State CD program jeopardized by Almelund Bank failure

Northwestern Financial Review, Aug 19, 2000 by Bengtson, Bom

The state may phase out its certificate of deposit program if it turns out such deposits are not protected by the Federal Deposit Insurance Corp.

Howard Becker of the State Investment Board broke the news on Aug. 5 to bankers attending the annual convention of the Independent Community Bankers of Minnesota. The state had $750,000 in certificates of deposit with the Town and Country Bank of Almelund, Minn., which failed on July 14. Becker said the FDIC has refused to repay those deposits. If it turns out that such deposits are not protected by the FDIC, Becker said, the State Investment Board will discontinue its CD program, which has been operating since 1980. The state currently has about $200 million in Minnesota banks through the CD program.

Becker said this is the first time the state has run into trouble collecting money deposited with a failed bank. Becker explained that he had always understood that even though the state exceeded the $100,000 per account limit, it was protected under the FDIC's pass-through rules on deposits from pension funds. The CD program is one way the investment board deploys $55 billion in pension funds from 450,000 state employees.

Becker explained the state has eight pension plans. Assuming pass-through protection of $100,000 for each plan, deposits should be protected up to $800,000 at individual banks, Becker said. To be safe, Becker said the investment board had a policy of not depositing more than $750,000 with any one bank. Becker said that depending upon interpretation, FDIC coverage could actually be much higher since.the fund represents money from thousands of people, each of whom presumably are eligible for up to $100,000 in coverage.

Becker said he has had trouble getting a clear answer on the situation from the FDIC's Division of Resolutions in Dallas. He asked for the bankers' help in dealing with the FDIC.

Becker said the state has pumped more than $3 billion into Minnesota banks through the CD program since 1980. He also said Minnesota's program has served as a model for other states. If Minnesota discontinues its program, other states may do the same, he said.

David Barr, an FDIC spokesman, said the FDIC cannot comment on the specifics of the Almelund bank and the state of Minnesota deposits. Barr said the rules on pass-through protection for pension funds are complicated. While funds in excess of $100,000 per account can be covered under pass-through rules for pension plans, Barr said certain conditions apply. For example, the bank must have adequate capital at the time the CDs were purchased for the insurance to be effective. On March 31, the Town and Country Bank of Almelund had an equity capital to assets ratio of 6.78 percent, a decrease from the 8.14 percent reported during the same time in 1999.

The FDIC reported that $1.2 million in deposits at the Almelund bank were not protected by FDIC insurance.

Becker said the investment board needs prompt, permanent resolution to the FDIC coverage question. Its next regularly scheduled purchase of CDs is set for September. He said the state would not buy those CDs if he is not assured they qualify for FDIC protection. He said it would not be worth continuing the program if coverage for the state was limited to $100,000 per bank.