The Federal Deposit Insurance Corp. dusted off a tool it had not used in more than a quarter century to resolve New Frontier Bank in Greeley, Colo., which failed Friday.
After no buyer emerged for the $2 billion-asset New Frontier, the FDIC established a deposit insurance national bank — a last resort in which the Deposit Insurance Fund sidesteps a mass payout by giving the failed institution's depositors 30 days to shop for a new bank.
The FDIC has used this strategy only five times before, most recently in July 1982, with the failure of Penn Square Bank of Oklahoma City.
Experts said the arrangement could become more common in this downturn, because many of the banks that are in trouble lack core deposits, making them unattractive to buyers, whose numbers are limited by capital constraints.
"Some of these banks just don't have any franchise value," said Chip MacDonald, a partner at Jones Day. "I definitely think we could see more of it, particularly in places where the failure is too large for the local banks to handle the transfer."
Often "those other banks are already seeing inflows of deposits" from customers fleeing the failed bank, MacDonald said, so there is no point buying it.
Darrell McAllister, the chief executive of Bank of Choice in Greeley, said his $1.2 billion-asset institution passed on bidding for New Frontier.
"I am sure the cost would have been reasonable, but the deal would have taken too much capital, because of New Frontier's size," McAllister said. He estimated his bank would have needed at least another $50 million of capital to take on the failed one.
Though he called the failure a blow to Greeley's economy, he said deposits are up at Bank of Choice. It brought on 100 accounts Saturday; a usual Saturday generates two or three new accounts.
"Every chair in our office has been pulled into our lobby, and we've imported additional staff from our Fort Collins and Denver branches to help out," McAllister said. "I imagine this will continue for a couple of weeks."
On Friday regulators also seized Cape Fear Bank in Wilmington, N.C. First Federal Savings and Loan Association of Charleston, S.C., agreed to buy all of Cape Fear's deposits and most of its $492 million of assets.
So far this year 23 banks have failed.
In other recent failures where a buyer was not found, the FDIC has engaged other banks to serve as agents, which continue to pay on deposits for 30 days to prevent disruption to customers. The benefit to the agents is that the customers may open accounts at their banks after the 30 days are up.
In the case of New Frontier, "we didn't have a buyer, and we didn't have a paying agent," David Barr, a spokesman for the FDIC, said in a telephone interview from Greeley, where he is assisting with the failure. "We are acting as our own paying agent, which allows depositors some time and convenience to move their accounts."
(The FDIC hired BNP Paribas SA's Bank of the West to manage New Frontier's main office and two branches. The San Francisco bank has two branches of its own in Greeley.)
Brokered deposits made up 43% of New Frontier's $1.67 billion of deposits as of Dec. 31, and it was paying handsomely to retain those deposits. For example, Barr said signs in the bank's lobby declare, "Earn CD-like interest on checking accounts."
The failed bank's vast sum of high-rate CD's and brokered deposits means the newly created bank hardly resembles its predecessor. It will hold only 10% -- or about $150 million - of New Frontier's deposits. The FDIC said it was sending payments for the rest directly to customers or brokers.
Local news reports over the last two weeks indicated that depositors had begun yanking their money after a planned $30 million private infusion collapsed last month.
Jeffrey C. Gerrish, the chairman of Gerrish McCreary Smith Consultants LLC, said buyers exist for failed banks, but only when there is something there that is worth salvaging.
"Failed bank deals can be a great way to allocate your capital to pick up an attractive core deposit base or provide entrance to a new area," he said.
"But the question is, what kind of money can I make off of it? If it is built on hot money and credits no one wants, it isn't going to make the cut."
Sanford Brown, the managing partner in Bracewell & Giuliani LLP's Dallas office, said the FDIC's revival of the deposit bank setup for New Frontier showed that "they couldn't find anybody to take it," regardless of the price. "If they believed there was some level of value there, they would have run it for a little while and sold it."