Eastern Bank says it is sound

TV erroneously reported risk of failure

customers alarmed

July 17, 2008|By Paul Adams | Paul Adams,Sun reporter

Eastern Savings Bank of Hunt Valley sought to calm nervous depositors yesterday after an erroneous television news report said the bank could close amid financial troubles.

Though later corrected, the mistake sparked dozens of calls to the bank and illustrated how anxious consumers feel about financial institutions after a week in which one major bank failed and federal regulators stepped in to rescue mortgage giants Fannie Mae and Freddie Mac.

Baltimore ABC News affiliate WMAR-TV aired the report about Eastern during its noon newscast. A producer at the station mistakenly concluded that Eastern was in danger of closing after it was included in an ABCnews.com report of private analyses of banks carrying a high percentage of delinquent loans, a WMAR news director said.

A senior banking official with Eastern acknowledged that the bank has appeared on similar industry reports for 17 years but said it has remained profitable during that time.

The privately held bank is well-capitalized by industry standards, and its regulatory filings show that it has been profitable in every quarter for the past year. Eastern, with assets of more than $1 billion and Baltimore roots dating to 1905, has four branches in the metro area.

ABCnews.com cited one report by Research Associates of America, a Washington-based nonprofit funded by labor unions, that said Eastern had one of the highest ratios of bad loans in the country.

But Eastern officials said such figures are a result of the bank's unconventional business model, which includes buying defaulted loans at a discount from other banks and trying to collect what it can from the borrowers.

The bank is not subject to any enforcement action by the Office of Thrift Supervision, an agency spokesman said yesterday. The Office of Thrift is among the regulators that oversee the financial health of banks across the nation.

WMAR News Director Manager Peggy Phillip said the station apologized to bank officials and aired a correction on its evening newscasts. But the senior bank official said the report resulted in 40 to 50 phone calls from customers.

Bank officials posted a note on the doors of its branches yesterday saying that it was not in financial distress and that "news reports to the contrary are totally false and irresponsible."

"It was not anything like a run on the bank, nor do we anticipate there will be," said the bank official, who did not want his name used, citing the family-owned bank's corporate policy on talking with the news media.

The ABC report came as consumers are watching for any news of trouble at their banks during turmoil in the financial industry. The worries stem in part from news last week that Pasadena, Calif.-based IndyMac had failed, forcing its takeover by the Federal Deposit Insurance Corp. In a chaotic scene, customers lined up outside the bank this week, trying to withdraw their funds.

The news on IndyMac preceded the Bush administration's announcement over the weekend that it will implement a plan to shore up Freddie Mac and Fannie Mae in the wake of Wall Street concerns that the nation's two largest mortgage lenders were at risk of insolvency. The two companies guarantee more than $5 trillion in mortgages, accounting for about half the nation's total.

President Bush sought Tuesday to calm consumers worried about the safety of their bank deposits and a souring economy. Speaking to reporters, Bush declared the nation's banks "basically sound." But he said there is no quick fix to rising concerns about energy prices and inflation - two factors hampering an economic recovery.

FDIC Chairwoman Sheila Blair also appeared on CBS' The Early Show Tuesday to assure consumers that the banking system as a whole is "absolutely safe." The FDIC insures bank deposits of up to $100,000 per depositor and up to $250,000 for funds in retirement accounts such as IRAs.

Banking analysts agreed with Blair's assessment yesterday but said the mortgage lending crisis will likely result in the failure of 150 to 200 banks during the next 18 months to two years.

Elinda Kiss, a Tyser teaching fellow at the University of Maryland's Robert H. Smith School of Business, who specializes in finance and banking, said fear and lack of knowledge drive consumers to panic in the face of such turmoil. Some consumers have heard stories or know people who lost money during the Depression, she said.

"They hear something bad and it's mob psychology," Kiss said. "They are afraid. I don't think people understand deposit insurance."

Concern over Eastern Savings Bank occurred when ABCnews.com said it appeared on lists of troubled banks compiled by research groups and financial analysts. But the lists rely on financial measures that distort Eastern's fiscal well-being, the senior bank official said.

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