January 17, 2013Agency Responsibilities andTexas Banking System Kurt Purdom Director of Bank and Trust Supervision Texas Department of Banking
DisclaimerThe views expressed in this presentation arethose of the author and do not necessarilyreflect official positions of the TexasDepartment of Banking. Some of theinformation used in the preparation of thispresentation was obtained from publiclyavailable sources which are consideredreliable. However, the use of this informationdoes not constitute any endorsement of itsaccuracy by the Texas Department of Banking.
Topics Agency Operations Banking Issues Balance Sheet Risk vs. Reward New Product Lines Trimming OH Costs CFPB BASEL III Cyber Crime3
Profile of Regulated Entities Total Assets Regulated Entity Number of Entities $(billions) Commercial Banks* 300 $196 Foreign Bank Agencies 10 $ 84 Public Trust Companies 22 $ 22 Prepaid Funeral Licensees 398 $ 3 Perpetual Care Cemeteries 243 $ 0 Money Service Businesses 135 $ 81 Private Child Support Enforcement Agencies 10 N/A Check Verification Entities 4 N/A Totals 1,122 $386 Information as of June 2012. * Excludes out of state, state-chartered banks operating in Texas.5
Assets Under Supervision in Texas Sources:6 FDIC June 2012
Return on Assets by State 8Source: FDIC Quarterly Banking Profile – 3Q 2012.
Commercial Bank Performance and Condition RatioComparison (State and Federal Charters) Texas Nation Texas Nation 12/31/2008 12/31/2008 6/30/2012 6/30/2012 Number of Banks 594 7,085 544 6,222 Total Assets ($ in millions) $273,498 $12,312,914 $338,458 $12,889,818 % of Unprofitable Institutions 14.14% 21.85% 6.07% 9.95% Net Interest Margin 3.82% 3.23% 3.59% 3.50% Return on Assets 0.82% 0.21% 1.19% 0.99% Return on Equity 7.85% 2.11% 10.64% 8.86% Net Charge-Offs to Loans 0.50% 1.31% 0.44% 1.15% Earnings Coverage of Net Loan Charge- Offs (x) 5.00 2.17 6.41 2.92 Efficiency Ratio 64.73% 58.30% 62.23% 61.87% Source: FDIC As of 12-31-08 and 6-30-129
Commercial Bank Performance and Condition RatioComparison (State and Federal Charters) Texas Nation Texas Nation 12/31/2008 12/31/2008 6/30/2012 6/30/2012 Loss Allowance to Loans 1.31% 2.28% 1.72% 2.44% % CRE to Total Loans 44.2% 25.0% 20.8%* 14.1%** % CRE to Total Risk-Based Capital 285.2% 148.6% 117.8%* 73.2%** % C & D Loans to Total RBC 108.6% 46.4% 40.9% 15.3% Noncurrent Assets Plus ORE to Assets 1.14% 1.82% 1.71% 2.40% Noncurrent Loans to Loans 1.43% 2.90% 2.07% 3.93% Core Capital (leverage) Ratio 8.94% 7.42% 9.81% 9.11% Equity Capital to Assets 10.40% 9.45% 11.21% 11.29% Tier 1 Risk-Based Capital Ratio 10.62% 9.75% 14.38% 12.84% Total Risk-Based Capital Ratio 12.67% 12.75% 16.12% 14.98% Total Bank Failures and Assistance Transactions (All) 2 30 0 32 Source: FDIC As of 12-31-08 and 6-30-12 *Represents CRE Concentration (without owner occupied properties). CRE Exposure w/owner occupied and commitments would be 36.3% and 205.6%, respectively.10 ** Represents CRE Concentration (without owner occupied properties). CRE Exposure w/owner occupied and commitments would be 22.7% and 117.7%, respectively.
Noncurrent Rate on RE Construction and Development Loans (Nationally)11
RE Loan Growth Rates: 2001 to 2011 (All FDIC Insured Institutions in the U.S.)Source: FDIC Quarterly Bank Profile – 3rd Quarter 2012. 12
Yield Curve: Low Rates Continue13 Graphic provided by Federal Reserve Bank of Dallas
Quarterly NIM: Lower Asset Yields Cause Downward Pressure (All Insured Institutions in the U.S.)Source: FDIC Quarterly – 2nd Quarter 2012. 14
Dodd-Frank ActPurpose: Promote financial stability by improving accountability and transparency in the financial system, ending “too big to fail,” and protecting consumers. Organized under 16 titles in 848 pages of legislation.Requires regulators to create 243 rules.Conduct 67 studies.Issue 22 periodic reports. 16
Dodd-Frank ActOTS: Eliminates the Office of Thrift Supervision, who was the supervisor of federal thrifts. 17
Dodd-Frank ActToo Big to Fail: Requires banks of $50 billion and over to draft living wills and imposes new capital requirements, which may make it undesirable to become too big. FSOC: Creates the Financial Stability Oversight Council. Charged with identifying and responding to emerging risks in the financial system. Decides which banks and other non‐bank financial service providers are “Systemically Important Financial Institutions,” or SIFIs. 18
Dodd-Frank Act Amends FDI Act to fully insure, without limit, all noninterest bearing transaction accts. Ended 12‐31‐ 12. Voelcker Rule – Will ban proprietary trading. Banks can still execute trades for customers, but not for themselves. Rating Agencies – Banks can no longer rely on them when purchasing bonds. Must do their own analysis.19
Dodd-Frank Act Ability to Repay: Requires that the lender consider the borrower’s ability to repay the loan. If a lender originates a mortgage that a consumer clearly can’t repay, then they can be subject to litigation risk. Bankers wanted a “safe harbor” from this provision. If the lender underwrites the loan according to the “Qualifying Mortgage” guidelines, then they will not be subject to lawsuits. Consumer groups wanted limits on the “safe harbor.” Final rule released by CFPB on 1‐10‐13 only provides a “safe harbor” for prime loans. 20
Dodd-Frank Act Ability to Repay: Generally speaking, the characteristics of a QM loan are: The borrower has a debt‐to‐income ratio no greater than 43%. Fees and points cannot exceed 3% of the total loan amount, although certain "bona fide" fees on prime loans are excluded. Lenders must verify a borrowers income. Cannot include certain characteristics of nontraditional mortgages, including interest‐only and negative‐ amortization loans, as well as mortgages for a period of longer than 30 years.21
Dodd-Frank Act Qualifying Residential Mortgage (QRM): Mortgage lenders will be required to have “skin in the game,” meaning that they will be required to retain a percent of the mortgage (Ex: $5,000 on a $100,000 loan). However, if the loan is a QRM, then the lender can sell the entire balance into the secondary market. Current proposal from the regulators is the loan must have 20% down payment to be a QRM. CFPB opposes the 20% down payment on low‐risk mortgages, but will not intervene. 22
Dodd-Frank ActSwipe Fees: New rules on interchange fees went into effect 10‐1‐11 limiting the fees that big banks can charge to 21 cents per transaction, plus a few cents more if the bank has a fraud prevention program in place. The average was approximately 44 cents per transaction before the Durbin Amendment to the Dodd‐Frank Act. 23