Yesterday’s five bank failures bring the number of banks to fail during this economic storm to 120. Should these bank failures come as a surprise? No, some were already slapped with a Cease and Desist order prior to the FDIC shutting them down. The FDIC never announces to anyone, not even to the bank being closed that they will be seized ahead of time.

When the FDIC shows up at the bank it is most often done on a Friday after the bank has said goodnight to their last customer for the day. As the bank is about to lock the doors for the night it is then that the FDIC and regulators enter the facility and announce that they are being put into the control of the FDIC.

The FDIC feels it is in everyone’s best interest to never let the public or anyone else know ahead of time that a bank is about to be seized for fear of creating a panic situation among depositors. If I knew that my bank was going to be seized next Friday the first thing I would do is go and withdraw all of my funds and this is what they want to avoid, even if it means knowing that some depositors will not receive all of their money (for having more than the $250K limit). Even if I had less than the $250K limit I would still take my funds out for fear of having to wait for my money to be returned to me by the FDIC or wait while a new bank takes over my accounts.

So is there really no way at all to know a bank ‘may‘ be in trouble? Yes there is, just look at the list I published on November 4th (Barney Frank Tells Regulators to be Deaf, Dumb, and Blind). This is public information that anyone can find on the FDIC website.

Let’s look at some of the banks that failed yesterday:

First is United Commercial Bank of San Francisco.

United Commercial Bank, San Francisco, California, was closed today by the California Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

If you had an account at First United Commercial Bank you probably awoke this morning and heard about it on your local news. You probably went into the bank in previous weeks and months never knowing anything was wrong, the same smiling faces were behind the counters, the deposit slips were still on the tables, and the floors were clean and shinny.

But, behind the scenes the management of United Commercial Bank of San Francisco was notified on September 3rd of 2009 that they were operating in a manner that was judged to be unsafe. United Commercial appears on the list of Cease and Desist orders issued by the FDIC. What did the FDIC tell United Commercial?

(excerpt from FDIC order dated September 3, 2009)

The FDIC and the CDFI considered the matter and determined that they had reason to believe that the Bank had engaged in unsafe or unsound banking practices. The FDIC and the CDFI, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

IT IS HEREBY ORDERED, that the Bank, its institution-affiliated parties, as that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), and its successors and assigns, cease and desist from the following unsafe and unsound banking practices, as more fully set forth in the Joint FDIC and CDFI Report of Examination dated April 6, 2009 (“ROE”):

(a) operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;
(b) operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the Bank;
(c) operating with inadequate capital in relation to the kind and quality of assets held by the Bank;
(d) operating with an inadequate loan valuation reserve;
(e) operating with a large volume of poor quality loans;
(f) engaging in unsatisfactory lending and collection practices;
(g) operating in such a manner as to produce operating losses;
(h) operating with inadequate provisions for liquidity; and
(i) operating in violation of the following laws and regulations:
(i) Section 7(a)(1) of the Federal Deposit Insurance Act, 12 U.S,C, § 1817(a)(1); and
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(ii) Section 103.121(b)(2)(i)(B) of the United States Department of the Treasury’s Financial Recordkeeping regulations, 31 C.F.R. § 103.121(b)(2)(i)(B).
(j) operating in contravention of the following:
(i) Appendix A to Part 364 of the FDIC’s Rules and Regulations, 12 C.F.R. Part 364, Appendix A;
(ii) Appendix A to Part 365 of the FDIC Rules and Regulations, 12 C.F.R. Part 365 Appendix A; and
(iii) the Statement of Policy entitled “Interagency Appraisal and Evaluation Guidelines.”

This information was already out there if you knew where to look. Did you think that your bank would send each depositor a copy of the order to its customers? Do you think they would post a large sign on their front window advising their customers that they have been found to be operating in an unsafe manner? Of course not, they don’t want you to know.

How about Gateway Bank of St. Louis:

On Friday, November 6, 2009, Gateway Bank of St. Louis, St. Louis, MO was closed by the Missouri Division of Finance, and the Federal Deposit Insurance Corporation (FDIC) was named Receiver.  No advance notice is given to the public when a financial institution is closed.

Did Gateway tell their customers that they were slapped with FDIC civil fines?

(excerpt from FDIC notice dated June 10, 2009)

…the Bank entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO PAY CIVIL
MONEY PENALTY (“CONSENT AGREEMENT”) with a representative of the Legal Division of the FDIC, whereby the Bank, solely for the
purpose of this proceeding and without admitting or denying any violations, consented to the issuance of an ORDER TO PAY CIVIL
MONEY PENALTY (“ORDER”) by the FDIC and agreed to pay a civil money penalty in the amount of $2,500 to the Treasury Department
of the United States.

After taking into account the CONSENT AGREEMENT, the appropriateness of the penalty with respect to the financial
resources and good faith of the Bank, the gravity of the violations by the Bank, the history of previous violations by
the Bank, and such other matters as justice may require, the FDIC considered the matter and determined it had reason to
believe that the Bank engaged or participated in violations of law and regulation for which it is appropriate to assess a civil money penalty of $2,500 against the Bank.

You say $2,500 does not sound like much. True, it is peanuts of a fine but a cival penalaty is still a serious matter and Gateway had been fined other times as well for other violations of the Federal Deposit Insurance Act. If I was shopping for a bank I would not want to put my money in an institution that keeps getting slapped with cival penalities. And of course the bank never tells you about them.

You get the idea here. How about Prosperan Bank which also failed yesterday…

On November 6, 2009, Prosperan Bank, Oakdale, MN was closed by the Minnesota Department of Commerce, and the Federal Deposit Insurance Corporation (FDIC) was named Receiver.  No advance notice is given to the public when a financial institution is closed.

Excerpts from FDIC order dated September 10, 2009

In the Matter of
PROSPERAN BANK
OAKDALE, MINNESOTA

ORDER TO CEASE AND DESIST

IT IS HEREBY ORDERED that the Bank, its institution-affiliated parties, as that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), and its successors and assigns, cease and desist from the following unsafe or unsound banking practices:
A. Operating with a board of directors and management that failed to implement adequate policies and practices for the prudent operation of the Bank.
B. Operating with inadequate capital and an inadequate allowance for loan and lease losses for the volume, kind, and quality of loans and leases held, and/or failing to make provision for an adequate allowance for possible loan and lease losses.
C. Operating with inadequate liquidity in light of the Bank’s asset and liability mix.
D. Operating with an excessive level of adversely classified loans or assets, and/or delinquent loans and/or nonaccrual loans.
E. Engaging in hazardous lending and lax collection practices.
F. Operating with inadequate earnings.
IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action

While not all bank failures will have had previous slaps on the wrist it is still revealing that some of these institutions were already warned that they were in violation of FDIC regulations and in some instances the violations were very serious.

Does your bank show up on the publically available FDIC list of actions taken? If so you just may want to print out a copy and take it to your bank and ask the manager if the bank has rectified the conditions identified by the FDIC. Chances are that not even the local branch manager will be aware of the FDIC orders but at least you can ask.

What is the real point of this article? The point is we will spend months researching different makes and models of cars before making a purchase or check with consumer reports before buying a microwave oven, but when it comes to banks we will just go to whoever is offering free checking or a free toaster without knowing anything at all about them. We don’t know anything of their financial health, previous violations, or even cease and desist orders that they may be operating under. We simply hand over our paychecks (for those who still get one) and hope the money will be safe.

Take the time to know your bank, find out if they have been issued cease and desit orders for unsafe banking practices, or any other violations for that matter. Of course some banks will go on to correct their problems and be fine in the long run. But you do have a choice where you put your money and I for one would want to know if my bank has ever been slapped with a cease and desit order by the FDIC, especially for unsafe banking practices.

And remember to never have more than $250,000 at any one financial institution, this way you stay inside the FDIC insurance limits.

By the way… I still boycott ‘any‘ institution that has received tax payer bailout funds.