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Sterling Energy Resources Inc. had $2 million on deposit at Columbian when it failed Aug. 22. Since then, Sterling has been able to retrieve only the federally insured $100,000 portion.
"It means layoffs of 10 to 15 people," CEO Reid Scofield said. "I'm going to have to unless I get this thing resolved."
Scofield is particularly incensed because when a smaller Florida bank failed early this month, the Federal Deposit Insurance Corp. quickly paid half the uninsured deposits on top of the insured amounts.
The FDIC also quickly delivered on a 50 percent payout to uninsured depositors at the much larger California-based IndyMac Bank when it failed last month.
Indeed, Columbian's failure highlights stark differences in how uninsured depositors -- typically businesses -- have fared in the nation's 10 bank closings this year.
The FDIC said the differences lie within the banks that failed.
Compounding Scofield's frustration are the five bank failures this year in which uninsured depositors got immediate access to all their money, including the January closing of Douglass National Bank in Kansas City and a Georgia bank that failed Friday.
In those failures, all the closed bank's deposits, including uninsured balances, moved to another bank that had bought the remains of the failed bank from the FDIC.
When Columbian failed, the FDIC offered only the insured deposits to interested bidders, largely because the bank failed quickly.
In other instances, banks that bid on the uninsured deposits in failures didn't provide enough to make their bid the least costly option for the FDIC, which is the one it is bound by law to take.
Scofield and other large depositors at Columbian are not alone.
Uninsured depositors also received no immediate payout in a large Arkansas bank failure and in a tiny Hume, Mo., failure this year. Only the insured balances were available.
Industry experts say they're at a loss to explain the different outcomes for uninsured depositors. Specifically, they're baffled by the FDIC's decision to make partial quick payouts in some cases and not others.
"If you figure that out, will you call me and tell me?" said Garland Binns Jr., a banking attorney who helped one client bid on the failed Arkansas bank in May. "It's a hit-miss deal."
Businesses typically are the ones facing a hit in failures. Their need to handle large transactions often puts them over the $100,000 insurance limit and makes it difficult, if not impossible, to spread the money among several banks.
Loan agreements often require business borrowers to maintain large deposit accounts at the same bank.
"The problem is corporate accounts," said Ron Glancz, a banking attorney at Venable LLP who previously worked for the FDIC.
Smaller accounts are safe in a failure. Their insured balances, as well as the insured balances of larger accounts, are covered by the FDIC insurance fund. These accounts automatically transfer to the bank that bid successfully to gain the business.
In Columbian's failure, the fund covered approximately $308 million in insured deposits that transferred to Citizens Bank and Trust Co., which is based in Chillicothe, Mo., and now operates the former Columbian branches.
The insurance fund also covered the insured portion of $268 million in brokered deposits at Columbian that the FDIC is paying off directly. Brokers place these deposits for their customers in banks paying high interest rates, typically making sure the amounts are federally insured.
FDIC's insurance fund, however, isn't available to uninsured depositors. They get paid only out of the leftover assets of the failed bank.
According to the FDIC, a quick payout, like the one at IndyMac and the Florida bank that failed, relies heavily on the amount of cash and readily available funds the bank had on hand when it failed.
The FDIC can boost that amount by selling some of the failed bank's assets to the bank that assumed the deposits.
Neither source generated much money for a quick uninsured payout at Columbian.
Columbian's failure had come about largely because it was having cash problems of its own.
A July 15 cease-and-desist order against the bank, which the FDIC made public Friday, showed examiners cited liquidity concerns in a January examination report. In short, Columbian's money was tied up and not as readily available as it needed to be.
Tom Thull, Kansas banking commissioner, said he closed the bank because it would not be able to meet the ordinary withdrawals of its depositors.
Liquidity problems mean there aren't available funds to make a quick payout to uninsured depositors once a bank fails, said Jim Wigand, deputy director of the FDIC's division of resolutions and receiverships, which handles bank failures.
Citizens Bank and Trust also bought only $85.5 million of Columbian's assets and none of its loans, out of the $752 million in total assets. The FDIC didn't offer any loans, in large part because of the quickness of the bank's liquidity-driven failure. That's also the reason it didn't offer uninsured deposits to bidding banks.
The limited amount of money available after Columbian's failure also faced more demands than the estimated $46 million in uninsured deposits.
The available funds also have to cover the FDIC's costs to maintain and sell the failed bank's loans and properties. Secured creditors of the failed bank also have a specific claim on the collateral pledged to them.
Uninsured depositors stand next in line for what's available, but the FDIC insurance fund is right there with them, seeking to recover what it paid out on insured deposits.
This is why the FDIC typically says that uninsured depositors will share in its estimated loss from the failure.
In the IndyMac failure, the FDIC said it had sufficient cash on hand to make a payout. It did, in part, because IndyMac didn't have a liquidity failure and isn't being liquidated. It is being run as a new bank by the FDIC, in what it calls a conservatorship.
Even when the FDIC has enough money from the failed bank, it is not obligated to make an immediate payout.
"I will say this. It's discretionary," said Ann Graham, a former FDIC regional counsel who teaches law at Texas Tech University.
On this score, IndyMac's $32 billion size worked in the favor of uninsured depositors.
The bank had a large number of transaction accounts with uninsured balances, which meant a lot of large outstanding checks would bounce if the FDIC cut the accounts down to $100,000.
Adding back half the uninsured balances would prevent a wave of bounced checks that could disrupt the nationwide check clearing system.
"In the case of IndyMac, that was one additional factor," Wigand said.
In Columbian's case, the question didn't arise, because the bank was small and there weren't sufficient funds for a payout, according to the FDIC.
Uninsured depositors likely will receive payments after a failure in a few months. That gives the FDIC time to fully assess its costs to handle the leftover assets and the value they'll bring once sold.
The size of the total payout depends on the amount raised from those sales.
The IndyMac payout raises the most questions outside the FDIC, largely because the FDIC estimated it would lose $4 billion to $8 billion from the failure. It has since updated the loss estimate to more than $8 billion.
"It's surprising that IndyMac, in light of its assets ... that you would think would be most vulnerable to write-downs would result in a payout to uninsured depositors," said Peter Weinstock, who heads the Hunton & Williams law firm's financial institutions, corporate and regulatory group.
But he defers judgment. Outsiders simply can't tell from the publicly available information.
"It's really just pure speculation," Weinstock said. "None of us have a basis for determining."
And that leaves large depositors guessing about their fate in any bank failure.
Graham suggested they treat the banks the same way that banks treat borrowers who owe millions of dollars.
"They want your financials on a real-time basis, and if they don't like what they see, they call the loan," she said. "A large depositor with uninsured exposure is just like that. If they determine it is not a safe exposure, they should move that account."
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Tips for big depositors
Various sources, including the American Bankers Association, offer tips for reducing the likelihood of losses in a bank failure:
--Understand what is insured, such as money market deposit accounts, but not money market mutual funds purchased at a bank.
--Test your FDIC coverage with the Electronic Deposit Insurance Estimator, or EDIE, at www.fdic.gov.
--Know that the FDIC counts a sole proprietorship's bank account as a personal account for insurance coverage.
--Consider using CDARS, or Certificate of Deposit Account Registry Service, to increase coverage beyond $100,000 at one bank.
--Use "sweep" accounts nightly to move uninsured balances into secure assets such as Treasury securities.
--A large bank failure may be more disruptive to the nation's check clearing system, making a quick payment to uninsured depositors more likely.
--Banks facing liquidity problems are less likely to support a quick payout by the FDIC or see their uninsured deposits transferred to another bank in a failure.
To reach Mark Davis, call 816-234-4372 or send e-mail to mdavis@kcstar.com.
To see more of The Kansas City Star, or to subscribe to the newspaper, go to http://www.kansascity.com. Copyright (c) 2008, The Kansas City Star, Mo. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
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