Certificate of Deposit Rate Forecast

Sometimes I hate being right. I am often asked for a Certificate of Deposit rate forecast and last week I made a doozy. Unfortunately, it seems to be coming true.

I predicted that 1-year CD rates would be heading towards 0.50% and 5-year CDs down to 1.50%. When you remove the top players, we are quickly approaching those numbers. Which also means that the top players are likely to begin going down.

Institutional jumbo CD investors are especially hard hit. The top player such as Alliant Federal Credit Union still has a 1.75% APY for 1-year, but it isn’t available for institutional CD buyers. And once you have $250,000 of personal funds with them you have to move on down the list. The average for the top 10 and top 20 certificate of deposit rates is quickly decreasing.

As with any investment vehicle, those who try to time the market generally don’t fare so well. That is why I believe long-term CDs with low penalties are a good option. You get some better yield now and have a fixed cost to close if rates go up anytime soon. However, rates rising anytime soon doesn’t seem likely.

If you have jumbo investment needs, give us a jingle and we’ll let you know what we can do.

$250,000 FDIC Insurance Limit Made Permanent

Sorry that I didn’t get this out sooner. On Wednesday, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This was touted as the largest set of financial reforms since The Great Depression. Only time will tell if that is true or not.

The good news is that tucked into the bill was making the $250,000 FDIC insurance limit permanent. For those with larger amounts, you at least don’t need to worry about watching maturity dates any longer. A husband and wife can now have up to $1 Million insured at one bank. If they add beneficiaries and POD accounts it can be substantially more.

Another bit of good news for many was that the bill made the $250,000 limit retroactive to January 1, 2008. This means that many investors who found themselves over insured at ANB Financial and IndyMac when they failed will recoup much if not all of their losses. This is being handled automatically and we were told by the FDIC that people should be receiving checks within 7 to 10-Days. One problem may be for those that have moved. The FDIC will be using the address on record at the time of the failure. So if you have moved, I would contact the FDIC and see how you can recover your funds.

My family took a big summer trip. What have you been up to this summer? Leave a comment and let me know.

Have a great day,
cd :O)

House Panel Approves Making $250,000 Insurance Limit Permanent

This is pretty exciting news. A story in MarketWatch mentioned that a House Panel has voted 12 to 7 to make the $250,000 FDIC insurance limit permanent. In addition, it would make it retroactive to January 1, 2008. This would certainly help people who lost funds in the ANB Failure in May of 2008 and IndyMac failure of 2008. There were many stories of people being bit by not having POD accounts properly set-up. So this move would help them out. On the other hand, with the FDIC insurance fund already in the red, I wonder what kind of extra burden that will place on the system.

The provision is part of a larger bill to consolidate the Office of Thrift Supervision and Office of Comptroller of the Currency. Now the entire bill will go to the House. If it passes the House, the Senate will vote on it. If it passes and it doesn’t need revisions it will go for signing by President Obama. I’m not sure what else is in the bill, so it may be good to read through it before urging passage, but on the surface it would be helpful.

Even to this day, people are unaware that the current $250,000 limit is temporary and set to expire after 12/31/13. Many people don’t realize the limit is temporary and have been doing long term CDs without paying attention to the maturity dates. So passage would certainly remove confusion.

Certificate of Deposit Rates

FDIC Establishes A National CD Rate

The FDIC has basically established a national rate for CDs. You’ll find it quite difficult to find any bank offering above 1.60% for 1-year CDs. You may be wondering why. Starting January 1, 2010, under capitalized banks have to set rates at or below the Weekly rates that the FDIC publishes. Here is a link.

What is interesting that even healthy banks are deciding to follow the rate cap. I guess they figure if the FDIC thinks that is a “good” level they might as well fall in place. Many are even offering lower rates. We have even heard of some pressure from bank examiners telling banks, healthy or not, that they shouldn’t be paying rates higher than the cap.

Honestly, when the law was passed I didn’t really see this as the outcome. I thought it might make it harder for the unhealthy banks to raise deposits and thus decrease potential losses if the bank fails. I see the opposite happening. With many healthy banks posting lower rates, the unhealthy banks are still able to easily bring in deposits.

Regardless it is very frustrating to see the government stepping in so strongly to basically regulate the rates that banks pay. It is also interesting to note that although banks haven’t strayed too far from the posted CD rates, many are still out there with high yield savings and checking account specials.

Another interesting development is to see banks work around the caps with creative penalties. For instance we have seen a couple of banks offer 2-Year rates with a zero penalty after 1-year. That effectively allows them to use the higher 2-year rate for a 1-year CD. Also goes to show you that creativity can “trump” governmental restrictions. Also goes to show you that governmental restrictions are rarely thought out well enough and often have the opposite effect of what was hoped or intended.

Two good notes. Credit Unions are not regulated by the FDIC and thus have no rate cap. There are still a few out there posting 2% or above for 1-year CDs. Secondly, there is a bank with a 2Y at 2.53% APY with a 1x bump and a 3Y at 2.79% APY with a 2x bump. Shoot a message and use the magic words, “Awesome Rates” and I’ll give you a 20% discount from our normal fee.

[Update 3/11/10: The 2Y bump rate dropped to 1.88% and the 3Y dropped to 2.21%. At this point a 5-year with a low closure penalty may be the best option]

Have a great weekend.
cd :O)

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)