Failed Banks For May 22, 2009

Failed Banks:  Citizens National Bank and Strategic Capital Bank

There were two more failed banks this week on May 22 – Citizens National Bank, Macomb, IL and Strategic Capital Bank, Champaign, IL.  This bring the total number of bank failures for the week to 3 with the closing of BankUnited, FSB on May 21.   2009 has now seen a total of 11 more failed banks than occurred for all of 2008.  The FDIC closure of Citizens National and Strategic Capital brings total banking failures for 2009 to 36 banks.  The FDIC estimates that these two latest bank failures will cost the FDIC Deposit Insurance Fund (DIF) $279 million in losses, as follows:

1. Citizens National Bank, Macomb, Illinois. To protect depositors, the FDIC entered into an agreement with Morton Community Bank, Morton, Illinois, to assume all of Citizens deposits, excluding $200 million of brokered deposits.

As of May 13, 2009, Citizens has total assets of $437 million and total deposits of $400.  Morton Bank agreed to purchase only $240 million of Citizens assets and, in addition, the FDIC agreed to enter into a loss-share transaction on $200 million, or 83% of the purchased assets.  Morton agreed to purchase only 55% of Citizens assets and only did so after the FDIC agreed to accept some portion of losses on 83% of the assets purchased.  This arrangement indicates that the quality of Citizens loan portfolio was exceptionally poor.  The FDIC did not reveal what portion of losses they would cover on the $200 million of assets covered by the loss-share transaction with Morton Bank.

Morton Bank is not purchasing the $200 million in brokered deposits, which represented a huge 50% of Citizens Bank deposits.   The FDIC will pay off the brokered deposits by paying the brokers directly for the money they placed with Citizens.  Typically, the interest rates on brokered assets (such as a certificate of deposit – CD) is far above prevailing rates as a problem bank must pay higher rates to attract deposits.   When a bank fails, however, the good times are over for the holders of the brokered high rate deposits since they are typically paid off by the FDIC.  (See also – Sign of a Problem Bank – High CD Rates.)

The FDIC expects that the cost to the DIF for Citizens will be $106 million.  Citizens was the 36th bank to fail this year and the fifth in Illinois.

2. Strategic Capital Bank, Champaign, Illinois. To protect depositors, the FDIC as receiver for Strategic Capital, entered into an agreement with Midland States Bank, Effingham, Illinois, to assume all of Strategic’s deposits.

As of May 13, 2009 Strategic Capital Bank has total assets of $537 million and total deposits of $471 million.  Midland States Bank agreed to purchase $536 million of Strategic’s assets, but only after entering into a loss-share transaction with the FDIC.  The FDIC will cover an unspecified amount of the losses on $420 million of the asset pool purchased by Midland.   The FDIC is estimating a loss to the FDIC deposit fund of $173 million, implying that 32% of the Strategic Capital “asset pool” has no value.

It would be of interest to understand the FDIC’s methods and underlying assumptions used when computing estimated losses on a failed bank’s assets.  If the economy does not strengthen and real estate markets continue to weaken, expect the final FDIC losses on failed banks to expand dramatically from their initial estimates.