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Bank-run scenes create concerns: IndyMac situation unlikely in Indiana, but customers should check out stability of their banks, experts warn

July 28, 2008

It was a scary scene, reminiscent of the Great Depression: Customers lined up outside California's IndyMac Bank branches to withdraw deposits after a bank run led to the bank's failure.

The images have driven some central Indiana customers-businesses and individuals-to take a more critical look at the strength of their banks and the safety of their deposits. Even as financial stocks rallied in mid-July, the risk remains for more bank failures. Dismal earnings reports and massive write-downs continued in recent days, including moves by regional giants such as Regions, Key and Fifth Third.

The most important factor for consumers and businesses to consider is the quality of the individual bank, said Joe DeHaven, president of the Indiana Bankers Association.

IndyMac was not a traditional retail bank, he points out. Rather, it was a mortgage-focused bank spawned by troubled mortgage giant Countrywide. The bank had only 33 locations, and rumors of its impending collapse were enough to sink it.

"Consumers have a right and responsibility to themselves to ask about the financial position of their bank, particularly if you're going to have more than the insured deposits in there," DeHaven said. "Businesspeople in particular need to make sure their bank is in good shape."

Local bankers are reassuring customers who call or stop by their local branches, just as they did when the subprime mort- gage crisis gained steam and after the investment bank Bear Stearns failed. Their message also is backed by a new national ad campaign by the Federal Deposit Insurance Corp., which insures depositors at more than 8,500 banks nationwide.

The FDIC covers up to $100,000 per person per bank. Joint accounts are insured to $200,000, and IRAs are covered up to $250,000.

"It's natural to be concerned or apprehensive," said Bob Jones, CEO of Evansville-based Old National Bank. "But, in 75 years, there hasn't been an insured depositor that has lost their money."

In the case of IndyMac, the sixth and largest bank to fail this year, the FDIC stepped in immediately to return insured deposits and 50 percent of uninsured amounts. The downside: More than 10,000 customers with a total of $1 billion in uninsured deposits could lose half their cash.

Another concern: IndyMac could soak up $8 billion of the FDIC's $53 billion set aside for bank failures. And the bank wasn't even on the group's watch list of about 150 banks the FDIC believes are in danger of failure. (The list identifies the banks only by market value and not by name, but no banks as large as IndyMac were on the list.)

Of course, most expect the federal government would step in and send the bill to taxpayers if the FDIC depletes its war chest.

"Get to know your bank," advises Keenan Hauke, CEO of local money manager Samex Capital Advisors. "Find out what's going on inside the balance sheet."

Hauke expects as many as 200 banks, mostly small or regional players, will fail before the crisis ends. He's betting the recent rally in financials won't last long. He sees a bottom in the next 18 months.

Many financial stocks lifted impressively from their lows earlier this month, leading many prognosticators to call a bottom for a second time.

This time, it could stick, said John Reed, a banking analyst and executive vice president of Chicago-based investment firm David A. Noyes & Co.

"There are strong signs of hope," he said. "When you have a positive attitude prevalent in the market, good news is great and bad news is, so what? When you have a lousy attitude, it's the other way around."

Hence, shares in regional banks rose even after ugly news: Regions Financial Corp. of Alabama slashed its dividend 74 percent after second-quarter profit fell 55 percent and the bank set aside $310 million for loan losses; KeyCorp of Cleveland reported a $1.1 billion loss as it wrote off more than $500 million in bad loans and set aside another $650 million to cover future loan losses; Fifth Third lost $202 million, wrote off $344 million, and set aside $720 million.

If the sentiment that financials have reached a bottom holds, that could discourage more bank failures, Reed said. But he believes there could be more trouble ahead.

"We still have huge problems in the economy," he said. "We're on track for a million more residential foreclosures this year, you have developers going under, the mortgage business is in disarray. It's going to be a long haul before the economy is right."

After analysts first called a bottom in financials, in March, banking indexes fell another 20 percent.

Besides mortgage exposure, banks still have to work through problem home-equity loans that now exceed the value of homeowner equity, said Robert Neal, an associate professor of finance at the Indiana University Kelley School of Business. And most believe housing prices still have further to fall as supply reaches record levels.

Adding to the worry is a growing number of delinquent auto and credit-card loans. Even the venerable American Express reported dismal results and added $600 million to its loan-loss reserves this month.

"It's a tough time to be a banker," Neal said. "But they will survive. Anytime you've got something like this, you'll have some firms doing relatively well and others doing worse. If they can afford to do a deal, it's a good time to do it."

Neal's prediction? Banks will take more write-downs as they unravel some badnews-delaying tactics, including pushing back the point at which loans are considered delinquent.

A few more banks, possibly regional ones, could fail, so customers should split large deposits across multiple banks. Following the usual trend, stock prices should improve several months before the market turns, Neal said.

"At some point, we'll get to a point of overreaction," he said. "Clearly, National City is worth something."

One pleasant surprise-and a reason for optimism-is the abundant amount of capital available to recapitalize struggling banks, said Reagan Rick, the regional president for Milwaukee-based M&I Bank.

"It's a huge affirmation of the ultimate faith in the financial services industry in this country," Rick said. "It shows that a lot of investors have a lot of long-term faith in the financial sector."

Once recapitalization subsides and bank earnings return to some semblance of normalcy, Rick expects some banks could eye consolidation.

"I still think it's a time of tremendous opportunity," he said. "Anytime you get volatility like this, you get greater opportunity to make movements."
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