Committee on Financial Institutions Texas House of Representatives

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

2. 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. House Committee on Financial Institutions June 2008

3. Seriously Delinquent Subprime Loans, as Percent of Active Loans Year-end 2006 Year-end 2007 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.

4. Texas State-Chartered Banks*Highlights – March 31, 2008 • 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. House Committee on Financial Institutions June 2008

5. Texas State-Chartered Banks*Stresses – March 31, 2008 Prepared by: Texas Department of Banking • 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. House Committee on Financial Institutions June 2008 5

6. 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 30-89 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 2008. • Foreclosed 1-4 family property is manageable at $48.5 million. *Indicates only commercial banks supervised by the Department of Banking. House Committee on Financial Institutions June 2008

7. Texas Department of BankingBank Regulatory Plan • 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. House Committee on Financial Institutions June 2008

8. Texas State-Chartered Banks*Credit Card Activity - March 31, 2008 • 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. House Committee on Financial Institutions June 2008

9. Texas Department of BankingFinancial 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 2007. • 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 2008. • 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. House Committee on Financial Institutions June 2008