BankNotes ...

The FDIC's mission to maintain stability in the U.S. banking system is partially fulfilled by the deposit insurance program. The FDIC collects premiums from banking institutions to fund the deposit insurance; these premiums are calculated as a percentage of each bank's total deposits. Most banks today are paying out insurance premiums of about 5 to 7 cents for every $100 of domestic deposits.   

The premiums, less operating costs, go into the Deposit Insurance Fund (DIF) which is used to cover the deposit losses of failed banks. Since the existence of a viable deposit insurance program is of critical importance in maintaining the public's faith in the banking system, the FDIC is continually assessing the risks of bank failures and projecting potential expenses that may be charged to the DIF.

Rising losses could signal rising fees

This year, the FDIC has been appointed the receiver for ten banks with total assets just over $40 billion. Not all of these assets translate to losses in the DIF however. Part of the FDIC's function as receiver is to sell off the assets of the failed banks, thus recouping losses to the DIF. It is estimated that the losses to the DIF associated with those ten bank failures will amount to $7.5 billion, meaning that more than 80 percent of the total assets should be recovered.

Even so, the FDIC's list of problem banks is growing. As of the end of the second quarter, there were 117 banks on the "problem" list, up from 90 at the end of the first quarter and 61 at the end of the second quarter of 2007. To address the rising number of at-risk banks, the FDIC increased its provisions for insurance losses by $10.2 billion during the second quarter; this was the largest factor behind the $7.6 billion decrease in the fund, which ended the quarter at $45.2 billion (unaudited). Since insured deposits only rose 0.5 percent in the same time period, the reserve ratio fell to 1.01 percent as of June 30, 2008. The reserve ratio has not been this low since 1995, when the combined Bank Insurance Fund (BIF) and Savings Account Insurance Fund (SAIF) was 0.98. The BIF and SAIF were merged in 2006.

When the reserve ratio dips below 1.15 percent, the FDIC is required by the Federal Deposit Insurance Reform Act of 2005 to create a fund restoration plan that will bring the ratio back up to 1.15 percent within five years. FDIC Chairman, Sheila C. Bair, has already stated publicly that the FDIC's restoration plan is likely to incorporate an increase in the premiums the banks pay into the fund. Bair has also indicated that the FDIC will propose changes in the rate structure to shift a greater share of the responsibility onto financial institutions that participate in higher-risk activities. The current credit crisis will likely result in premium increases across the board for all banks.

An increase in FDIC insurance premiums will put more strain on banks that are already grappling with rising credit losses. While this is bad news for existing banks, it is a necessary step in maintaining the public's confidence in the banking system. Should the FDIC develop an assessment system that provides rewards to banks that engage in safer activities, at least these institutions will have the option and incentive to take some of the risk out of their operations. De novo banks may end up with an advantage in this regard, because they can open the doors with a business strategy that complies with FDIC guidelines to keep premiums low and minimize risk going forward. De Novo Banks also open without a legacy portfolio that may have some high-risk loans. Very few de novo banks fail, which is a credit to the bankers and regulators working together in an effort to build a solid foundation for the new financial institution.

For banks with problem loans in its portfolio, the best solution is to get in and meet with the borrowers early (perhaps when the borrower misses the first payment, not the third). The sooner the problems are addressed the greater opportunity for success in recovery or improvement of the loan. This might mean meeting with all borrowers as a ‘check up' on their status. It is far better for the bank to find the problem loans than the examiners.

The bank insurance fund is a critical part of our country's economic engine and is a model for the world. The fund will be stressed during this credit crisis, but we have to maintain the faith in the system that has kept our banking system safe and in good health for the past 75 years.

By Wendell Brock, MBA, ChFC

Integrity Bank, Alpharetta, Georgia, with $1.1 billion in total assets and $974.0 million in total deposits as of June 30, 2008, was closed today by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corporation was named receiver.

The FDIC Board of Directors today approved the assumption of all the deposits of Integrity Bank by Regions Bank, Birmingham, Alabama. All depositors of Integrity Bank, including those with deposits in excess of the FDIC's insurance limits, will automatically become depositors of Regions Bank for the full amount of their deposits, and they will continue to have uninterrupted access to their deposits. Depositors will continue to be insured with Regions Bank so there is no need for customers to change their banking relationship to retain their deposit insurance.

The failed bank's five offices will reopen Tuesday, September 2nd, as branches of Regions Bank. However, for the time being, customers of both banks should use their existing branches until Regions Bank can fully integrate the deposit records of Integrity Bank.

Regions Bank has agreed to pay a total premium of 1.012 percent for the failed bank's deposits. In addition, Regions Bank will purchase approximately $34.4 million of Integrity Bank's assets, consisting of cash and cash equivalents. The FDIC will retain the remaining assets for later disposition.

Customers with questions about today's transaction or who would like more information about the failure of Integrity Bank can visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/integrity.html, or call the FDIC toll-free at 1-800-523-0640, today from 5 p.m. until 9 p.m., Eastern Time, on Saturday from 9 a.m. to 6 p.m., on Sunday from 11 a.m. to 5 p.m., and thereafter from 8 a.m. to 8 p.m.

The FDIC estimates that the cost to its Deposit Insurance Fund will be between $250 million and $350 million. Regions Bank's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to all alternatives because the expected losses to uninsured depositors were fully covered by the premium paid for the failed bank's franchise.

Integrity Bank is the tenth FDIC-insured bank to fail this year, and the first in Georgia since NetBank in Alpharetta on September 28, 2007.

By Wendell Brock, MBA, ChFC

Years ago when I was backpacking in the High Sierras, my Boy Scout leader taught me that the air temperature was coldest just before dawn. Hopefully, we are experiencing that time now and things will get better as dawn approaches, because this quarter's report is pretty ice cold! Total net income from insured banks is off 87 percent from second quarter last year to $5 billion. "Loss provisions totaled $50.2 billion, more than four times the $11.4 billion quarterly total of a year ago." Provisions drained almost one-third (31.9 percent) of the industry's operating revenue-the highest level since the third quarter of 1989. 

The average return on assets (ROA) was only 0.15 percent; in the same quarter last year, it was 1.21 percent. Larger institutions (over $1 billion in assets) suffered a bit more; their ROA was 0.10 percent. The average ROA for the smaller institutions (less than $1 billion in assets) was 0.57 percent. In the same quarter last year, the ROAs were 1.23 percent and 1.10 percent, respectively. Nearly two of three institutions (62.1 percent) reported a lower ROA this quarter. Almost 18 percent of banks, approximately 1,530 in number, were unprofitable this quarter; in the second quarter of 2007, this percentage was 9.8 percent.

Noninterest income was 10.9 percent lower than in second quarter of 2007, dipping to $60.8 billion. This decline was due in large part to lower trading income, which totaled only $5.5 billion and was down 88.6 percent from last year. A revenue bright spot showed up in net interest income, which increased by $8.2 billion (9.3 percent) over last year, with servicing fee income rising 35.9 percent or $1.9 billion. Bank customers paid more in service charges this quarter by $853 million or 8.6 percent over year-earlier levels.

Net interest margin ticked up slightly to 3.37 percent compared to the first quarter's margin of 3.33 percent. "Improvements and declines were fairly evenly divided among insured institutions, with 46.9 percent reporting lower margins than in the first quarter, and 51.5 percent reporting improved NIMs." The average yields on interest-bearing assets fell 51 basis points, from 6.27 percent to 5.76 percent. During the same quarter, the interest expense dropped 57 basis points from 2.95 percent to 2.38 percent. The industry average has remained steady within a 5-basis-point range over the last six quarters. The margins for community banks have fallen by 21 basis points, and larger institutions have gained only 10 basis points.

Net charge-offs increased sharply to a total of $26.4 billion during the quarter, which is almost three-times the $8.9 billion in the second quarter of 2007. This is the largest quarterly charge-off rate since the fourth quarter of 1991. At large institutions, the charge-off rate was 1.46 percent; at small institutions, the rate was only 0.44 percent. The annualized industry average for the quarter was 1.32 percent, considerably higher than last year's quarterly average of 0.49 percent.

The amount of noncurrent loans and leases has risen for nine consecutive quarters, increasing by $26.7 billion or 19.6 percent. In the second quarter, all major loan categories experienced increases in noncurrent loans. By quarter-end, the industry's total noncurrent loans and leases reached 2.04 percent, the highest level since the third quarter of 1993. Provisions increased for the third straight quarter, nearly doubling the amount of charge-offs. Institutions set aside $23.8 billion in provisions during the quarter and industry reserves rose by 19.1 percent. The total ratio increased from 1.52 percent to 1.80 percent, which is the highest level since mid-1996. At the same time, the coverage ratio slipped slightly from 88.9 cents for every $1.00 of noncurrent loans to 88.5 cents, which is a 15-year low.

Sixty percent of the institutions reported a decline in their total risk-based capital ratios during the quarter. The industry added only $10.6 billion to its regulatory capital during the quarter. Dividend payments were significantly lower during the quarter, totaling $17.7 billion, less than half the $40.9 billion paid a year earlier. Only 45.5 percent of the institutions reported higher retained earnings compared to a year ago. "Despite the slowdown in capital growth and the erosion in capital ratios at many institutions, 98.4 percent of all institutions (accounting for 99.4 percent of total industry assets) met or exceeded the highest regulatory capital requirements at the end of June."

Total assets declined for the first time since the first quarter of 2002 and experienced the largest quarterly decline since the first quarter of 1991. The decline totaled $118.9 billion or 11.8 percent, with nearly 40 percent of banks reported lower assets at the end of June. OREO properties (acquired by foreclosure) increased by $3.5 billion (29.1 percent) during the quarter to $15.6 billion.

Small business and farm loans increased only 3.4 percent or $25.3 billion during the 12 months ending June 30. These loans currently account for 32.7 percent of all business and farm loans to domestic borrowers. Larger business and farm loans increased by $249.4 billion or 18.4 percent during the same period. Total deposits increased only $6.9 billion or 0.1 percent during the second quarter. This was mostly from deposits in foreign offices, which rose by $46.8 billion, while domestic office deposits decreased by $39.6 billion.

Reporting institutions dropped to 8,451, equating to a loss of 43 institutions. Two banks failed during the quarter, ANB Financial in Arkansas and First Integrity in Minnesota. Three mutual banks converted to stock ownership (combined assets of $1.1 billion). The FDIC's problem bank list increased by 27 banks this quarter, from 90 banks in the first quarter to 117. This is an increase of 40 new problem banks for the year. Assets of problem banks increased from $26.3 billion to $78.3 billion. During the quarter there were 24 new charters, which brings the total of de novo banks for the year to 62.

We can only hope this is as cold as it gets before the dawn!

Note: quotes are from the FDIC second quarter 2008 report.

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 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

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.

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.
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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.
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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.
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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
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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
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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.

So in difficult times, as we are experiencing now, the strategic plan of the FDIC is in place to guide the regulators in managing the complex issues they experience in the financial/banking environment. The targeted loss reserves are between 1.15 and 1.50 percent of estimated insured deposits. The loss reserve is the insurance fund, which is financed by charging the banks an insurance premium based on the risk exposure of the bank and its insured deposits. This premium is derived from the FDIC's Financial Risk Committee (FRC) assessments, quarterly failure projections and loss estimates. The FRC analyzes the risk exposure of the insurance fund based on the risks of the insured banks. When bank loans go bad, the risk exposure of the bank goes up and the FRC reevaluates the risk of the fund. This, in turn, sets a new premium for the bank and for other similar banks.

The FDIC reviews the assessment history of all failed banks on an ongoing basis to determine if the system is working properly. In 2007, after much research and testing, a new risk-based assessment system was implemented through the modification of FDIC systems and business procedures. This updated system is designed to measure the risk of individual banks more accurately, which allows for the assessment of fees that are more in line with the risk level. Currently, the FDIC is the primary regulator for 5,197 state-chartered banks that are not members of the Federal Reserve System or are national banks or thrifts which are regulated by the OCC and OTS respectively.

Because of the complexity of the analysis that is required to develop accurate pricing and review the effectiveness of new regulations, the FDIC will require additional staff. Further demands will arise from the combining of the Bank Insurance Fund and the Savings Association Insurance Fund; the merger affected 48 information systems and resulted in some changes in deposit coverage. As a result, the FDIC will require new analysis techniques and will be tasked with extensive testing of the systems. All of these systems are necessary to manage the risk of consumers and businesses not being able to pay their debts, while keeping consumer and commercial deposits safe and accessible.

This enormous balancing act adds to the challenge of starting a new bank. The risks to a new bank are great because they have new capital to employ; new banks need assets on the books and many deposits to help fund the new loans. However, because of the strict regulatory controls, new banks succeed more often than not. It is rare that a de novo bank fails. If the right organizers and bank board, management team, business plan and capital are in place, chances are great that a de novo bank will succeed.

Treasury Blueprint Would Abolish NCUA and NCUSIF

WASHINGTON - Among the long-term recommendations of the Treasury Blueprint would be the creation of a new federally-insured depository institution (FIDI) charter. The FIDI charter would consolidate the national bank, federal savings association, and federal credit union charters and would be available to all corporate forms, including stock, mutual, and cooperative ownership structures. A new prudential regulator, the Prudential Financial Regulatory Agency ("PFRA"), would be responsible for the financial regulation of all FIDIs. In explaining its rationale for a single charter, Treasury wrote "[t]he goal of establishing a FIDI charter is to create a level playing field where competition among financial institutions can take place on an economic basis, rather than on the basis of regulatory differences." The operation of the credit union insurance fund would be assumed by the FDIC, which would be reconstituted as the Federal Insurance Guarantee Corporation.  "Some credit unions have arguably moved away from their original mission of making credit available to people of small means, and in many cases they provide services which are difficult to distinguish from other depository institutions." Treasury Department's Blueprint for a Modernized Financial Regulatory Structure.

http://www.treas.gov/press/releases/reports/Blueprint.pdf

By: Keith Leggett, American Bankers Association 

Recently Ms. Sheila Blair presented the FDIC's 2008 Annual Performance Plan. Ms. Blair's published introduction to the Plan discusses the historical mission of the FDIC as well as the current economic environment. This year, the FDIC will celebrate its 75th year of insuring the nation's bank deposits. And the organization is perhaps finding itself in one of the most demanding years since its founding. Indeed, the FDIC plays a critical role in "maintaining public confidence in the nation's financial system." The challenges associated with this role, given the current financial difficulties, are broad and deep.

The maintenance of public confidence requires the FDIC to manage many different aspects of our nation's financial system. The organization currently administers approximately 250 programs to help keep the banks operating in a safe and sound manner; the FDIC is tasked with insuring deposits, keeping the public informed, helping the banks manage risks, as well as many other action items associated with our banking and financial system.

When problems arise, the goal is to address them promptly, solving them before they become issues that can cause serious financial problems. This requires the FDIC to be prepared to handle failures of insured institutions, "regardless of their number and size." Yes, this means that the FDIC is expecting some bank failures this year and perhaps even some large banks. There have already been two to date; see BankNotes for the press releases on these events. Both failed entities were small banks in Missouri, not much in the overall financial market, but still important nonetheless. In preparation for more extreme events, the FDIC is finalizing a "claims process to manage large/complex bank failures, including a new automated system to support this process."

The FDIC is also working closely with consumer protection groups to help with the current foreclosure issues facing many Americans. While we as Americans pride ourselves in our education system (for all its faults, it is still very good), our financial literacy is quite low-a statement that can be supported by our low savings rate. The FDIC is working to improve that by finalizing plans to distribute 10,000 booklets addressing financial literacy.

An additional challenge the FDIC is facing is the attrition of its workforce. Nearly 40 percent of the FDIC workforce will be retiring within the next ten years. This will create a large demand for new employees to be trained to take over and manage this critical institution. The FDIC expects to be regarded as an "outstanding employer." It will be looking to secure well-educated people with advanced technical and analytical skills, who can effectively support and carry out the FDIC mission. The plan has many more discussion points, which will be addressed in future articles.