BarCamp Bank - Chicago
July 16, 2008 @ 9am - 4pm
A BarCamp is an ad-hoc gathering born from the desire for people to share and learn in an open environment. It is an intense event with discussions, demos, and interaction from attendees. This BarCamp will focus on banking in the 21st century - and how to do it better. How can banks relate more effectively with their clients? How are banks growing and improving their clients' business or lives? How are new and community banks creatively competing and getting results? These and many other topics will be discussed at the BarCamp Bank - Chicago.
Because a BarCamp is not intended to "make a profit" we are using CREED a registered 501(c)3 non-profit to accept the money and pay the bills. CREED, which focuses on Economic Education and Development has an interest in improving financial education among the general population as well as bankers.
The BarCamp Bank - Chicago location will be at the Drake Hotel, a Hilton Property, and within one block of the Interagency Minority Depository Institutions National Conference (MDI Conference), being held July 16 - 18, 2008. The MDI Conference will start with an evening cocktail party at 5:00 p.m.; there would be enough time for attendees to walk over to the MDI Conference.
BarCamp Bank - Chicago:
Site: The Drake Hotel
140 East Walton Place, Chicago, IL 60611, 312.787.2200
Spot: $69.00 per person, (limited to 30 people)
Sponsor: $500.00 (limited to 3 sponsors)
Other Stuff: A light lunch will be served.
Current Sponsors: De Novo Strategy, Inc.; CREED;
Topics: BarCamp Bank - Chicago will cover six topics total. 12pm - 1:00 p.m. is for sponsors to facilitate short discussions. Sponsors may discuss recent trends in their markets, ask questions, or drive ideas by the group. Sponsors may also provide topics for the general session and assist in those discussions. This is an open forum requiring participation from all attendees. You should expect to enjoy the engagement with your peers.
Contact: Wendell Brock, Principal
De Novo Strategy, Inc.
469-424-2888
wwbrock@denovostrategy.com
http://barcamp.pbwiki.com/BarCampBankChicago
The results are in for the First Quarter 2008 Banking Profile - and they are not looking good! The squeeze is getting tighter, but, taking a comprehensive perspective, it does look like we'll make it through. Among the first quarter challenges and trends, real estate problems continued to hold down earnings; restatements dramatically shrank fourth quarter, 2007 profits; market-sensitive revenues remained weak; interest rates tightened margins; charge-offs hit a five-year high; noncurrent loans grew; reserve coverage shrank; dividends were cut; growth in credit slowed; interest-bearing retail deposits posted strong growth; and the number of problem banks grew. The following are some key highlights.
Earnings were hit hard as banks suffered from "deteriorating asset quality concentrated in real estate loan portfolios." Higher loan loss provisions reduced quarterly earnings to $19.3 billion compared to $35.6 billion a year earlier. Insured institutions set aside $37.1 billion in loan loss provisions, four times the $9.2 billion set aside a year earlier. This really hit earnings - return on assets (ROA) was only 0.59 percent compared to 1.20 percent in the first quarter of 2007. The downward trend in profitability was broad; slightly more than half of all insured institutions reported declines in quarterly earnings, however, more than half the $16.3 billion decline in industry net income came from four large institutions.
Industry net income for the fourth quarter of 2007 was restated to $646 million from a previously reported $5.8 billion. This is the lowest quarterly earnings since 1990. First quarter, 2008 was also the second consecutive quarter that lower noninterest revenues contributed to the decline in earnings. The net interest margin checked in at 3.33 percent, compared to 3.32 percent for the first and fourth quarters of 2007. For community banks, those with less than $1 billion in assets, the rate fell to 3.70 percent - the lowest level since the fourth quarter of 1988.
Banks charged off $19.6 billion during the first quarter, 2008, an increase of $11.4 billion over the same quarter in the previous year. This is a five-year high. The first quarter was also the second consecutive quarter of very high charge-offs, following the previous quarter's charge-off total of $16.4 billion. "The average net charge-off rate at institutions with more than $1 billion in assets was 1.09 percent, more than three and a half times the 0.29 percent average rate at institutions with assets less than $1 billion."
With the high level of charge-offs, noncurrent loans (loans 90 days or more past due) rose by $26 billion in the first quarter, following a $27 billion increase in the fourth quarter of 2007. "Loans secured by real estate accounted for close to 90 percent of the total increase, but almost all major loan categories registered higher noncurrent levels." Total noncurrent real estate construction and development loans increased by $9.5 billion, and 1-4 family residential loans increased by $9.3 billion.
The reserve coverage continues to lose ground after adding $37.1 billion in loan loss provisions. "The industry's ratio of loss reserves to total loans and leases increased from 1.3 percent to 1.52 percent, the highest level since the first quarter of 2004." The growth in reserves was outpaced by noncurrent loans, allowing the "coverage ratio" to slip for the eighth consecutive quarter to 89 cents for every $1.00 of noncurrent loans.
Most institutions cut dividends to preserve capital - only $14 billion in total dividends were paid in the first quarter, down from $12.2 billion from the first quarter of 2007. Of the 3,776 banks that paid a dividend in the first quarter of 2007, 666 paid no dividend in 2008. Those that did pay a dividend, paid 48 percent less, on average. This assisted the banks' ability to bolster their capital levels; tier 1 capital increased by $15 billion and tier 2 capital increased by $10.5 billion.
Loan growth slowed in the first quarter, increasing by only $335.4 billion or 2.6 percent. At the same time, interest-bearing deposits increased by $150.4 billion or 1.8 percent. Savings accounts and interest-bearing checking accounts accounted for more than three-quarters of the growth. Non-deposit liabilities increased by $171.6 billion, or 5.2 percent, led by securities sold under repurchase agreements (accounting for $65 billion of the increase) and trading liabilities (accounting for $63.2 billion of the increase).
The number of banks on the regulators' problem list grew from 77 to 90, while the number of total banks decreased from 8,534 to 8,494 during the first quarter. In this quarter, there were two bank failures, 38 new charters issued, 77 institutions merged into other banks, and two mutual banks converted to stock ownership. With 82 banks converting to Subchapter S Corporations during the first quarter, almost 30 percent of all banks now operate under that structure.
You may download the full report at: http://www4.fdic.gov/qbp/2008mar/qbp.pdf
While Remote Deposit Capture brings many exciting new opportunities to small community banks, it also brings increased challenges. Even though there are challenges and operational considerations, we must face the reality that the larger banks are aggressively promoting Remote Deposit (Merchant Capture) and targeting our core deposits. We must position our banks to meet the challenges. Face the facts, Remote Deposit Capture is here to stay, and will keep growing. The larger banks are aggressively promoting it, and if we offer Remote Deposit, the regulators will be scrutinizing our operational processes.
If Remote Deposit is implemented properly with the basic infrastructure in place, the bank can increase and sustain its core deposits, effectively compete in the Remote Deposit arena, minimize risk and satisfy regulatory requirements.
If you are considering Remote Deposit, go through the short term pain and implement a program that will sustain the growth. You may already be offering Remote Deposit Capture, just re-evaluate the program and be sure the infrastructure postures your bank for success while minimizing risk.
A Remote Deposit operational infrastructure, which addresses program growth, controls, and regulatory requirements include, but are not limited to:
- Policies, procedures and controls which integrate documentation and processes from the lending department to deposit operations
- A monitored and perpetuated selling component which gets the same level of focus that loans in the pipeline receive
- An aggressive bank-wide training program which includes teaching lenders the importance of Remote Deposit as it relates to enhancing banking relationships, building core deposits and retention of business customers
- Proper staffing of Cash Management Departments to support the day-to-day functions and servicing of business customers
- Customer evaluation and underwriting process to minimize risk and potential losses
- Established daily thresholds monitored by operations
- Review of your blanket bond insurance coverage to minimize liquidity risk, if the bank sustains a material loss from fraud
- Fraud related security-exception reports to monitor and minimize risk integrated into the operations department
- Consideration of "holds" on transmitted funds
- Annual creditworthiness review and audits of customers
- Perpetual staff training to focus on Remote Deposit Capture features and opportunities to grow the bank and its core deposits
- BSA Officer review for changes in patterns and trends to minimize money laundering and illicit activity
- Required regulatory risk assessments of the Remote Deposit Service Providers and the Remote Deposit product offering which is considered an electronic banking product
We have to think of obtaining and sustaining customers while implementing a basic infrastructure to control risk and address regulatory compliance requirements.
With challenges come opportunities when promoting Remote Deposit. The bank will enjoy core deposit growth, sustain their current customer base, reduce lines at their counters, have a potential new source of fee income, be able to compete in the market and have new opportunities to increase loan volume.
Article Submitted by: Carolyn C. Dowdy, President of Bank Project Solutions
http://www.bankprojectsolutions.com/
T: (770) 653 2389
FDIC Chairman Sheila Bair at the Brookings Institution Forum, The Great Credit Squeeze: How it Happened, How to Prevent Another; Washington, DC
May 16, 2008
Good morning and thank you for inviting me to speak.
Let me first say that this new study by Martin Bailey, Douglas Elmendorf, and Bob Litan comes at the right time.
It gives a comprehensive overview of how we got to where we are and covers the key issues policymakers must deal with to fix a broken mortgage market and ultimately stabilize housing prices.
Importantly, it connects the dots between some of the seemingly disparate financial developments of the past year. Among these is the direct connection between protecting consumers and safe and sound lending.
It's one of the best volumes I've seen since the one written last year by the late Ned Gramlich on subprime lending.
As a former academic, I can appreciate all the time and energy that went into it.
Housing crisis
Without a doubt, we have some significant challenges ahead of us. And while some credit markets may be stabilizing, families, communities, and the economy continue to suffer.
Frankly, things may get worse before they get better.
As regulators, we continue to see a lot of distress out there.
Foreclosures keep rising as mortgages reset to higher rates, home prices keep sinking, and millions of families continue to struggle with unaffordable mortgages.
I can sympathize with these families.
I've seen hundreds and hundreds of ordinary people at foreclosure workshops desperately looking for ways to keep their homes.
And all of us can see the strain on state and local government budgets and the impact on the banking and financial systems.
And there is more uncertainty ahead.
Data show there could be a second wave of the more traditional credit stress you see in an economic slowdown.
Delinquencies are rising for other types of credit, most notably for construction and development lending, but also for commercial loans and consumer debt.
The slowdown we've seen in the U.S. economy since late last year appears to be directly linked to the housing crisis and the self-reinforcing cycle of defaults and foreclosures, putting more downward pressure on the housing market and leading to yet more defaults and foreclosures.
This is why regulators and policymakers continue to focus on the housing market.
We need to find better ways to help struggling homeowners.
Case for greater government action
Over the past year, federal and state governments, and consumer groups have worked with some success to encourage the industry to modify loans.
But it's just not happening fast enough. Given the scale of the problem, this cannot go on loan-by-loan as it has.
Solutions must be simple and practical, and quick to implement. And they must be designed to result in limited or no cost to taxpayers.
Congress and the White House are working on proposals that would expand the role of the Federal Housing Administration (which insures mortgages).
These are laudable efforts. They will help certain borrowers.
But the FHA approach has its limitations. And new refinancing options may take more time than we have. We need something that is more immediate.
Home Ownership Preservation Loans
I think the next line of attack should be using low-cost government loans to help borrowers pay down unaffordable mortgages.
We need to take a systematic approach that pays down enough of these mortgages to make them affordable.
And it can be done at zero cost to taxpayers.
The FDIC is calling for up to $50 billion in new government loans that would pay down a portion of the value of over a million existing loans. (The Treasury would sell debt to fund the plan.)
We're calling these new government loans Home Ownership Preservation Loans - HOP loans for short.
Eligible borrowers could get a HOP loan to pay off up to 20 percent of their mortgage.
Mortgage holders would get the cash. As their part of the deal, they would restructure the remaining 80 percent into fixed rate, affordable payments. And they would agree to pay the government's interest for the first five years.
That way, the HOP loans would be interest-free to the borrower for the first five years.
After that, borrowers would begin repaying them at fixed Treasury rates.
This would give borrowers a breather, and dramatically reduce the chance of foreclosures.
As another part of the deal, the mortgage holders would agree that the government would be paid first after any sale or refinancing of the house.
As a result, taxpayers would be protected from any losses, even if the borrower cannot repay the mortgage for any reason.
The plan would leverage the government's lower borrowing costs to significantly reduce foreclosures with no expansion of contingent liabilities and no net exposure to taxpayers.
The HOP loan program has a number of major advantages.
First, it's not a bailout. (That's a very big plus.)
Second, it would help stabilize a huge number of high-cost mortgages, (which would be good for credit markets).
And it would also keep people in their homes, and making their payments (which would slow the decline in home prices).
HOP loans would essentially give borrowers breathing room by reducing their debt burden to a more manageable level.
And they would focus on homeowners who want to stick it out and stay in their homes long-term.
Let me explain how HOP loans would work with a brief example.
Take a look at this projection on the screen.
Loan Restructuring Example - PowerPoint (PPT Help)
For a borrower with a $200,000 mortgage in this example, the HOP loan program would slash the current payment by about $500 to $1,200 a month. (That's a 30 percent reduction.)
After five-years, when it's time to repay the Treasury, the HOP loan payment plus the regular mortgage payment would push the monthly total to about $1,400 a month.
That's still $300 less a month than the original payment.
And it's now five years down the road, giving borrowers time to stabilize their finances and to rebuild some home equity.
There are other advantages.
The HOP program focuses on making unaffordable mortgages affordable. And it has incentives for mortgage investors to qualify borrowers who have a good chance of paying-off a restructured loan over the long term.
It would complement the current FHA proposals now before Congress, which may be most effective for people who are deeply underwater with mortgages worth much more than their homes.
It also works within existing securitization contracts, avoiding costly legal disputes.
Unlike any other current proposal there would be no need to negotiate with the owners of second-liens, such as a home equity loan.
And it can be implemented quickly because it's administratively simple.
In most cases, eligibility can be determined with information readily available from existing records.
No property assessments are required.
So, what about the naysayers?
No matter your political stripes or economic interests, foreclosures, especially preventable ones, are to be avoided.
They cost lenders and borrowers a lot of money.
A modified, performing loan is almost always of significantly greater value to mortgage investors than a foreclosed home.
As for the taxpayer, as I said, this is no bailout at taxpayer expense. The HOP loan program is designed to result in no cost to the government.
The loans and their financing costs would be fully repaid.
What about the speculators?
I was at a foreclosure prevention meeting in Los Angeles a few weeks ago.
The place was filled with hundreds of families wanting to fix their mortgages, with hundreds more lined up around the block.
I saw a lot of anxious, terrified faces.
But I didn't see any loan flippers or condo speculators.
Yes, there are borrowers out there who knowingly overleveraged, hoping to make a quick profit as home prices rose.
But there are also many people who were the unknowing subjects of misleading marketing and inexcusably lax underwriting.
All they wanted was to live in a home of their own. What they got was a mortgage they couldn't repay.
What is accomplished when these good faith borrowers are forced into foreclosure?
- Another empty house on the market.
- Another blight on a neighborhood.
- Another hit to surrounding property values.
- More erosion of local tax bases.
These foreclosures are hurting us all.
Is the HOP loan program the Holy Grail?
No. But it could help break the logjam.
Too many unaffordable mortgages are causing a never-ending cycle, a whirlpool of falling house prices and limited refinancing options that contribute to more defaults, foreclosures and the ballooning of the housing stock.
And the only way to break this perilous cycle is by a wholesale restructuring of these unaffordable mortgages.
Conclusion
I think it's time we come to grips with the need for more pro-active intervention. And we need to act soon.
The housing crisis is now a national problem that requires a national solution. It's no longer confined to states that once had go-go real estate markets.
Creating additional tools to help borrowers that are cost neutral and are systematically applied makes too much sense to not act upon.
The FDIC has dealt with this kind of crisis before.
Remember the S&L disaster of the 1980s and 1990s?
Fortunately, we're in a much stronger position today. Banks are healthy, and we want them to stay that way.
But we haven't forgotten the lesson. Not by a long shot.
We learned the hard way that early intervention always costs less, and is always better than a policy of after-the-fact clean-up.
I hope that is the path we follow.
And I urge all of you here today to climb on board, help us make the right policy choices, and help restore the American promise.
Thank you very much.