Committee on Financial Institutions Texas House of Representatives Residential Mortgage Foreclosure Credit Cards Financial Education Testimony by: Robert Bacon, Deputy Commissioner Texas Department of Banking June 11, 2008

Texas State-Chartered Banks * Overview The Texas state-chartered banking system is entering this period of economic uncertainty from a position of relative strength. Overall, state-chartered banks are operating within acceptable risk profiles and reflect sufficient management, capital, profitability, liquidity and loan loss reserves. Overall, the involvement of state-chartered Texas banks in residential mortgage lending has been measured, prudent, and conducted in a safe and sound manner. However, stresses in the housing markets, including interim construction and land development, have affected some institutions, with a few banks experiencing a marked increase in asset quality issues. *Indicates only commercial banks supervised by the Department of Banking. Prepared by: Texas Department of Banking House Committee on Financial Institutions June

Source: FDIC calculations based on the LoanPerformance Securities Database Note: Seriously Delinquent includes active loans 90 or more days past due or in foreclosure; excluding REO. Seriously Delinquent Subprime Loans, as Percent of Active Loans Year-end 2006 Year-end 2007

Texas State-Chartered Banks * Highlights – March 31, 2008 House Committee on Financial Institutions June 2008 Prepared by: Texas Department of Banking 4 Texas has 328 state-chartered institutions with $152.8 billion in assets, employ 35,335 persons, and operate 1,463 in-state branches and 392 out-of-state branches in eight states (AZ, CA, CO, FL, MI, NM, OK, VA). New Texas state-chartered banks opening in 2007 totaled 14. Capital adequacy is strong with a core position of 9.1%. Loan loss reserves are adequate at 1.11% of total loans. Profitability is acceptable with a return on assets of 1.01% and return on equity of 9.99%. Loan volume is satisfactory with net loans and leases to total assets at 67.68%. Past dues loans are manageable at 1.0% of total loans and leases. The primary funding source remains core deposits at 61.26% of total liabilities. *Indicates only commercial banks supervised by the Department of Banking.

Texas State-Chartered Banks * Stresses – March 31, 2008 House Committee on Financial Institutions June 2008 Prepared by: Texas Department of Banking 5  The percentage of unprofitable institutions increased to 12.5%, but adjusted for unprofitable state charters less than one year old, the ratio changes to 8.8%.  Overall, the net interest margin declined to 3.72%.  The number of problem institutions (CAMELS rated 3, 4, or 5) increased to 14 (none are rated 5 or are in immediate jeopardy of failing).  Net loan charge-offs to total loans increased to 0.51%.  Experienced bankers with loan work-out experience are in short supply. *Indicates only commercial banks supervised by the Department of Banking.

Texas State-Chartered Banks * Residential Mortgage Activity- March 31, 2008 Material residential mortgage loan problems have been avoided due to: minimal credit concentrations; generally sound underwriting; and statutory limitation on home equity loans at 80% of the property’s appraised value. 1-4 family mortgage loans total $11.5 billion or 7.46% of gross bank assets, a decrease from 9.45% and 10.11% as of March 2005 and 2002, respectively. (Nationwide, 1-4 family mortgages at commercial banks are 17.19% of gross bank assets.) Past due residential mortgages are manageable at 1.03% for days and 0.27% for 90 plus days. Net charge-offs of residential mortgages remain manageable at $17 million in 2007 and $6.5 million for the first quarter of Foreclosed 1-4 family property is manageable at $48.5 million. *Indicates only commercial banks supervised by the Department of Banking. Prepared by: Texas Department of Banking House Committee on Financial Institutions June

Texas Department of Banking Bank Regulatory Plan House Committee on Financial Institutions June 2008 Prepared by: Texas Department of Banking 7 The Department, in conjunction with other state and federal bank regulators, is concentrating on monitoring and reacting to:  System liquidity and bank funding sources;  Concentrations in construction and land development loans;  Concentrations in commercial real estate loans; and  Bank management’s risk management practices.

Texas State-Chartered Banks * Credit Card Activity - March 31, 2008 House Committee on Financial Institutions June 2008 Prepared by: Texas Department of Banking 8 Most Texas state-chartered banks are not active in extending credit card debt. Only ten institutions reflect credit card loans in excess of 1.0% of total assets. Texas state-chartered banks are not active in issuing credit card loans, predominately because of the state usury ceiling as other states have no usury limit for this type debt. Basically, Texas citizens carry credit cards issued by out-of-state financial institutions. *Indicates only commercial banks supervised by the Department of Banking.

Texas Department of Banking Financial Education Highlights  Conducted legal research and initiated discussions with the FDIC to reduce the burden of establishing in-school branches.  Participated in state-wide financial education surveys in 2006 and  Conducted a series of seven statewide workshops in 2007 that attracted hundreds of participants.  The Department’s Financial Education Coordinator visited over 20 state-chartered banks in fiscal year 2008, with five more visits planned before September  The Financial Education Coordinator has been active in numerous public speaking events.  Leilani Lim-Villegas, the Department’s Financial Education Coordinator, received one of five FDIC 2007 Pioneer Awards for her efforts in promoting financial education. Prepared by: Texas Department of Banking House Committee on Financial Institutions June