP Bank, NA (35280)-Newark, NJ
• Millennium Bank, NA (35096)-Reston, VA
• Millennium Bank (57175)-Edwards, CO
• New Millennium Bank (35151)-New Brunswick, NJ

Thoughts on AIG

I would encourage everyone to read the linked article. Michael Lewis lays it out and provides us insight into why we should fear the Gov’t being able to modify contracts. I’m as outraged as the next person, but the problem is not the bonuses. The problem is allowing a company to continue way past its expiration date. Let me know what you think of the article.

Mass Hysteria Over AIG Obscures Simple Truths: Michael Lewis

Looking for the best CD Rates – Introducing MoneyAisle

While searching for the best rates for you guys, I came across MoneyAisle awhile back. After some talks back and forth I felt comfortable with their service. You’ve probably seen their ad on our rates page. They offered to write an introduction piece for us, their blogger, Kevin Cafferty, provide the below information. They have competitive rates. I ran an auction today and a 2.50% APY was the top rate. That is in the top 10 rates that we are seeing. So enough of me, here is Kevin. Please leave any questions in the comments, I’m sure we can get Kevin to come over and respond.

Looking for the best CD Rates?
Recent market volatility has made safe investments like certificates of deposit more attractive to consumers looking to get a steady return on their savings. Rates between different financial institutions may vary to the point where it’s difficult to find out if you’re getting the most out of your cash.

The Solution: MoneyAisle
MoneyAisle takes guesswork and time-consuming comparison shopping out of the equation by providing you with great rates, free of charge. Over 100 banks in the MoneyAisle network all want to acquire you as a depositor and are willing to bid against each other in a live instant auction for that privilege.

Here’s how it works: you enter the terms of your CD (deposit amount and duration) into MoneyAisle and then watch the banks battle it out in a live automated auction – the winning rate at the end of the auction is the highest rate available in MoneyAisle’s system at that time. You’ll be presented with comparison rates on a national and state level to give you a sense of what your return will be and you’ll be provided with information on the bank.

It’s free, and you don’t have to commit until you’ve gone over all the information. The entire auction process only takes a few minutes, every bank in the network is a member of the FDIC, and the banks have been further pre-screened using an independent bank rating agency for additional consumer protection (banks rated in danger of failing are not in the network.)

Will IndyMac Return From the Brink?

In a story on Yahoo today, it is being reported that the Gov’t is in talks to return IndyMac to private ownership.

Many are touting this as a blue-print of succes for potential Nationalization with future banks. Of course the stockholders that were wiped out when the Gov’t took over the bank may disagree and the folks who had uninsured funds would certainly not agree. Another key difference is the size of the bank. IndyMac was about $40 Billion in assets when it was seized. It is now about $23BB. Citibank is $1.2 Trillion dollars. Just a wee bit bigger. :O) Bank of America is a tad larger at $1.47 Trillion. Don’t you love decimals, they can make big numbers seem so innocent.

I honestly think they should break up Citibank and Bank of America. If the Gov’t is of the mindset that they are too big to fail, they shouldn’t be able to get that big. I detest too much Gov’t intervention, but they are already way beyond that. They should set a limit on the size and footprint a bank should have. If banks want to maintain a large ATM network, partner with other banks. That is what credit unions do.

Allow some regional or community banks to purchase branches, assets, and deposits of Citbank or Bank of America that are in their area. I bet service would actually improve. Probably rates, too.

Yahoo also carried another story on whether the FDIC can handle all of the bank failures that will most likely happen throughout this year and into next year. The headline of course was an attention grabber and meant to cause fear. But the underlying story was about the efforts the FDIC is taking to shore up the insurance fund. They are assesing a 20 Basis Point or 0.20% premimum on banks insured deposits. So for every $1000 a bank has on deposit, $2 is being paid to the FDIC. That’s pretty significant. However, at least they are trying to be proactive. They also have facilities to borrow up to $500BB. Just turn the printing presses on. I don’t think you have to worry about not being paid back if a bank fails. I do worry about the future tax burden that will be put on our children, grandchildren, and great grandchildren.

There isn’t much other good news in the financial world or any other part for that matter. How about a quote?

You can shower a child with presents or money, but what do they really mean, compared to the more valuable gift of all — your time? Vacations and special events are nice but so often, the best moments are the spontaneous ones. Being there. Every moment you spend with your child could be the one that really matters. — Tim Russert (Host of NBC’s Meet the Press and author of Wisdom of our Fathers.

What are your thoughts?
cd :O)