BankNotes ...

Bank failures get the press, but credit unions are struggling too

The banks and the FDIC may be the ones getting all of the attention, but credit unions and their regulating and insuring entity, the NCUA, are also logging their share of problems. So far this year, a full twenty-one credit unions have failed. Compare this to the number of bank failures, just eight, and one has to wonder why the banks are getting a disproportionate share of media coverage.

The easy answer is the difference in the bottom line. Credit unions generally maintain a far smaller asset value relative to their for-profit counterparts. The largest credit union to undergo an NCUA-managed restructure this year was Cal State 9 Credit Union of California, whose asset base totaled $339 million. Next to the $32-billion IndyMac Bancorp. failure, it's almost understandable why Cal State 9's problems weren't worth the air time. This difference is evident in the total figures as well: the combined asset value of all eight failed banks exceeds $38 billion, while the combined assets of twenty-one failed credit unions add up to only $1.8 billion.

A closer look at the numbers, however, indicates that the current economic crisis may be hitting credit unions harder, despite their smaller size. The largest three failed banks, IndyMac, First National Bank of Nevada and ANB, managed assets totaling $32 billion, $3.4 billion and $2.1 billion, respectively. Remove these three entities from the equation and the remaining five failed banks had an average asset size of about $129 million. That $129 million is far more comparable to the average size of the failed credit union, which is roughly $87 million. Evaluating the data in terms of similar-sized operations, the scale tilts in favor of the banks, with only five failures relative to twenty-one credit union failures.

And still, the system works

Even as financial institutions struggle to recover from fractures in the mortgage, real estate and lending sectors, the federal protections have remained reliable. The deposit insurance provided by the FDIC (banks) and the NCUSIF (credit unions) continues to safeguard customer funds: when an entity fails, the FDIC and NCUA give customers immediate access to all insured deposits. Where a customer's deposits exceed insurance limitations, both the FDIC and NCUA work diligently behind the scenes to recover those funds as quickly as possible. In the days following the IndyMac failure, for example, the FDIC offered to advance customers half of their uninsured deposits immediately. The remaining amounts were transferred to customers in the form of receivership certificates, which will be converted to cash as the bank's assets are sold.  

Panic begets panic

While the customers of financial institutions may be inclined to make a run on their bank or credit union at even a whisper of instability, those panicky actions actually work against the system. The demise of IndyMac is a case in point. Prior to the bank's closure, U.S. Senator Charles Schumer wrote a letter stating his concerns about IndyMac's financial condition. The bank's customers responded by withdrawing $1.3 billion of deposits in eleven days-a swift and pronounced asset depletion that essentially cemented IndyMac's fate. Subsequently, the OTS had no choice but to step in and ask the FDIC take over IndyMac. 

The future may be bright, for some

Unfortunately, the bank and credit union failures are going to continue. Years of enthusiastic underwriting practices combined with troubled economic times are not easily overcome. In the wake of a lending crisis, the future may be brightest for de novo banks that are just now launching operations-nascent entities that aren't weighted down with a legacy portfolio that is marred by bad loans. Also, considering the current real estate market, a new bank enjoys the advantage of writing loans against lower property values. When values start heading back up, those banks will have stronger equity positions. With careful planning and thoughtful underwriting practices, today's de novo banks could be enjoying greater financial stability than most of their competitors for years to come. Given those dynamics, now may be the right time to add a de novo bank investment to your portfolio.

The Federal Reserve System today announced the nationwide launch of Partnership for Progress, an innovative outreach and technical assistance program for minority-owned and de novo institutions.  The program seeks to help these institutions confront their unique challenges, cultivate safe and sound practices, and compete more effectively in today's marketplace through a combination of one-on-one guidance, workshops, and an extensive interactive web-based resource and information center (http://www.fedpartnership.gov/).

"The program's overarching mission is to preserve and promote minority-owned institutions and to enhance their vital role in providing access to credit and financial services in communities that have been historically underserved," said Federal Reserve Board Chairman Ben S. Bernanke. "The Federal Reserve is committed to helping minority-owned and de novo banks achieve long-term success."

Partnership for Progress provides insight on key issues in three distinct stages of a bank's life cycle: "Start a Bank," "Manage Transition," and "Grow Shareholder Value." Topics covered include credit and interest rate risk, capital and liquidity, and banking regulations. To ensure broad access to the program, all aspects of the training will be available through workshops, online courses, and the program's interactive website.

"This cutting-edge program, which draws on insights from economics, accounting, finance, and regulatory compliance, will become a valuable resource for institutions at different stages of their development," said Federal Reserve Board Governor Randall S. Kroszner.

In developing the program, Federal Reserve officials met with minority-owned and de novo banks across the country as well as trade groups, bank consultants, and state and federal banking agencies to better understand the challenges these institutions face in raising capital, growing their institutions, and attracting talent. This process provided valuable insight and contributed significantly to the design of the program, which was spearheaded by the Federal Reserve Bank of Philadelphia. Key concepts from the program will be incorporated into the Federal Reserve System's examiner training to provide a deeper understanding of the issues unique to minority-owned institutions.

The nationwide launch of Partnership for Progress follows a successful pilot for the program that began last fall. Questions and comments regarding the program should be directed to Marilyn Wimp at the Federal Reserve Bank of Philadelphia, 215-574-4197.

Note:  While at the Minority Depository Institutions National Conference we received a preview to this program.  This will be a great help to all de novo and emerging banks.  Take a few minutes to view some of the information on the site.

FOR IMMEDIATE RELEASE August 1, 2008

Media Contacts: Andrew Gray (Cell: 202-494-1049) David Barr (Cell: 703-622-4790; Office: 202-898-6992)

First Priority Bank, Bradenton, Florida, was closed today by the Commissioner of the Florida Office of Financial Regulation, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with SunTrust Bank, Atlanta, Georgia, to assume the insured deposits of First Priority.

The six branches of First Priority will reopen on Monday as branches of SunTrust Bank. Depositors of the failed bank will automatically become depositors of SunTrust. 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. For the time being, however, customers of both banks should use their existing branches until SunTrust can fully integrate the deposit records of First Priority.

Over the weekend, customers of First Priority 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 June 30 2008, First Priority had total assets of $259 million and total deposits of $227 million. At the time of closing, there were approximately $13 million in uninsured deposits held in approximately 840 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.

Customers with accounts in excess of $100,000 should contact the FDIC toll free at 1-800-837-0215 to set up an appointment to discuss their deposits. This phone number will be operational this evening until 9:00 p.m. EDT; on Saturday from 8:00 a.m. to 8:00 p.m. EDT; and on Sunday and thereafter from 8:00 a.m. to 6:00 p.m. EDT.

In addition to continued access to their insured deposits, depositors of First Priority with amounts exceeding the insurance limits will receive a payment of 50 percent of their uninsured balance from the FDIC as receiver. The FDIC will mail these payments directly to the customers early next week; the amounts will not appear in their account balances at SunTrust Bank.

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/firstprioritybank.html. Beginning Monday, depositors of First Priority with more than $100,000 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

SunTrust agreed to assume the insured deposits for no premium. In addition to assuming the failed bank's insured deposits, SunTrust Bank will purchase approximately $42 million of the failed bank's assets. The assets are comprised mainly of cash, cash equivalents and securities. The FDIC, however, entered into a separate agreement with LNV Corporation, Plano, Texas, to purchase $14 million in First Priority's assets. LNV Corporation is a subsidiary of Beal Bank Nevada, Las Vegas, Nevada. The FDIC will retain the remaining assets for later disposition.

The cost to the FDIC's Deposit Insurance Fund is estimated to be $72 million. First Priority is the first bank to fail in Florida since Guaranty National Bank, Tallahassee, on March 12, 2004. This year, a total of eight FDIC-insured institutions have been closed.

 
All Insured and Uninsured Deposits Transferred to Acquiring Bank

FOR IMMEDIATE RELEASE July 25, 2008

Media Contact: In Washington: Andrew Gray (202) 898-7192 angray@fdic.gov In Arizona: David Barr Cell: (703) 622-4790 dbarr@fdic.gov

First National Bank of Nevada, Reno, Nevada, and First Heritage Bank, N.A., Newport Beach, California (owned by First National Bank Holding Company, Scottsdale, Arizona), were closed today by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC) was named receiver. The FDIC entered into purchase and assumption agreements with Mutual of Omaha Bank, Omaha, Nebraska, to take over all of the deposits and certain assets of the First National Bank of Nevada, Reno (also operating as First National Bank of Arizona, which recently merged into it), and First Heritage Bank, N.A., Newport Beach, California.

The 28 offices of the two banks will reopen on Monday as branches of Mutual of Omaha Bank. All depositors, including those with deposits in excess of the FDIC's insurance limits, will automatically become depositors of Mutual of Omaha Bank for the full amount of their deposits. Depositors will continue to be insured with Mutual of Omaha Bank so there is no need for customers to change their banking relationship to retain their deposit insurance.

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

Of the 10 institutions that have failed over the past two years, this is the second time in which another bank acquired all of the failing banks' insured and uninsured deposits. Mutual of Omaha Bank's acquisition of all deposits was the "least costly" resolution for the Deposit Insurance Fund compared to all alternatives because the expected losses to uninsured depositors were fully covered by the premium paid for the banks' franchises.

As of June 30, 2008, First National of Nevada had total assets of $3.4 billion and total deposits of $3.0 billion. First Heritage Bank had total assets of $254 million and total deposits of $233 million.

Customers who would like more information on today's transactions should visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/fnbnv.html (for First National Bank of Nevada) and http://www.fdic.gov/bank/individual/failed/heritage.html (for First Heritage Bank, N.A.). They may also call the FDIC toll free about both institutions at 1-866-674-8944 and 1-800-523-8089 until 9:00 p.m. Pacific time this evening, and then 8:00 a.m. to 8:00 p.m. daily, thereafter.

In addition to assuming all of the deposits of the banks, Mutual of Omaha Bank will purchase approximately $200 million of assets from the receiverships. Mutual of Omaha Bank will pay the FDIC a premium of 4.41 percent to assume all the deposits. The FDIC will retain the remaining assets for later disposition.

First Heritage Bank, N.A., Newport Beach, California, had three branches; its clientele was comprised primarily of corporations. First National Bank of Nevada, with 25 branches, also operated as First National Bank of Arizona. It is not affiliated with National Bank of Arizona, Zions Bancorporation or its affiliates.

The cost of the transactions to the Deposit Insurance Fund is estimated to be $862 million. The failed banks had combined assets of $3.6 billion, .03 percent of the $13.4 trillion in assets held by the 8,494 institutions insured by the FDIC.

First National Bank of Nevada is the first bank to be closed in Nevada since Frontier Savings Association, Las Vegas, on December 14, 1990. The bank closed most recently in California was IndyMac Bank, F.S.B., Pasadena, on July 11, 2008. This year, a total of seven FDIC-insured banks have been closed.

 FDIC Establishes IndyMac Federal Bank, FSB as Successor to IndyMac Bank, F.S.B., Pasadena, California

FOR IMMEDIATE RELEASE July 11, 2008

Media Contact: In Washington: Andrew Gray (202) 898-7192, Cell: 202-494-1049 angray@fdic.gov In California: David Barr Cell: 703-622-4790 dbarr@fdic.gov

IndyMac Bank, F.S.B., Pasadena, CA, was closed today by the Office of Thrift Supervision. The Federal Deposit Insurance Corporation (FDIC) was named conservator. The FDIC will transfer insured deposits and substantially all the assets of IndyMac Bank, F.S.B., Pasadena, CA, to IndyMac Federal Bank, FSB. Brokered deposits will be held by the FDIC and those insured deposits will be paid off when the insurance determination is complete. IndyMac Bank, FSB had total assets of $32.01 billion and total deposits of $19.06 billion as of March 31, 2008. As conservator, the FDIC will operate IndyMac Federal Bank, FSB to maximize the value of the institution for a future sale and to maintain banking services in the communities formerly served by IndyMac Bank, F.S.B.

Insured depositors and borrowers will automatically become customers of IndyMac Federal, FSB and will continue to have uninterrupted customer service and access to their funds by ATM, debit cards and writing checks in the same manner as before. Depositors of IndyMac Federal Bank, FSB will have no access to on-line and phone banking services this weekend. These services will be operational again on Monday. Loan customers should continue making loan payments as usual.

Beginning on Monday, July 14, IndyMac Federal Bank, FSB's 33 branches will observe normal operating hours and will continue to offer full banking services, including on-line banking. For additional information, the FDIC has established a toll-free number for customers of IndyMac Federal Bank, FSB. The toll-free number is 1-866-806-5919 and will operate today from 3:00 p.m. to 9:00 p.m. (PDT), and then daily from 8:00 a.m. to 8:00 p.m. thereafter, except Sunday, July 13, when the hours will be 8:00 a.m. to 6:00 p.m. Customers also may visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/IndyMac.html for further information.

At the time of closing, IndyMac Bank, F.S.B. had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors. The FDIC will begin contacting customers with uninsured deposits to arrange an appointment with an FDIC claims agent by Monday. Customers can contact the FDIC for an appointment using the toll-free number above. The FDIC will pay uninsured depositors an advance dividend equal to 50 percent of the uninsured amount.

Based on preliminary analysis, the estimated cost of the resolution to the Deposit Insurance Fund is between $4 and $8 billion. IndyMac Bank, F.S.B. is the fifth FDIC-insured failure of the year. The last FDIC-insured failure in California was the Southern Pacific Bank, Torrance, on February 7, 2003.

 FDIC Approves the Assumption of All the Deposits of First Integrity Bank, National Association, Staples, Minnesota

FOR IMMEDIATE RELEASE May 30, 2008

Media Contact: David Barr (202) 898-6992 Cell: (703) 622-4790 Email: dbarr@fdic.gov

First Integrity, National Association, Staples, Minnesota, with $54.7 million in total assets and $50.3 million in total deposits as of March 31, 2008, was closed today by the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation was named receiver.

The FDIC Board of Directors today approved the assumption of all the deposits of First Integrity by First International Bank and Trust, Watford City, North Dakota. Depositors of First Integrity will automatically become depositors of the assuming bank and continue to have uninterrupted access to their deposits. The failed bank's two offices will reopen on Saturday from 8:30 a.m. to 11:30 a.m. as branches of First International.

In addition to assuming all of the deposits of the failed bank, First International will purchase approximately $35.8 million of First Integrity's assets for a total premium of $2.03 million. The FDIC will retain approximately $18.9 million in assets for later disposition.

Customers with questions about today's transaction or who would like more information about the failure of First Integrity can visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/first_integrity_bank.html, or call the FDIC toll-free at 1-800-331-6306 until 9 p.m. this evening, and from 8 a.m. to 6 p.m., Central Daylight Time, thereafter.

The transaction is the least costly resolution option, and the FDIC estimates that the cost to its Deposit Insurance Fund is approximately $2.3 million. First Integrity is the fourth FDIC-insured bank to fail this year, and the first in Minnesota since Town & Country Bank of Almelund, on July 14, 2000. Last year, three FDIC-insured institutions failed.

 

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

MarketWatch posted an article titled "Bank failures to surge in coming years", which addresses a few issues surrounding the anticipated surge of bank failures, so far this year there have been three bank failures.  Overall, the article is very good and interesting - I just wanted to post a couple comments. 

As mentioned in the FDIC's annual plan they have been planning for such events (see BankNotes), in terms of additional work force and new systems.  They have carefully tested these systems to further prepare for financial disasters.  In the past few years they have been strongly encouraging banks to reduce their ratio of commercial real estate loans to below 300% of capital or lower depending on the bank's particular circumstances.  The regulators have done their job - in fact if anything they have been aggressively though. 

One challenge is that the banks are competitive and they are looking for deposits as well as loans.  The markets are demanding a rate of return.  The competition has caused banks to narrow margins, which are being squeezed tighter and tighter, and their overhead continues to climb.  At times, they may look at loans that perhaps they would normally not write. 

So now it appears that there will be more bank failures, what do we do?  It seems that patience is needed at all levels.  The regulators, can be a little slower to close banks, which they really do not want to close banks in the first place.  The banks can slow down on their aggressive lending practices and work to solve the issues with the problem loans, which they have done.  Now we need to wait to see - not 30 or 60 days but a year or more.  Banks will need time to work out these loans.  So, they can see their Texas Ratio start heading back down to lower levels.

Our economy has gone through these cycles before and they will go through them again - we all just need to be patient and let the dust settle.  When that happens we will see a little clearer and be able to better judge what to do next.  It's the old saying that ‘assets are soft and debts are hard', the assets and debts of the bank are no different.  How do you match up assets that are soft against hard debts - you can't - you have to wait until the assets rebound.  That takes patience!  But they will rebound - I don't think any piece of real estate in this country has ever been deem - ‘completely worthless' if it has it has not been there for long - someone has made some value out of it in the future.  Moreover, they will do it again with any property a bank has on its books.

 

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.

I. Introduction

On May 9, 2008, ANB Financial, NA, Bentonville, AR was closed by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed.

The FDIC has assembled useful information regarding your relationship with this institution. Besides a checking account, you may have Certificates of Deposit, a car loan, a business checking account, a commercial loan, a Social Security direct deposit, and other relationships with the institution. The FDIC has compiled the following information which should help answer many of your questions.

II. Press Release

The FDIC has issued a press release (PR-33-2008) about the institution's closure. If you represent a media outlet and would like information about the closure, please contact David Barr at 202-898-6992.
Back to top

III. Acquiring Financial Institution and Your Insured Deposits

All insured deposit accounts have been transferred to Pulaski Bank and Trust Company, Little Rock, AR ("assuming institution") and will be available immediately. Your bank will re-open on Monday at 8:30 am at the former ANB Financial, NA main office and branch. You may view more information about Pulaski Bank and Trust Company by visiting their web site.
Pulaski Bank and Trust Company Web Site (www.pulaskibank.com)

Principal and interest on insured accounts, through May 9, 2008, are fully insured by the FDIC, up to the insurance limit of $100,000. You will receive full payment for your insured account. Certain entitlements and different types of accounts may be insured for more than the $100,000 limit. IRA funds are insured separately from other types of accounts, up to a $250,000 limit.

If it is determined that you have uninsured funds, the FDIC will mail you a Receiver Certificate. This certificate entitles you to share proportionately in any funds recovered through the assets of ANB Financial, NA. This means that you may eventually recover some of your uninsured funds.

All accounts that exceed the $100,000 insurance limit, and/or all accounts that appear to be related and exceed this limit, are reviewed by the FDIC to determine their ownership and insurance coverage. If it appears that you have potentially uninsured funds, an FDIC Claim Agent will contact you, by either telephone or mail, regarding your account(s). Or, you may call 1-877-367-2719 up to 9:00 pm Central on May 9, 2008 and between 8:00 am and 6:00 pm Central thereafter, to arrange for a telephone interview with a Claim Agent. The Claim Agent may direct you to download and submit a particular form that will assist in expediting the processing of your claim.

List of Affidavits, Declarations, and Forms available for download

Your transferred deposits will be separately insured from any accounts you may already have at Pulaski Bank and Trust Company for six months after the failure of ANB Financial, NA. Checks that were drawn on ANB Financial, NA that did not clear before the institution closed will be honored up to the insurance limit. You may speak to an FDIC representative regarding deposit insurance by calling: 1-877-ASK-FDIC (1-877-275-3342).

You may withdraw your funds from any transferred account without an early withdrawal penalty until you enter into a new deposit agreement with Pulaski Bank and Trust Company by either making a deposit to or a withdrawal from your account, provided the deposits are not pledged as collateral for loans.

For all questions regarding new loans and the lending policies of Pulaski Bank and Trust Company, please call 1-888-226-5262.

For additional information on deposit insurance visit EDIE the FDIC's Electronic Deposit Insurance Estimator.

EDIE - FDIC's Electronic Deposit Insurance Estimator

V. Banking Services

You may continue to use the services to which you previously had access, such as automatic teller machines (ATMs), safe deposit boxes, night deposit boxes, wire services, etc.

Your checks will be processed as usual. All outstanding checks will be paid against your available insured balance(s) as if no change had occurred. Pulaski Bank and Trust Company will contact you soon regarding any changes in the terms of your account. If you have a problem with a merchant refusing to accept your check, please contact Pulaski Bank and Trust Company, Customer Service Department, at 1-888-226-5262. An account representative will clear up any confusion about the validity of your checks.

After May 9, 2008, your account will earn interest at a rate determined by Pulaski Bank and Trust Company. You will be notified by letter regarding this matter.

Your automatic direct deposit(s) and/or automatic withdrawal(s) should be transferred automatically to your Pulaski Bank and Trust Company. You should contact Pulaski Bank and Trust Company, however, to discuss your account(s) and to insure that service is not delayed or discontinued.

All your deposit account histories and records will be transferred to Pulaski Bank and Trust Company. If Pulaski Bank and Trust Company requires any additional signatures or forms, it will notify you. If you have any questions or special requests, you may contact a representative of Pulaski Bank and Trust Company at 1-888-226-5262.
Back to top

VI. Loan Customers

If you had a loan with ANB Financial, NA, you should continue to make your payments as usual. The terms of your loan will not change under the terms of the loan contract because they are contractually agreed to in your promissory note with the failed institution. Checks should be made to your former bank and sent to the same address until further notice.
Back to top

VII. Possible Claims Against the Failed Institution

Claims against failed financial institutions occur when bills sent to the institution remain unpaid at the time of failure. Shortly after the failure, the FDIC sends notices directly to all known service providers to explain the claim filing process.

Please note: there are time limits for filing a claim, as specified in the notice.

If you provided a service for ANB Financial, NA and have not received a notice, please contact:

Federal Deposit Insurance Corporation
Receiver: ANB Financial, NA
Attention: Claims Department, DRR
1601 Bryan Street
Dallas, Texas 75201

Or:
Call toll free 1-800-568-9161
Back to top

VIII. Priority of Claims

In accordance with Federal law, allowed claims will be paid, after administrative expenses, in the following order of priority:

1. Depositors
2. General Unsecured Creditors
3. Subordinated Debt
4. Stockholders

IX. Dividend Information

No dividends have been paid at this time.
Dividend Information on Failed Financial Institutions
Back to top

X. Brokered Deposits

The FDIC offers a reference guide to deposit brokers acting as agents for their investor clientele. This site outlines the FDIC's policies and procedures that must be followed by deposit brokers when filing for pass-through insurance coverage on custodial accounts deposited in a failed FDIC Insured Institution.