Last week’s chart showed that a bank’s leverage capital ratio doesn’t always rise and fall proportionally with star-ratings. Often, regulatory capital ratios are not a leading indicator of a bank’s health but a lagging one.
Take GulfSouth Private Bank, Destin, FL, for example, which failed on October 19, 2012. By regulatory capital standards, it was “Well-Capitalized” just one year before it failed. If you look at the trends of the bank, however, you see it was losing money for its last three years and delinquent loans and repossessed assets kept climbing. (Its nonperforming assets ratio was 21.5% just before it failed.) GulfSouth earned Zero-Stars from Bauer since the fourth quarter of 2010.
SmartBank, Pigeon Forge, TN acquired all deposits, including brokered accounts (which is unusual). If you already had deposits at SmartBank, they remained separately insured until last week.
A suitable acquirer was not found in the failure of New City Bank, Chicago, IL. In this case, the FDIC mailed checks to depositors for the insured portions. In order to retrieve any deposits over the insurance limit, depositors had to file a claim as an unsecured creditor within 90 days of the bank’s closing.
New City Bank was considered “Well-Capitalized” less than 9 months before it was shut down, but the writing was on the wall. Like GulfSouth, New City had been posting repeated losses and its nonperforming assets ratio was 21% shortly before it was closed.
If your deposits are under the $250,000 insurance limit, you may not care what your bank’s rating is or even if it fails. There are still things you should be aware of. If you decide to keep deposits in a poorly rated institution, at least you will have made an informed choice.
To begin with, verify that all of your deposits really are fully insured. Simple, right? But there are things you may not have considered. Many consumers title their accounts in ways they can get more than the standard deposit insurance. Consider this: You and your spouse have a joint account at the bank on Main Street with $400,000 fully-insured. If you or your spouse die, the survivor is left with $150,000 uninsured after a 6-month grace period. If the bank happens to fail before the surviving spouse has a chance to move it, the excess is at risk.
Let’s say you have nowhere near that amount in any bank, but you switch jobs and decide to move your retirement funds, or maybe you sell your house. For convenience you park the money at the bank that knows you …just long enough to get it rolled-over into a new retirement account …Get the point?
Okay, so you’re sure your deposits are fully insured and, you have no intention of selling your home or moving your retirement. In fact, maybe you are already retired and your pension check gets deposited into your account every month without a hitch. Except, if the bank was New City and was closed down without an acquirer, there is no place for that check to go.
The same goes for any bills that you have automatically set up to pay from your checking account. Anything set up on the internet will have to be changed, but it’s not just virtual; any paper checks outstanding could be returned as unpaid if the bank fails and is shuttered. This can trigger fees or worse.
For CD holders, an acquiring bank can lower the interest rate you are receiving although you will have a grace period in which you can withdraw the CD without penalty. Borrowers can lose their line of credit or have to start from scratch if a loan application is still pending. These are all things to consider above and beyond federal deposit insurance.
Federal guarantees are great but they should not be an excuse for complacency. The bottom line is, you are responsible for your own bottom line.