By Vistage Speaker Edmond P. Freiermuth with Vistage Web Editor, Paul Diamond

On Oct. 3rd the U.S. Congress approved a temporary increase on FDIC coverage for individual, IRA, CD, and business accounts. Under this legislation, deposit coverage increases from $100,000 to $250,000 through the end of 2009. The FDIC's recent takeover of IndyMac Bank, seizure and sale of Washington Mutual and forced sale of Wachovia, has caused anxiety in many business and personal depositors. While the vast majority of the banks in the United States are in sound condition, the increase in FDIC coverage attempts to prevent more failures which may be likely to come. Business owners should know the facts about being a depositor or a borrower in a FDIC-insured bank. Here are some frequently asked questions.

How should businesses with more than $250,000 in FDIC-insured deposits in a single bank protect their assets?
The FDIC insures business deposits on a per-taxpayer-ID basis, per bank up to $250,000 until Dec. 31, 2009. To fully protect bank deposits over $250,000 you can take one of two actions.

• If you are borrowing money from the bank, pay down the amount of the loan outstanding such that your depository account balance does not exceed $250,000.
• You can transfer funds in excess of $250,000 to other banks.

How can individuals protect more than $250,000 in an FDIC-insured bank?
Individuals can get more coverage by designating different ownership categories to their accounts at the same bank. For example a husband and wife can get up to $1.5 million insured at one bank by designating these types of accounts:

Husband single account: $250,000
Wife single account: $250,000
Husband/Wife joint account: $500,000
Husband's revocable trust account for wife: $250,000
Wife's revocable trust account for husband: $250,000

What does it mean if a bank is on the FDIC’s watch list?
It was recently reported that 90 banks are currently on the banking regulators’ “watch list.” Being on the list does not necessarily mean that failure will occur. It does mean that the banks’ ability to grow, without significant injections of additional capital, will be curtailed. The banks on the list may be required to shrink their outstanding credit.

If you bank with a bank on the watch list, the bank might reduce your revolving credit line, decline to make you a term loan, or increase your interest rate.

How can business owners perform due diligence on a bank?
The common stock of most banks is publicly traded. As such, they are required to file periodic financial reports with the U.S. Securities and Exchange Commission. Additionally, all banks must also file periodic Call Reports with bank regulators. Banks also publish financial statements that are available just by asking your relationship manager/loan officer. These documents contain a wealth of information about banks.

Are there any signs that a bank might be in trouble?
The single greatest warning sign that indicates that bank is in financial trouble is when regulators issue a “cease and desist order” to the bank. Other signs a bank is in trouble include:

• Seriously declining stock value
• High executive turnover
• Recent changes in the management of your account
• No longer ranked as “well capitalized” by regulators.

Additionally, if bankers seeking your business should suddenly inundate you with offers, it may be that they know something about your bank that you don’t.

What happens if your business has a loan from a bank that gets taken over by the FDIC?
If the FDIC takes over a bank, it attempts to find a buyer for the bank for the full value of all assets. If the FDIC cannot find a buyer, it will sell liquid assets such as government securities and then try to sell loans, in bulk, to another lender, or lenders. In either case, if you have a loan with a bank that has been taken over, you may see changes in the payment method or terms of the loan. In the worst case scenario your loan may be called, forcing you to find a new lender. If your business is not performing well and/or is leveraged more than 3:1, it may be difficult to find a new lender. It’s good planning to have a back-up line of credit.

If your business has a loan from a bank that is taken over by the FDIC, you should immediately begin searching for a banking relationship with a new lender.

When the FDIC takes over a bank, how long do businesses have to wait before they can access their money?
If your total depository accounts are within the FDIC insurance limit of $250,000, you should be able to gain full access to funds within a few days. If your accounts are above the limit, it could take much longer and the exposure to loss could be significant for the excess amount. It all depends upon how bad the condition of the bank is, and when and how much the FDIC believes will ultimately be received from the sale or liquidation of the assets. Typically, the FDIC makes a preliminary estimate of the expected loss and then allows access to a certain percent of the uninsured funds on deposit in a few days.

How long will the turmoil in the credit and equity markets last?

Expunging the excesses caused by irresponsible lending and borrowing will take another 18-24 months to correct. There will, regrettably, be more bank failures.

Vistage Speaker Ed Freiermuth has more than 30 years' experience in financing and advising businesses of all sizes. He has worked directly with the CEOs and senior managers of more than 250 companies. As an independent business consultant, he works closely with lending officers, attorneys, accountants, venture capitalists, investment bankers and others seeking to resolve complex financial, marketing and operational challenges.

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