BankNotes ...

As bank failures mount into a heap of moldering economic stimulus, and the FDIC's Bank Insurance Fund shrinks to its lowest level in many years, FDIC Chairman Sheila Bair tells the public that depositor have nothing to worry about, because, "The FDIC fully guarantees their insured deposits and provides them with seamless access to their money. For the insured depositor, a bank failure is a non-event."

This may be true for many depositors, however it is not true for the bank's "C" level management team, board of directors, and shareholders - they are the losers! In more ways than one! Not only do they lose their bank, but they lose their jobs, careers, and opportunity to associate with a bank in the future. With the FDIC there is no forgiveness, no bankruptcy court to "work out" the problems and reorganize the institution - the only option is failure.

The FDIC has a $100 billion line of credit with the U.S. Treasury - they can close a lot of banks with that much money. So far, all the banks that have been closed, the expense has been paid for by the FDIC's Member Banks through their deposit insurance premiums they have paid in over the years. We can only hope, the FDIC won't have to tap that line of credit. The law states that the FDIC guarantees deposits with the full faith and credit of the U.S. Government, which means borrowing from the U.S. taxpayers. We are the full faith and credit of the U.S. Government.

In most cases when a bank is closed the deposits are available the next business day. This is because the FDIC is usually available to help another institution acquire the deposits and make good on them. Often the FDIC has to give a lot of concessions to the acquiring bank - which costs the insurance fund money. The complexity of these transactions, even for a small bank, takes many hours to iron out - often taking upwards of ninety people from the FDIC two weeks to close a bank.

The amazing thing is that with all the flaws of the system, it seems to work - no FDIC insured depositor one has ever "lost a penny of their deposits" according to Ms. Bair, "and none ever will". Thank goodness for the full faith and credit of the U.S. Government.

The FDIC first began using loss-sharing arrangements in 1991, as the agency managed its way through the S&L crisis. Community banks benefited from these arrangements. These arrangements are associated with purchase and assumption agreements that transfer a failed bank's assets from the FDIC to a healthy bank. In the aftermath of the 2008 financial crisis, the loss-sharing arrangement has made a dramatic return to the forefront.

Under a simple loss-sharing deal, the FDIC might agree to absorb 80 percent of the losses associated with a specific pool of non-performing loans that the healthy bank acquires in the transaction. The healthy bank would absorb the first 20 percent of losses arising from that loan book. The FDIC's liability to share in these losses would last for a stated time period, such as three, five or seven years. There would be additional terms governing the deal-including maximum aggregate losses incurred by the healthy bank, FDIC reimbursement of net charge-offs of  shared loss assets, etc.

A proven strategy

Between September of 1991 and January of 1993, the FDIC made loss-sharing arrangements in connection with 24 bank failures. The aggregate value of assets covered by those arrangements was approximately $18.5 billion. After the fact, the FDIC compared the costs of purchase agreements made with and without loss-share arrangements. The agency concluded that loss-share transactions were less expensive than the conventional purchase and assumption agreements, for both large and small banks. http://www.fdic.gov/bank/historical/managing/history1-07.pdf

Besides reduced resolution costs, there are other advantages associated with loss sharing, including:

Greater incentive for the healthy bank to acquire more than just the failed bank's deposits

• Fewer disruptions for loan customers
• Fewer assets being absorbed and subsequently managed/liquidated by the FDIC 
• Fewer assets being removed from the private sector

FDIC loss-share arrangements have been called a win/win, but they are not without risks. The problem assets may be a distraction to the new management team, even if the potential for financial losses is limited. Where there is no loss-share agreement, the healthy bank takes only the deposits, thus beginning operations with a clean slate.

Today's crisis

In the first seven months of 2009, the FDIC has used loss share in at least 36 out of 64 bank failures. The aggregate value of assets covered by these arrangements is roughly $20 billion. Among the largest 2009 transactions are:

BankUnited FSB, $10.7 billion covered by loss-sharing

• Security Bank of Jones, $1.6 billion covered by loss-sharing
• Vineyard Bank, $1.5 billion covered by loss-sharing
• Temecula Valley Bank, $1.5 billion covered by loss-sharing

A complete list of 2009 bank failures, along with links to the associated Purchase and Assumption agreements is available here: http://www.fdic.gov/bank/individual/failed/banklist.html

In the first quarter of 2009, the banking industry rebounded from a net loss in the prior quarter-an improvement that masked mixed performance. The first quarter cumulative net profit of $7.6 billion, the highpoint of the previous four quarters, was more than 60 percent below 2008's first quarter performance. Further, this year's profitability was largely fueled by strong trading revenues and realized gains on securities at large banks. Nearly one-quarter (21.6 percent) of banks reported a net loss, and a majority of banks reported quarter-over-quarter net income declines.  

A $7.6 billion increase in trading revenues boosted noninterest income, with additional contribution coming from increased servicing fees and gains on loan sales. The industry also benefited from an improved net interest margin (NIM), driven primarily by a lower cost of funds. The average NIM of 3.39 percent was slightly higher on a sequential and quarter-over-quarter basis.

Bad loans still a factor

First quarter charge-offs notched a slight sequential decline, but are still outpacing last year's level by almost 100 percent.

C&I loans accounted for most of the year-over-year increase in charge-offs, but credit cards, real estate construction loans and closed end 1-4 family residential real estate loans were also problematic. Net charge-offs in all major categories were higher than a year ago. The total annualized charge-off rate was 1 basis point below the fourth quarter's record-high level.

Noncurrent loans are still on the rise. The percentage of noncurrent loans and leases to total loans and leases rose 81 basis points during the first quarter to 3.76 percent, with the increase being led by real estate loans. Nearly three-fifths (58 percent) of banks indicated that their noncurrent loan balances increased during the first quarter.

Banks added to their reserves again this quarter, pushing the ratio of reserves to total loans up to the record level of 2.5 percent. This reserve building was outpaced by the rise in noncurrent loans, however, such that the ratio of reserves to noncurrent loans declined to 66.5 percent, a 17-year low.

Balance sheets shift

The industry's equity capital rose substantially, partially driven by reduced dividend payments and TARP infusions. The paring down of loan portfolios and trading accounts led to an industry-wide decline in total assets of $302 billion. As a result, the ratio of total deposits to industry assets rose to 66.1 percent, despite a slight decline in total deposits.

Failure rate high, DIF decreasing  

At quarter-end, there were 8,246 FDIC-insured commercial banks and savings institutions, down from 8,305 at year-end. Twenty-one banks failed in the first quarter. The problem list grew in number from 252 to 305, while the assets managed by problem banks increased 38 percent to $220 billion.

Loss provisions (for actual and anticipated failures) drove a 24.7 percent in the DIF during the quarter, bringing the balance to about $13 billion. The 21 failures during the first quarter are estimated to have cost the DIF $2.2 billion. At quarter-end, the reserve ratio was 0.27 percent, its lowest level in 16 years.

New charters approved during the first quarter of 2009 numbered 13, the lowest level since the first quarter of 1994.  There were 50 bank mergers during the quarter.

Sanderson State Bank, Sanderson, Texas, was closed today by the Texas Department of Banking, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with The Pecos County State Bank, Fort Stockton, Texas, to assume all of Sanderson State Bank's deposits, including those that exceeded the deposit insurance limit.

Sanderson State Bank's sole office will reopen on Monday as a branch of The Pecos County State Bank. All depositors of the failed bank will automatically become depositors of The Pecos County State Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their existing banking relationship to retain their deposit insurance coverage. Customers of the failed bank should continue to use the same banking location until they receive further information from The Pecos County State Bank.

Over the weekend, depositors of Sanderson State Bank will have access to all of their money by writing checks or using ATMs or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of December 3, 2008, Sanderson State Bank had total assets of $37 million and total deposits of $27.9 million. The Pecos County State Bank agreed to assume all of the deposits for a .55 percent premium. In addition to assuming all of the failed bank's deposits, The Pecos County State Bank will purchase approximately $3.8 million of assets, and have the option to purchase owned premises and equipment. The FDIC will retain the remaining assets for later disposition.

Customers who have questions about today's transaction can call the FDIC toll-free at
1-866-782-1766. This phone number will be operational this evening until 9:00 p.m., CST; on Saturday from 9:00 a.m. to 6:00 p.m., CST; on Sunday from noon until 6:00 p.m., CST; and thereafter from 8 a.m. to 8 p.m., Central. Interested parties can also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/sanderson.html.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $12.5 million. The Pecos County State Bank's acquisition of all the deposits was the least costly resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Sanderson State Bank is the 25th bank to fail in the nation this year, and the second in Texas. The last bank to be closed in the state was Franklin Bank, SSB, Houston, TX, on November 7, 2008.

Haven Trust Bank, Duluth, Georgia, was closed today by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Branch Banking & Trust (BB&T), Winston-Salem, NC, to assume all of Haven Trust's deposits, including those that exceeded the insurance limit.

The four branches of Haven Trust will reopen on Monday as branches of BB&T. All the depositors of Haven Trust will automatically become depositors of BB&T. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their existing banking relationship to retain their deposit insurance coverage. Customers of the failed bank should continue to use their existing branches until they receive further information from BB&T.

Over the weekend, depositors of Haven Trust can access all their money by writing checks or using ATMs or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of December 8, 2008, Haven Trust had total assets of $572 million and total deposits of $515 million. BB&T agreed to assume all of the deposits for $112,000. In addition to assuming all of the failed bank's deposits, BB&T will purchase approximately $55 million of the failed bank's assets. The FDIC will retain the remaining assets for later disposition.

Customers who have questions about today's transaction can call the FDIC toll-free at 1-866-782-1402. This phone number will be operational this evening until 9 p.m., EST; on Saturday from 9 a.m. to 6 p.m., EST; on Sunday from noon to 6 p.m., EST; and thereafter from 8 a.m. to 8 p.m., EST. Interested parties can also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/haventrust.html.

It is important to note that neither the FDIC as receiver nor BB&T as the acquiring institution will e-mail customers of Haven Trust asking them to validate their deposits or to request personal, confidential information, such as account numbers, social security numbers or driver's license numbers. Customers will not be asked to revalidate passwords, deposit accounts or deposit insurance. If customers receive e-mails asking for such personal information, they should consider the e-mails fraudulent and should not respond.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $200 million. The BB&T's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Haven Trust is the 24th bank to fail in the nation this year, and the fifth in Georgia. The last bank to be closed in the state was First Georgia Community Bank, Jackson, GA, on December 5, 2008.

U.S. Bank, National Association, Minneapolis, MN, acquired the banking operations, including all the deposits, of Downey Savings and Loan Association, F.A., Newport Beach, CA, and PFF Bank & Trust, Pomona, CA, in a transaction facilitated by the Federal Deposit Insurance Corporation.

The combined 213 branches of the two organizations will reopen as branches of U.S. Bank under their normal business hours, including those with Saturday hours. Depositors will automatically become depositors of U.S. Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage.

Customers of both banks should continue to use their existing branches until U.S. Bank can fully integrate the deposit records of the organizations. Over the weekend, depositors can access their money by writing checks or using ATM or debit cards.

As of September 30, 2008, Downey Savings had total assets of $12.8 billion and total deposits of $9.7 billion. PFF Bank had total assets of $3.7 billion and total deposits of $2.4 billion. Besides assuming all the deposits from the two California banks, U.S. Bank will purchase virtually all their assets. The FDIC will retain any remaining assets for later disposition.

The FDIC and U.S. Bank entered into a loss share transaction. U.S. Bank will assume the first $1.6 billion of losses on the asset pools covered under the loss share agreement, equal to the net asset position at close. The FDIC will then share in any further losses. Under the agreement, U.S. Bank will implement a loan modification program similar to the one the FDIC announced in August stemming from the failure of IndyMac Bank, F.S.B., Pasadena, CA.

The loss-sharing arrangement is expected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers as they will maintain a banking relationship.

Customers who have questions about today's transactions can call the FDIC toll free. Customers of Downey Savings should call 1-800-930-5169, and for PFF Bank 1-800-930-6827. The phone numbers will be operational this evening until 9:00 p.m. pacific; on Saturday from 8:00 a.m. to 6:00 p.m. pacific; and on Sunday noon until 6:00 p.m. pacific and thereafter from 8:00a.m. to 8:00 p.m. pacific. Interested parties can also visit the FDIC's Web site. For Downey Savings they can visit http://www.fdic.gov/bank/individual/failed/downey.html and for PFF Bank http://www.fdic.gov/bank/individual/failed/pff.html.

U.S. Bank currently has 353 offices in California. Downey Savings and PFF Bank are not affiliated with each other. Downey Savings has 170 branches in California and five in Arizona, and PFF Bank has 38 branches in California.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) for Downey Savings will be $1.4 billion and $700 million for PFF Bank. U.S. Bank's acquisition of all the deposits of the two institutions was the "least costly" option for the FDIC's DIF compared to alternatives.

These were the twenty first and twenty second banks to fail in the nation this year, and the fourth and fifth banks to close in California. The last bank to be closed in the state was Security Pacific Bank, Los Angeles, on November 7, 2008.

The Community Bank, Loganville, Georgia, was closed today by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Bank of Essex, to assume all of the deposits of The Community Bank.

The Community Bank's four branches will open on Monday, November 24, 2008 as Bank of Essex. Depositors of the failed bank will automatically become depositors of Bank of Essex. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage.

Over the weekend, customers of The Community Bank can access their deposits by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of October 17, 2008, The Community Bank had total assets of $681.0 million and total deposits of $611.4 million. Bank of Essex purchased approximately $84.4 million of The Community Bank's assets, and did pay the FDIC a premium of $3.2 million for the right to assume the failed bank's deposits. The FDIC will retain the remaining assets for later disposition.

Customers with questions about today's transaction may contact the FDIC toll-free at 1-800-930-1904. This phone number will be operational this evening until 9:00 p.m. eastern; on Saturday from 9:00 a.m. to 6:00 p.m. eastern; on Sunday noon until 6:00 p.m.; and from 8:00 a.m. to 8:00 p.m. Monday and thereafter. They may also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/community.html.

The transaction is the least costly resolution option, and the FDIC estimates that the cost to its Deposit Insurance Fund will be between $200 million and $240 million. The Community Bank is the twentieth FDIC-insured institution to be closed nationwide, and the third in Georgia, this year.

Security Pacific Bank, Los Angeles, California, was closed today by the Commissioner of the California Department of Financial Institutions, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Pacific Western Bank, Las Angeles, California, to assume all of the deposits of Security Pacific.

The four branches of Security Pacific will reopen on Monday as branches of Pacific Western. Depositors of the failed bank will automatically become depositors of Pacific Western. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of both banks should continue to use their existing branches until Pacific Western can fully integrate the deposit records of Security Pacific.

Over the weekend, depositors of Security Pacific can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of October 17, 2008, Security Pacific had total assets of $561.1 million and total deposits of $450.1 million. Pacific Western agreed to assume all the deposits for a two percent premium. In addition to assuming all of the failed bank's deposits, Pacific Western will purchase approximately $51.8 million of assets. The FDIC will retain the remaining assets for later disposition.

Customers who have questions about today's transaction can call the FDIC toll free at 1-866-934-8944. This phone number will be operational this evening until 9 p.m. pacific; on Saturday from 9 a.m. to 5 p.m. pacific; and on Sunday noon until 5 p.m. pacific and thereafter from 8 a.m. to 8 p.m. pacific. Interested parties can also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/securitypacific.html.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $210 million. Pacific Western's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. Security Pacific is the nineteenth bank to fail in the nation this year, and the third in California. The last bank to be closed in the state was First Heritage Bank, National Association, Newport Beach, on July 25, 2008.

Alpha Bank and Trust, Alpharetta, Georgia, was closed today by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Stearns Bank, National Association, St. Cloud, Minnesota, to assume the insured deposits of Alpha Bank & Trust.

The two branches of Alpha Bank & Trust will open on Monday, October 27, 2008 as Stearns Bank, N.A. Depositors of the failed bank will automatically become depositors of Stearns Bank, N.A. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage.

Over the weekend, customers of Alpha Bank & Trust can access their insured deposits by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of September 30, 2008, Alpha Bank & Trust had total assets of $354.1 million and total deposits of $346.2 million. Stearns Bank did not pay the FDIC a premium for the right to assume the failed bank's insured deposits.

At the time of closing, there were approximately $3.1 million in uninsured deposits held in approximately 59 accounts that potentially exceeded the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.

Alpha Bank & Trust also had approximately $16.8million in brokered deposits that are not part of today's transaction. The FDIC will pay the brokers directly for the amount of their insured funds.

Customers with accounts in excess of $250,000 should contact the FDIC toll-free at 1-800-591-2912 to set up an appointment to discuss their deposits. This phone number will be operational this evening until 9:00 p.m. EST; on Saturday from 9:00 a.m. to 5:00 p.m. EST; and Sunday 12:00 EST to 5:00 EST and thereafter from 8:00 a.m. to 8:00 p.m. EST.

Customers who would like more information on today's transaction should visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/alpha.html. Beginning Monday, depositors of Alpha Bank & Trust with more than $250,000 at the bank may visit the FDIC's Web page, "Is My Account Fully Insured?" at http://www2.fdic.gov/dip/Index.asp to determine their insurance coverage.

In addition to assuming the failed bank's insured deposits, Stearns Bank, N.A. will purchase approximately $38.9 million of Alpha's assets. The FDIC will retain the remaining assets for later disposition.

The transaction is the least costly resolution option, and the FDIC estimates that the cost to its Deposit Insurance Fund will be $158.1 million. The last bank to fail in Georgia was Integrity Bank, Alpharetta, on August 29, 2008. Alpha Bank & Trust is the sixteenth FDIC-insured institution to be closed this year.

FDIC Facilitates Transaction that Protects All Depositors and Comes at No Cost to the Deposit Insurance Fund

JPMorgan Chase acquired the banking operations of Washington Mutual Bank in a transaction facilitated by the Federal Deposit Insurance Corporation. All depositors are fully protected and there will be no cost to the Deposit Insurance Fund.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," said FDIC Chairman Sheila C. Bair. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

JPMorgan Chase acquired the assets, assumed the qualified financial contracts and made a payment of $1.9 billion. Claims by equity, subordinated and senior debt holders were not acquired.

"WaMu's balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses," Bair said.

Washington Mutual Bank also has a subsidiary, Washington Mutual FSB, Park City, Utah. They have combined assets of $307 billion and total deposits of $188 billion.

Thursday evening, Washington Mutual was closed by the Office of Thrift Supervision and the FDIC named receiver. WaMu customers with questions should call their normal banking representative, service center, 1-800-788-7000 or visit http://www.wamu.com/. The FDIC's consumer hotline is 1-877-ASK-FDIC (1-877-275-3342) or visit http://www.fdic.gov/.