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STATE OF COMMUNITY BANKING: 

IS THE CURRENT REGULATORY 

ENVIRONMENT ADVERSELY AFFECTING 

COMMUNITY FINANCIAL INSTITUTIONS? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

MARCH 20, 2013 

Printed for the use of the Committee on Financial Services 

Serial No. 113–9 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SHELLEY MOORE CAPITO, West Virginia, Chairman 

SEAN P. DUFFY, Wisconsin, Vice Chairman 

SPENCER BACHUS, Alabama 

GARY G. MILLER, California 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

MARLIN A. STUTZMAN, Indiana 

ROBERT PITTENGER, North Carolina 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

GREGORY W. MEEKS, New York, Ranking 

Member 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

NYDIA M. VELA ́ ZQUEZ, New York 

STEPHEN F. LYNCH, Massachusetts 

MICHAEL E. CAPUANO, Massachusetts 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

DENNY HECK, Washington 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 20, 2013 ................................................................................................. 1 

Appendix: 

March 20, 2013 ................................................................................................. 43 

WITNESSES 

WEDNESDAY, MARCH 20, 2013 

Brown, Richard A., Chief Economist, Federal Deposit Insurance Corporation, 

accompanied by Doreen R. Eberley, Director, Division of Risk Management 

Supervision, Federal Deposit Insurance Corporation, and Bret D. Edwards, 

Director, Division of Resolutions and Receiverships, Federal Deposit Insurance Corporation .................................................................................................. 7 

Evans, Lawrance L., Director, Financial Markets and Community Investment, 

U.S. Government Accountability Office .............................................................. 10 

Rymer, Hon. Jon T., Inspector General, Federal Deposit Insurance Corporation ........................................................................................................................ 8 

APPENDIX 

Prepared statements: 

Evans, Lawrance L. .......................................................................................... 44 

Joint FDIC statement ...................................................................................... 62 

Rymer, Hon. Jon T. .......................................................................................... 84 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Capito, Hon. Shelley Moore: 

Letter from the National Association of Federal Credit Unions (NAFCU), 

dated March 19, 2013 ................................................................................... 91 

Maloney, Hon. Carolyn: 

Letter to Federal Reserve Chairman Ben Bernanke, FDIC Chairman 

Martin Gruenberg, and Comptroller of the Currency Thomas Curry 

from Representatives Carolyn Maloney and Shelley Moore Capito, 

dated February 19, 2013 .............................................................................. 97 

Westmoreland, Hon. Lynn: 

Written statement of Representative Tom Graves ........................................ 99 

Evans, Lawrance L.: 

Written responses to questions submitted by Representative Capito .......... 101 

Written responses to questions submitted by Representative Posey ........... 102 

Written responses to questions submitted by Representative Westmoreland ................................................................................................................ 104 

FDIC witnesses: 

Written responses to questions submitted by Representative Bachus ........ 117 

Written responses to questions submitted by Representative Capito .......... 118 

Written responses to questions submitted by Representative Pearce .......... 123 

Written responses to questions submitted by Representative Westmoreland ................................................................................................................ 125 

Rymer, Hon. Jon. T.: 

Written responses to questions submitted by Representative Posey ........... 141 

Written responses to questions submitted by Representative Westmoreland ................................................................................................................ 142 

(1) 

STATE OF COMMUNITY BANKING: 

IS THE CURRENT REGULATORY 

ENVIRONMENT ADVERSELY AFFECTING 

COMMUNITY FINANCIAL INSTITUTIONS? 

Wednesday, March 20, 2013 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:02 a.m., in room 

2128, Rayburn House Office Building, Hon. Shelley Moore Capito 

[chairwoman of the subcommittee] presiding. 

Members present: Representatives Capito, Miller, McHenry, 

Campbell, Pearce, Posey, Fitzpatrick, Westmoreland, Luetkemeyer, 

Duffy, Stutzman, Pittenger, Barr, Cotton; Meeks, Maloney, Watt, 

McCarthy of New York, Green, Capuano, Murphy, Delaney, and 

Heck. 

Ex officio present: Representative Hensarling. 

Chairwoman CAPITO. The subcommittee will come to order. Without objection, the Chair is authorized to declare a recess of the 

committee at any time. Also, without objection, members of the full 

Financial Services Committee who are not members of the subcommittee will be allowed to sit on the dais and participate in today’s hearing. Without objection, it is so ordered. 

This morning’s hearing is the first hearing for the Financial Institutions and Consumer Credit Subcommittee in this Congress. I 

would like to welcome our new members to the subcommittee, as 

well as the new ranking member, Mr. Meeks. I think we will work 

very well together. 

As chairman, I intend to highlight the many challenges being 

faced by our community financial institutions and the communities 

they serve across the country. This should not be a partisan issue. 

It is my goal to work with the ranking member to identify areas 

of agreement for fostering a regulatory environment for community 

financial institutions that promote economic growth and access to 

a wide range of consumer credit products. 

The focus of this hearing—I forgot to yield myself 3 minutes. So, 

the focus of this morning’s hearing is on three important studies 

on the state of community banking. Two of the studies were products of legislation that Mr. Westmoreland of Georgia authored last 

Congress. 

2 

As many of my colleagues know, the State of Georgia led the Nation in the number of bank failures between 2008 and 2011. Mr. 

Westmoreland and Mr. Scott, also from Georgia, have been tireless 

advocates for the struggling financial institutions and their districts in the State of Georgia and the communities that have been 

adversely affected. 

At the behest of Congress, the Inspectors General of the FDIC 

and the GAO conducted studies on the FDIC’s handling of the 

failed community banks and lessons from community bank failures. 

This subcommittee first began examining these issues at a field 

hearing in Mr. Westmoreland’s district in Newnan, Georgia, in August of 2011. And I look forward to learning more about the 

progress being made by the regulatory agencies to mitigate the adverse effect of community bank failures on local communities. 

The third study to be discussed this morning is a study that is 

a thoughtful contribution to the discussion that we began in the 

last Congress on the importance of community financial institutions and how the current regulatory environment affects the viability of community financial institutions and their role—and their 

model. We heard countless anecdotal stories last Congress from 

community bankers expressing despair and frustration about the 

future prospects for a vibrant and diverse financial services system 

that features community banks. 

The FDIC study highlights many areas that demonstrate the importance of community banks to the U.S. banking system. The 

study points out that in many rural areas, such as the one I represent, local community banks are the only source of banking services for members of the community. 

Although larger institutions may choose to enter these markets, 

they will not maintain the same level of personal service and understanding that the community—the local community banks can 

offer. This element of relationship banking is critical in rural communities like those I represent in West Virginia. Lenders not only 

know their customers, but they know their extended families and 

the businesses they operate in these communities. 

It is this level of understanding that allows the lender to sit 

down with the borrower and develop alternative financial strategies when economic downturns occur, or if there is a life-changing 

event that might impact the borrower in some way. Rural communities will not be well-served if the current regulatory environment 

forces lenders to move away from relationship banking and make 

decisions on a one-size-fits-all form of regulation and compliance. 

The FDIC study also attempts to quantify the growing burden of 

complying with the myriad of financial regulations for community 

institutions. I think we found in the study it is difficult to quantify. 

In January of 2001, just 6 months after Dodd-Frank, we learned 

from a community banker in West Virginia that they have already 

had to hire an additional primary compliance officer. 

I understand that it is a difficult figure to quantify, but we must 

keep up the discussion amongst policymakers, regulators, and community bankers about ways to reduce this growing burden. We 

need to have safely run financial institutions in our local communities. But we must ensure that any cost of compliance does not 

3 

outweigh the benefits and the regulations emanating from Washington. 

I would like to thank our witnesses for being here this morning 

to update the subcommittee on these important studies, and at this 

time I would like to recognize the ranking member, Mr. Meeks, for 

3 minutes for the purpose of giving an opening statement. 

Mr. MEEKS. Thank you, Madam Chairwoman, for holding this 

hearing today. And as you have indicated, this is the first hearing 

of the Subcommittee on Financial Institutions and Consumer Credit during the 113th Congress. 

I want to express how pleased I am to be working with the chairwoman on this subcommittee. I know that we will find areas of cooperation, and I look forward to collaborating with the Chair on 

many areas of common interest, including regulatory relief for 

smaller banks and credit unions and mobile payment services, and 

the associated electronic payments field and many other consumer 

protection issues. And I know that we are going to be working very 

closely together. 

While it is not explicitly the topic of today’s hearing, but since 

this is our first hearing of the subcommittee, I want to state now 

that I am concerned about the impact that Basel III can have on 

community banks. Previous iterations of Basel have excluded 

smaller institutions from their capital requirements, which are better designed to address the risk portfolios of larger financial institutions. And of course, smaller institutions must have adequate 

capital for their activities. But it appears that Basel III takes a 

one-size-fits-all approach. 

I am concerned that Basel III is too complicated and does not 

offer the appropriate risk ratings to different classes of assets. For 

example, it would apply a discount to any asset that isn’t sovereign 

debt in the U.S. Treasuries or cash. 

This means a bank that specializes in mortgages, for example, 

may have to hold a lot more capital against those mortgages to satisfy minimum capital requirements. However, I would think that 

we learn to start to make sure capital requirements don’t stifle 

small banks in even medium-sized or regional banks institutions 

that don’t engage in the exotic activities that some of the larger institutions do. 

As we learned in the FDIC’s Community Banking Study, smaller 

and regional institutions are the engines of economic growth in this 

country because they lend to their neighbors in their communities 

to keep their farms or their small businesses going, or to hire employees. In fact, the study noted that though community banks hold 

only 14 percent of the banking industry’s assets, they make 46 percent of the smaller denomination loans to farms and small businesses. 

Along with credit unions, they are often the sole source for mortgage financing and therefore the lifeline of the housing industry in 

our communities. It was not their activity that blew up the global 

banking system. And I think the capital requirements we place on 

banks should recognize that. I want to work with the chairwoman 

on that issue. 

A concern that I often hear from my community banks is the lack 

of certainty. And much of this arises from the timing of rules on 

4 

which the argument about uncertainty has credence. I would hope 

that we would make sure that we start and do not cut off funding 

for regulators, including the SEC, the CFTC, and the CFPB, all of 

which creates additional regulatory uncertainty. 

A common complaint I hear from businesses when I am in New 

York is on the timing of rulemakings. Businesses in the market 

will adjust to rules and regulations, but they need to know what 

they are. It is time to fully fund our regulators so they can complete the process of implementing Dodd-Frank and therefore restore confidence to the marketplace. 

I look forward to hearing about the other issues that are the 

focus of this hearing, including what I hope is a robust discussion 

on the good things that the FDIC is doing in protecting the Deposit 

Insurance Fund, and therefore taxpayers. 

In reviewing the FDIC’s programs in preparation for this hearing, I was pleased to learn of some of the efforts the agency has 

made to engage in mortgage modifications, something I hope the 

industry proactively addresses further. And I also hope we can explore some of the recommendations of the FDIC Inspector General 

and how the FDIC is implementing them. 

I look forward to the testimony. Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Duffy for 11⁄2 minutes for the purpose of an opening statement. 

Mr. DUFFY. Thank you, Chairwoman Capito. I appreciate you 

calling this very important hearing. And I appreciate the panel for 

coming in and talking about our community banks and their 

health, and how we can make sure we have a strong community 

bank system throughout our country. 

Many of us know that our small community banks or credit 

unions are the lifeblood of economic growth in our small communities across this great country. And it is those very institutions 

that get capital out to our small businesses which are starting up 

or that small business or that manufacturer which is going to expand their business and create jobs across the country. They are 

the institutions in rural America which get dollars out to our families who are going to buy a home or buy a car; and if our community banks are failing, so too are our small communities. 

So I am pleased that the OIG and the GAO studies address some 

of the issues that we have known for quite some time affect our 

small community banks. Clearly, they face a lot of challenges in 

this hyper-regulatory environment. And small banks are constantly 

being forced to deploy resources, money, time, and personnel towards regulatory compliance instead of focusing on their traditional role of lending and serving our customers. 

I look forward to your testimony and the conversation we are 

going to have today about the health of our small financial institutions. I yield back. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Westmoreland for 2 minutes. 

Mr. WESTMORELAND. Thank you, Madam Chairwoman. I would 

like to ask for unanimous consent to enter into the record a stateVerDate Nov 24 2008 18:30 Aug 22, 2013 Jkt 080875 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\80875.TXT TERRI
5 

ment from Representative Tom Graves, and some written questions 

for the witnesses. 

Chairwoman CAPITO. Without objection, it is so ordered. 

Mr. WESTMORELAND. I want to thank the chairwoman for having 

this hearing. This hearing is especially important to me because I 

and others worked hard to authorize it last Congress. 

I read the studies with interest, but unfortunately they seemed 

to raise more questions than answers. I think the biggest thing to 

come from these studies is finally an admission that what my Georgia banks have been saying is true, that acquiring banks will maximize their expiring loss share agreements for commercial assets. 

Unfortunately, the studies show the FDIC has no plan for dealing with the potential new bubble in the commercial real estate 

market. I am hearing from acquiring banks that they really don’t 

know what to do with their expiring loss share agreements. I am 

also hearing stories from borrowers in Georgia whose acquiring 

bank will not negotiate reasonable modification terms. 

This is a special concern since the studies also noted examiners’ 

ongoing failure to follow the spirit of the 2009 guidance on commercial loan modifications. And as if these problems were not enough, 

the GAO study recognized that bank examiners negatively classify 

a collateral-dependent loan simply because the value of the collateral has declined. 

Further, there are serious problems in the way appraisals are 

handled by examiners and the application of impairment accounting standards in the examination process. The IG found examiners 

do not properly document appraisals or evaluation for the best use 

of the underlying collateral. To me, this is code for examiners to 

be able to do what they want in terms of valuing collateral, but not 

having to justify it to the bank or their bosses. 

The FDIC IG found examiners do not have the necessary training or background in appraisals, yet are relying on their experience 

in this field during bank exams. The studies make it very clear 

that the FDIC, the OCC, and the Federal Reserve have had trouble 

handling the boom-and-bust cycles over the last 25 years. They are 

repeating the same patterns over and over, but expecting different 

results. 

And again, I would like to just thank the chairwoman for having 

this hearing. It is very important to the constituents and the bankers in Georgia. 

Chairwoman CAPITO. I am glad you got that last line in. 

I would like to recognize Mr. Watt for 1 minute. 

Mr. WATT. Thank you, Madam Chairwoman. I want to join the 

other members of the subcommittee in applauding you and the 

ranking member for convening this hearing. This is a subject that 

all of us are hearing about regularly. And I especially want to applaud the composition of this panel, because we hear the community banker side, and I am sure that is an important perspective. 

But it is also important to hear the perspective of the regulators 

and to understand whether what we are hearing from the banks 

is a regulatory matter or whether it is a matter of legislative significance. When it is our responsibility as legislators, we need to 

know that. And when we can push the regulators to be more 

prompt as regulators in promulgating rules, we need to push that. 

6 

So, it is especially important and I appreciate the opportunity to 

express that. I yield back. 

Chairwoman CAPITO. Thank you. I would like to recognize Mr. 

Miller for 1 minute. 

Mr. MILLER. Thank you, Madam Chairwoman. 

The environment within which the regulators work today should 

basically encourage innovation and growth rather than to stifle it, 

but that is not what is happening. The government is acting to 

help banks. But what they should do is serve their customers. Instead, banks are having an onslaught of new regulations they are 

having to deal with. We certainly need a well-functioning regulatory system, but it should facilitate growth, not stifle it. 

We are starting to see a basic turnaround in the housing market 

today. But what is stifling that ability to get loans? AD & C loans 

are just not available to many builders today, especially the smaller builders. Banks are being held back from doing what they want 

to do. And because of regulations placed upon them, you are seeing 

a certain group in the marketplace who are just avoiding getting 

involved. 

Representative Carolyn McCarthy and I introduced the Home 

Construction Lending Regulatory Act today that addresses overzealous regulators. It lets you do your job, lets you make loans to 

well-qualified builders who have good projects but are being held 

back today. And it is an issue I think we need to bring up in this 

committee to basically turn the economy around. And it is an issue 

I think is important to banks and to builders. I yield back. 

Chairwoman CAPITO. The gentleman yields back. 

Mr. Fitzpatrick for 1 minute. 

Mr. FITZPATRICK. Thank you, Madam Chairwoman. First of all, 

I want to say I am looking forward to being a part of this subcommittee in the 113th Congress. Among the important responsibilities of the subcommittee is to work with consumer financial 

institutions to find ways to provide credit for small businesses and 

families who inject capital into our communities. 

In just the first few weeks, this Congressman made a point to 

meet with representatives from some of the financial institutions 

that serve my district in Pennsylvania. On a recent conference call 

with community bankers, I was reminded again about the grinding 

process and progress of our economy and of the housing market, 

and how those factors more than any others are dragging our communities down and causing high unemployment in the communities. 

And of course, I heard about regulations and financial supervision, which are onerous and burdensome. We all agree that we 

need oversight and regulation of financial institutions. But the 

point is to be smart about it and not to stifle economic growth. And 

this is, of course, why we are here today. So I look forward to the 

hearing, and I yield back. 

Chairwoman CAPITO. The gentleman yields back. I believe that 

concludes our opening statements. So, I would like to welcome our 

panel of distinguished witnesses. 

My understanding is that Mr. Brown will give the statement 

from the FDIC, and then Ms. Eberley and Mr. Edwards will be 

7 

here to answer questions for us. So, I appreciate that. I will introduce all three of you, and then let Mr. Brown make the statement. 

Mr. Richard Brown is the Chief Economist and Associate Director of the Division of Insurance and Research for the FDIC. Ms. 

Eberley is the Director of the Division of Risk Management Supervision, welcome. And Mr. Bret Edwards is the Director of the Division of Resolutions and Receivership. Welcome. 

Mr. Brown? 

STATEMENT OF RICHARD A. BROWN, CHIEF ECONOMIST, FEDERAL DEPOSIT INSURANCE CORPORATION, ACCOMPANIED 

BY DOREEN R. EBERLEY, DIRECTOR, DIVISION OF RISK 

MANAGEMENT SUPERVISION, FEDERAL DEPOSIT INSURANCE CORPORATION, AND BRET D. EDWARDS, DIRECTOR, 

DIVISION OF RESOLUTIONS AND RECEIVERSHIPS, FEDERAL 

DEPOSIT INSURANCE CORPORATION 

Mr. BROWN. Chairwoman Capito, Ranking Member Meeks, and 

members of the subcommittee, I appreciate the opportunity to testify on behalf of the FDIC regarding the FDIC Community Banking 

Study. This research effort was begun in late 2011 to better understand the changes that have taken place among the community 

banking sector over the past quarter century. The effort was motivated by our sense of the importance of community banks to small 

businesses and to local economies in every part of the country, and 

by our understanding that community banks face some important 

challenges in the post-crisis financial environment. 

Our research confirms the crucial role that community banks 

play in our financial system. As defined by our study, community 

banks make up 95 percent of U.S. banking organizations. It has 

been mentioned that they hold 14 percent of U.S. banking assets, 

but make 46 percent of small loans to farms and businesses. 

While their share of total deposits has declined over time, community banks still hold the majority of bank deposits in rural and 

other non-metropolitan counties. Without community banks, many 

rural areas, small towns, and urban neighborhoods would have little or no physical access to mainstream banking services. The 

study identified 629 counties where the only banking offices are 

those operated by community banks. 

Our study examined the long-term trend of banking industry 

consolidation that has reduced the number of banks and thrifts by 

more than half since 1984. But the results cast doubt on the notion 

that future consolidation will continue at the same pace, or that 

the community banking model is in any way obsolete. 

Since 1984, more than 2,500 institutions have failed, with most 

of the failures taking place during 2 crisis periods. To the extent 

that future crises can be avoided or mitigated, bank failures should 

contribute much less to future consolidation. 

About 80 percent of the consolidation that has taken place has 

resulted from eliminating charters within bank holding companies 

or from voluntary mergers. And both of those trends were facilitated by the relaxation of geographic restrictions on banking that 

took place in the 1980s and the early 1990s. The pace of the voluntary consolidation has slowed over the past 15 years as the effects of these one-time changes were realized. 

8 

The study also showed that community banks which grew prudently and which maintained either diversified portfolios or otherwise stuck to core lending competencies exhibited relatively strong 

and stable performance over time, including during the recent crisis. By comparison, institutions which pursued more aggressive 

growth strategies underperformed. 

With regard to measuring the cost of regulatory compliance, the 

study noted that the financial data collected by regulators does not 

identify regulatory costs as a distinct category of non-interest expenses. As part of our study, the FDIC conducted interviews with 

a group of community banks to try to learn more about regulatory 

costs. 

Most of the participants stated that no single regulation or practice had a significant effect on their institution. Instead, most said 

that the strain on their organization came from the cumulative effects of a number of regulatory requirements that have built up 

over time. 

Several of those interviewed indicated that they have increased 

staff over the past 10 years to support their responsibilities in the 

area of regulatory compliance. Still, none of the interview participants said that they actively track the various costs associated 

with compliance, citing the difficulties associated with breaking out 

those costs separately. 

In summary, despite the challenges of the current operating environment, the study concludes that the community banking sector 

will remain a viable and vital component of the overall U.S. financial system for the foreseeable future. The FDIC’s testimony today 

also summarizes the congressionally mandated studies by the GAO 

and the FDIC Office of Inspector General. These studies provided 

valuable information on the causes of the recent crisis and the 

FDIC’s response. 

The Inspector General also made several useful recommendations that are highly relevant to the FDIC’s efforts to address the 

issues arising from the crisis. The FDIC concurs with all of the 

OIG recommendations, and is now in the process of implementing 

them. 

I am joined today by Doreen Eberley, Director of the FDIC Division of Risk Management Supervision; and Bret Edwards, Director 

of the Division of Resolutions and Receiverships, who can address 

your questions about how the FDIC is implementing these recommendations. Thank you for the opportunity to testify, and we 

look forward to your questions. 

[The joint prepared statement of Mr. Brown, Ms. Eberley, and 

Mr. Edwards can be found on page 62 of the appendix.] 

Chairwoman CAPITO. Thank you, Mr. Brown. 

Our next witness is the Honorable Jon T. Rymer, the Inspector 

General for the FDIC. Welcome. 

STATEMENT OF THE HONORABLE JON T. RYMER, INSPECTOR 

GENERAL, FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. RYMER. Thank you, Madam Chairwoman. Madam Chairwoman, Ranking Member Meeks, and members of the subcommittee, I appreciate your interest in the study conducted by my 

office as required by Public Law 112–88. I ask that the report entiVerDate Nov 24 2008 18:30 Aug 22, 2013 Jkt 080875 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\80875.TXT TERRI
9 

tled, ‘‘Comprehensive Study of the Impact of the Failure of Insured 

Depository Institutions,’’ issued on January 3rd of this year, be 

made a part of the hearing’s official record. 

The report may be accessed at the following link: 

http://www.fdicoig.gov/reports13%5C13-002EV.pdf 

In the wake of the financial crisis of the 1980s, the Congress 

passed two laws: FIRREA, passed in 1989; and the FDIC Improvement Act, passed in 1991. These laws drove the closure and resolution processes used in the most recent crisis. 

Taken together, these laws amended the FDI Act and required, 

among other things, that: (1) financial institutions maintain minimum capital levels; (2) regulators promptly close critically undercapitalized institutions; and the FDIC resolve banks in the least 

costly manner. In response, banking regulators issued rules, regulations, and policies that pertained to many of the topics discussed 

in our report. In my time today, I would like to highlight the two 

overarching conclusions we reached, and then talk about four specific observations. 

The events leading to the financial crisis and the subsequent efforts to resolve it involve the dynamic interplay of laws, regulations, and agency policies and practices with the real estate and financial markets. Banks expanded lending using rapid growth in 

construction and real estate development. 

Many of the banks that failed did so because management relaxed underwriting standards and did not implement adequate 

oversight and control. For their part, many borrowers did not have 

the capacity to repay the loan, and sometimes pursued projects 

without properly considering risk. 

During the financial crisis, the regulators generally fulfilled their 

responsibilities by using risk-based supervision to react to a rapidly 

changing economic and financial landscape. 

Chairwoman CAPITO. Excuse me. Pull the microphone just a little bit closer. 

Mr. RYMER. Yes, ma’am. 

Chairwoman CAPITO. Our ears are getting old up here. 

Mr. RYMER. Yes, ma’am. 

That said, however, most material loss reviews conducted by the 

three banking regulatory IGs found that regulators could have provided earlier and greater supervisory attention to troubled banks 

and thrifts. 

The four specific observations I mentioned earlier are as follows. 

First, the FDIC’s resolution methods, including the shared loss 

agreements, were market-driven. Often, failing banks with little or 

no franchise value and poor asset quality did not attract sufficient 

interest from qualified bidders for the FDIC to sell the bank without a loss share guarantee. The FDIC used these agreements to 

leave failed bank assets in the banking sector, thereby supporting 

asset value and reducing losses to the Deposit Insurance Fund, or 

DIF. 

Second, most community bank failures were the result of aggressive growth, asset concentrations, deficient credit administration, 

and declining real estate values. These factors led to write-downs 

10 

and charge-offs on delinquent loans and non-performing real estate 

loans. 

Third, we found examiners generally followed and implemented 

longstanding polices related to problem assets, appraisal programs, 

and capital adequacy. We also found that examiners did not always 

document the examination procedures that they performed. 

And fourth, the FDIC has investment-related policies in place to 

protect the DIF, and to assure the character and fitness of potential investors. By their nature, such policies are going to impact 

FDIC decisions on proposed private equity investments. 

Finally, I would like to express my appreciation to the regulators 

for making their staffs and the information we requested readily 

available to us. I would also like to thank those in my office who 

contributed to this study for their dedicated efforts to comply with 

the law. 

That concludes my prepared statement. I look forward to answering your questions. Thank you. 

[The prepared statement of Inspector General Rymer can be 

found on page 84 of the appendix.] 

Chairwoman CAPITO. Thank you very much. 

And our next witness is Mr. Lawrance L. Evans, the Director of 

Financial Markets and Community Investment at the U.S. Government Accountability Office. Welcome. 

STATEMENT OF LAWRANCE L. EVANS, DIRECTOR, FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. EVANS. Thank you. Chairwoman Capito, Ranking Member 

Meeks, and members of the subcommittee, I am pleased to be here 

this morning as you examine issues related to bank failures in 

community banking. 

Between 2008 and 2011, over 400 banks in the United States 

failed. Almost all of these failures involved smaller banks which 

had less than $10 billion in assets and often specialized in providing credit to local communities. My remarks today are based on 

our January report, and I will briefly share some of the key findings. 

First, failures of small banks were associated with high concentrations in CRE and ADC loans. These loans grew rapidly as a 

percentage of total risk-based capital and exceeded the regulatory 

thresholds for heightened scrutiny by a significant margin. Heavy 

ADC and CRE concentrations were often associated with aggressive growth, poor risk management, weak credit administration, 

and the use of riskier funding sources, namely broker deposits. 

Second, we found that fair value losses related to some mortgagerelated assets were a factor in a limited number of failures. But 

overall, fair value accounting standards were not a major driver. In 

fact, our analysis found that most of the assets held by failing institutions were not subject to fair value accounting. The biggest 

contributor to credit losses at failed institutions was non-performing loans recorded at historical costs. 

However, declining collateral values related to these non-performing loans contribute to credit losses and surfaced issues between examiners and some bankers over appraisals and the classiVerDate Nov 24 2008 18:30 Aug 22, 2013 Jkt 080875 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\80875.TXT TERRI
11 

fication of certain loans. Following accounting rules, regulators will 

require that impaired collateral dependent loans be written down 

to the fair value of the collateral. 

State banking regulators in bank associations we spoke with said 

that given the significant decline in real estate values, these impaired loans resulted in significant reductions to regulatory capital. 

Two State banking associations maintained that the magnitude of 

these losses was exaggerated or exacerbated by Federal bank examiners’ adverse classification of performing loans, and by their 

challenging of appraisals used by banks. This is at odds with regulatory guidance issued in 2006 and clarified in 2009. 

Third, loan loss reserves were not adequate to absorb credit 

losses, in part because the current accounting model for loan loss 

provisioning is based on historical loss rates or incurred losses. As 

a result, estimated losses were based on economic conditions that 

understated default risk and led to insufficient reserving. This left 

banks vulnerable to the sustained downturn that began in 2007 as 

credit losses ate through reserves and depleted regulatory capital. 

A more forward-looking model that focuses on expected losses 

could reduce the need to raise capital when it is most difficult to 

do so and encourage prudent risk management practices. Accounting standard-setters are taking important steps in this direction, 

and GAO will continue to monitor development in this area. 

Fourth, driven by market conditions, FDIC resolved nearly 70% 

of bank failures between 2008 and 2011 using shared loss agreements to minimize the cost to the DIF. While estimated losses are 

expected to be roughly $43 billion, FDIC estimates that loss share 

agreements saved the DIF over $40 billion when compared to the 

estimated cost of liquidating the banks. 

Lastly, we found that the impact of failures on communities may 

have been mitigated by the acquisitions of failed banks by healthy 

institutions, although significant negative effects are likely in a few 

areas of the country. Bank failures, by their very nature, can impact consumers who rely on local banks through their effects on the 

costs and availability of credit. 

Our analysis of market concentration in geographic areas that 

experience failures found that only a few local markets raise these 

concerns. Some of these areas were rural counties which were serviced by one bank that was liquidated or where few banks remain. 

Our econometric analysis found that failing small banks extended progressively less credit as they approached failure, but 

that acquiring banks generally increased credit after the acquisition, albeit more slowly. Several acquiring and peer banks we 

interviewed in Georgia, Michigan, and Nevada noted that conditions were generally tighter in the period following the financial 

crisis, making it difficult for some borrowers to access credit, particularly in CRE and ADC markets. 

Econometric analysis also shows that on average, bank failures 

in a State were more likely to affect housing prices than unemployment or personal income. These results could be different at the 

local level and do not capture any changes in the patterns of lending or philanthropic activity that might be material for a community. 

12 

That concludes my opening statement. I will be happy to answer 

any questions that you may have. 

[The prepared statement of Mr. Evans can be found on page 44 

of the appendix.] 

Chairwoman CAPITO. Thank you. I would like to thank the witnesses. And I will begin the questions with Mr. Brown. 

We talked about relationship lending, how it defines what a community bank is, and how important it is to certain areas. I fear 

that as the CFPB drafts more regulations, this type of relationship 

lending will cease to exist. I am already concerned that the recent 

QM rule that the CFPB promulgated will be unworkable for many 

of our rural lenders. And they will get out of the mortgage business, which will cut out a lot of our constituents from being able 

to obtain a mortgage. 

What steps are you taking as a regulator to ensure that these 

rules are workable for smaller institutions? 

Mr. BROWN. Madam Chairwoman, your sense of the importance 

of relationship lending to community banks is something that was 

borne out in our study. They do lending on a completely different 

business model in terms of how credits are evaluated, and I think 

that will remain their niche, their specialty in the future. That is 

the thing that our study points out to us most clearly of all. 

In terms of rules coming about through Dodd-Frank, there is concern that has been expressed by community banks in some of the 

roundtables that we have conducted and the interviews that we 

have conducted about rules in certain areas, including mortgage 

rules. And I think that there are some community bankers who 

have expressed that they might not plan to go on in those lines of 

business, depending on how those rules are promulgated. 

So I do think that taking care to make sure that those rules do 

not disadvantage community banks and their particular business 

model, their way of doing business, is something that is very important and that the regulators are taking into account as the rules 

move forward. 

I will allow my colleagues to chime in if they have something to 

add. 

Chairwoman CAPITO. Did you have a comment, Ms. Eberley? 

Ms. EBERLEY. Sure. We can just add that we did have the opportunity to consult with the CFPB on the rulemaking process. And 

we were able to share the concerns that we heard from community 

bankers through our Community Bank Initiatives Roundtables and 

other venues. And we do believe that had an impact on the final 

rule. 

Chairwoman CAPITO. Are you presently using the FDIC’s Advisory Committee on Community Banking as a liaison to the CFPB? 

Is this an ongoing relationship? Or is this just kind of one phone 

call and then back to your relative responsibilities? 

There is an advisory committee on community banks within the 

FDIC. Are they coordinating with the CFPB and others to show the 

effects that these regulations are having on our smaller institutions? 

Ms. EBERLEY. Our Community Bank Advisory Committee does 

not coordinate directly with the CFPB, but they do inform us of 

concerns that we share with the CFPB. So we essentially serve as 

13 

the liaison with the CFPB—between community bankers and the 

CFPB. 

Chairwoman CAPITO. Did you have a comment? Yes? 

Mr. RYMER. Yes, ma’am. I would just like to add one thing. We, 

at the OIG, do have some concerns. I want to make sure that there 

is not overlap between the FDIC’s Division of Consumer Protection 

and the CFPB. Some of the initial work we will be doing in the Division of Consumer Protection will be to try to identify overlap. 

Chairwoman CAPITO. I welcome that. I think that was one of our 

ongoing concerns with the creation of the CFPB. At the beginning, 

it was supposed to rid the silos and all the prudential regulators 

were supposed to cede this authority. And I think in actuality that 

is not occurring, which bears out in your report. 

Let’s get to the cost of compliance. I know it is hard to quantify. 

That is in your reports. But anecdotally, whether it is hiring a single compliance officer in the smaller institutions, maybe your chief 

lending officer, your HR person, your vice president for community 

affairs, whatever officers you have there, and having to devote 

more of their time to the issue of compliance, is there anybody at 

the FDIC who looks at, as the regulations come forward, the cost 

to the community institutions? 

Mr. BROWN. During the process when the regulations are considered and promulgated, the FDIC solicits input from the industry on 

the costs of implementing the regulations. And also about alternatives, different ways that the regulations could be devised or implemented that could mitigate those costs. 

And so that is a dialogue that happens not just through our more 

informal processes such as our roundtables, and our Advisory Committee on Community Banking, but specifically during the rulemaking process. And we receive thousands of letters on that topic 

that are carefully considered during the rulemaking process. 

Chairwoman CAPITO. My last question—or my last comment because I have only 12 seconds left—would be that no new bank charters were chartered in 2012, according to the FDIC. We have seen 

all the closures. We have talked about how important to the fabric 

of lending to small businesses and farmers and the agricultural 

community and rural areas, and that these institutions do for our 

constituents. 

I would just launch a concern. When you see everything closing 

and nothing opening, that to me is a red flag which we need to 

monitor. And I hope that you will join us in that effort. 

I will now go to Mr. Meeks for questions. 

Mr. MEEKS. Thank you, Madam Chairwoman. 

Let me start with, I guess, Mr. Brown. 

As I stated in my opening statement, that community bank study 

showed that community banks hold 14 percent of the Nation’s 

banking assets, while they offer 46 percent of small business and 

farming loans. So would you agree that it seems as though community banks are playing an outsized role in terms of the impact on 

the economy? Please give me your thoughts on that. 

Mr. BROWN. Yes. I think that is our clear sense. It was our sense 

going into the project that obviously small businesses are very important to job creation, creating two-thirds or more of new jobs. 

14 

Small businesses were hit hard by the recession, and they depend 

on community banks as a source of credit. 

Surveys over time have shown that small businesses prefer to do 

business with small banks who understand their needs, can customize their products, that sort of thing. So, that tight connection 

between small businesses and and community banks was borne 

out, I think, by the data that you are citing. 

Mr. MEEKS. And so now we are trying to make sure, I think, that 

we get this balance right with reference to regulation in this sector. 

Clearly, there is some compliance cost to regulation. But what 

would you think the marketplace looks like for consumers without 

regulations such as the Equal Credit Opportunity Act, or similar 

fair lending bills? 

Mr. BROWN. Part of the stability of the banking industry is a regulatory environment that maintains safe and sound banking and 

that maintains fair treatment for consumers. 

The confidence that bank customers have in their institutions 

comes about in part because of standards that the institutions follow for fair business practices, disclosure, things that give consumers and borrowers confidence in that institution. And so, safety 

and soundness and consumer protection are really two sides of the 

same coin, and it is something that is a strength of the banking 

industry. 

Mr. MEEKS. Let me ask Mr. Evans, one of the criticisms of the 

shared loss agreements, one of the shared loss agreements, really 

quick, is that banks are incentivized to dump assets which allegedly depress housing and commercial real estate markets. Did either the GAO study or the FDIC IG study turn up any evidence 

of that occurring, to your knowledge? 

Mr. EVANS. I think— 

Mr. MEEKS. Mr. Edwards? Okay. 

Mr. EVANS. The FDIC IG’s study covered those issues in much 

greater depth. All we can say is what we heard. We talked to some 

banks and they were concerned that was occurring. But we also 

heard from acquiring banks who said something different. But that 

is about the extent of what we did in that particular area, so I 

guess I will just— 

Mr. MEEKS. Mr. Edwards? 

Mr. EDWARDS. Sure. Of course we are concerned any time we 

hear that. We believe the way we structure the agreements 

incentivizes the banks not to do that, and in fact there are a lot 

of controls in place, including regular compliance reviews by our 

contractors and our staff, to ensure that kind of thing is not happening. 

The premise for these shared loss agreements really was to allow 

the private sector, i.e., the banks that are acquiring these failed 

banks, to work these assets appropriately and maximize the value 

of the assets. And specifically, we have provisions in the agreement 

that if an acquiring institution wants to do a single note sale, they 

have to get our permission. 

And certainly if they want to attempt to do any bulk sales, they 

have to get our permission. But our intent was for them to work 

these assets, and we believe, especially early on in the crisis, that 

15 

we did not want these assets put out for sale because we felt they 

were trading below their intrinsic value. 

Mr. MEEKS. Have the shared loss agreements saved the Deposit 

Insurance Fund any money, and ultimately the taxpayers, over the 

course of liquidation? And if so, what is your estimate today? 

Mr. EDWARDS. The estimate is a little over $40 billion, as was 

noted earlier. And what that is, at the time that we do a cost test, 

when we bid the failed bank out, we are required under the statute 

to resolve the bank in the least costly manner to the DIF. So the 

baseline case is if we had to liquidate the bank, pay out all the deposits, and take all the assets back ourselves. That is one cost. 

That is generally the worst-case scenario. 

Any other deal we have, i.e., a whole bank transaction where we 

sell the failed bank to an acquiring institution with a loss share 

agreement, if that saves us money then we count that as a savings. 

So when you added up all the savings, it was about $40 billion, because liquidating a bank and paying out the deposits and putting 

the assets in the government’s hand is always going to be the 

worst-case scenario. 

Chairwoman CAPITO. Thank you. 

I now recognize Mr. Miller for 5 minutes for questions. 

Mr. MILLER. Thank you very much. 

I enjoyed your presentation today. If you look at 2008 to 2011, 

lenders went through a very, very tough time, especially rural 

banks. If you look at their AD & C loans, when the regulators were 

forced to apply mark-to-market and the SEC would not modify it, 

you put many of these loans in a poor asset quality category and 

they were forced to sell them off. 

It is sad because most of those loans are probably worth 3 times 

today in value than what they had to sell them off for, and it is 

really sad to see. But it doesn’t seem like after the economy really 

got to where it was starting to pick up again, and builders were 

starting to build again, which is going to take builders putting 

houses out that will help the economy return, it doesn’t seem like 

the banks are being allowed to make the loans they should. 

Mr. Brown, what is your assessment of the current state of lending for the construction industry today? 

Mr. BROWN. Real estate construction lending has declined. The 

volume outstanding has declined quite a bit during the crisis. And 

the loan charge-offs in that sector have exceeded $70 billion since 

the end of 2007 to the present. So there have been heavy losses in 

that area really associated with the large declines in the market 

value of residential and non-residential real estate assets. 

Mr. MILLER. No, I understand. That was what I said in my statement. We have gotten to the bottom. Those assets have been sold 

off. Those banks have taken a hit. Many of them are gone today. 

But the market is starting to build again. We are dealing with 

today. What do you see occurring today and in the future? We 

know it has been bad. We know it has been awful. We are past 

that. 

Mr. BROWN. Right. We are seeing some rebound in prices in some 

of the formerly hard-hit markets like Phoenix, Las Vegas, and Atlanta, where we saw a double-digit increase according to the CaseVerDate Nov 24 2008 18:30 Aug 22, 2013 Jkt 080875 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\80875.TXT TERRI
16 

Shiller Home Price Indices last year. But those market prices, 

those indices remain far below their peaks from before the crisis. 

Mr. MILLER. Yes. But what we are seeing out there is the regulators are basically requiring banks to go above required capital as 

far as lending. If you take the system that they face today, say a 

bank had $50 million in deposits, required reserves of $1,500,000, 

they are not allowed to lend about $3 million to $800,000. And that 

is about—that is 100 percent, and it used to be 300 percent. 

Ms. Eberley, how would you say that is working today in the system? 

Ms. EBERLEY. In our guidance, we encourage banks to make 

loans to creditworthy borrowers, including homebuilders. And there 

is no prohibition on making loans in the Acquisition, Development 

and Construction sector. The thresholds that you cite, the 100 percent and 300 percent, appear in guidance that we issued in— 

Mr. MILLER. Well, 300 percent was before, but the regulators 

today are not allowing anybody to exceed 100 percent. And that is 

stifling the industry. 

Ms. EBERLEY. So we don’t have any rules like that. 

Mr. MILLER. But the regulators are—there are no rules, but the 

regulators are applying this in the banks. I have talked to too 

many banks that keep coming back and saying the same thing. 

And I think the regulators are being overly restrictive because of 

the market situation in 2008–2011, which I am not saying wasn’t 

bad. It was horrible. Banks lost tremendous amounts of money. 

But you are seeing throughout different regions in this country 

that the markets coming back. People are buying new homes. 

When they buy new homes, the current value of existing homes is 

going up with them. But builders who have qualified credit and 

good projects can’t get lenders to lend above this 100 percent because the regulators won’t allow them to do that. 

Ms. EBERLEY. I can just tell you that we do not have a prohibition for institutions to make acquisition development loans above 

100 percent of their capital. To the extent that you have an institution that is doing that or an examiner who is telling an institution 

to do that, we would of course be interested in hearing the specifics 

on that. 

Mr. MILLER. I probably have a room full of bankers who can give 

you specifics on that. And that is the problem we are facing. It 

seems like we are forcing and mandating a restriction on lenders 

that currently does not exist in law. And I understand the regulators are being cautious because of what many banks went 

through. If we would have modified mark-to-market, a lot of those 

banks would still be out there today. 

If we would have modified mark-to-market and not forced them 

to take respective losses, many of those banks could have held 

those loans, and today, in a better marketplace, could have sold 

those off. I am not blaming you for that. We did nothing to modify 

it. I got language to the SEC to have them look at that issue and 

they came back and did nothing. 

So I am not blaming you. We didn’t do our job to allow you to 

do your job. But what we are facing out there to ensure that bank 

examiners on the ground know that they are not empowered to enVerDate Nov 24 2008 18:30 Aug 22, 2013 Jkt 080875 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\80875.TXT TERRI
17 

force that I think is something we need to work on internally because it is occurring. 

There is no doubt that it is occurring. And there is no doubt that 

it is not restricted and regulated by law for them to do that. But 

when you look at the situation they were allowed, going to 300 percent of that and now they are forcing the 100 percent guidelines 

as a standard and not letting people exceed that. 

It is just something that I—we introduced a bill to directly deal 

with that. But it would be nice if you could internally look at that 

and understand that system doesn’t work in a recovering market. 

And the market is recovering. 

I see my time has expired, and I thank the chairwoman for her 

generosity. 

Chairwoman CAPITO. Thank you. 

Mr. Watt for 5 minutes. 

Mr. WATT. Thank you, Madam Chairwoman. I am always interested in some of the unintended consequences of the decisions we 

make here. I noticed that Mr. Brown, and I think Mr. Evans, 

talked about how the bulk of the failures that we have experienced, 

or a large part of them, resulted from aggressive expansion. And 

I think Mr. Brown testified about a change we made in the law at 

some point which made it easier for community banks to expand 

by lifting geographic restrictions. 

First of all, Mr. Brown, tell me again what that change was and 

when we made it. 

Mr. BROWN. Yes. Traditionally, there were restrictions on 

branching at the State levels. Some banks were in unit banking 

States. They really couldn’t have branches. And those were relaxed 

at the State level in the early 1980s and early 1990s, allowing 

some banking organizations then to consolidate their charters and 

run them as branches. 

Moreover, restrictions on interstate banking at the State level 

were essentially undone or relaxed through the Riegle-Neal Act of 

1994, and after that interstate banking became much more prevalent. And both of those deregulation events facilitated the consolidation of charters within bank holding companies and also voluntary mergers across State lines. 

Mr. WATT. And of course, I was here in 1994, so I am sure I supported that change. So, an unintended consequence of that is aggressive mergers, aggressive growth, and aggressive growth is 

what led to a number of the bank failures during the economic 

downturn. I want to pick up on that. 

Tell us again what part of these failures and forced consolidations resulted from larger banks acquiring or other banking groups 

acquiring those failed banks’ assets. What part of that resulted, 

based on your study, from aggressive growth? 

Mr. BROWN. First, it was really the non-community banks, the 

558 charters in 2011 that did not meet our community banking definition. They held $12 trillion in assets. They had gained $6 trillion 

in those assets through direct acquisitions, almost 2,500 acquisitions. So, they really grew their share of industry assets to 86 percent through acquisitions and through retail lending and consumer 

lending for the most part. 

18 

Community banks, on the other hand, tended to grow more organically— 

Mr. WATT. And which ones of those had been community banks 

before that as opposed to the category that you just described? 

Mr. BROWN. I am not sure if I have that information at my disposal. We probably could calculate it from the data that we collected. 

Mr. WATT. Mr. Evans, you referred to something called ‘‘forwardlooking’’ rather than retrospective accounting. How would that 

look? What kinds of things are the accounting standards people are 

talking about that would allow us to be more forward-looking in 

the accounting principles that are applied? 

Mr. EVANS. Right. So, instead of estimated losses being based on 

historical losses or losses that have been incurred to date, you 

would consider current market conditions and other factors— 

Mr. WATT. How can an accountant do that? I guess I think of accountants as being—they keep track of the numbers as they are. 

What would be the theory on which an accounting standard change 

would address that issue? 

Mr. EVANS. The accountant would be doing the auditing and the 

attestation. This is what bankers would be doing who have knowledge of what current conditions look like and what they anticipate 

going forward. It would be embedded in the updated standards that 

will allow them to do that. 

Mr. WATT. So you are talking about the audit standards as opposed to actual accounting standards then? 

Mr. EVANS. That is right. 

[Mr. Evans submitted the following clarification for the record: 

‘‘This is an update of current accounting standards.’’] 

Mr. WATT. My time is about to expire, so I will yield back. 

Chairwoman CAPITO. Thank you. 

Mr. Campbell for 5 minutes. 

Mr. CAMPBELL. Thank you, Madam Chairwoman. 

I want to step back and do a little 20,000-foot kind of view here. 

It seems to me, and I will ask you to comment on this, that there 

are two problems facing community banks. One is the squeeze on 

margins, which has to do with monetary policy, which has nothing 

to do with any of you at that table or any of us up at this dais. 

And in recent testimony before this committee or subcommittee, 

other subcommittees that are a part of this overall committee, even 

those who advocate the current loose monetary policy would agree 

with it and admit that there is a tremendous pressure and squeeze 

on margins at the community bank level because larger banks can 

borrow from the Fed under the Treasury and make a spread that 

is completely without risk. And that is limiting margins at the community bank level. 

Then on the other end, we have this increase, although 

unquantifiable, so it seems. But this increase in cost at the community bank level due to regulatory restrictions. 

So, if you look at that, if you have declining margins and increasing costs, we see this reflected in very few new bank charters and 

consolidations at the community bank level. 

And so from where I sit I look and I say all right, we actually 

have a current regulatory environment that is damaging the very 

19 

sector that we are supposed to be protecting, that is causing there 

to be a shrinkage and, sure, maybe not failures in the classical 

sense of failures, but a failure of the overall sector because they 

just can’t make it with increasing regulatory costs and shrinking 

margins. Would any of you like to comment on that? 

Mr. BROWN. The importance of net interest income to the earnings of community banks is absolutely an accurate assessment. We 

have looked at changes in their efficiency ratio over time, that is, 

the ratio of their overhead expenses to their revenues. And it has 

deteriorated over the last 15 years. But more than 70 percent of 

that deterioration came about due to a shrinking of net interest income. And only a small portion, 20 percent, came from higher expenses. Those are expenses of regulatory and non-regulatory. We 

can’t separate those out. 

The community banks fund themselves through deposits. That is 

a very good funding model during periods of normal interest rates. 

High interest rates you can get some discounts there, but during 

a period of low interest rates, it is not necessarily the cheapest 

source of funds for them. 

Mr. CAMPBELL. Other comments? Mr. Rymer? 

Mr. RYMER. Yes, sir. I would just like to point out that there is 

some cyclicality to this. Prior to the crisis, there was an extraordinarily large number of de novo banks, new banks formed. Unfortunately, I think the crisis certainly has dissuaded potential bank 

investors from investing in new banks at this point in the cycle. 

But prior to the crisis, particularly in Georgia and California, lots 

of new banks were formed. 

Mr. CAMPBELL. Okay. So the monetary policy as we discussed the 

shrinking margins is the two-thirds or three-quarters of their problem. But the regulatory costs are still part of the problem. 

Do you all believe, and I only have a minute or so left, that we 

can—I could rattle through, they are all in here, all the different 

regulations that we have passed just in the last 10 or 15 years, 

many of which are overlapping or duplicative. Do you all believe 

that we can relieve this regulatory—that there is a way to pull this 

stuff back in order to give some relief to this sector so that the regulation isn’t forcing the sector down without adding significantly to 

the failure risk? 

Ms. EBERLEY. I might just say that what community bankers 

have asked us to do is to help them in understanding the regulatory environment and framework. So through our Community 

Bank Initiative, there were a couple of very specific requests that 

were made for us to help reduce burdens at community banks. 

One was to increase our outreach and training. Our Director’s 

College Program and other outreach was cited as being very valuable to bankers. They use it to help train their staff, make sure 

their directors understand their roles and responsibilities. And they 

have asked us to expand those opportunities where possible, including the ways that deliver the programs. And so, we are working on that. 

The second was to give them line of sight for the regulations 

coming down the pike. So what is out there, what is proposed, does 

it apply to them, how would it apply to them. And we have develVerDate Nov 24 2008 18:30 Aug 22, 2013 Jkt 080875 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\80875.TXT TERRI
20 

oped a Web-based tool to bring all of that together and help community bankers gain an understanding. 

Mr. CAMPBELL. Thank you. My time has expired. 

Chairwoman CAPITO. Thank you. 

Mrs. McCarthy for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you. And thank you for 

having this hearing. I find it fascinating. 

I want to follow through a little bit with what Mr. Miller had 

started to talk to you about. We have been looking at the GAO report and we know that many residential builders in this are small 

businesses owners who rely on the community banks to finance 

their acquisition, development, and construction activities. 

The financing options are tight and sometimes nonexistent that 

we have seen, and I have seen it in my own area in New York. But 

looking at the GAO report, commercial AD & C financing combined 

with weak underwriting, insufficient capital, and high concentration have proven to be risky and have led to some bank failures. 

If the oversight and the prudent management were in place, what, 

if anything, could make commercial AD & C loans risky? 

Ms. EBERLEY. What makes acquisition, development, and construction loans risky is the length of time before the project comes 

to completion and it is the risk of economic changes during that 

time when the construction is taking place. 

But you raised a couple of interesting points. Our Inspector General conducted an evaluation and issued a report a little bit earlier 

this year that covered institutions that did have concentrations 

that exceeded the thresholds that are included in our regulatory 

guidance, at which point we expect heightened attention and risk 

management practices by institutions. 

And so, there were institutions that exceeded these thresholds, 

but weathered the crisis in good shape. There were other institutions that got into trouble, but managed their way back out without failing. And the principles that you outlined were the ones to 

which they actually adhered. 

They had strong risk management practices in place. They paid 

attention to market fundamentals, and when their market appeared to be overheated, they pulled back. And they had strong 

board governance around their credit administration practices. So 

those were the things that made a difference for institutions that 

were concentrated at high levels that made it through the crisis 

okay. 

Mrs. MCCARTHY OF NEW YORK. From what I understand, obviously with the commercial loans the banks took, which are usually 

higher amounts of loans and there is a certain limit on what banks 

would possibly put out there for what they might consider a risky 

loan, that kind of left our smaller residential builders with no place 

to go. Am I correct in interpreting it that way? 

Ms. EBERLEY. I am not sure I understand your question. 

Mrs. MCCARTHY OF NEW YORK. From what I understand, the 

bank has a—if they are going under risk management and if they 

are looking at how many loans they have out there and they have 

a lot of commercial loans, which usually are large pieces of property, more expensive to build. And if they start to go under, as we 

21 

saw going back a few years ago, there wasn’t any money left over 

for the small businesses. 

That is what we are trying to look at, how we can make sure our 

small businesses that are residential builders, that don’t need as 

much money as the commercial. And once they reach that limit, 

there was nothing left for the small businesses to get. 

Ms. EBERLEY. Again, I would just say that our guidance doesn’t 

set limits on commercial real estate lending or acquisition, development, and construction lending. It sets thresholds beyond which we 

expect institutions to have heightened risk management practices. 

So that means our expectations about how the banks are going 

to manage that portfolio, we expect to see more due diligence 

around it. We expect to see greater levels of understanding of the 

marketplace fundamentals, monitoring of the marketplace fundamentals, stress testing of the portfolio to determine impacts on 

capital or borrowers, or changes in interest rates or changes in economic fundamentals. 

So, that is our expectation. We don’t place limits on the amount 

of lending an institution can do in a portfolio like that. 

Mrs. MCCARTHY OF NEW YORK. I have a few more questions, but 

I don’t think I can get them answered in 46 seconds, so I yield 

back. I will ask for written responses to my— 

Ms. EBERLEY. Oh, certainly. Certainly. 

Chairwoman CAPITO. Mr. McHenry for 5 minutes. 

Mr. MCHENRY. Thank you. And I want to thank all of you for 

your service to our government and to our people. 

Now look, I have met with a lot of community bankers, as most 

members of the committee have. And they tell me stories about an 

inconsistent, overly stringent examination process; that this is a 

hyperreaction by the FDIC to the crisis, an overreaction, in their 

words. Now certainly, they are regulating, but it is consistent with 

the FDIC study that we are talking about today. 

You have also reached out to various consultants and contractors 

for these community banks. And I know the FDIC is in an ongoing 

process of doing that. But I wanted to share with you a couple 

highlights of criticisms of the FDIC that I have which they don’t 

receive: 

‘‘We have received examination criticisms that were inconsistent 

with what prior examiners found, inconsistent with what was 

found in prior examinations by the same examining body, and inconsistent with guidance from our regulator. The inconsistency of 

the examination has made it extremely difficult for us to understand what is expected of us and to comply with expectations of our 

examiners.’’ 

Another one, ‘‘My financial institution has not tried to appeal a 

decision from our regulator. The appeals process does not appear 

to us to be independent. The appeals process appears to be similar 

to being bullied in elementary school and your only appeal is to the 

bully’s mother.’’ 

‘‘Typically, in the past, if the examiners found areas of concerns 

they would identify the area of concern and make suggestions on 

how to improve in these areas. Now minor infractions are met with 

severe criticisms and/or penalties.’’ 

22 

Likewise another one, ‘‘Our exam this past summer was a dual 

exam. The exam included compliance, CRA, and fair lending. The 

exam lasted 4 to 5 weeks, and the number of people ranged from 

six to eight. We had an excellent rating prior to this exam. The 

compliance examiners came in with unlimited budgets and correspondingly unlimited time to search our files for errors to prove 

exactly what?’’ 

I had another banker say that your agency used to be one to fix 

problems and to repair wounds, but that has changed to a mindset 

of bayoneting the wounded. Now, I understand there is a reaction 

to lax exams prior to the crisis. But this overreaction leads me to 

ask one simple question. 

I will begin with you, Ms. Eberley, because exam process is certainly key to this. How are community banks expected to exist 

under this hostile regulatory environment? 

Ms. EBERLEY. I would start by saying that we expect our examiners to examine banks in a fair and balanced manner, and to remain professional throughout all of their dealings with institutions. 

I take great pride in the professionalism of our examination staff 

and I do believe that we have a number of programs in place to 

ensure that we have consistency on a nationwide basis. 

We have a national training program for examiners and a stringent commissioning process. We undertake internal reviews of our 

examination program through each of our regional offices. And we 

engage in extensive— 

Mr. MCHENRY. So things are good? 

Ms. EBERLEY. I would just tell you that we work very hard to— 

Mr. MCHENRY. No, I appreciate you working very hard. I acknowledge that. And I certainly appreciate your service. But these 

are the criticisms I am receiving and I am hearing. Are they 

wrong? 

Ms. EBERLEY. They have not come to me. I would ask that— 

Mr. MCHENRY. Right. So they are going to come to the regulator. 

They are going to come to, in these words, this appeals process 

which they think doesn’t work. 

Let me just ask another question. At the November meeting of 

the FDIC Advisory Committee on Community Banks, there was a 

question on the ongoing examinations and reports and after-examinations. Have you implemented any policies or procedures to improve this process? 

Ms. EBERLEY. We have undertaken a number of initiatives. We 

did engage in training with our entire examination workforce in 

2011, I believe, about the examination approach. 

In terms of communication with institutions, we issued a Supervisory Insights Journal article last year talking about the risk 

management examination process and what bankers should expect 

in terms of communication throughout the process. We issued a financial institution letter in 2011 reminding bankers about examination processes again, and the appeal programs. 

We do encourage institutions to try to resolve issues while the 

examination is open, with the examiners. But if that can’t be done, 

we can disagree professionally. And we encourage bankers to talk 

to us. We don’t know that there is a problem unless there is a communication of the issue. And so they can talk to the field superVerDate Nov 24 2008 18:30 Aug 22, 2013 Jkt 080875 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\80875.TXT TERRI
23 

visor, regional office management, and me. I have a dedicated mailbox that is listed out in that financial institution letter. 

One of the things that we are going to do through the Community Bank Initiative Project is institute an information packet, essentially, for community banks that will be mailed out to all of the 

community banks that we regulate, reminding them about all of 

these processes and encouraging them to take advantage of the 

process. I mean that with all sincerity that we want to communicate. We want to know if there are issues. And we want the opportunity to fix them if that is the case— 

Chairwoman CAPITO. I am going to step in here, because the gentleman’s time has expired. 

Ms. EBERLEY. I apologize. 

Chairwoman CAPITO. And we will move on to the next questioner, Mrs. Maloney. 

Mrs. MALONEY. I would like to thank Ranking Member Meeks 

and Chairwoman Capito for calling this really important hearing 

on the status of community banks in our financial system and its 

service in our communities. 

I am pleased to have joined Mr. Westmoreland in support of his 

two studies, and in support of really looking at ways we can help 

community banks. They are critical. And I would say regional 

banks too. They are critical to our financial system, and really 

unique in America. 

In many of the foreign countries, they have very large banks. 

They don’t have community banks. And my first concern was on 

the Basel III capital requirements. 

Chairwoman Capito and I wrote a letter to the regulators, Mr. 

Bernanke, Mr. Curry, and others, expressing our concern that the 

requirements for international global banking, huge banks, were 

the same for the community banks. Community banks are not involved in global financing. And the requirements in Basel III, according to many community banks in the district I am privileged 

to represent, would force them to merge or literally go out of existence. 

So I am going to be reworking this letter. I would like unanimous 

consent to place it into the record. Many Democrats have come to 

me and asked to go on it. Since we already sent it out, I think we 

should work on another, so that others can express their concern. 

And so I ask— 

Chairwoman CAPITO. Without objection, it is so ordered. 

Mrs. MALONEY. I also want to reference the chairwoman’s mention about how important community banks are to rural areas. I 

would say they are just as important in urban areas. During the 

financial downturn, when many of our extremely important financial institutions that were larger were facing great stress, the only 

service that was there for the community in any type of loan and 

bank processing were regional and community banks. 

They would continue to do the mortgages. They would continue 

to do the small loans. So they are absolutely critical to our banking 

system, and to services in many areas. 

Constituents would come to me and say, ‘‘My rating is perfect, 

I am making zillions of dollars, but I can’t refinance my home, I 

24 

can’t take out a mortgage. What do I do? I have been to every 

major bank in New York.’’ 

I would say, here is a list of community banks, regional banks, 

try them. And they would be able to get the services they needed. 

So I think that supporting them is very, very, very, very important. 

And in that vein, the chairwoman and I introduced a bill last 

year that responded to some of the concerns that community banks 

brought to our attention. And we are working on reintroducing it 

over this break. I hope that our staffs can meet with the FDIC. 

The FDIC was not supportive of the bill. I am very supportive 

of regulators. And I certainly want regulators to support efforts 

that we have. And we need to do it in a reasonable way. 

But one of the areas was the appeal process where they feel that 

their appeals are not listened to, they are not taken into consideration. And often I feel a disconnect when I talk to regulators, whom 

I respect. They say, we are there, we are helping, we are doing everything. 

And then you talk to community banks that because they are in 

the community, you know what they are doing, you know them, 

they know all the communities, just really know your customer. 

They know your customers and the customers know them. And 

they were saying that they did not feel that their appeals were listened to or that they were treated fairly. 

I feel that this is an area where we have to work together to 

make it work better. We are unique in having the community 

banking system. It is not the same in Europe. And that is why 

Basel III is not sensitive to the community banks. 

I personally think that community banks should be exempted 

from the Basel III requirements or have a different standard because they are not global competitors. They don’t need to have the 

same standard as a global competitor. They are not global competitors. They are community banks helping communities. 

I just have great respect for them because they are there for the 

communities I represent. And people tell me, thank God for bank 

such and such, a little community bank that was there to help 

them. 

So, what my basic question is that I would like to submit to the 

FDIC, and I see the panel is basically all FDIC primarily, the bill 

that we did, and have your input on it. Because I think that we 

do need to have some relief for the community bankers. And my 

first question is on Basel III. 

Chairwoman CAPITO. Your time has expired. 

Mrs. MALONEY. Okay. 

Anyway, I will give you a copy of it and the letter and I would 

love to see any comments that you have. But I think this is a very 

important hearing. I want to thank the ranking member; I know 

he pushed hard for it, and thank the chairwoman for having it. 

Chairwoman CAPITO. Thank you. 

Mr. Fitzpatrick? 

Mr. FITZPATRICK. Thank you, Madam Chairwoman. 

I will actually follow up on that question and ask Mr. Brown or 

Ms. Eberley, do you agree with the gentlelady’s assertion or question that community banks should be exempt from Basel III? 

25 

Ms. EBERLEY. I would say that we received more than 2,500 comments from community banks about the Basel III and the standardized approach capital rulemakings that we put out for a notice 

of proposed rulemaking. We are in the process of considering those 

and take very seriously the comments and concerns that community banks have raised. It is not our intent to have an unintended 

consequence on the community banking— 

Mr. FITZPATRICK. So what are those comments indicating? And 

what is your position on that question? 

Ms. EBERLEY. We are in the rulemaking process, so we can’t talk 

about our position. 

But the comments that have been raised fall into three areas primarily. One has already been mentioned, and it is the implications 

for mortgages. It is the risk weighting for mortgages through the 

standardized approach. Another is the treatment of trust preferred 

securities. And a third would be the treatment of accumulated 

other comprehensive income, which is a fancy way to say depreciation or appreciation on securities. 

So, those were the three primary issues that were raised. We are 

taking all of the comments into account. We are reading every comment letter and working with the other agencies as we go through 

the process to come up with a final rule. 

Mr. FITZPATRICK. Mr. Brown, you indicated in your written testimony—I think you may have been quoting the FDIC community 

banking study—that the surveys of the community bank presidents 

indicated that it wasn’t a cost of any single regulation that was 

going to break the bank, but that it was a cumulative cost of everything put together, which is exactly what I am hearing from the 

community banks in my district in Pennsylvania, especially around 

Bucks and Montgomery Counties. 

They are saying that they have to hire compliance people that 

they didn’t have a couple of years ago, they need to train their employees. They are now responsible for outside consulting fees, 

bringing folks in, increased costs of both internal and external auditing. And of course, all this is taking away from their ability to 

make the loans and their ability to have the capital to make those 

loans. It is a distraction. 

What is your plan over the course of the next year to address 

those issues? And when might this subcommittee hear back on that 

plan? 

Mr. BROWN. Our entire Community Banking Initiative is designed to learn more about these issues. Those were some of the 

things that we have learned thus far. And on the supervisory side, 

to try to address them through some of the technical assistance 

and other initiatives that Ms. Eberley has described thus far. 

Ms. Eberley, I don’t know if you want to elaborate on some of the 

steps in the Community Banking Initiative that we are undertaking. 

Ms. EBERLEY. The ones that I mentioned were bankers who did 

ask us for more technical assistance. They expressed that they valued the director’s colleges that we put on. These are training sessions that we offer through trade associations in each of our regions for bank directors to participate in and learn about emerging 

issues. We host teleconferences. We have had workshops where we 

26 

will focus on a specific topic like allowance for loan and lease 

losses, and troubled debt restructuring. 

Those have received high praise. And we have been asked for 

more and we have committed to do more. We are trying to look at 

ways to make those offerings available more broadly, like a Webbased offering so that it could be available on-demand, in order to 

provide that kind of training so that institutions don’t have to rely 

on outside assistance to get that. 

Mr. FITZPATRICK. Is there a specific work plan for this year, for 

2013, to address the cumulative impact of all those regulations on 

community banks? 

Ms. EBERLEY. The specific work plan that we have in place is 

geared toward the technical assistance offerings, and we do have 

a work plan, yes. 

Mr. FITZPATRICK. I agree with what Mrs. Maloney indicated that 

during those very difficult economic times this past couple of years, 

it was community banks that were literally holding the communities together. They were the ones that were making the mortgage 

loans. They were the ones making the small business loans. 

What do the statistics show during those last couple of years in 

a number of those small community banks, the charters have gone 

out of business versus new startups? Are we seeing more community banks go out of business and fewer starting up? 

Ms. EBERLEY. We have seen that. And that is consistent with the 

economic cycle. We saw it during the last crisis as well. We are 

starting to hear discussions from consulting groups that are representing groups of organizers that are interested in chartering 

community institutions. 

Mr. FITZPATRICK. What are you doing to encourage more charters? 

Ms. EBERLEY. To encourage more charters? We are open to receiving applications for deposit insurance. It really is more of an 

economic fundamental and we are waiting for groups to come forward. We try to be supportive of the banking industry through our 

Community Bank Initiative and our other outreach efforts. 

Chairwoman CAPITO. Thank you. The gentleman’s time has expired. 

Mr. Scott for 5 minutes. 

Mr. SCOTT. Thank you. Let me start, first of all, because my colleague from Georgia, Congressman Lynn Westmoreland, and I put 

forward a very important bill that I think you all are aware of. Are 

you not? You are not aware of the bill we put forward? I certainly 

hope that you will soon become aware of it because you all are the 

source of this bill. I am surprised that you do not know of our 

work, which begs the question as to why community banks might 

be suffering unnecessarily. 

Just to refresh your memory, Congressman Westmoreland and I 

represent the State of Georgia. And Georgia has unfortunately led 

this Nation in bank closures. Many of us feel that some of those 

bank closures were not necessarily caused by the external strong 

winds of the economy, but in many respects by not the proper type 

of regulation, perhaps overaggressive regulations. 

In other words, we wanted to find out why these banks failed. 

And you all play a very important role in that. So you can see why 

27 

I am very disappointed that you all have no idea of this law and 

this bill that we passed. 

Let me refresh your memory just for a second to explain to you 

what it is so you understand my very serious disappointment. We 

introduced Public Law 112–88 to address the concerns that our 

constituents in Georgia have that they are facing not only more 

regulations, but more aggressive enforcement, not being sensitive 

to those situations. 

They have had increased costs unnecessarily. So we wanted to 

take a look at it, and we directed the Office of Inspector General 

of the FDIC—are you here? 

Mr. RYMER. Yes, sir. I am right here. 

Mr. SCOTT. All right. So this law affected you. And the GAO, are 

you here? Okay. To thoroughly study, which obviously you have not 

done, and report on a wide range of policies and procedures used 

by the FDIC in its supervision of troubling and failing institutions. 

We specifically instructed you to address the following: the effect 

of loss sharing agreements; the significance of losses; the consistency of procedures used by examiners for appraising collateral values; the factors examiners consider when assessing capital adequacy; the success of FDIC field examiners in implementing the 

FDIC guidelines for commercial real estate workouts; the impact of 

cease-and-desist orders on troubled institutions; the FDIC’s procedure for evaluating potential private investment in insured depository institutions; and the impact of the FDIC’s policy on private investment in insured depository institutions. 

This is serious. Our community banks deserve better. They only 

control 14 percent of the total banking assets in this country. But 

yet they account for 46 percent of all of the small business loans, 

all of the farmer’s loans. 

So you can see why this is serious business to us in Georgia. And 

we don’t just sit here to pass these laws like this that are directed 

towards you to respond to. And so I certainly hope, with all due 

respect, that you will find the time to look at the legislation that 

my colleague, Mr. Westmoreland, and I worked so feverishly on, 

and to try to examine. 

I yield back, Madam Chairwoman. 

Chairwoman CAPITO. The gentleman yields back. 

I ask unanimous consent to insert into the record a letter from 

the National Association of Federal Credit Unions. Without objection, it is so ordered. 

Mr. Westmoreland for 5 minutes. 

Mr. WESTMORELAND. Thank you, Madam Chairwoman. And I 

want to personally thank Mr. Edwards and his staff for the accessibility that they have given me and my office to address our constituents’ questions and concerns. We haven’t always agreed, but 

we have had some great conversations. And I want to thank him 

publicly for that. 

Ms. Eberley, let me say that I got a call from one of my community bankers who said he had been in the banking business for 35 

years. He is going through an examination. He said he had never 

really had an examination like this that was more nitpicking, with 

incompetent regulators. Yet, he did not want to come forward because of fear of retaliation. 

28 

And so, I think that is something that you need to look at. And 

the fact that this bank is finally making money, but it said it 

seemed like the regulators wanted to look in the rearview mirror 

rather than looking forward into what they had done to actually 

begin making money in saving their bank. So— 

Chairwoman CAPITO. Will the gentleman yield? 

Mr. WESTMORELAND. I will. 

Chairwoman CAPITO. I want to underscore what he is saying because I think it is a very serious issue. And when I would talk to 

banks, and as I understand it we cannot appeal to you for an individual bank, we can only appeal in a policy way, that is why we 

wrote our letter, or rather our bill. Many of them would say they 

couldn’t appeal because they were afraid of retaliation. They feel 

that if they raise something, they are going to be punished. And 

I think we have to get rid of that. Anyway, I yield back. 

Mr. WESTMORELAND. Yes, but— 

Chairwoman CAPITO. Your point is a very important one. 

Mr. WESTMORELAND. Reclaiming my time, I guess this would be 

to Mr. Brown or anybody from the FDIC who wants to take it. 

Coming from the State of Georgia, and even despite the crisis that 

we have had, we are still one of the fastest-growing States in the 

Nation. And to accommodate that growth, it is important that we 

do have the financing in place to develop real estate. 

Leading up to the downturn, the community banks, as you probably know, paid the largest amount of attention to being able to 

lend so we could develop. But because a lot of these real estate 

loans tanked, the economy tanked. They were having to write down 

these loans immediately, and acquire more capital, which was hard 

to do. 

But the studies showed that the construction activity is essential 

to economic activity, and I think Mr. Evans will agree with this, 

in your community. It is certainly true in my district. And the further research—you have to establish a balance between the social 

benefits and the social costs of the commercial real estate. 

We are beginning to see the first signs of some new construction 

activity in my district. And my fear is that the examiners will not 

allow these community banks to participate in this economic comeback that we are having in Georgia, especially in my district. So, 

could you describe any new guidance that you might have that you 

could provide to these banks to help them, and to give us the assurance that they can get back into this type of lending? 

Ms. EBERLEY. I think that probably falls more in my camp. We 

don’t have any new guidance planned, but I would say that the existing guidance that we issued throughout the crisis stands. And 

we have encouraged institutions to make loans to creditworthy borrowers. 

We have issued a couple of different statements in that regard, 

in addition to encouraging institutions to work out credits with 

troubled borrowers. So, we keep repeating that. I can reemphasize 

it with the staff in the Atlanta region, and I am happy to do that, 

and in fact the staff nationwide. But that is our policy. 

Mr. WESTMORELAND. Thank you. 

The other thing I hope that you all will look at is the appraisal 

situation, because if you look at the loss share banks and they get 

29 

an appraisal, it is far lower than what a non-loss share bank appraisal would get because that means that loss share bank would 

get more reimbursement from the government, which is really costing the taxpayers money. 

And we have appraisal problems that go far beyond that, though, 

in the fact that we are now having to use appraisers from different 

parts of the State. As you know, real estate is location, location, location. And if these appraisers aren’t familiar with the location and 

the benefits that it has, then they really can’t do a firm appraisal. 

So I hope that the FDIC in total will look at the appraisal process 

and some of the problems that are coming from it. 

With that, I know I am over my time, and I yield back. 

Chairwoman CAPITO. Thank you. 

Mr. Green for 5 minutes. 

Mr. GREEN. Thank you, Madam Chairwoman. And I thank the 

ranking member as well. I think this is a very timely hearing. I 

thank the witnesses for appearing today. We all have community 

banks in our districts, and sometimes we call them neighborhood 

banks. They are referred to as small banks. We have many names, 

and I am not sure that we all have the same thing in mind when 

we use this terminology. 

So let me, if I may, bring us to a more mundane question. There 

are a lot of lofty ideals to be considered today, but there is something as simple as, how do you define a community bank so that 

I may understand that you and I are thinking of the same institution when we use the terminology? 

Mr. Brown, you have said that they have created a niche for 

themselves. You indicated that they have a different business 

model. So would you kindly give us your definition of a community 

bank, as we have been discussing things today, please? 

Mr. BROWN. Yes, Congressman. Previous studies have tended to 

just rely on asset size as a definition of community banks. We 

thought that did not quite capture their nature as relationship 

lenders. 

Mr. GREEN. Let me quickly intercede and ask this: In terms of 

asset size, because that was one of the things I was going to inquire about, what is the asset size of a community bank? 

Mr. BROWN. Many studies use an asset size of $1 billion and 

below as the definition of a community bank. But we went beyond 

that to look at their lending and deposit gathering activities, and 

the scope of their geographic footprint to try to come up with a better definition of a community bank. 

Mr. GREEN. Could you give us a little bit more information on 

it, please? 

Mr. BROWN. Yes. We excluded institutions that had no loans, no 

core deposits, that were specialty banks or that had foreign operations greater than 10 percent of assets. We then included institutions that had loans to assets greater than a third of the portfolio, 

core deposits greater than half the portfolio, had fewer than 75 offices, no more than 2 large metropolitan areas where they did business, and no more than 3 States where they did business, and no 

single branch more than $5 billion. 

30 

So, these tend to look at the activities of the institution, look at 

the geographic spread of the institution, and try to capture its local 

nature and its relationship nature through those attributes. 

Mr. GREEN. Would anyone else like to comment on the definition 

of a community bank? Or have you all agreed that this is the definition that we should work from? Thank you. It is nice to see that 

there is agreement on something today. 

I will be meeting with community bankers. And I, like other 

members of the subcommittee, hear quite regularly this notion that 

we are inundated with paperwork; and I am simplifying what they 

say. Permit me to ask you to tell me what I should ask them when 

I talk to them, given that they will surely bring this up. 

I plan to have them take me through the bank, show me whatever it is that they want me to see, because I want to clearly hear 

and understand their side of this. When they come into my office 

here in Washington, D.C., we have extensive conversations. But I 

think it is time for me to go out and have a firsthand look at community banking. And I have asked that this be accorded me. And 

I have been told that this is something that I can do. So, what 

should I ask? What should I say to them pursuant to what the regulators think? Here is something that I would like for you to explain to me. 

Mr. BROWN. In the roundtables conducted as part of the FDIC 

Community Banking Initiative, we talked to the bankers about 

their view of the future of the industry, its future viability in their 

mind, its connection to small business lending, how they view their 

niche in the financial industry, and also how they view loan demand, how their customers are doing, and how the state of their 

customers has changed over the course of the recession. 

In addition, we talked a lot about the regulatory side, some of 

the concerns they had about regulation and about their perception 

of the cost of regulation. Those are very important issues. 

Mr. GREEN. With the little time that I have left, about 29 seconds, what is the smallest bank that we have? How many employees does the smallest bank have? 

Ms. EBERLEY. I believe I am aware of a $4 million institution and 

it has 4 employees, I believe was the number. 

Mr. GREEN. Four. With four employees, is Basel III or let’s just 

say a small number of employees, is it difficult to comprehend and 

work through these regulations when you have few employees? 

Let’s not use a number, but few? 

Ms. EBERLEY. That is certainly what bankers have told us, that 

it is the breadth of regulatory requirements and rules and regulations that is very difficult for them to absorb. And they have asked 

for our assistance. 

Mr. GREEN. Do we have a means by which we can accord assistance to these banks such that they know that there is a space or 

place that they can tap into? 

Ms. EBERLEY. Yes. We have established a Web tool to help institutions manage rules and regulations that are coming down the 

pike. And we have also committed to expanding our educational offerings for community banks to assist with training on existing 

rules and regulations. 

31 

Mr. GREEN. Thank you, Madam Chairwoman. I will yield back, 

and simply say that I will probably have more questions after I 

have talked to my community bankers. Thank you. 

Chairwoman CAPITO. Thank you. 

Mr. Duffy for 5 minutes. 

Mr. DUFFY. Thank you, Madam Chairwoman. 

I would join Mr. Green, Ranking Member Meeks, Mrs. Maloney, 

and Mr. Fitzpatrick in piling on my concern with Basel III. I, too, 

hear constantly from my community banks what impact this potential rule will have on them. And I guess first off, do we have a 

timeline of when we think the rule is going to come out? 

Ms. EBERLEY. We are working diligently with the other regulators to finalize the process as soon as possible. We know what the 

uncertainty of delays means to institutions. 

Mr. DUFFY. Do you have anything more specific than, ‘‘We are 

working on it?’’ 

Ms. EBERLEY. I do not. 

Mr. DUFFY. Fair enough. And I know you are not going to comment on the rule. I think it was Mr. Fitzpatrick who talked about 

exempting our community banks, which I think is reasonable. But 

if it is not an exemption, maybe a tiered structure would at least 

be considered for smaller community banks. 

Just one other point: if you look at the conversation we are having today, the difficulty of our community banks with the burdensome regulations that are being piled upon them, and we look forward to Basel III and QM, the burden isn’t getting lighter. It is 

getting heavier. And so hopefully, you will all take that into consideration as we try to make sure we have a structure in place that 

allows a healthy and vibrant community bank structure across the 

country. So, I didn’t want to pile on, but I guess I did. 

I want to quickly move over to new charters. I know it was 

touched on, I think by the chairwoman. But listen, we haven’t had 

any new charters in 2012, right? In 2011, we had three, and in 

2010, we had nine. 

So as we move away from the financial crisis, we did have a bottom and then it started to recover. We actually have continually 

gone down since the crisis. Is there an explanation for why that is 

taking place, why we haven’t bottomed out and come up since the 

crisis? 

Ms. EBERLEY. I would say that the industry lags the economy, in 

terms of its overall condition and performance. And so I think that 

is what you are seeing is that we have hit zero. And we would anticipate that we would move up from here. As the industry is starting to improve, we would expect to see additional activity or new 

activity. 

Mr. DUFFY. And if you look at the recession in the early 1990s, 

we never bottomed out—never came to zero. Maybe there is a difference between a recession and a financial crisis. Is that the answer? 

Mr. BROWN. Yes. Just that the new charters have always been 

highly cyclical. This has been a particularly severe cycle with regard to the effect on the financial industry and their customers. 

And so, I think that explains some of the severity of the cycle. 

32 

There were nearly 5,000 new charters for the industry during the 

period of our study, and we anticipate that chartering activity will 

pick up with the economy and with the recovery of the industry. 

Mr. DUFFY. So do you think it is more the cycle in a crisis as opposed to the new rules and regulations that have come from DoddFrank and others? 

Mr. BROWN. Our experience through history is that it has been 

highly cyclical. So, we would anticipate a rebound. 

Mr. DUFFY. But is it this cyclical in the sense that when we are 

4 years, 3 years from the crisis we have not started to recover and 

come up, we are actually still going down? 

Mr. BROWN. As was indicated, the performance of the industry 

tends to lag the recovery of the economy. The recovery of the economy itself has been somewhat muted, again, going to the severity 

of the financial crisis. 

Mr. DUFFY. Okay. And I wanted to give a few minutes or a 

minute-and-a-half back to the gentleman from Georgia. So I would 

yield my time to him. 

Mr. WESTMORELAND. Thank you for yielding. Let me say that I 

think Basel III would be the last nail in the coffin for a lot of our 

community banks. So I hope you will take that into consideration. 

Mr. Evans, in your report you noticed what I have been saying 

for a while, that some of the acquiring banks had driven down the 

real estate values by selling at depressed prices. Do you see that 

the FDIC can handle what I am anticipating is a second wave of 

this, when these loss share agreements expire? If they are not extended for some point in time, there is going to be another selloff, 

which will depress the markets even more, which would cause even 

more community banks to fail. 

Mr. EVANS. Thank you. We did hear from one bank who expressed those issues. We also, I should point out, heard from other 

acquiring banks who said the loss share agreements gave them 

time to work out loans. And so, I think the verdict is still out; more 

work needs to be done to try to figure this out. Certainly given 

what we have heard, it is something that you might want to consider looking into in greater depth. 

Mr. WESTMORELAND. I yield back. 

Chairwoman CAPITO. Thank you. 

I would like to welcome to the subcommittee a new member, and 

recognize him for questioning, Mr. Heck from Washington. 

Mr. HECK. Thank you, Madam Chairwoman, very much. 

I believe this question is most appropriately directed at Mr. Edwards. Sir, could you, as succinctly and clearly as possible describe 

for us, help us better understand the division in decision-making 

responsibility and authority when it comes to the acquisition of a 

failing bank, between headquarters and regional offices? 

As you might imagine, that question stems from circumstances 

in the congressional district I have the honor to represent, where 

the decision-making process kind of went on and on. And losses 

mounted. And when finally it came down and it was never clear 

where the decisions were being made, the evidently self-qualified 

local investors took a walk on the 70 stipulated new conditions. So, 

help us describe that division if you would please, sir. 

33 

Mr. EDWARDS. Sure. And I will ask Doreen to pipe in as well. So, 

when somebody is trying to be qualified to bid on a failing bank, 

they have to go through the Division of Risk Management Supervision and get approved to bid. I will let Doreen describe how that 

works. 

But essentially, they have to be in good financial shape and they 

have to be deemed to be qualified to take that failing bank over 

and be successful. Otherwise, we wouldn’t want that transaction to 

go forward. 

Doreen, do you want to add to that? 

Mr. HECK. And that is done at headquarters? 

Ms. EBERLEY. No. The process is handled in the region. Essentially for an institution to be on the bid list for a failing bank 

transaction, we have to be able to know ahead of time that we can 

resolve the statutory factors that would be required to be considered for a merger transaction— 

Mr. HECK. So the regional offices are the ones who make the decisions, not here? 

Ms. EBERLEY. The regional— 

Mr. HECK. Is that correct? 

Ms. EBERLEY. Right. The regional office— 

Mr. HECK. Including the formulation of new conditions or conditions, is that made at the general office? 

Ms. EBERLEY. Yes. For an institution to become listed on the bid 

list and be able to participate in a failing bank transaction, that 

happens at the region. So, other transactions occur as well on an 

open bank basis. And those considerations may involve the Washington office on a parallel basis in considering things like change 

of control of an institution that is open and troubled before failure. 

Mr. HECK. So there is a division of responsibility? 

Ms. EBERLEY. For certain transactions, yes. That is an open bank 

transaction for a recapitalization of an institution through a change 

of control. 

Mr. HECK. And then that decision is made here? 

Ms. EBERLEY. It is not made here. There is discussion back and 

forth. There is consultation. 

Mr. HECK. Between corporate headquarters, as it were, and the 

regional bank? 

Ms. EBERLEY. Yes. 

Mr. HECK. I see. I don’t know to whom I should ask this question, but I am trying to put myself in the shoes of a community 

banker who is running a pretty well-run shop and is looking at admittedly the fairly low cost of money right now that he or she has 

to pay to depositors, and looking forward at the prospect, which 

seems to me to be inevitable that interest rates will rise again. 

And I am wondering if you agree that, in and of itself, was an 

inherent impediment to aggressive loaning for what would otherwise be qualified borrowers insofar as the amount of money you 

lock in long-term and low-cost returns, confronts a changing interest rate environment you may be stuck. And I guess as a part of 

that question it makes me wonder when you evaluate bank portfolios, what is your forecast, what is your outlook for the interest 

rate environment? 

34 

Mr. Brown, I thought I should ask that question of you, upon reconsideration. Thank you. 

Mr. BROWN. First of all, our historical experience has been that 

lending tends to expand somewhat during periods of rising interest 

rates. That is the part of the economic cycle when the economy is 

expanding and the monetary authority feels it is okay to raise interest rates from the recession lows. 

Mr. HECK. Excuse me, sir. Do you not agree, then, that it would 

be an impediment to more lending? We had a lot of discussion here 

about not being able to get as many dollars out there circulating 

as possible. But if you are confronting increasing interest rates, 

how much today do you want to put on your books that is low return? 

Mr. BROWN. Historically, lending has increased more in periods 

of rising interest rates. Periods of very low interest rates have been 

associated with less vibrant economies, slow growth like we have 

seen recently. And a lot of the bankers we have talked to in the 

roundtables and other venues have cited a lack of loan demand in 

the current environment, that entrepreneurs are not eager to expand their operations. 

Chairwoman CAPITO. The gentleman’s time has expired. 

Mr. HECK. Thank you. 

Chairwoman CAPITO. Thank you. 

And I would like to welcome a new member to our committee, 

and a new Member to Congress, Mr. Pittenger from North Carolina. Welcome. 

Mr. PITTENGER. Thank you, Madam Chairwoman. Thank you for 

calling this important hearing. And I thank the witnesses for being 

here with us today and responding to our questions. 

I would like to follow up on Mr. Duffy’s questioning and also Mr. 

Westmoreland and others. I served on a community bank board for 

about 14 years, from the early 1990s until the mid-2000s. It was 

an exciting time. It was a great time for investors to invest in community banks. It was a great time of growth. And our community 

banks played a significant role in our region. 

I live in the Charlotte, North Carolina, area. And our bank grew. 

We ended up selling to a regional bank. We had our typical requirements, CRA and loan loss reserve issues that we were accountable to. We had the audits that came in. We got a clean bill 

of health most all the time. It was a good environment. It was very 

positive, and frankly, it was a great learning curve for me. 

But today, of course, the environment has changed, and the impediments are out there in a greater way. I met with seven of our 

community bank presidents a couple of weeks ago, and they expressed to me just more of an oppressive atmosphere, totally different than what I had the privilege of being involved in during 

those 14 years. And clearly, Basel III was a major concern, just the 

high regulatory effect and the cost of compliance, the attention that 

is given to it. 

The concerns are getting capital. And the difficulty there where 

some banks were forced to look for private equity. And as such, the 

only exit for private equity is to sell a bank and consolidate more, 

which is worse for the market, and worse for competition. 

35 

So, all this leads us to believe that the need for relief today, to 

create that same environment that we had back during those positive years and to recognize that perhaps what we are doing today 

through the regulations is creating more difficulty and impediments than protection. And maybe the pendulum just swung way 

too far and maybe if we can come back. 

I speak on their behalf, and frankly, on the behalf of communities all over the country that there would be very serious consideration to giving relief to these community banks, which in our region I—we probably had six community banks that grew and now 

they are all have consolidated or sold out. It is pretty sad. But I 

believe we can see this again if we have some thoughtful, prudent 

reevaluation of the requirements they are having to live under 

today. 

If you would like to comment, I would be glad to hear from you. 

Mr. BROWN. I think the topics that you raised obviously are of 

concern. They have been raised as concerns to us in our interactions with the bankers. 

I would point out that in terms of the evolution of the industry, 

the industry’s financial condition and performance is improving, 

and that includes small institutions. And the return on assets has 

increased for each of the last 3 years, and the return on equity. 

Non-current loans have gone down. This repairing of the balance 

sheet and the earnings capacity of small banks has proceeded slower than the economic recovery, perhaps also slower than the larger 

banks in terms of their recovery. But it is taking place. And I think 

that you also mentioned access to capital. 

We found that just under half of all of the additions to capital 

during our study period relate to retained earnings. And of course, 

that requires a healthy level of earnings to gain that capital. So, 

the restoration of that earning capacity is very important for access 

to capital for the industry. That is what our study— 

Mr. PITTENGER. Sir, I would just say to you that I think it is a 

compelling statement that there are no new charters. So it is a 

much different climate today. And that is reflected in the absence 

of those who want to get back and engaged in this business as they 

were before. 

I yield back my time. Thank you. 

Chairwoman CAPITO. The gentleman yields back. 

Mr. Posey for 5 minutes. 

Mr. POSEY. Thank you, Madam Chairwoman. 

Mr. Rymer, on Page 59 of your report you note that the historical 

cost was proving to be poor measurement approach in inflationary 

markets. Is it fair to say that the impaired accounting and fair 

value accounting is a poor measurement in bubble markets? As 

briefly as possible, please. 

Mr. RYMER. Yes, sir. In terms of fair value accounting related to 

bank portfolios, we didn’t find that fair value accounting was— 

Mr. POSEY. Can you just answer my question? You agree with me 

or you don’t agree with me? 

Mr. RYMER. Sorry. If you could repeat it, sir; I have a little bit 

of a hearing problem. 

Mr. POSEY. Is it fair to say that the impairment accounting and 

fair value accounting is a poor measurement in bubble markets? 

36 

Mr. RYMER. Public markets? 

Mr. POSEY. In bubble, B-U-B-B-L-E markets. 

Mr. RYMER. I don’t think you can apply fair value accounting to 

bank lending. It doesn’t fly. 

Mr. POSEY. Very good. Thank you. 

A question for each of you, just a yes or no if you would, do you 

think it is possible through overregulation to bankrupt or make insolvent lending institutions? Let’s start with Mr. Brown. 

Mr. BROWN. That has not been the experience of the study. 

Mr. POSEY. Is that a ‘‘yes?’’ 

Mr. BROWN. I think that would be a ‘‘no.’’ 

Mr. POSEY. A ‘‘no.’’ So it is impossible to overregulate a business 

out of business. Okay. Thank you. 

Yes, ma’am? Please speak up. I can’t hear you up here. 

Ms. EBERLEY. The question was, is it possible to overregulate a 

business out of business? 

Mr. POSEY. Yes. 

Ms. EBERLEY. I— 

Mr. POSEY. It is a tough question. I understand that. Especially 

for people who work for the government. No insult intended. So, 

you don’t know whether it is possible to overregulate anybody out 

of business or not. Okay. 

Mr. Edwards, how about you? 

Mr. EDWARDS. Is it theoretically possible? I would concede it is 

theoretically possible. In my experience, have I seen that? No, I 

have not. 

Mr. POSEY. Okay. 

Mr. Rymer? 

Mr. RYMER. I would agree with Mr. Edwards. I think theoretically, it is certainly possible. 

Mr. POSEY. Okay. 

Mr. EVANS. I agree as well. Theoretically, it is possible. It is possible to overregulate a business. 

Mr. POSEY. Do you think it would be possible if regulators put 

55 percent of a bank’s loans on nonaccrual? Let’s start with you, 

Mr. Brown. 

Mr. BROWN. If they put 55 percent of loans on nonaccrual— 

Mr. POSEY. Wrongfully. 

Mr. BROWN. Wrongfully? 

Mr. POSEY. Yes. 

Mr. BROWN. Then what is the question? I’m sorry. 

Mr. POSEY. Do you think they could put a bank out of business 

like that? 

Mr. BROWN. It is possible a bank could go out of business if it 

had 55 percent of loans on nonaccrual. 

Mr. POSEY. Okay. But the last time you said it wasn’t possible 

to overregulate them out of business. But you think if they did 

that, it would be possible. 

Mr. BROWN. If they had 55 percent of loans on nonaccrual, it is 

possible they could be. 

Mr. POSEY. Okay. 

Ms. EBERLEY. I don’t think regulators could inappropriately put 

loans on nonaccrual. 

37 

Mr. POSEY. I can’t—you are going to have to speak into the 

microphone, please. 

Ms. EBERLEY. I don’t think that a regulator could inappropriately 

place a loan on nonaccrual. So I don’t believe that would cause an 

institution to inappropriately go out of business. I think that if 

loans need to be on nonaccrual, they should be on nonaccrual, and 

the accounting guidance is fairly clear. It is clear that institutions— 

Mr. POSEY. Okay— 

Ms. EBERLEY. —nonperforming loans. 

Mr. POSEY. You said, ‘‘no.’’ That is good. 

Mr. Edwards? 

Mr. EDWARDS. Yes. I have to agree with Ms. Eberley that it is 

hard for me to understand a circumstance where the regulators 

would— 

Mr. POSEY. Okay. That is good. 

Mr. Rymer? 

Mr. RYMER. First of all, it is the bank’s responsibility initially to 

make the nonaccrual judgments. It is not the regulator’s responsibility. 

Mr. POSEY. All right. So is that a yes or a no? 

Mr. RYMER. If— 

Mr. POSEY. Just yes or no, just really simple. 

Mr. RYMER. I would say from the work that we did, I did not see 

such a circumstance. 

Mr. POSEY. Never mind. Thank you. 

Yes, sir, at the end? 

Mr. EVANS. Nonperforming loans would be a significant driver of 

bank failures. And that is what we found in our report. But the 

classification issue, I will pass on that. 

Mr. POSEY. For Ms. Eberley’s benefit, I know of an instance 

where regulators took a first mortgage with—on a hotel actually, 

about a 30 percent loan-to-value ratio, about 7 years mature, never 

been a day late. And the regulator said, we don’t think in this market they should be able to make their payment. They have never 

been 1 second late in the history of the loan, a well-secured loan. 

Some people think it might be entirely appropriate to put that 

on nonaccrual. And some people trying to use a little bit of commonsense think it would be highly inappropriate. 

Mr. Rymer, let’s see, Mr. Evans, from your research do you believe impairment accounting as applied in the examination process 

fuels the various spiral of negative balance sheet pressures, leading 

to more failures and write downs? 

Mr. RYMER. Our study did cite some issues. 

Mr. POSEY. Okay. That was a ‘‘no.’’ That is good enough because 

I have a lot of ground I would like to cover, and I am running out 

of time. 

Mr. RYMER. —regulatory issues. 

Mr. POSEY. I am out of time. 

Chairwoman CAPITO. You are out of time, sorry. 

Mr. POSEY. Thank you, Madam Chairwoman. I would sure love 

a lightning round if we had 2 minutes left. 

Chairwoman CAPITO. Thank you. 

38 

Mr. Barr, I would like to welcome you to the committee, and I 

recognize you for 5 minutes for questioning. 

Mr. BARR. Thank you, Madam Chairwoman. 

Ladies and gentlemen, a president of a small community bank in 

Central and Eastern Kentucky told me that it used to be that his 

bank made a business decision about whether to make a loan to 

a borrower and what the terms of that loan would be. Today, that 

same banker tells me that the government makes that decision for 

them. With that troubling anecdote in mind, I want to focus my 

questions on the costs imposed by regulations and the costs imposed by increasingly aggressive enforcement by supervisory agencies like the FDIC. 

First of all, just a quick yes or no answer from Mr. Brown, Ms. 

Eberley, and Mr. Edwards. Do you think it is important to perform 

cost-benefit analysis as a predicate to promulgating rules and regulations? 

Mr. BROWN. Yes, and that is our practice. 

Ms. EBERLEY. I agree. 

Mr. EDWARDS. Yes, I concur with that. Yes. 

Mr. BARR. Okay. And Mr. Brown, you testified earlier that you 

solicit input from industry regarding regulatory costs through informal practices and also in the notice of comment process. Ms. 

Eberley, you noted that your agency was engaged in technical assistance, Web seminars, training sessions for bank directors, workshops. And I applaud the agency for taking those actions. 

But the FDIC study that you all refer to in your testimony, Mr. 

Brown specifically, you indicated that most interview participants 

stated that no single regulation or practice had a significant impact 

on the institution, but that the cumulative effects of all regulatory 

requirements have built up over time. 

Several other members on this panel have mentioned that earlier 

today, that increased staff is something that you are observing 

compliance staff in these community banks. But that it is so timeconsuming, so costly, and so interwoven into the operations that it 

would be too difficult to break out these specific costs. With that 

testimony in mind, how can the analysis be done, the cost-benefit 

analysis be done properly if you acknowledge that the true costs associated with regulatory compliance cannot be captured? 

Mr. BROWN. I think the difficulties in making a precise quantification of the costs and the benefits of specific regulations is 

something that has been noted by the GAO and other sources. We 

are very mindful of the balance between wanting to get information 

on the costs, regulatory cost, but also imposing the burden of additional regulatory reporting on the industry, which in itself can be 

a burden. 

So we maintain that balance. That is why we rely on input from 

the industry, especially during the rulemaking process, to try to get 

better information. We think that industry is in the best position 

to understand their cost structure. 

Mr. BARR. Given that compliance costs are increasing, and the 

study corroborates that and you acknowledge that increasing compliance staff is something that is happening in the industry, that 

the fastest growing area of banks is not in loan officers or in lending, but in compliance staff. How is the FDIC tracking, if at all, 

39 

the increased compliance costs, increased costs of employing compliance officers as part of, as you acknowledge, your important costbenefit analysis? 

Mr. BROWN. I don’t believe the responses indicated that compliance costs were the fastest growing cost element of those institutions. They had indicated that it had increased over a long period 

of time in response to a large number of regulatory changes over 

time. But there was no indication that it was the fastest growing 

area. 

Mr. BARR. Okay. On top of compliance costs, I also want to just 

briefly explore the issue of regulatory clarity. And the example that 

I will cite to you is a compliance officer in a very reputable and 

growing community bank in Central Kentucky who tells me that 

her most pressing concern is the mixed signals that she receives 

from regulators. 

Specifically, on the one hand, they are told that they need to be 

prudent and responsible with their loans in order to ensure safety 

and soundness. That comes from you all typically. Yet on the other 

hand, the Community Reinvestment Act wants banks to reach out 

to riskier, low-income borrowers who don’t meet creditworthy borrowing criteria. 

So the question is, is the FDIC sensitive to this concern? And 

what is the FDIC doing to address the contradictory mandates imposed on community banks from safety and soundness examinations on the one hand and CRA audits on the other? 

Ms. EBERLEY. The consumer protection examinations are not 

under my purview, but I do know that we don’t believe that the 

Community Reinvestment Act requires institutions or directs institutions to make loans that are not creditworthy. So I would disagree with the stipulation that there is— 

Mr. BARR. What would you say to that particular compliance officer who doesn’t understand the government’s direction to the bank? 

Ms. EBERLEY. We need to have a discussion with the banker. 

And they need to seek clarity, and I would encourage them to seek 

clarity from their supervisor, from their field supervisor, from their 

regional office. Both the consumer protection function and the safety and soundness function report up to one regional director in the 

field. For Kentucky, that is Anthony Lowe out of our Chicago office. 

Mr. BARR. I would just—my time is up. But I would just like to 

encourage the FDIC to take that concern very seriously, that there 

is a serious lack of clarity on the part of well-meaning, well-intentioned compliance officers in these community banks. And your 

sensitivity to that would be appreciated. 

Chairwoman CAPITO. Thank you. 

Mr. Pearce for 5 minutes. 

Mr. PEARCE. Thank you, Madam Chairwoman. 

Just following up on Mr. Posey’s statements, and then the discussion of whether it was theoretically possible for the government to 

regulate out of business. Now I am taking a broader view than just 

the banking industry. But I would direct you to my State, where 

we used to have 123 timber mills. And because of one regulation, 

all but one are shut down today, and 23,000 farmers in the San 

Joaquin Valley all gone because of one regulation. 

40 

The banks in the area, by the way, became unstable. Suicides 

rose to an all-time high for any place in the country because of one 

regulation. So, when you are unable to find in your own experience, 

come on to New Mexico. Come out to the West and we will show 

you a lot of areas that have been regulated out of existence. 

Following up on what Mr. McHenry was talking about, I suspect 

that he may have been listening in on the meetings with our bankers. I hear the same complaints there, that in the past, regulators 

came in and they were interested in safety and soundness. And 

today, they come in and they are 90 percent compliance. 

And so, Mr. Brown, you had said earlier in your testimony that 

safety and soundness, that was your charter. Do you have any idea 

on the budget for safety and soundness versus the budget for compliance, and the number of hours spent yearly in compliance versus 

safety and soundness? Does anyone on the panel have that? 

Mr. BROWN. Congressman, I don’t believe we have those numbers— 

Mr. PEARCE. I would like to get them. 

Mr. BROWN. We can certainly get back to you on that. 

Mr. PEARCE. Now, keep in mind that every time I ask questions 

like this, we have a lower rate of getting back to me than the U.S. 

Postal Service. So I would really appreciate if you would follow up 

on that. 

Now, Ms. Eberley, you were talking about how you have deep interest in making sure that there is not any hostile environment. Do 

you have a—last weekend, I was going to check into the Hampton 

for coming up, and I was able to go online and I was able to get 

five stars or three stars. This hotel, this one at this place rated 

three stars, four stars, five stars. And then, I could get comments 

from people who had stayed there. 

Do you have anything like that for your process for your examiners so that bankers anonymously—because you heard the hostility, no they are not going to come to you. They are scared out 

of their minds. They are afraid that you are going to take them 

over and that you are going to do something. And I think that they 

have a valid reason, looking at the 123 mills that used to be in 

New Mexico and they are gone. 

So, do you have a process for feedback where you can rate—or 

where your people get rated five stars, four stars or three stars? 

Do you have anything like that? 

Ms. EBERLEY. We do have an examination survey process. So at 

the end of every examination when we mail out the report of examination, we mail a survey to the institution and ask them to complete it. I think the scale is 1 to 10— 

Mr. PEARCE. And it talks about the individual regulators themselves? 

Ms. EBERLEY. Yes— 

Mr. PEARCE. The individual regulators. 

Ms. EBERLEY. The— 

Mr. PEARCE. And what percent of those do you get back? 

Ms. EBERLEY. Pardon me? 

Mr. PEARCE. What percent of those do you get back? 

Ms. EBERLEY. I don’t know the exact percentage, but we get a 

fairly good number, and— 

41 

Mr. PEARCE. Pretty good number? 

Ms. EBERLEY. Yes. And they go to our Division of Insurance and 

Receivership, so they don’t—I am sorry, Insurance and Research. 

They don’t come to my division. So that division compiles the information for me and gives it to me on an aggregate basis with trends 

by region so that I can see what the results are. 

Mr. PEARCE. Do you make that information available to the 

banks so that they know when someone is coming in what sort of 

examination that the last people received? 

Ms. EBERLEY. No, it is not made available today. 

Mr. PEARCE. I keep in mind that I can get that, paid $2.99 online 

for some program last night and I am able to get that information 

for $2.99. Yet you all control the banking industry of the world and 

they are sitting out there alarmed at what you are doing. 

In New Mexico, we don’t get many floods. We get 9 inches of rain 

a year. And yet, the flood insurance is a piece that is hammered 

down in New Mexico and people—the bankers express alarm about 

that. 

Now, in a recent compliance review, one of the banks got a 

$15,000 fine because the names did not match exactly the IRS 

names. Can’t you—again, on that $2.99 program I filled out last 

night, if I didn’t fill it out correctly, it just wouldn’t accept it. Can’t 

you give a bank something where if they don’t fill it out correctly— 

why did you stick somebody $15,000 for not—there were less than 

100 of those names. 

Ms. EBERLEY. So was this on their HMDA? 

Mr. PEARCE. It is on the loans and— 

Ms. EBERLEY. Yes. So probably the— 

Mr. PEARCE. And it didn’t match the IRS? 

Ms. EBERLEY. Right. 

Mr. PEARCE. Those used to be letters. And you sent them a letter 

of concern. And now, you are sticking people with fines that are 

very tough for small institutions, trailer houses. You are making it 

tough to lend money on trailer houses and on—I will be finished 

in just a second, Madam Chairwoman, you are very patient. 

New Mexico is 47 per capita income. If you can’t lend for trailer 

houses and if you can’t lend for consumer stuff, what purpose is 

there in New Mexico? That is us. We are at the bottom of the heap. 

You guys are making it very tough for New Mexico to get access 

to loans. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. The gentleman yields back. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

The hearing is adjourned. 

[Whereupon, at 12:11 p.m., the hearing was adjourned.] 

(43) 

A P P E N D I X 

March 20, 2013 

44 


80875.001

GAO 

For Rdpase on Delivery 

gxpeded at 10 a.IU. EIlT We(bwsday, March 20, 201;1 

GAO-13-476T 

United States Government Accountability Office 

Testimony Before the Subcommittee on 

Financial Institutions and Consumer 

Credit, House Committee on Financial 

Services 

FINANCIAL INSTITUTIONS 

Causes and Consequences 

of Recent Failures of 

Community Banks 

Statement of Lawrance L. Evans, Director 

Financial Markets and Commnnity Investment 

GAO 

Accountability * Integrity * Reliability 
45 


80875.002

· W:!Iy GAO Did T4is StUdy. 

BelWeen Ja~u"ry2008 and December 

2011:..c,aper1i>ct oieeo"qlTlio daW11!9m 

inth~:Unjted 'ltate.r-414 Insured l/$ ~anks failed, Of the~e,' 80. perc.en! . 

(353) had less thaR $1 billion in llSSets, 

'Jhese.s",all banks oftenspeclaHze In,; 

smallbusin~ss lending and are' 

",ss'Gelated Wtth Ioda) cpmmu'r,ll)' 

development an.dphilanthrapy.These· 

small bank,f~ilure.s have rais.ect 

."!uestiQns;about the contributing 

factors, inclu>!ing jhe:!lassible role of 

looal,market PQTlditioh.s; and the 

· aPplication of fair ValueaccQuntil\g 

under U: $, accounting standards, 

· Thjs.statemEmtis based on fin~in9s. fromthl' 201~ repoi:\on redent bank 

failure~ (GAO'1,a,71 ),'h1s testitr"8Y 

.discus~es (1.) the factors thin, . . 

co.ntribut,[,d totheQ",nk failure's.!B 

S!a,tes.with tnel1)osj failedins!itutioi\S 

be\Weeli,200a and 201.1 "nowha! rQle, 

jf~ny, fairyaloe a1icounting played,in 

tM~e; fa.ilure~ (2ltne Use of shared 

loss agteements iii JfSOlVin9 ,roubled 

bahks;and. (3)the .effect 9f recent.bank 

'\f,ail~~~s'O(i tpc~J cQrnm~ni!tie$>1:~'d~ , 

this work, .GAb relted on. issued report 

GAQ-1H1apdupdated data where \ 

'appropriate, '. 

GAO ~id nat m'akerecqmmendations 

in the repo(t. 

FINANCIAL INSTITUTIONS 

Causes and Consequences of Recent Failures of 

Community Banks 

What GAO Found 

Ten states concentrated in the western, midwestern, and southeastern United 

States-all areas where the heusing market had experienced strong grewth in 

the prier decade-experienced 10 er mere cemmercial bank er thrift (bank) 

failures between 2008 and 2011, The failures afthe smaller banks (those with 

less than $1 billien in assets) in these states were largely driven by credit lesses 

en commercial real estate (CRE) loans. The failed banks also. had often pursued 

aggressive growth strategies using nontraditional, riskier funding sources and 

exhibited weak undelWriting and credit administration practices, Fair value 

accounting also has been cited as a potential contributor to bank failures, but 

between 2007 and 2011 fair value accounting losses in general did not appear to 

be a majer centributer, as ever twe-thirds ef small failed banks' assets were net 

subject to fair value accounting. During the course of our work, some state 

banking associations said that the magnitude of the credit losses were 

exacerbated by federal bank examiners' classification of collateral-dependent 

leans and evaluatien ef appraisals used by banks to. suppert impairment analysis 

ef these leans, Federal banking regulaters neted that regulatery guidance en 

CRE werkeuts issued in Octeber 2009 directed examiners net to. require banks to. 

write dewn leans to. an ameunt less than the lean balance selely because the 

value ef the undenying cellateral had declined, and that examiners were 

generally not expected to. challenge the appraisals ebtained by banks unless they 

feund that underlying facts er assumptiens abeut the appraisals were 

inappropriate or could support alternative assumptions. 

The Federal Depesit Insurance Cerperatien (FDIC) used shared less agreements 

to. help reselve failed banks at the least cest during the recent financial crisis, 

Under a shared less agreement, FDIC abserbs a pertien of the less en specified 

assets ef a failed bank that are purchased by an acquiring bank, FDIC officials, 

state bank regulators, community banking associations, and acquiring banks of 

failed institutiens GAO interviewed said that shared less agreements helped to. 

attract petential bidders fer failed banks during the financial crisis, During 2008-

2011, FDIC reselved 281 of 414 failures using shared less agreements en assets 

purchased by the acquiring bank. As ef December 31,2011, Depesit Insurance 

Fund (DIF) receiverships are estimated to. pay $42,8 billien ever the duration ef 

the shared less agreements. 

The acquisitiens of failed banks by healthy banks appear to. have mitigated the 

petentially negative effects ef bank failures en cemmunities, altheugh the fecus ef 

lecallending and philanthrepy may have shifted, Fer example, GAO's analysis 

found limited rural and metropOlitan areas where failures resulted in significant 

increases in market concentration. GAO's econometric analysis of call report 

data frem 2006 through 2011 feund that failing small banks extended 

progressively less net credit as they appreached failure, and that acquiring banks 

generally increased net credit after the acquisition. However, acquiring bank and 

existing peer bank efficials GAO interviewed neted that in the wake ef the bank 

failures, underwriting standards had tightened and thus credit was generally 

more available for small business owners who had good credit histories and 

strong finaneials than these that did net. Mereever, the effects ef bank failures 

ceuld be significant fer these limited areas that were serviced by ene bank er 

where few banks remain. 

_____________ United States Government Accountability Office 
46 


80875.003

United States Government Accountability Offi('e 

Washington, DC 20548 

Chairman Capito, Ranking Member Meeks, and Members of the 

Subcommittee: 

I am pleased to be here today as you examine issues related to recent 

bank failures and community banks. Between January 2008 and 

December 2011, 414 insured U.S. commercial banks and thrifts (banks) 

failed. Of these, 85 percent (353), were small banks with less than $1 

billion in assets. Banks of this size tend to be community banks with a 

relatively limited geographic scope of operations and often specialize in 

providing credit to local small businesses. Typically these banks are also 

associated with local community development, leadership, and 

philanthropy. The failures of these community banks, which were largely 

concentrated in certain parts of the country, occurred against the 

backdrop of the worst financial crisis since the Great Depression and 

raised a number of questions. Among these are the role played by local 

market conditions and related economic factors; the application of fair 

value accounting under generally accepted accounting principles (GAAP); 

and the potential effect on the communities where the banks were 

located, particularly in terms of credit availability, income and 

employment, and philanthropic activity.' In addition, there are questions 

about the impact of the Federal Deposit Insurance Corporation's (FDIC) 

methods for resolving failed banks on the Deposit Insurance Fund (DIF). 

My remarks today are based on our January 2013 report on the impact of 

bank failures.' My statement will address (1) the factors that contributed 

to the failure of banks in states with 10 or more failures between 2008 

and 2011, including the extent to which losses related to fair value 

accounting treatment affected the regulatory capital positions of failed 

banks; (2) market factors that affected FDIC's choice of resolution method 

and the costs that the DIF incurred as a result of these methods; and (3) 

the effect of recent small bank failures on local communities. To address 

accounting IS a financial reporting approach that requires or permits financial 

institutions to measure and report on an ongoing basis certain finanCial assets and 

liabilitles at the pr"lce that would be received to sell an asset or paid to transfer a !iabirlty in 

an orderly transaction between market participants at the measurement date 

Financial Institutions: Causes and Consequences of Recent Bank Fai/ures, 

(Washington, D C. Jan. 3, 2013). This report was mandated by Pub. L. No. 

112~88, § 3,125 Stat 1899, 1902 (2012). As part ofthis act, the FDIC Inspector General 

(IG) was also required to conduct a separate study on the Impact of bank failures 

Page 1 GAO~13476T 
47 


80875.004

Background 

these issues, we analyzed call report data; reviewed inspectors general 

(lG) reviews of individual bank failures; conducted econometric modeling; 

and interviewed officials from federal and state banking regulators, 

banking associations, banks, and market experts. We also coordinated 

with the FDIC Inspector General on its study. We conducted this 

performance audit from February 2012 to December 2012 in accordance 

with generally accepted government auditing standards. 

Ten states concentrated in the western, midwestern, and southeastern 

United States-all areas where the housing market had experienced 

strong growth in the prior decade-experienced 10 or more bank failures 

between 2008 and 2011 (see fig.1). Together, failures in these 10 states 

comprised 72 percent (298), of the 414 bank failures across all states 

during this time period. 

Figure 1: Number of Bank Failures by State, 2008-2011 

Page 2 GAO·13-476T 
48 


80875.005

Bank Failures Were 

Largely Related to 

Nonperforming Real 

Estate Loans, but Also 

Highlighted the 

Impact of Impaimlent 

Accounting and Loan 

Loss Provisioning 

Within these 10 states, 86 percent (257) of the failed banks were small 

institutions with assets of less than $1 billion at the time of failure, and 52 

percent (155), had assets of less than $250 million. Twelve percent (36) 

were of medium-size banks with more than $1 billion but less than $10 

billion in assets, and 2 percent (5) were large banks with assets of more 

than $10 billion at the time of failure. 

In the 10 states with 10 or more failures between 2008 and 2011, failures 

of small and medium-size banks were largely associated with high 

concentrations of commercial real estate (CRE) loans, in particular the 

subset of acquisition, development, and construction (ADC) loans, and 

with inadequate management of the risks associated with these high 

concentrations. 3 Our analysis of call report data found that CRE (including 

ADC) lending increased significantly in the years prior to the housing 

market downturn at the 258 small banks that failed between 2008 and 

2011. This rapid growth of failed banks' CRE portfolios resulted in 

concentrations-that is, the ratio of total CRE loans to total risk-based 

capital-that exceeded regulatory thresholds for heightened scrutiny 

established in 2006 and increased the banks' exposure to the sustained 

downturn that began in 2007. 4 Specifically, we found CRE concentrations 

grew from 333 percent in December 2001 to 535 percent in June 2008. At 

the same time, ADC concentrations grew from 104 percent to 259 

percent. The trends for the 36 failed medium-size banks were similar over 

this time period. In contrast, small and medium-sized banks that did not 

fail exhibited substantially lower levels and markedly slower growth rates 

define eRE loans to include ADC loans that are secured by real estate to 

finance land development and construction, induding new construction, upgrades, and 

rehabilltation. eRE loans also include unsecured loans to finance commercial real estate, 

loans secured by multifamily properties, and loans secured by nonfarm nonresidential 

property ADC loans generally are considered to be the riskiest class of eRE loans 

because of their long development times and because they can include properties (such 

as housing developments or retail space in a shopping mall) that are built without firm 

commitments from buyers or lessees. By the time the construction phase is completed, 

market demand may have fallen, putting downward pressure on sales prices or rents, 

making ADC loans more volatile. 

4Guidelines issued by federal banking regulators in 2006 described characteristics that 

would subject banks to greater regulatory scrutiny. These Included an AOC concentration 

of more than 100 percent or a CRE concentration of more than 300 percent when there is 

an increase in the outstanding balance of the eRE portfolio of 50 percent or more during 

the prior 36 months. Concentrations in Commercia! Rea! Estate Lending, Sound Risk 

Management Practices 71 Fed. Reg, 74,580 (Dec. 12,2006) 

Page 3 GAO~13416T 
49 


80875.006

of CRE loans and as a result had significantly lower concentrations of 

them, reducing the banks' exposure. 

With the onset of the financial crisis, the level of nonperforming loans 

began to rise, as did the level of subsequent charge-offs, leading to a 

decline in net interest income and regulatory capital. 5 The rising level of 

nonperforming loans, particularty ADC loans, appears to have been the 

key factor in the failures of small and medium banks in the 10 states 

between 2008 and 2011. For example, in December 2001, 2 percent of 

ADC loans at the small failed banks were classified as nonperforming. 

With the onset of the financial crisis, the level of nonperforming ADC 

loans increased quickly to 11 percent by June 2008 and 46 percent by 

June 2011.6 As banks began to designate nonperforming loans or 

portions of these loans as uncollectible, the level of net charge-offs also 

began to rise. 7 In December 2001, net charge-offs of ADC loans at small 

failed banks were less than 1 percent. By June 2008, they had risen to 2 

percent and by June 2011 to 12 percent. 

CRE and especially ADC concentrations in small and medium-size failed 

banks in the 10 states were often correlated with poor risk management 

and risky funding sources. Our analysiS showed that small failed banks in 

the 10 states had often pursued aggressive growth strategies using 

nontraditional and riskier funding sources such as brokered deposits.8 

is the difference between the interest income recognized on earning 

assets and the interest expense on deposits and other borrowed funds. Increases in the 

loan loss allowance for credit losses on nonperforming loans are charged to the bank's 

expenses on the income statement, thus reducing its net interest income. Reductions in a 

bank's income are reflected In its earnings, which are included in retained earnings, a 

component of regulatory capital. 

6Nonperforming loans are defined as loans that are 90 days or more past due and loans 

on which the bank is no longer accruing interest Institutions must estimate the credit 

losses on non performing loans and increase the loan loss allowance accordingly. 

7Net charge-offs are the total amount of loans that are removed from the balance sheet 

because of uncoUectibility, less amounts recovered on loans previously charged off. 

sA "brokered deposit" is defined as a deposit obtained, directly or indirectly, from or 

through the mediation or assistance of a deposit broker. The broker pools largedenomination deposits from many small investors and markets the pooled deposits to 

financial institutions, usually in blocks nearing $100,000, and negotiates a higher rate for 

the pooled certificates of deposit. In contrast, core deposits are largely derived from a 

bank's regular customer base, and are typically the most stable and least costly source of 

funding with the lowest interest rates 

Page 4 GAO·13476T 
50 


80875.007

The IG reviews noted that in the majority of failures, management 

exercised poor oversight of the risks associated with high CRE and ADC 

concentrations and engaged in weak underwriting and credit 

administration practices. Further, 28 percent (84) of the failed banks had 

been chartered for less than 10 years at the time of failure and according 

to FDIC, appeared in many cases to have deviated from their approved 

business plans. Large bank failures in the 10 states were associated with 

some of the same factors as small banks-high-risk growth strategies, 

weak underwriting and risk controls, and excessive concentrations that 

increased these banks' exposure to the real estate market downturn. The 

primary difference was that the large banks' strategies generally relied on 

risky nontraditional residential mortgage products as opposed to 

commercial real estate. 

To further investigate factors associated with bank failures across the 

United States, we analyzed data on FDIC-insured commercial banks and 

state-chartered savings banks from 2006 to 2011. Our econometric 

analysis suggests that across the country, riskier lending and funding 

sources were associated with an increased likelihood of bank failures. 

Specifically, we found that banks with high concentrations of ADC loans 

and an increased use of brokered deposits were more likely to fail from 

2008 to 2011, while banks with better asset quality and greater capital 

adequacy were less likely to fail. 9 An FDIC IG study issued in October 

2012 found that some banks with high ADC concentrations were able to 

weather the recent financial crisis without experiencing a corresponding 

decline in their overall financial condition. Among other things, the IG 

found that these banks exhibited strong management, sound credit 

administration and underwriting practices, and adequate capital. 10 

savings associations and insured branches of foreign banks from our 

analysis, because these institutions did not report data on key variables for the time period 

we analyzed. We collected data on characteristics that described a bank's capital 

adequacy; asset quality; earnings; liquidity, ADC lending; multifamJly real estate lending; 

nonfarm, nonresidential real estate lending; commercial real estate lending not secured by real estate; brokered deposits funding; and size. We then estimated the likelihood of 

failure as a function of these characteristics, controlling for factors that affected the 

likelihood of failure of all banks, such as the market for the banks' products and services 

and overall economic conditions. 

10FDIC Office of the Inspector General, Office of Audits and Evaluations, Acquisition 

Development, and Construction Loan Concentration Study, no. EVAL-13-001 (October 

2012) 

PageS GAO·13-476T 
51 


80875.008

offs from Nonperforming 

Loans Contributed 

Significantly to Bank 

Failures Nationwide, but 

Losses Due to Fair Value 

Accounting Did Not 

We found that losses related to bank assets and liabilities that were 

subject to fair value accounting contributed little to bank failures overall, 

largely because most banks' assets and liabilities were not recorded at 

fair value. Based on our analysis, fair value losses related to certain types 

of mortgage-related investment securities contributed to some bank 

failures. But in general fair value-related losses contributed little to the 

decline in net interest income and regulatory capital that failed banks 

experienced overall once the financial crisis began. 

We analyzed the assets and liabilities on the balance sheets of failed 

banks nationwide that were subject to fair value accounting between 2007 

and 2011. We found that generally over two-thirds of the assets of all 

failed commercial banks (small, medium-size, and large) were classified 

as held-for-investment (HFI) loans, which were not subject to fair value 

accounting." For example, small failed commercial banks held an 

average of 77 percent of their assets as HFI loans in 2008. At the same 

time, small surviving (open) commercial banks held an average of 69 

percent in such loans. Failed and open small thrifts, as well as mediumsize and large commercial banks, had similar percentages. 

Investment securities classified as available for sale (AFS) represented 

the second-largest percentage of assets for all failed and open banks 

over the 5-year period we reviewed. For example, in 2008, small failed 

commercial banks held an average of 10 percent of their assets as AFS 

securities, while small open banks averaged 16 percent. Generally, AFS 

securities are recorded at fair value, but the changes in fair value only 

impacts earnings or regulatory capital under certain circumstances. 12 

While several other asset and liability categories are recorded at fair 

HFlloans are recorded at amortized cost, net of an impairment allowance for 

credit losses. Essentially, amortized cost IS outstanding principal adjusted for 

any charge-offs, deferred fees or costs, and unamortized discounts or premiums 

12Some assets and liabilities, such as securities designated for trading, are measured at 

fair value on a recurring basis (at each reporting period), where unrealized gains or losses 

flow through the bank's earnings in the income statement and affect regulatory capital 

However, for certain other assets and liabilities that are measured at fair value on a 

recurring basis, such as AFS securities, unrealized fair value gains and losses generally 

do not impact earnings and thus generally are not included in regulatory capital 

calculations. instead, these gains or losses are recorded through other comprehensive 

income, unless the institution determines that a decline in fair value below amortized cost 

constitutes an other than temporary impairment, in which case the instrument is written 

down to its fair value, with credit losses reflected in earnings 

Page 6 GAO·13.-416T 
52 


80875.009

value and impact regulatory capital, together these categories did not 

account for a significant percentage of total assets at either failed or open 

commercial banks or thrifts, For example, in 2008, trading assets, 

nontrading assets such as nontrading derivative contracts, and trading 

liabilities at small failed banks ranged from 0,00 to 0,03 percent oltotal 

assets, 

As discussed earlier, declines in regulatory capital at failed banks were 

driven by rising levels of credit losses related to nonperforming loans and 

charge-oils of these loans, For failed commercial banks and thrifts of all 

sizes nationwide, credit losses, which resulted from nonperforming HFI 

loans, were the largest contributors to the institutions' overall losses when 

compared to any other asset class, These losses had a greater negative 

impact on institutions' earnings and regulatory capital levels than those 

recorded at fair value, 

During the course of our work, several state regulators and community 

banking association officials told us that at some small failed banks, 

declining collateral values of impaired collateral-dependent loansparticularly CRE and ADC loans in those areas where real estate assets 

prices declined severely-drove both credit losses and charge-oils and 

resulted in reductions to regulatory capital. Data are not publicly available 

to analyze the extent to which credit losses or charge-oils at the failed 

banks were driven by declines in the collateral values of impaired 

collateral-dependent CRE or ADC loans, However, state banking 

associations said that the magnitude of the losses was exacerbated by 

federal bank examiners' classification of collateral-dependent loans and 

evaluation of appraisals used by banks to support impairment analysis of 

these loans, Federal banking regulators noted that regulatory guidance in 

2009 directed examiners not to require banks to write down loans to an 

amount less than the loan balance solely because the value of the 

underlying collateral had declined and that examiners were generally not 

expected to challenge the appraisals obtained by banks unless they 

found that any underlying facts or assumptions about the appraisal were 

inappropriate or could support alternative assumptions, 13 

13FDIC, Federal Reserve, oce, OTS, the National Credit Union Administration (NCUA), 

and the Federal Financial Institutions Examination Council (FFIEC) State Liaison 

Committee, Policy Statement on Prudent Commercial Rea! Estate Loan Workouts (Oct 

30,2009) (see for example, Federal Reserve SR 09-07 and FDIC FIL-61-2009) We 

reported in 2011 that interviews with officials from 43 banks in different parts of the 

Page 7 GAO·13476T 
53 


80875.010

Practices for Loss 

Provisioning May Have 

Delayed Reporting of 

Credit Losses during the 

Recent Crisis 

A loan loss provision is the money a bank sets aside to cover potential 

credit losses on loans.'4 The Department of the Treasury (Treasury) and 

the Financial Stability Forum's Working Group on Loss Provisioning 

(Working Group) observed that the current accounting model for 

estimating credit losses is based on historical loss rates, which were low 

in the years before the financial crisis. Under GAAP, the accounting 

model for estimating credit losses is commonly referred to as an "incurred 

loss model" because the timing and measurement of losses are based on 

estimates of losses incurred as of the balance sheet date. In a 2009 

speech, the Comptroller of the Currency, who was a co-chair of the 

Working Group, noted that in a long period of benign economic 

conditions, such as the years prior to the most recent downturn, historical 

loan loss rates would typically be low. As a result, justifying significant 

loan loss provisioning to increase the loan loss allowance can be difficult 

under the incurred loss model. 

Treasury and the Working Group noted that earlier recognition of loan 

losses could have reduced the need for banks having to recognize 

increases in their incurred credit losses through a sudden series of loan 

loss provisions that reduced earnings and regulatory capital. Federal 

banking regulators have also noted that requiring management at the 

failed banks to recognize loan losses earlier could have helped stem 

losses. Specifically, such a requirement might have provided an incentive 

not to concentrate so heavily in the loans that later resulted in significant 

losses. To address this issue, the Financial Accounting Standards Board 

has issued a proposal for public comment for a loan loss provisioning 

model that is more forward-looking and focuses on expected losses. This 

proposal would allow banks to establish a means of recognizing potential 

country had identified multIple concerns with examiner treatment of eRE loans and related 

issues. GAO, Banking Regulation: Enhanced Guidance on Commercial Rea! Estate Risks 

Needed, GAO~11-489 (Washington, D.C .. May 19, 2011) 

14GMP requires financial institutions to maintain an allowance for loan losses (loan loss 

allowance) at a level that is appropriate to cover estimated credit losses incurred as of the 

balance sheet date for their entire portfolio of HFlloans. Under GAAP, institutions must 

recognize impaIrment on HFlloans when credit losses are determined to be probable and 

reasonably estimable. That is, when, based on current information and events, it is 

probable that an institution will be unable to collect aU amounts due (i.e., both principal 

and interest) according to the contractual terms of the original loan agreement. An 

increase in the loan loss allowance results in a charge to expenses, termed a provision for 

loan losses (loan loss provision), except in the case where there are recoveries of 

amounts previously charged off. Loan loss provisions reduce the net interest income 

earned as part of a bank's earnings, and regulatory capital declines 

Page 8 GAO·13-416T 
54 


80875.011

FDIC Used Shared 

Loss Agreements to 

Attract Bidders at 

Least Cost to the 

Deposit Insurance 

Fund 

losses earlier on the loans they underwrite and could incentivize prudent 

risk management practices. Moreover, it is designed to help address the 

cycle of losses and failures that emerged in the recent crisis as banks 

were forced to increase loan loss allowances and raise capital when they 

were least able to do so (procyclicality). We plan to continue to monitor 

the progress of the ongoing activities of the standard setters to address 

concerns with the loan loss provisioning model. 

FDIC is required to resolve a bank failure in a manner that results in the 

least cost to the Deposit Insurance Fund (DIF). FDIC's preferred 

resolution method is to sell the failed bank to another, healthier, bank. 

During the most recent financial crisis, FDIC facilitated these sales by 

including a loss share agreement, under which FDIC absorbed a portion 

of the loss on specified assets purchased by the acquiring bank. From 

January 2008 through December 31,2011, FDIC was appointed as 

receiver for the 414 failed banks, with $662 billion in book value of failed 

bank assets. FDIC used purchase and assumption agreements (the direct 

sale of a failed bank to another, healthier bank) to resolve 394 failed 

institutions with approximately $652 billion in assets. As such, during the 

period 2008 through 2011, FDIC sold 98 percent of failed bank assets 

using purchase and assumption agreements. However, FDIC only was 

able to resolve so many of these banks with purchase and assumption 

agreements because it offered to share in the losses incurred by the 

acquiring institution. According to FDIC officials, at the height of the 

financial crisis in 2008, FDIC sought bids for whole bank purchase and 

assumption agreements (where the acquiring bank assumes essentially 

all of the failed bank's assets and liabilities) with little success. Potential 

acquiring banks we interviewed told us that they did not have sufficient 

capital to take on the additional risks that the failed institutions' assets 

represented. Acquiring bank officials that we spoke to said that, because 

of uncertainties in the market and the value of the assets, they would not 

have purchased the failed banks without FDIC's shared loss agreements. 

Because shared loss agreements had worked well during the savings and 

loan crisis of the 1980s and early 1990s, FDIC decided to offer the option 

of having such agreements as part of the purchase and assumption of the 

failed bank. Shared loss agreements provide potential buyers with some 

protection on the purchase of failed bank assets, reduce immediate cash 

needs, keep assets in the private sector, and minimize disruptions to 

banking customers. Under the agreements, FDIC generally agrees to pay 

80 percent for covered losses, and the acquiring bank covers the 

remaining 20 percent. From 2008 to the end of 2011, FDIC resolved 281 

Page 9 GAO·13-416T 
55 


80875.012

of the 414 failures (68 percent) by providing a shared loss agreement as 

part of the purchase and assumption. The need to offer shared loss 

agreements diminished as the market improved. For example, in 2012 

FDIC had been able to resolve more than half of all failed institutions 

without having to offer to share in the losses. Specifically, between 

January and September 30, 2012, FDIC had to agree to share losses on 

18 of 43 bank failures (42 percent). Additionally, some potential bidders 

were willing to accept shared loss agreements with lower than 80 percent 

coverage. 

As of December 31,2011, DIF receiverships had made shared loss 

payments totaling $16.2 billion. In addition, future payments under DIF 

receiverships are estimated at an additional $26.6 billion over the duration 

of the shared loss agreements, resulting in total estimated lifetime losses 

of $42.8 billion (see fig. 2).'5 

Figure 2: Shared Loss Agreements Entered into by Year, 2008~2011 

By comparing the estimated cost of the shared loss agreements with the 

estimated cost of directly liquidating the failed banks' assets, FDIC has 

estimated that using shared loss agreements has saved the DIF over $40 

billion. However, while the total estimated lifetime losses of the shared 

loss agreements may not change, the timing of the losses may, and 

payments from shared loss agreements may increase as the terms of the 

agreements mature. FDIC officials stated that the acquiring banks were 

15FDIC reported that, as of December 31, 2012, DIF receiverships made shared-loss 

payments totaling $23.3 billion and are estimated to pay an additional $18.1 bimon over 

the duration of the shared loss agreements, resulting in total lifetime losses of $41 4 

billion. These data included shared-loss agreements associated with both the bank 

failures that occurred between 2008 and 2011 as well as the additional banks that failed in 

2012 

Page 10 
56 


80875.013

Impact of Bank 

Failures on Local 

Communities Was 

Mixed 

being monitored for compliance with the terms and conditions of the 

shared loss agreements. FDIC is in the process of issuing guidance to the 

acquiring banks reminding them of these terms to prevent increased 

shared loss payments as these agreements approach maturity. 

The acquisitions of failed banks by healthy banks appear to have 

mitigated the potentially negative effects of bank failures on communities, 

although the focus of local lending and philanthropy may have shifted. 

First, while bank failures and failed bank acquisitions can have an impact 

on market concentration-an indicator of the extent to which banks in the 

market can exercise market power, such as raising prices or reducing the 

availability of some products and services-we found that a limited 

number of metropolitan areas and rural counties were likely to have 

become significantly more concentrated. 

We analyzed the impact of bank failures and failed bank acquisitions on 

local credit markets using data for the period from June 2007 to June 

2012. We calculated the Herfindahl-Hirschman Index (HHI), a key 

statistical measure used to assess market concentration and the potential 

for firms to exercise their ability to influence market prices. The HHI is 

measured on a scale of ° to 10,000, with values over 1,500 considered 

indicative of concentration.'6 Our results suggest that a small number of 

the markets affected by bank failures and failed bank acquisitions were 

likely to have become significantly more concentrated. For example, 8 of 

the 188 metropolitan areas affected by bank failures and failed bank 

acquisitions between June 30, 2009, and June 29, 2010, met the criteria 

for raising significant competitive concerns. Similarly, 5 of the 68 rural 

counties affected by bank failures during the same time period met the 

criteria. The relatively limited number of areas where concentration 

increased was generally the result of acquisitions by institutions that were 

not already established in the locales that the failed banks served. 

HHI reflects the number of firms in the industry and each firm's market share, It is 

calculated by summing the squares of the market shares of each firm competing in the 

market The HH! also reflects the distribution of market shares of the top firms and the 

composition of the market outside the top firms. According to the Department of Justice 

and the Federal Trade Commission, markets in which the value ofthe HHI is between 

1,500 and 2,500 points are considered to be moderately concentrated, and those in which 

the value of the HHI is in excess of 2,500 points are considered to be highly concentrated, 

although other factors also playa role, 

Page 11 GAO·13-476T 
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However, the effects could be significant for those limited areas that were 

serviced by one bank or where few banks remain. 

Second, our econometric analysis of call report data from 2006 through 

2011 found that failing small banks extended progressively less net credit 

as they approached failure, but that acquiring banks generally increased 

net credit after the acquisition, albeit more slowly. 17 Acquiring and peer 

banks we interviewed in Georgia, Michigan, and Nevada agreed. 18 

However general credit conditions were generally tighter in the period 

following the financial crisis. For example, several noted that in the wake 

of the bank failures, underwriting standards had tightened, making it 

harder for some borrowers who might have been able to obtain loans 

prior to the bank failures to obtain them afterward. Several banks officials 

we interviewed also said that new lending for certain types of loans could 

be restricted in certain areas. For example, they noted that the CRE 

market, and in particular the ADC market, had contracted and that new 

lending in this area had declined significantly. 

Officials from regulators, banking associations, and banks we spoke with 

also said that involvement in local philanthropy declined as small banks 

approached failure but generally increased after acquisition. State 

banking regulators and national and state community banking 

associations we interviewed told us that community banks tended to be 

highly involved in local philanthropic activities before the recession-for 

example, by designating portions of their earnings for community 

development or other charitable activities. However, these philanthropic 

activities decreased as the banks approached failure and struggled to 

17We used an econometnc mode! to estimate net credit extended by banks during a 

quarter as a function of the capita! adequacy; asset quality; earnings; liquidity; ADC 

!ending; nonfarm, nonresidential real estate lending: multifamily real estate lending; 

commercIal real estate lending not secured by real estate, brokered deposits; size; and 

other factors. We also included indicators for each quarter to control for factors affecting 

net credit extension that are common to all banks at the same time, such as the regulatory 

environment, the state of the market for bank products and services, and the condition of 

the overall economy. We then used the results of our mode! to predict net credit extended 

by failing banks in the quarters leading up to their failure and by acquiring banks in the 

quarters following acquisition of a failed bank 

18We chose to focus on these three states because they reflect the three major areas 

where the bank failures were concentrated-the southeast, southwest, and midwest They 

reflect states with either highest numbers of bank failures or highest failure rates. They 

also reflect the economic conditions that contributed to the bank failures-high 

unemployment rates, and for tINa states, high declines in house prices 

Page 12 GAO·13476T 
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conserve capital. Acquiring bank officials we interviewed told us that they 

had generally increased philanthropic activities compared with the failed 

community banks during the economic downturn and in the months 

before failure. However, acquiring banks mayor may not focus on the 

same philanthropic activities as the failed banks. For example, one large 

acquiring bank official told us that it made major charitable contributions 

to large national or statewide philanthropic organizations and causes and 

focused less on the local community charities to which the failed bank 

had contributed. 

Finally, we econometrically analyzed the relationships among bank 

failures, income, unemployment, and real estate prices for all states and 

the District of Columbia (states) for 1994 through 2011. Our analysis 

showed that bank failures in a state were more likely to affect its real 

estate sector than its labor market or broader economy. In particular, this 

analysis did not suggest that bank failures in a state-as measured by 

failed banks' share of deposits-were associated with a decline in 

personal income in that state. To the extent that there is a relationship 

between the unemployment rate and bank failures, the unemployment 

rate appears to have more bearing on failed banks' share of deposits than 

vice versa. In contrast, our analysis found that failed banks' share of 

deposits and the house price index in a state appear to be significantly 

related to each other. Altogether, these results suggest that the impact of 

bank failures on a state's economy is most likely to appear in the real 

estate sector and less likely to appear in the overall labor market or in the 

broader economy. 19 However, we note that these results could be 

different at the city or county level. 

1SVve measured bank failures in a state as the fraction of deposits in a state that were in 

banks that failed during the past year. This measure captures both the size of the falting 

banks and their share of the deposits (a proxy for their weight in a state), whereas the 

absolute number of failures or the simple failure rate does not. We measured income in a 

state using state personal income, adjusted for inflation. We measured unemployment in a 

state using the unemployment rate. We measured real estate prices using house price 

indICes for single-family detached propertIes with conventional conforming mortgages. For 

each variable, we estimated the relationshIp between the variable, its past values, and 

past values of the other three variables. We used a technique that controls for timeinvariant characteristics of states and features of the national economy that affect all 

states at the same time and that allows for the possibility that all four variables are jointly 

determined and affected by each other. We then used Granger causality tests to estimate 

the likelihood that the past values of each variable helped explain the current values of the 

other variables 

Page 13 GAO·13476T 
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Contacts and 

Acknowledgments 

(250723) 

Chairman Capito, Ranking Member Meeks, and Members of the 

Subcommittee, this concludes my prepared statement. I would be happy 

to answer any questions that you may have at this time. 

If you or your staff have any questions about this testimony, please 

contact Lawrance Evans, Jr. at (202) 512-4802 or evansl@gao.gov. 

Contact points for our Offices of Public Affairs and Congressional 

Relations may be found on the last page of this report. GAO staff who 

made key contributions to this testimony include Karen Tremba, Assistant 

Director; William Cordrey, Assistant Director; Gary Chupka, Assistant 

Director; William Chatlos; Emily Chalmers, Robert Dacey; Rachel 

DeMarcus; M'8aye Diagne; Courtney LaFountain; Marc MOlino, Patricia 

Moye; Lauren Nunnally; Angela Pun, Stefanie Jonkman; Akiko Ohnuma; 

Michael Osman; and Jay Thomas. 

Page 14 GAO~13476T 
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61 


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62 


80875.019

STATEMENT OF 

THE FEDERAL DEPOSIT INSURANCE CORPORATION 

by 

DOREEN R. EBERLEY 

DIRECTOR 

DIVISION OF RISK MANAGEMENT SUPERVISION 

BRET D. EDWARDS 

DIRECTOR 

DIVISION OF RESOLUTIONS AND RECEIVERSHIPS 

RICHARD A. BROWN 

CHIEF ECONOMIST 

on 

STATE OF COMMUNITY BANKING: IS THE CURRENT REGULATORY 

ENVIRONMENT ADVERSELY AFFECTING COMMUNITY FINANCIAL 

INSTITUTIONS? 

before the 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

COMMITTEE ON FINANCIAL SERVICES 

U.S. House of Representatives 

March 20, 2013 

2128 Rayburn House Office Building 
63 


80875.020

Chairwoman Capito, Ranking Member Meeks, and members of the Subcommittee, we 

appreciate the opportunity to testify on behalf of the Federal Deposit Insurance Corporation 

(FDIC) regarding the state of community banking and to describe the findings of the FDIC 

Community Banking Study, a comprehensive review based on 27 years of data on community 

banks.l We also welcome the opportunity to discuss the reviews by the Government 

Accountability Office (GAO) and the FDIC Office oflnspector General (OlG) of the causes of 

the recent financial crisis and the FDIC's supervision and resolution-related responses. 

As the Subcommittee is well aware, the recent financial crisis has proved challenging for 

all financial institutions. The FDIC's problem bank list peaked at 888 institutions in 201l. Since 

January 2008, 469 insured depository institutions have failed, with banks under $1 billion 

making up 407 of those failures. Fortunately, the pace offailures has declined significantly since 

2010, a trend we expect to continue. 

The failure of a bank has the potential to be a highly disruptive event. While the FDIC 

protects insured depositors and resolves each institution in the least costly and least disruptive 

manner possible, the customers of a failed bank may still face the need to establish a new 

banking relationship that meets their financial needs. A bank failure also may be disruptive to a 

local community if the failure results in an adverse impact on the availability of credit or if 

distress sales of the failed bank's assets adversely affect local real estate prices. 

I PDIC Community Banking Sludv, December 2012, http://www.fdic.gov/regulations/resources/cbi/study.html 
64 


80875.021

Given the challenges that community banks, in particular, have faced in recent years, the 

FDIC last year launched a "Community Banking Initiative" to refocus our efforts to 

communicate with community banks and to better understand their concerns. The knowledge 

gathered through this Initiative will help to ensure that our supervisory actions are grounded in 

the recognition of the important role that community banks play in our economy. A key product 

of the Initiative was the recently published FDIC Community Banking Study, which is discussed 

in more detail below. 

Congress also enacted P.L. 112-88, which mandates comprehensive reviews by the GAO 

and by the FDIC OIG of the causes of the recent crisis, the supervisory response, and the 

resolution offailed institutions. Consistent with the FDIC Community Banking Study, the GAO 

and OIG reviews identify three primary factors that contributed to bank failures in the recent 

crisis, namely: 1) rapid growth; 2) excessive concentrations in commercial real estate lending 

(especially acquisition and development lending); and 3) funding through highly volatile 

deposits. By contrast, community banks that followed a traditional business plan of prudent 

growth, careful underwriting and stable deposit funding were much more likely to survive the 

recent crisis. 

Our testimony discusses the findings of the FDIC Community Banking Study, as well as 

our assessment and response to the reviews by the FDIC OIG and the GAO. 

2 
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FDIC Community Banking Study 

In December 2012, the FDIC released the I"DIC Community Banking Study, our 

comprehensive review of the U.S. community banking sector covering 27 years of data. Tbe 

Study set out to explore some of the important trends that have shaped the operating environment 

for community banks over this period, including: long-term industry consolidation; the 

geographic footprint of community banks; their comparative financial performance overall and 

by lending specialty group; efficiency and economies of scale; and access to capital. This 

research was based on a new definition of community bank that goes beyond size to also account 

for the types oflending and deposit gathering activities and limited geographic scope that are 

characteristic of community banks. 

Specifically, where most previous studies have defined community banks strictly in terms 

of asset size (typically including banks with assets less than $1 billion), our study introduced a 

definition that takes into account a focus on lending, reliance on core deposit funding, and a 

limited geographic scope of operations. Applying these criteria for the baseline year of 2010 has 

the effect of excluding 92 banking organizations with assets less than $1 billion while including 

330 banking organizations with assets greater than $1 billion. Importantly, the 330 community 

banks over $1 billion in size held $623 billion in total assets - approximately one-third of the 

community bank total. While these institutions would have been excluded under many sizebased definitions, we found that they operated in a similar fashion to smaller community banks. 

It is important to note that the purpose of this definition is research and analysis; it is not 

intended to substitute for size-based thresholds that are currently embedded in statute, regulation, 

and supervisory practice. 

3 
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Our research confirms the crucial role that community banks play in the American 

financial system. As defined by the Study, community banks represented 95 percent of all U.S. 

banking organizations in 2011. These institutions accounted for just 14 percent of the U.S. 

banking assets in our nation, but held 46 percent of all the small loans to businesses and farms 

made by FDIC-insured institutions. While their share of total deposits has declined over time, 

community banks still hold the majority of bank deposits in rural and micropolitan counties2 

The Study showed that in 629 U.S. counties (or almost one-fifth of all U.S. counties), the only 

banking offices operated by FDIC-insured institutions at year-end 2011 were those operated by 

community banks. Without community banks, many rural areas, small towns and urban 

neighborhoods would have little or no physical access to mainstream banking services. 

Our Study took an in-depth look at the long-term trend of banking industry consolidation 

that has reduced the number offederally insured banks and thrifts from 17,901 in 1984 to 7,357 

in 2011. All of this net consolidation can be accounted for by an even larger decline in the 

number of institutions with assets less than $100 million. But a closer look casts significant 

doubt on the notion that future consolidation will continue at this same pace, or that the 

community banking model is in any way obsolete. 

More than 2,500 institutions have failed since 1984, with the vast majority failing in the 

crisis periods of the 1980s, early 1990s, and the period since 2007. To the extent that future 

crises can be avoided or mitigated, bank failures should contribute much less to future 

2 The 3,238 U.S. couuties in 2010 includcd 694 rnicropolitan counties centered on an urban core with population 

between 10,000 and 50,000 people, and 1.376 mral counties with populations less than 10,000 peoplc. 

4 
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80875.024

consolidation. In addition, about one third of the consolidation that has taken place since 1984 is 

the result of charter consolidation within bank holding companies, while just under halfis the 

result of voluntaIY mergers. But both of these trends were greatly facilitated by the gradual 

relaxation of restrictions on intrastate branching at the state level in the 1980s and early 1990s, as 

well as the rising trend of interstate branching that followed enactment of the Riegle-Neal 

Interstate Banking and Branching Efficiency Act of 1994. The pace of voluntary consolidation 

has indeed slowed over the past IS years as the effects of these one-time changes were realized. 

Finally, the Study questions whether the rapid pre-crisis growth of some of the nation's largest 

banks, which occurred largely as a result of mergers and acquisitions and growth in retail 

lending, can continue at the same pace going forward. Some of the pre-crisis cost savings 

realized by large banks have proven to be unsustainable in the post-crisis period, and a return to 

pre-crisis rates of growth in consumer and mortgage lending appears, for now anyway, to be a 

questionable assumption. 

The Study finds that community banks that grew prudently and that maintained 

diversified portfolios or otherwise stuck to their core lending competencies during the study 

period exhibited relatively strong and stable performance over time. Other institutions that 

pursued higher-growth strategies - frequently through commercial real estate or construction and 

development lending encountered severe problems during real estate downturns and generally 

underperformed over the long run. Moreover, the Study finds that economies of scale playa 

limited role in the viability of community banks. While average costs are found to be higher for 

very small community banks, most economies of scale are largely realized by the time an 

institution reaches $100 million to $300 million in size, depending on the lending specialty. 

5 
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These results comport well with the experience of banking industry consolidation since 1984, in 

which the number of bank and thrift charters with assets less than $25 million has declined by 96 

percent, while the number of charters with assets between $100 million and $1 billion has grown 

by 19 percent. 

With regard to measuring the costs associated with regulatory compliance, the Study 

noted that the financial data collected by regulators does not identify regulatory costs as a 

distinct category of noninterest expenses. In light of the limitations of the data and the 

importance of this topic in our discussions with community bankers, the FDIC conducted 

interviews with a group of community banks as part of our Study to try to learn more about 

regulatory costs. As described in Appendix B of the Study, most interview participants stated 

that no single regulation or practice had a significant effect on their institution. Instead, most 

stated that the strain on their organization came from the cumulative etIects of all the regulatory 

requirements that have built up over time. Many of the interview participants indicated that they 

have increased statIover the past ten years to support the enhanced responsibility associated with 

regulatory compliance. Still, none of the interview participants indicated that they actively track 

the various costs associated with regulatory compliance, because it is too time-consuming, too 

costly, and so interwoven into their operations that it would be difficult to break out these 

specific costs. These responses point to the challenges of achieving a greater degree of 

quantification in studying this important topic. 

In summary, the Study finds that, despite the challenges of the current operating 

environment, the community banking sector remains a viable and vital component of the overall 

6 
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80875.026

US. financial system. It identifies a number of issues for future research, including the role of 

commercial real estate lending at community banks, their use of new technologies, and how 

additional information might be obtained on ref,'Ulatory compliance costs. 

Fxamination and Rulemaking Review 

In addition to the comprehensive study on community banks, the FDIC also reviewed its 

examination, rulemaking, and guidance processes during 2012 with a goal of identifying ways to 

make the supervisory process more efficient, consistent, and transparent while maintaining safe 

and sound banking practices. This review was informed by a February 2012 FDIC conference 

on the challenges and opportunities facing community banks, a series of six roundtable 

discussions with community bankers around the nation, and ongoing discussions with the 

FDIC's Advisory Committee on Community Banking. 

Based on concerns raised in these discussions, the FDIC has implemented a number of 

enhancements to our supervisory and rulemaking processes. First, the FDIC has restructured the 

pre-exam process to better scope examinations, define expectations and improve efficiency. 

Second, the FDIC is taking steps to improve communication with banks under our supervision 

by using web-based tools to provide critical information about changes in regulations, including 

deadlines for submitting comments on proposed new rules. Finally, the FDIC has instituted a 

number of outreach and technical assistance efforts, including increased direct communication 

between examinations, increased opportunities to attend training workshops and symposiums, 

and conference calls and training videos on complex topics of interest to community bankers. 

7 
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80875.027

The FDIC plans to continue its review of examination and rulemaking processes, and is 

developing new initiatives to provide technical assistance to community banks, which we expect 

to introduce later this year. 

Reviews Required by P.L. 112-88 

Under PL. 112-88, the GAO was tasked with analyzing the causes and impact of a 

number of elements of the crisis, including: I) the causes of high levels of bank failures in states 

with 10 or more failures since 2008; 2) the procyclical impact of fair value accounting standards; 

3) the causes and potential solutions for the "vicious cycle" ofloan write downs, raising capital, 

and failures; 4) an analysis of the community impact of bank failures; and 5) the feasibility and 

overall impact ofloss share agreements. 

PL. 112-88 also tasked the FDIC's OIG with reviewing eight specific issue areas: 1) 

loss share agreements, otherwise known as shared-loss agreements (SLAs); 2) losses at failed 

banks; 3) examiner implementation of appraisal t,'Uidelines; 4) examiner assessment of capital 

adequacy and private capital investment in failing institutions; 5) examiner implementation of 

loan workout guidance; 6) the application and impact offormal enforcement orders; 7) the 

impact of FDIC policies on investments in institutions; and 8) the FDIC's handling of private 

equity company investments in institutions. The OIG subsequently reviewed and described 

FDIC compliance with applicable regulatory and supervisory standards in each of the eight areas. 

8 
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80875.028

The resulting GAO and OIG reviews were detailed and comprehensive, providing a 

wealth ofinfonnation and data regarding the causes of the recent crisis and the FDIC's response. 

Although the GAO review did not include any recommendations, the OlG made several useful 

recommendations that are highly relevant to the FDIC's efforts to address the many issues 

arising from the crisis. The FDIC concurs with all of the OIG's recommendations and is now in 

the process of implementing them. Detailed descriptions of the FDIC's assessment of the issues 

identified by PL 112-88, the OIG's recommendations and the FDIC's implementation efforts 

are provided as an Appendix to this testimony. 

Conclusion 

The recent financial crisis has proved challenging for financial institutions in general and 

for community banks in particular. Analyses of bank failures during the crisis by the FDIC, its 

OIG and the GAO point to some common risk factors, including rapid growth, concentrations in 

high-risk loans, and funding through volatile deposits. In contrast, community banks that 

followed more conservative business models were much more likely to survive the crisis. The 

FDIC's extensive study of community banking over a 27-year period shows that while these 

institutions face a number of challenges, they will remain a viable and vital component of the 

overall U. S. financial system in the years ahead. 

As mandated by statute, the GAO and the FDIC OIG conducted reviews that provided 

valuable infonnation regarding the causes of the recent crisis and the FDIC's response. The 

FDIC welcomes the insights provided by the GAO and the OIG regarding the causes of the 

9 
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80875.029

recent crisis. As described in the Appendix to this testimony, the review by the FDIC OIG also 

made a number of useful recommendations that the FDIC is now in the process of implementing. 

We believe that this type of analysis and policy review is an important element of our long-term 

efforts to maintain a safe and sound financial system and to effectively and appropriately respond 

when FDIC-insured institutions encounter financial distress. 

10 
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80875.030

Appendix 

The discussions below correspond to the eight issue areas identified in PL. 112-88 for review by 

the FDIC's Office ofInspector General (OIG). Each section includes a discussion of the key 

policy issues, any recommendations by the OIG and actions being undertaken by the FDIC to 

implement the recommendations. 

Issue 1 - Shared-Loss Agreements 

When the Office of the Comptroller of the Currency (OCC) or a state banking regulator 

closes an FDIC-insured institution, federal law requires the FDIC to use the least costly method 

to resolve the failing institution. During the savings and loan and banking crisis of the late 1980s 

and early 1990s, the FDIC in most cases took control of the troubled assets of failed banks and 

managed them for eventual liquidation. Although the management of troubled assets in 

receivership met our statutory responsibilities in resolving failed banks, this strategy was found 

to have some serious shortcomings. Liquidating assets in receivership can result in significant 

disruptions for borrowers and surrounding communities, a diminution in the value of assets held 

under government control, and high losses to the insurance fund. In addition, the FDIC and the 

Resolution Trust Corporation had to employ over 20,000 people to manage and sell the assets 

from those bank failures. 

An innovation introduced in the early 1990s was the shared loss agreement (SLA), in 

which the acquiring institution would assume all of the assets of the failed bank in exchange for 

a partial indemnification against future losses on troubled assets. Under a typical SLA structure, 

the FDIC would assume 80 percent offuture losses on troubled assets, with the acquiring 

institution assuming the remaining 20 percent. While this partial indemnification against loss 

would induce risk averse acquirers to take on these troubled assets under private management, 

and thus keep them out of a government-controlled receivership, it also provided an incentive for 

the acquirer to maximize net recoveries on those assets - consistent with the fiduciary 

responsibility of the FDIC. 

In the recent financial crisis, the FDIC has made much more extensive use of SLAs to 

facilitate the prompt transfer offailed bank assets to private management. SLAs were an 

essential tool to overcome the extreme uncertainty and risk aversion with regard to future loan 

performance and collateral values, especially early in the crisis. Almost 65 percent of the bank 

failures since the beginning of 2008 through 2012 were resolved through whole-bank purchase 

and assumption transactions with SLAs. As of December 31,2012, the cost savings obtained 

through using whole-bank purchase and assumption transactions with SLAs, as opposed to more 

costly resolution alternatives, were projected to be approximately $41.1 billion 

The goals of SLAs are to allow as many assets as possible to be kept in the private sector 

with a lending institution and to have the acquiring institution manage those assets under 
74 


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incentives that closely align the interests of the bank with the interests of the FDIC. Because an 

acquiring institution has financial exposure to the losses on assets purchased under this 

arrangement, it has an incentive to utilize a "least loss" strategy in managing and disposing of 

these assets. 

SLAs also address the effect of bank failures on the local market by keeping more of the 

failed bank's borrowers in a banking environment. The acquiring institution can more easily 

work with the borrowers to restructure problem loans or to advance additional funding when 

prudent, helping to avoid a further decline in collateral values in the failed bank's market. Most 

importantly for the borrowers, the provisions of the SLAs entered into by the FDIC during this 

crisis require the acquiring institution to consider modifications for nonperfonning loans in order 

to minimize unnecessary foreclosures. 

Prospective bidders for failed institutions have the option to bid with or without an SLA. 

As expected, the number of failing bank resolution transactions conducted with SLAs has begun 

to decrease as the economy has recovered and as real estate markets have stabilized. In 2010, 

130 of 157 bank failures, or 83 percent, were resolved using SLAs. Since then, both the number 

and percent of failed bank resolutions involving SLAs has declined steadily. In 2011,58 out of 

92 failed bank resolutions, or 63 percent, involved an SLA, as did 20 of 51 resolutions, or 39 

percent, in 2012. None of the four failures so far this year was resolved using an SLA. 

Term of shared-loss agreements 

There are two primary types of SLAs, those applied to single family mortgage loans and 

those applied to non-single family loans. Single family SLAs have a tenn often years. Nonsingle family loan SLAs have a tenn of eight years, consisting of five years of shared-loss 

coverage followed by three years to allow for recovery payments to the FDIC on the assets for 

which a shared-loss claim was paid. The long tenn nature of the agreements is intended to allow 

for the acquiring institution to maximize the value of the failed bank's assets. As part of that 

process, banks work with distressed borrowers, attempting to reach a mutually beneficial 

resolution. The expiration of these agreements does not change the underlying incentives for the 

acquiring institution to develop new customer relationships and maximize net recoveries. 

Management of acquired assets 

The SLA requires the acquiring institution's best efforts to maximize recoveries. In 

satisfying this requirement, the acquiring institution is expected to consider every resolution 

alternative, including loan modifications. As such, acquiring institutions must undertake loss 

mitigation efforts prior to taking any foreclosure action. Additionally, the acquiring institution is 

required to manage and administer each loan covered under an SLA in accordance with prudent 

business and banking practices and in accordance with the acquiring institution's written internal 

credit policies and established practices. 

The requirement for acquiring institutions to undertake loan modifications is subject to a 

financial analysis designed to ensure that qualifying borrowers are approved for modification and 

that such a strategy will maximize long-tenn recoveries. Because acquiring institutions 

2 
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generally share a portion of any losses, they share the FDIC's interest in pursuing modification in 

cases where it can be shown to maximize recoveries. Loss mitigation alternatives that increase 

the value of the loans will likely improve the affordability of the loan to the borrower and 

thereby lower the probability of default. Loan modifications can help borrowers preserve their 

stake in their homes and businesses. Collectively, these efforts to avoid foreclosures can help to 

preserve the viability of the community as a whole, which is also clearly in the best interest of an 

acquiring bank doing business in that community. All of these considerations point to a strong 

incentive on the part of the acquiring bank to avoid foreclosure or short sale and pursue a loan 

modification or restructuring whenever that alternative proves feasible. 

Commercial real estate loan restructuring requirements 

On December 17, 2010, the FDIC issued Commercial Loss Mitigation Guidance on 

Commercial Real Estate (CR.E) Loans, requiring acquiring institutions to pursue a disposition 

strategy other than foreclosure on a covered asset when an alternative strategy is projected to 

result in the least loss. For commercial loans that are restructured by an acquiring institution, the 

loss share reimbursement is based on the portion of a restructured loan that is categorized as a 

loss. Therefore, an acquiring institution may file a shared-loss claim on a commercial loan based 

on the market value of the underlying collateral without the need to foreclose. 

Residential mortgage modification requirements 

SLAs also require the acquiring institution to implement a comprehensive loan 

modification program, such as HAMP or the FDIC Loan Modification Program, for singlefamily mortgages covered under the agreement. Modifications improve borrower affordability, 

increase the probability of performance, and allow borrowers to remain in their homes. Prior to 

any foreclosure action, the acquiring institution is required to perform and document a simple 

financial analysis to assess the feasibility of modifying a single family mortgage loan. If a 

qualified borrower accepts the modification offer, the bank can submit a shared-loss claim to the 

FDIC. One clear advantage for acquiring institutions to pursue modification is the ability to be 

paid sooner than might be the case in a foreclosure. Not only must the institution exhaust all loss 

mitigation options before foreclosure can proceed, but foreclosure and the sale of foreclosed 

property is a process that can take up to two years or more, depending on the state in which the 

property is located. Hence, the acquiring institution has a strong incentive to consider and 

engage in single family mortgage loan modifications where viable. 

Monitoring of shared-loss agreements 

The FDIC monitors compliance with the SLAs through quarterly reporting by the 

acquiring institution and through periodic reviews of the acquiring institution's adherence to the 

agreement terms. If the FDIC determines that an acquiring institution has not complied with the 

terms of the SLA, including the requirement to consider and engage in loan modifications, the 

FDIC will delay payment of shared-loss claims until compliance problems are corrected. The 

FDIC can deny payment of a claim altogether or indefinitely suspend payments for as long as the 

acquiring institution remains out of compliance with the agreement. The periodic reviews of the 

acquiring institution are completed onsite, and include: verifying the accuracy of shared-loss 

3 
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claims; ensuring compliance with loss mitigation efforts; testing the acquiring institution's 

policies and procedures to ensure uniform criteria are being applied to both shared-loss assets 

and the bank's own legacy assets; reviewing internal audit reports and the external independent 

public accountant reports to ensure that internal controls are in place; and verifying that adequate 

accounting, reporting, and recordkeeping systems are in place. Thus far, we have found that the 

overwhelming majority of acquiring institutions are diligent in their efforts to comply with all the 

terms of the SLAs. 

OIG Recommendation 

The OIG recommended that the FDIC develop a strategy for mitigating the impact of 

impending portfolio sales and SLA terminations on the Deposit Insurance Fund, and that it 

ensure that procedures, processes, and resources are sufficient to address the volume of 

terminations and potential requests for asset sales. 

The FDIC agrees with this recommendation, and steps are being taken to meet its stated 

goals. At the same time, we believe that a number of factors, including the provisions of the 

SLAs themselves, will help to avoid the unnecessary sale of distressed assets and mitigate the 

market impact once the SLAs are terminated. 

For example, the FDIC policy for portfolio note sales provides that: 1) the acquiring 

institution's right to conduct a portfolio sale is conditional and requires FDIC consent; 2) the 

evaluation of portfolio sales by the FDIC will include an analysis of alternative collection and 

modification strategies and a review to determine whether collections would be maximized on an 

asset-by-asset basis; 3) the FDIC's Loan Sale Advisory Review Committee will review all 

request for portfolio sales and large individual loan sales to ensure a consistent approach to the 

approval process; and 4) an acquiring institution is not to rely on portfolio sales as a primary 

resolution strategy for shared-loss assets3 

The FDIC has closely monitored and diligently enforced compliance with the SLAs. We 

believe that, as a result of our efforts in this regard combined with the aging of the portfolios, a 

relatively small portion of the original principal balance of non-single family assets covered 

under SLAs will remain outstanding when the shared-loss coverage periods on those agreements 

terminate. Since the inception of the program in 2008 through year-end 2012, the total covered 

principal balance for non-single family assets has already shrunk by over 60 percent, from 

approximately $139 billion to $54 billion. We project the total covered principal balance to 

shrink further to approximately $25 billion by the time the shared-loss coverage periods for the 

remaining non-single family SLAs expire. Furthermore, the majority of the shared-loss coverage 

periods on the outstanding non-single family SLAs are scheduled to expire over a four-year 

period (from 2014 to 2017) and over a wide geographic area. To the extent that the balances of 

covered assets have already declined, and that the expiration of the non-single family SLAs that 

cover these remaining balances will be spread out over a period of years and across different 

3 The FDIC has repealedly communicated its e"-pectations regarding the requirements and approval of portfolio note 

sales to the acquiriug iustitutions in a variety of sellings. including the Annual Risk Sharing Conference held in 

October 2012 and the Georgia Bankers Roundtable Conference held in November 2012. Formal guidance also was 

issned to all acquiring institutions in a letter dated October 9,2012. 

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geographical regions, we do not expect the scheduled expiration of non-single family SLAs to 

have severe effects on local asset markets. 

Some also have expressed the concern that, after the shared-loss coverage periods end, 

acquiring institutions will sell or otherwise dispose of non-single family assets at distressed 

prices. However, SLAs do not provide incentives for the acquiring institutions to engage in the 

"fire sale" of covered assets at the end of the shared-loss coverage period. As these agreements 

expire, the acquiring institutions will absorb 100 percent of all losses from below market sales or 

other dispositions, resulting in a hit to capital for these institutions. Further, the FDIC retains 

rights to recoveries on assets during the recovery period and, as a result, the acquiring 

institutions remain bound by the requirements of the SLA, including the requirement to 

maximize recoveries. 

The FDIC has committed to conducting a full assessment of the sufficiency of its 

procedures, processes, and resources for the anticipated volume of portfolio sales and SLA 

terminations. The FDIC will complete the assessment and deliver its conclusions to the OIG by 

September 30,2013. 

OIG Recommendation 

The second OIG recommendation was that the FDIC research the risks presented by 

commercial loan extension decisions and determine whether additional controls should be 

introduced to monitor the efforts of acquiring institutions to extend the terms of commercial 

loans. We agree with this recommendation. 

The FDIC has established an internal national task force that is composed of staff from 

the Division of Resolutions and Receiverships and the Division of Risk Management 

Supervision to share information and proactively collaborate on topics such as concerns about 

shared-loss agreements. In addition, regular collaboration with regulators at the Federal Reserve 

Board (FRE), the OCC, and the Canadian Office of Superintendent of Financial Institutions has 

been established to ensure consistency and to facilitate open communication and information 

sharing throughout the term of the SLAs. 

The FDIC is in the process of enhancing its Compliance Review Program to require the 

evaluation of loan amendments, including maturity date extensions, to ensure that they comply 

with the SLA provisions governing loan modifications. The goal of this effort is to ensure that 

any loan modification or refusal to modify a loan is consistent with maximizing recoveries and 

with the acquiring institution's policies and procedures with regard to legacy loans. Violations 

of the SLA will not be tolerated. Iffound, such violations could result in loans being removed 

from loss sharing and, when appropriate, the clawback of any claims paid by the FDIC. In 

addition, the Compliance Review Program will target high risk areas, such as sales of real estate 

owned, where assets could be liquidated in a manner that is inconsistent with prudent 

management standards and that fails to maximize collections. 

The FDIC conducts targeted Loss Mitigation Reviews, which are undertaken in addition 

to our regularly scheduled compliance monitoring reviews and serve as a mechanism to directly 

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communicate with acquiring institutions as to the requirements of the program. The acquiring 

institutions are reminded of the contractual obligations of the agreements and expectations for 

loan modification efforts, as well as the potential penalties for violations of the terms of the SLA. 

The reviews include, but are not limited to, inconsistent policies on commercial loan term 

extensions, violations of management standards and permitted amendment provisions, violations 

of internal bank policy and procedures, and actions that are inconsistent with maximizing 

coli ecti ons. 

In response to the OIG report, the FDIC has committed to reinforcing previous 

communications, requiring FDIC compliance monitoring contractors to review a sample ofloan 

modification decisions for maturing loans, and analyzing the costs and benefits of collecting and 

monitoring trend information on commercial loan modifications. The FDIC will complete these 

actions and deliver its conclusions to the OIG by September 30, 2013. 

Finally, the FDIC will continue to reach out to banks and other members of the public 

that may have concerns about the impact of the SLAs and their impending terminations. This 

type of communication will provide us with additional infonnation on the potential issues that 

could arise as the shared-loss coverage period on the SLAs terminate, and enhance our ability to 

address these concerns in a timely fashion. 

Issue 2 -- Losses at Institutions 

According to Material Loss Reviews conducted by the OIG in the aftermath of bank 

failures, losses at community banks during the crisis were most often caused by management 

strategies of aggressive growth and concentrations in commercial real estate (CRE) loans, 

including notably, concentrations in acquisition, development and construction loans, coupled 

with inadequate risk management practices in an environment of falling real estate values that 

led to impairment losses on delinquent and nonperfonning loans. Another common 

characteristic of failed banks was reliance on volatile brokered deposits as a funding source. 

We are not aware of, and the OIG did not identify, any instances where a bank failed due 

to supervisor required write-downs of current loans - so-called "paper losses." When examiners 

classified loans considered current by bank management, the examiners did so for safety and 

soundness reasons in accordance with regulatory guidance on classification of loans. 

In addition, the application of fair value accounting was not found to have had a 

significant effect on most community bank failures. Fair value accounting is most often applied 

to valuations of securities, and since most community banks classify debt securities as available 

for sale (AFS), the unrealized gains and losses on AFS securities do not impact regulatory capital 

under current rules. 

OIG Recommendation 

The OIG study of the losses that led to the failure of community banks during the 

financial crisis included no recommendations for the FDIC. 

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Issue 3 -- Appraisals 

Interagency supervisory policy establishes that repayment capacity is the primary driver 

of examination classification decisions4 However, as the crisis unfolded, it became clear that 

the failure to follow prudent underwriting criteria had contributed to the inability of many 

borrowers to service their loans. For example, many residential borrowers experienced difficulty 

in making their payments when their monthly loan payment reset to a higher amount, and many 

commercial borrowers experienced similar financial difficulties due to diminished cash flows 

from lower sales or reduced operating income. As primary sources ofloan repayment declined, 

lenders were increasingly forced to rely on the value of real estate collateral as a secondary 

source of repayment. Amid the real estate market distress triggered by the housing bust and 

resulting financial crisis, rising levels of nonperforming loans and subsequent foreclosures and 

distressed sales placed additional downward pressure on real estate prices. As the market value 

of many commercial and residential properties declined to levels below their original estimated 

value, the proper valuation of real estate collateral became a critical component of evaluating the 

condition of troubled banks. 

Then, as now, the FDIC reviews the appraisal programs of supervised institutions through 

the analysis of individual appraisals during loan reviews and through the assessment of a bank's 

appraisal policies and procedures. Examiners use a risk-focused approach tailored to a lender's 

real estate lending activities and expand the depth of their review when the examination process 

identifies any areas of concern. The FDIC uses an exception-based process to document 

noncompliance with appraisal guidance, regulations, and the institutions' valuation program 

requirements. When no deficiencies are noted relative to the FDIC's appraisal regulations, 

current guidance requires that a statement to that effect be included in the examination 

documentation.s While the ~IG's report found that examiners documented instances of 

noncompliance consistent with the FDIC's exception-based process, it also noted that 

examination documentation did not always include the required positive assurance statement. 

OIG Recommendation 

The OIG report recommended that the FDIC clarify and remind examiners of the 

supervisory expectations relative to documenting their review of a bank's appraisal program, 

including the need to include a positive assurance statement when examiners determine that 

appraisal practices are satisfactory. The FDIC concurs with these recommendations. In 

response, the FDIC has clarified its examination expectations relative to examiner review of 

valuations programs, reminded examiners of the requirement to include a positive assurance 

statement when appropriate, and compliance with this requirement will be monitored within the 

FDIC's existing internal review control process. 

The OIG also recommended to the FDIC, OCC, and FRB that the agencies strengthen 

requirements for examiner documentation related to the review of appraisal programs. On 

, See Part 323 oflhe FDIC Rules and Regulations at hltp:llwww.fdic.gov/regulations/laws/mlcs/2000-4300.hlml. 

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80875.037

February 19,2013, the FDIC discussed with the OCC and the FRB its strategy to improve 

documentation by reminding examiners of existing guidance and to monitor compliance as part 

of our internal control function. The agencies agreed to continue to evaluate whether additional 

guidance on appraisal review documentation might be warranted going forward. 

Supervisory guidance also requires examiners to assess the appropriateness of an 

institution's Allowance for Loan and Lease Losses (ALLL) within the framework of U.S. 

generally accepted accounting principles (GAAP). GAAP requires that the ALLL reflect losses 

which are "probable and estimable;" therefore, bank management must determine an appropriate 

ALLL level that is supported by reasonable assumptions and objective data. Furthermore, 

GAAP requires that all credit losses associated with a loan be deducted from the allowance, and 

that the loss portion of the loan balance be charged off in the period in which the loan is deemed 

uncollectible. If the ALLL is found to be insufficient during an FDIC examination, we may 

recommend that management increase the allowance or improve its ALLL calculation 

methodology to ensure that financial reporting is accurate under GAAP. 

The OIG made no recommendations with respect to how examiners follow examination 

procedures in evaluating an institution's ALLL. 

Issue 4 -- Capital 

Examiners assess an institution's capital adequacy by considering a number of factors, 

including: the institution's financial condition; the nature, trend, and volume of problem assets, 

the adequacy of ALLL; earnings and dividends; management's access to additional capital; 

prospects and the plans for growth, and past experience in managing growth; access to capital 

markets and other sources of capital; balance sheet composition and risks associated with 

nontraditional activities; and risk exposure associated with off-balance-sheet activities. During 

the crisis, examiners evaluated capital adequacy in accordance with the critelia outlined in the 

Uniform Financial Institution Ratings System (UFIRS) and applicable standards under the 

provisions of Prompt Corrective Action. When an institution was successful in raising external 

capital, examiners incorporated those capital raises into the analysis of capital adequacy and the 

overall rating of the institution. 

OIG Recommendation 

The OIG review made no recommendations with respect to the capital issues identified in 

the statute. 

Issue 5 -- Loan Workouts 

During the crisis, diminished cash flows associated with commercial properties 

contributed to sharp declines in real estate prices and made it difficult for many borrowers to 

make their payments. In such situations, prudent workout arrangements are often in the best 

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interest of the financial institution and the borrower. In response, the FDIC, working with the 

other Federal financial institution regulators, issued guidance encouraging lenders to work with 

borrowers experiencing financial difficulty repaying their real estate loans6 The guidance states 

that renewed or restructured loans to borrowers who have the ability to repay their debts 

according to reasonable, modified terms will not be subject to adverse classification solely 

because the value of the underlying collateral has fallen below the loan balance. Financial 

institutions that implement prudent commercial real estate loan workout arrangements after 

performing a comprehensive review ofa borrower's financial condition are not subject to 

criticism for engaging in these efforts even if the restructured loans have weaknesses that result 

in adverse credit classification. 

OIG Recommendation 

While the OIG determined that examiners had successfully implemented three of the four 

elements of the interagency guidance - those related to loan-specific workout arrangements, 

classification of loans, and regulatory reporting and accounting considerations -- the review did 

note a lack of documentation that examiners had reviewed the institution's implementation of the 

risk management requirements in cases where no exceptions were noted. The OIG 

recommended that the FDIC remind examiners of documentation requirements related to the 

review of loan workout programs. 

The FDIC concurs with the OIG recommendations. On February 27, 2013, the FDIC 

reminded risk management examiners of its examination expectations relative to their review of 

the risk management elements ofloan workout programs at supervised institutions. 

Issue 6 -- Supervisory Orders 

To promote uniformity of practice and to ensure that banks most in need of corrective 

action receive the appropriate supervisory attention, the FDIC has adopted a policy that presumes 

that banks with composite UFIRs ratings of 3, 4, or 5 will be the subject of either a formal or 

informal enforcement action unless there are specific circumstances that would excuse the 

institutions from such an action7 By definition, banks with composite ratings of 4 or 5 have 

significant problems that warrant formal action, and banks rated composite 3 have weaknesses 

that, if not corrected, could worsen to a more severe situation. Accordingly, FDIC policy 

indicates that at least an informal action, such as a memorandum of understanding, be taken 

against composite 3 rated institutions. 

OIG Recommendation 

The OIG determined that the FDIC, OCC, and FRB are each following their respective 

agency's policy with respect to issuing enforcement actions, but noted that those policies differ 

6 See Policy Statement on Prudent Commercial Real Estate Workouts. October 2009. at 

Working "with Afortgage Borrmvers, 

See FDIC Risk Management }danual a/Framination Policies at http://www.fdic.goY/regulatiol1s/safctY/mal1ual/ 

9 
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somewhat across the agencies. Accordingly, the OlG recommended that the agencies study 

these differences to determine whether there are certain approaches that have been more 

successful. The FDIC agrees with this recommendation, and is currently undertaking an internal 

review of enforcement action trends. We will share the results with the other agencies as part of 

a joint project to review the effectiveness of enforcement actions the agencies agreed to launch 

under the Task Force on Supervision, a group of senior supervision officials under the Federal 

Financial Institutions Examination Council. 

The OlG also reviewed whether enforcement actions may have limited credit availability 

and determined that some enforcement order provisions may have indirectly limited lending. 

However, the OIG also found that there were important safety and soundness reasons for those 

provisions and that other factors such as the weakness in the economy, competition, and a lack 

ofloan demand - impacted lending more. Similarly, the review of whether orders affected the 

ability to raise capital showed that a bank's ability to raise capital is related more to its condition, 

earnings, asset quality, and growth prospects than the existence of an enforcement order. 

Issue 7 -- Impact of FDIC Policies on Investment 

Through various statutes, rules, and policies, and in order to protect the Deposit Insurance 

Fund, the FDIC is required to consider a number of factors when evaluating applications for 

entry into banking or expansion of banking activities. The FDIC approved the majority of 

applications and notices over the review period. In cases where applications were not approved, 

the FDIC documented its concerns about various aspects of the proposals. 

OIG Recommendation 

The OlG did not identify instances of the FDIC "steering" potential investors away from 

failing banks, and made no recommendations for the FDIC with respect to its treatment of 

potential bank investors. 

Issue 8 -- Private Capital Investors 

As the financial crisis intensified, the number of problem and failing banks rose rapidly, 

and these institutions found it increasingly difficult to attract external capital. At the same time, 

the FDIC found it increasingly difficult to attract bidders to acquire failed institutions. In August 

2009, the FDIC Board of Directors adopted the Final Statement of Policy on Qualifications for 

Failed Bank Acquisitions, a policy statement providing guidance to private capital investors 

wishing to invest in bank holding companies or insured depository institutions formed for the 

purpose of acquiring failed institutions. 8 Among other things, the policy requires higher levels of 

capital namely, a commitment of Tier I common equity to total assets of at least 10 percent for 

a period of 3 years from the time of acquisition of a failed institution as well as a commitment 

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for cross-support on the part of institutions making multiple acquisitions, limits on affiliate 

transactions, and prohibitions on complex, functionally opaque ownership structures. 

Overall, private capital investors subject to the statement of policy have played a positive, 

but relatively small, part in the resolution offailed institutions. As of the date of the OIG's 

review, a total of 13 private capital investor groups had purchased 36 failed institutions. The 

FDIC's experience thus far indicates that private capital investors have complied with the 

statement of policy and have not presented significant supervisory issues. 

OIG Recommendation 

The OIG had no recommendations with respect to the private capital investment policy. 

11 
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IG 

Office of Inspector Generol 

Testimony 

Before the Committee on Financial Services 

Subcommittee on Financial Institutions and 

Consumer Credit 

U.S. House of Representatives 

Overview of FDIC OIG Report: 

Comprehensive Study on the Impact of 

the Failure of Insured Depository 

Institutions 

Statcment of Jon T. Rymcl' 

Inspector General 

Federal Deposit Insurance Corporation 
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Statement of Jon T. Rymer 

Inspector General, Federal Deposit Insurance Corporation 

March 20, 2013 

House Financial Services Committee 

Subcommittee on Financial Institutions and Consumer Credit 

Chainnan Capito, Ranking Member Meeks, and Members of the Subcommittee: 

Thank you for your interest in the year-long study that the Federal Deposit Insurance 

Corporation (FDIC) Office of Inspector General (OIG) conducted on the impact of the failure of 

insured depository institutions during the recent financial crisis. The OIG is an independent 

office within the FDIC, established to conduct audits, investigations, and other reviews to 

prevent and detect waste, fraud, and abuse relating to the programs and operations of the FDIC, 

and to improve the efficiency and effectiveness of those programs and operations. I was 

appointed as the Inspector General of the FDIC by President Bush, and confinned by the Senate 

in June 2006. 

Through its audits, evaluations, and other reviews, the OIG provides oversight of FDIC programs 

and operations. Our work is either required by law or self-initiated based on our assessment of 

various risks confronting the FDIC. Our audits, evaluations, and other reviews assess such areas 

as program effectiveness, adequacy of internal controls, and compliance with statutory 

requirements and corporate policies and procedures. We perfonn our work using internally 

available resources, supplemented by contracts with independent public accounting firms when 

expertise in a particular area is needed or when internal resources are not available. Our work, as 

well as that of our contractors, is perfonned in accordance with standards applicable to federal 

audit, evaluation, and investigative entities. 

As requested in your invitation to appear today, I will be providing an overview of the broad and 

comprehensive study required by Public Law 112-88. My office spent over 3,400 statf days to 

complete this study. The professionals conducting this study produced a 200-page report, 

containing general observations and detailed explanations of our findings and conclusions. I ask 

that my office's report, Comprehensive Study on the Impact of the Failure of Insured DepositOly 

Institlltions (Report No. EV AL-13-002, dated January 3, 2013), be made a part of this hearing's 

official record. 

It is important to note that in the wake of the savings and loan and banking crisis of the 1980s, 

the Congress passed two laws that drove the closure and resolution decisions we have witnessed 

in this most recent crisis. These laws were the Financial Institutions Refonn, Recovery, and 

Enforcement Act in 1989 and the FDIC Improvement Act in 1991. Taken together, these laws 

amended the Federal Deposit Insurance (FDI) Act to require, among other things, that (1) 

institutions maintain minimum capital levels and the chartering regulator promptly close 

critically undercapitalized institutions through prompt corrective action provisions, (2) the FDIC 

resolve banks in the least costly manner, and (3) the FDIC maximize recoveries from failed 

institutions. The FDI Act also placed requirements on how the regulators examine institutions, 
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including establishing minimum examination frequency requirements, requiring the agencies to 

establish standards for safety and soundness, and requiring the agencies to establish appraisal 

standards. In response, the FDIC and the other regulators issued implementing regulations and 

policy statements pertaining to many of the topics discussed in our report. 

Study Approach 

Signed into law on January 3,2012, Public Law 112-88 required my office to conduct this study 

and submit a report to the Congress not later than I year after the date of enactment. This study, 

looking into the impact of the failure of insured depository institutions, required us to address 

over 30 topics that fall under one of the following eight matters: 

Shared-loss agreements (SLA), 

Significance oflosses at institutions that failed, 

Examiner implementation of appraisal guidelines, 

Examiner assessment of capital adequacy and private capital investment in failing 

institutions, 

Examiner implementation ofloan workout guidance, 

Application and impact of formal enforcement orders, 

Impact of FDIC policies on investments in institutions, and 

The FDIC's handling of private equity company investments in institutions. 

Our review timeframes generally covered a 4-year period (i.e., 2008 through 2011). In some 

cases, our data analysis preceded 2008, and in other cases we gathered information through 

September 30,2012, updating data to the extent possible. As required, our scope included open 

and failed state member, state nonmember, and national banks. Our scope did not include 

institutions formerly regulated by the Office of Thrift Supervision. 

The legislation required my office to conduct work at the FDIC, the Office of the Comptroller of 

the Currency (OCC), and the Board of Govemors of the Federal Reserve System (FRB). To that 

end, we performed work at three FDIC regions, three OCC regions, eight reserve bank districts, 

and selected state banking agencies. 

In conducting our work, we 

Interviewed agency officials and bank examiners, representatives at open banks, 

investment bankers, and compliance contractors; 

Reviewed relevant policies and guidance; 

Reviewed examination reports, working papers, material loss review reports, and 

documentation supporting loan workouts and enforcements orders; 

Analyzed institution financial data and agency enforcement action statistics; and 

Surveyed borrowers of failed institutions. 

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As discussed in our report, we developed sound, data-driven methodologies to provide factbased, complete analyses. When appropriate, we devised sampling plans to sufficiently analyze 

the data and address each topic. For example, to address some of the topics related to losses, 

appraisals, and capital, my office reviewed a sample of 136 open institutions in Georgia, 

California, and New York that received a composite CAMELS rating of 3,4, or 5. 1 This sample 

involved reviewing over 750 loans or loan relationships to assess examiners' reviews and 

analyses. To address the issues raised in the enforcement orders matter, we reviewed a sample of 

119 enforcement orders and validated nearly 2,400 individual provisions. Appendices 1 and 2 of 

the final report contain a complete description of our approach and sampling methodologies. 

We conducted our work from January 2012 through October 2012, in accordance with the 

Council of the Inspectors General on Integrity and Efficiency's Quality Standards for Inspection 

and Evaluation. KPMG LLP assisted us with several areas of review. We also coordinated with 

the U.S. Government Accountability Office as that office conducted its work pursuant to Public 

Law 112-88. 

Before I discuss the study's high-level observations and resulting recommendations, and to 

provide helpful context, I will briefly describe the regulatory responsibilities for overseeing 

insured depository institutions and resolving those institutions when they fail. 

Regulator Responsibilities 

The OCC, FRB, and FDIC oversee the nation's insured depository institutions to ensure they 

operate in a safe and sound manner. The OCC supervises national banks, the FRB supervises 

state-chartered banks that are members of the Federal Reserve System and bank holding 

companies, and the FDIC supervises state-chartered banks that are not members of the Federal 

Reserve System (state nonmember banks). The FDIC has additional responsibilities for insuring 

deposits, effectively resolving failed institutions, and maximizing the recovery of receivership 

assets. 

In examining insured depository institutions, the regulators assess the condition of institutions 

through off-site monitoring and on-site examinations, and have longstanding policies for 

reviewing an institution's lending and loan review functions, assessing capital adequacy, and 

recommending improvements, if needed. When regulators determine that an institution's 

condition is less than satisfactory, they may take a variety of supervisory actions, including 

informal and formal enforcement actions, to address identified deficiencies. Each regulator has 

somewhat different approaches to enforcement actions. 

Should an institution's condition decline to a point that it becomes Critically Undercapitalized, 

the chartering regulator (a state banking authority or the OCC) is generally required by law to 

promptly close institutions that cannot be recapitalized. The FDIC is required by law to resolve 

failing institutions in the least costly manner. 

Financial institution regulators and examiners use the Uniform Financial Institutions Rating System to evaluate a 

bank's performance in six components represented by the CAMELS acronym: Capital adequacy, Asset quality, 

Management practices, Earnings performance, Liquidity position, and Sensitivity to market risk. Each component, 

and an overall composite score, is assigned a rating of 1 through 5, with 1 having the least regUlatory concern and 

5 having the greatest concern. 

3 
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Study Results 

The financial crisis had devastating impacts on the banking industry, businesses, communities, 

and consumers. At the time of our review, over 400 institutions had failed and several of the 

country's largest institutions had required government intervention to remain solvent. 

Commercial real estate (CRE) collateral values had fallen by more than 42 percent. Construction 

starts remained partially complete and continued to detract from the quality of neighborhoods 

and home values. Trillions of dollars of household wealth had vanished, and almost 18 million 

loans had faced foreclosure since 2007. Unemployment peaked at 10 percent in October 2009 

and remained stubbornly high at the time of our study. 

Events leading to the financial crisis and subsequent efforts to resolve it involved the dynamic 

interplay of laws passed by the Congress, re!,'Ulatory rules, agency-specific policies and 

practices, and the real estate and financial markets in ways that are continuing to play out. In 

that regard, our study indicated the following: 

The markets drove behaviors that were not always prudent. Banks expanded lending to 

keep pace with rapid growth in construction and real estate development, rising mortgage 

demands, and increased competition. Many of the banks that failed did so because 

management relaxed underwriting standards and did not implement adequate oversight 

and controls. For their part, many borrowers who engaged in commercial or residential 

lending arrangements did not always have the capacity to repay loans and pursued many 

construction projects without properly considering the risks involved. Ultimately, these 

loans created significant losses for the institutions involved and often left the FDIC with 

the challenge of managing and disposing of troubled assets. 

In response to unprecedented circumstances, the regulators generally fulfilled their 

supervisory and resolution responsibilities as defined by statutes, regulations, accounting 

standards, and interagency guidance in place at the time. In addition, the regulators 

reacted to a rapidly changing economic and financial landscape by establishing and 

revising supervisory policies and procedures to address key risks facing the industry. 

While not a focus of this study, our report does acknowledge, however, material loss 

review findings that showed the FRB, OCC, and FDIC could have provided earlier and 

greater supervisory attention to troubled institutions that failed. For its part, among other 

initiatives associated with resolutions, the FDIC reinstituted the use of SLAs with 

acquiring institutions and took steps to promote private capital investments in failing 

institutions. 

As previously noted, we provided a detailed presentation of our findings and conclusions for 

each of the topics under the law's eight matters. In addressing these matters, we also made the 

following observations: 

The FDIC's resolution methods-including the SLAs that we studied-were marketdriven. Often, failing banks with little or no franchise value and poor asset quality did 

not attract sufficient interest from viable bidders to enable the FDIC to sell the banks 

without a loss-share guarantee. The FDIC used SLAs to keep failed bank assets in the 

banking sector, support failed bank asset values, and preserve the sol vency of the Deposit 

Insurance Fund (DIF). The FDIC has established controls over its SLA monitoring 

4 
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program, which help protect the FDIC's interests, promote loan modifications, and 

require equal treatment ofSLA and legacy loans. We did find, however, that the FDIC 

should place additional emphasis on monitoring commercial loan extension decisions to 

ensure that acquiring institutions do not inappropriately reject loan modification requests 

as SLAs approach termination. In addition, we concluded that the FDIC needed to 

formulate a better strategy for mitigating the impact of impending portfolio sales and 

SLA terminations on the DIF so that the FDIC will be prepared to address the potentially 

significant volume of asset sale requests. 

The majority of community banks failed as a result of aggressive growth, asset 

concentrations, poor underwriting, and deficient credit administration coupled with 

declining real estate values. These factors led to write-downs and charge-offs on 

delinquent and non-performing real estate loans as opposed to examiner-required writedowns or fair value accounting losses. 

The regulators have longstanding policies for classifying problem assets, monitoring 

appraisal programs, assessing capital adequacy, evaluating CRE loan workouts, and 

administering enforcement actions, when warranted. The regulators also have processes 

and controls, training programs, and job aids to help ensure examiner compliance and 

consistency. We found that examiners generally followed relevant policies and 

implemented them appropriately. For example, examiners usually did not classify as loss 

loans that the institution claimed were paying as agreed without justification, nor did they 

question or reduce the appraised values of assets securing such loans. However, 

examiners did not always document the procedures and steps that they performed to 

assess institutions' appraisal and workout programs. We also noted that the regulators 

had different approaches to enforcement actions, particularly related to non-problem 

banks. 

The FDIC has investment-related policies in place to protect the DIF and to ensure the 

character and fitness of potential investors. These policies are largely based in statute. By 

their nature, such policies are going to have an impact on investments in institutions. The 

FDIC approved most change-in-control and merger applications, although approval rates 

were lower for states such as California, Florida, and Nevada that were heavily impacted 

by the financial crisis. The FDIC has policies and procedures for certain aspects of the 

review of private capital investors, and the FDIC generally followed those policies. 

Purchases of failed institutions by private capital investors accounted for 10 percent of 

total failed bank assets acquired. Finally, we identified instances where the FDIC did not 

accept proposed open bank investments and instead closed an institution. However, in 

each case, we found that the FDIC identified concerns with the proposed investment 

related to safety and soundness issues, proposed management, or proposed business 

plans, or determined that the proposed transaction would not present the least loss option 

to the DIF. 

Recommendations 

While the regulators generally implemented their policies appropriately, our study identified 

certain areas for improvement and issues warranting management attention. In the interest of 

5 
90 


80875.047

strengthening the effectiveness of certain supervisory activities and helping ensure the success of 

the FDIC's ongoing resolution efforts, we made seven recommendations. Five were addressed 

specifically to the FDIC and two were directed to the three regulators. These recommendations 

involved the following areas: 

SLA Program. We made recommendations related to developing additional controls for 

monitoring acquiring institutions' commercial loan modification efforts and developing a 

more formal strategy for mitigating the impact of impending portfolio sales and SLA 

terminations on the DIF. 

Appraisals and Workouts. We made several recommendations related to clarifying 

how examiners should review institutions' appraisal programs and strengthening 

examiner documentation requirements to more clearly define examination methodologies 

and procedures performed to assess institutions' appraisal and workout programs. These 

recommendations should help to assure agency management that examiners are 

consistently applying relevant guidance. 

Enforcement Orders. We recommended that the regulators study differences between 

the types of enforcement actions that are used by the regulators and the timing of such 

actions to determine whether there are certain approaches that have proven to be more 

effective in mitigating Jlsk and correcting deficiencies that should be implemented by all 

three regulators. 

The regulators concurred with our recommendations and proposed actions that adequately 

address the intent of our recommendations. 

* * * * * 

This concludes my prepared statement. Thank you for the opportunity to discuss our study. 

will be pleased to answer any questions that you may have. 

6 
91 


80875.048

~ iiiiiiii'i 

-I1iiiiii"I.-

NAFCU 

National Association of Federal Credit Unions 

3138 10th Street Norlh • Arlington, Virginia. 22201-2149 

(703) 522-4770 • (800) 336-4644 • Fax (703) 522-2734 

Fred R. Beckel', Jl·. 

President and CEO 

March 19,2013 

The Honorable Shelley Moore Capito 

Chairman 

Subcommittee on Financial Institutions 

and Consumer Credit 

House Financial Services Committee 

United States House of Representatives 

Wasl)ingtoll,D.C.20515 

The Honorable Gregory Meeks 

Ranking Member 

Subcommittee on Financial Institutions 

and Consumer Credit 

House Financial Services Conuuittee 

United States House of Representatives 

Washington, D.C. 20515 

Re: Regulatol'Y Relieffor Credit Unions in the 113lh Congress , "../ . 4,.,4 

Dear Chairman Capito and Ranking Member Me~a .. ,-r~ 

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade 

association that exclusively represents the interests of our nation's federal credit unions, I write 

today in conjunction with tomorrow's hearing, "State of Community Banking: Is the Current 

Regulatory Environment Adversely Affecting Community Financial Institutions?" NAFCU 

member credit unions and their 95 million member-owners appreciate the committee's timely 

focus on regulatory relief for community based financial institutions. 

As you know, all community based financial services institutions, inclnding credit unions, are 

struggling under an ever-increasing regulatory burden in the wake of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act [P.L. 111-203]. The impact of this growing compliance 

burden is evident as the number of credit unions continues to decline, dropping by more than 700 

institutions since 2009. Credit unions didn't canse the financial crisis and shouldn't be caught in 

the crosshairs of regulations aimed at those entities that did. Unfortunately, that has not been the 

case thus far. Accordingly, finding ways to cut-down on burdensome and UlUlecessary regulatory 

compliance costs is a chief priority of our members. We hope it will also be a priority of the 

Subcommittee. 

Regulatory relief is critical to the sUl'vival of credit nnions and, as outlined in the attached letter 

NAFCU sent to the Committee on February 12th, there are several areas where Congress can act 

to reduce the ovcrwhelming burden credit nnions face. We look forward to working with you aod 

your staff to ensure that the views of credit unions are conveyed and that the proposals outlined 

in the attached letter are given due consideration during the 113'11 Congress. 

E-mail: fbecker@nafcu.org • Web site: www.nafcu.org 
92 


80875.049

Thank you for your attention to this important matter. If you have any questions or would like 

fmiher information about any of these issues, please do not hesitate to contact me or NAFCU's 

Vice President of Legislative Affairs Brad Thaler by telephone at (703) 842-2204 or bye-mail at 

bthaler@nafcu.org. 

Fred 

~~ R. Becker, Jr. 

President and CEO 

co: Memhers ofthe Subcommittee on Financial Institutions and Consumer Credit 

Enclosure: February 12, 2013 letter "NAFCU Calls on Congress to Provide Regulatory Relief for 

Credit Unions" 
93 


80875.050

~ I 

3138 10th Street North Arlington, VA 22201·2149 

703.522.4770 1 800.336.4644 

NAFCU ;~:~!;~~;7::'~rg 

Fred R. Becker, Jr. 

President/CEO 

National Association of Federal Credit Unions I www.nafcu.org 

February 12,2013 

The Honorable Tim Jolmson 

Chairman 

Senate Committee on Banking, 

Housing and Urban Affairs 

United States Senate 

Washington, D.C. 20510 

The Honorable Jeb Hensarling 

Chairman 

House Financial Services Committee 

United States House of Representatives 

Washington, D.C. 20515 

The Honorable Michael Crapo 

Ranking Member 

Senate Committee on Banking, Housing 

and Urban Affairs 

United States Senate 

Washington, D.C. 20510 

The Honorable Maxine Waters 

Ranking Member 

House Financial Services Committee 

United States House ofReplesentatives , 

Washington, D.C. 20515 / 

... I/~r. "'/I-Y 

Rc: NAFCU Calls on Congress to P?~CgUlatory R?~d: t;nwn{ 

Deal' Chairman Johnson, Chjit~~g(' ~g Member Crapo and Ranking Member 

Watels: /' C.· 

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade 

association that exclusively represents the interests of our nation's federal credit unions, I write 

today to call for Congressional action during this session of the I131h Congress to enact broadbased regulatory relief that is essential to the credit union industry's ability to serve its 95 million 

members. 

Our nation's credit unions are struggling under an ever-increasing regulatory burden that must be 

immediately addressed. A survey of NAFCU members late last year found that 94% have seen 

their regulatory burden increase since the passage of the Dodd·Frank Act in July 2010. The 

regulatory onslaught continues to compound as credit unions now have over 5,000 pages of rules 

from the Consumer Financial Protection Bureau (CFPB) that they must understand, interpret, and 

ultimately comply with - despite the fact that Congress has widely acknowledged that credit 

unions were not the cause ofthe financial crisis. Credit unions, many ofwrueh have very small 

compliance depmlments, and in some cases only one compliance officer, must comply with the 

same rules alld regulations as our nation's largest financial institutions that employ al1nies of 

lawyers. The impact of the ever·increasing regulatory burden is even more sobering, as the 

number of credit unions continues to decline. There are nearly 700 fewer credit unions today 

than there were before the passage of the Dodd-Frank Act. 

NAFCU I Your Direct Connection to Education, Advocacy & Advancement 
94 


80875.051

The Honorable Tim Johnsoll, The Honorable Jeb HCllsarling. 

The Honorable Michael Crapo, The Honorable Maxine Waters 

February 12,2013 

Page Number 2 

It is with this regulatory onslaught in mind that we call on Congress to enact meaningful 

regulatory reforms and provide much needed assistance to our nation's credit unions. Over the 

past year, we have been actively conversing with our member credit unions to identify those 

arcas where regulatory relief is requisite. 

Our ongoing discussions with our members have led us to draft a five point plan for credit union 

regulatory relief: 

I. Administrative Improvements for the Powers of the NCUA 

We bclicve there are changes that must be made to strengthen and enhance the National Credit 

Union Administration (NCUA). 

First, the NCUA should have authority to grant parity to a fcderal credit union on a broadcr state 

rulc, if such a shift would allow them to bctter serve thcir members and continuc to protect the 

National Credit Union Share Insurance Fund. 

Second, the NCUA should have the authority to delay the implementation of a CFPB lule that 

applies to credit unions, if complying with the proposed timeline would create au uudue 

hardship. Furthermore, given the unique nature of credit unions, the NCUA should have 

authority to modify a CFPB rule for credit unions, provided that the objectives of the CFPB rule 

continue to be met. 

Third, the NCUA and the CFPB should be required to conduct a look-back cost-benefit analysis 

on all new rules after three years. The regulators should be required to revisit and modify any 

rules for which the cost of complying was underestimated by 20% or more from the original 

estimate at the time of issuance. 

Fourth, new examination fairness provisions should be enacted to help ensure timeliness, clear 

guidance and an iUdependent appeal process free of examiner retaliation. 

Finally, the Central Liquidity Facility (CLF) should be modernized with changes such as: (1) 

removing the subscriptiou requirement for membership, and (2) permanently removing the CLF 

borrowing cap so that it may meet the current needs oftlle industry. 

II. Capital Reforms for Credit Unions 

NAFCU believes that capital standards for credit unions should be modernized to reflect the 

realities orlhe 21" century financial marketplace. 

First, the NCUA should, with input from the industry, study and repOlt to Congress on thc 

problems with the currcnt prompt c011'ective action (PCA) system and recommended changes. 

Second, a risk-based capital system for credit unions that more accurately reflects a credit 

union's risk profile should be authorized by Congress. 

Third, the NCUA should be given the authority to allow supplemental capital accounts for credit 

unions that meet certain standards. 
95 


80875.052

The Honorable Tim Johnson, The Honorable Jeb Hensarling, 

The Honorable Michael Crapo, The Honorable Maxine Waters 

February 12, 2Gl3 

Page Number 3 

Finally, given that very rew neW credit unions have been chartered over the past decade, and in 

order to encourage the chaltering of new credit unions, the NCUA should be authorized to 

fmther establish special capital requirements for newly chartered federal credit unions that 

recognize the unique nature and challenges of starting a new credit union. 

Ill. Strnctural Improvements for Credit Unions 

NAFCU belleves there should be improvements to the Federal Credit Union Act to help enhance 

the federal credit union charter. 

First, Congress should direct the NCUA, with input from the industry, to study and report back 

to Congress suggested changes to outdated corporate governance pl'Ovisions in the federal 

Credit Union Act. Congress should then act upon those recommendations. 

Second, a series of improvements should be made to the field of membership (FOM) restrictions 

that credit unions face expanding the criteria for defining "urban" and "rural"; and allowing 

voluntary mergers involving multiple common bond credit unions and allowing credit unions 

that convert to community chaIiers to retain their current select employee groups (SEGs). 

Finally, all credit unions, regardless of charter type, should be allowed to add underserved areas 

to their field of membership. 

IV. Operational Improvements for Credit Unions 

Credit unions stand willing and ready to assist in our nation's economic recovery. Our industry's 

ability to do so, however, is severely inhibited by antiquated legislative restrictions. 

First, Congress should show America that they are serious about creating jobs by modifYing the 

aI'bitrary and outdated credit union member business lending (MBL) cap. This can be done by 

raising the current 12,25% limit to 27.5% for credit nnions that meet celtain criteria or by raising 

the outdated "definition" of a MBL from last century's $50,000 to a new 21" century standard of 

$250,000, with indexing for inflation to prevent future crosion. Furthermore, MBLs made to 

non-profit religious organizations, businesses in "underserved areas", or small businesses with 

fewer than 20 employees should be given special exemptions for the arbitraI'y cap. 

Second, requirements to mail redundant and unnecessary privacy notices on an annual basis 

should be removed, provided that the credit union's policy ha. not changed and additional 

sharing of information with outside entities has not been undertaken since the distribution of the 

previous notice. 

Third, credit unions should be given greater authority and flexibility in choosing their 

investments. 

Fomth, the NCUA should be given greater flexibility in how it handles credit union lending, 

such as the ability to establish longer matmities for certain loans. 
96 


80875.053

The Honorable Tim Johnson, The Honorable Jeb Hensarling, 

The Honorable Michael Crapo, The Honorable Maxine Waters 

February 12,2013 

Page Number 4 

Finally, Congress should clarify that Interest on Lawyers Trust Accounts (lOLTAs) at credit 

unions are fully insured and also that the NCUA should have practical requirements on how 

credit unions provide notice of their federally-insured status in any advertising. 

V. 21" Century Data Security Standarus 

Credit unions are being adversely impacted by ongoing cyber-attacks against the United States 

and continued data breaches at numerous merchants. The cost of dealing with these issues 

hinders the ability of credit unions to serve their members. Congress needs to enact new 21" 

century data security standards that include: the payment of costs associated with a data breach 

by those entities that were breached; establishing national standards for the safekeephtg of all 

financial information; require merchants to disclose their data security policies to their 

customers; requiring the timely disclosure of entities that have suffered a data breach; 

establishing enforcement standards for provisions prohibiting merchants Ii'om retaining financial 

data; requiring the timely notification of the account serviceI' if an account has been 

compromised by a data breach; and, requiring breached entities to prove a "lack-of-fault" ifthey 

have suffered from a data breach. 

We have outlined a number of proposals that are necessary to providing the regulatory relief and 

assistance that credit unions urgently require. The number of credit unions continues to decline 

on a monthly basis and the ever-increasing regulatory burden the industry is facing is 

accelerating that decline as compliance costs become even more onerous. It is with that in mind 

tltat we call on Congress to act on any and all of these proposals, whether as a comprehensive 

package, or individually. Our nation's credit unions and their 95 million members desperately 

need this relief and we call on Congress to enact it. 

Thank you for your attention to this important matter. 

If you have any qucstions or would like further information about any of these issues, please do 

not hesitate to contact me or NAI'CU's Executive Vice President of Government Affairs Dan 

Berger by telephone at (703) 842-2203 or bye-mail at dberger@nafcu.org. 

';~I::~ Fr R. Beckel', Jr. 

President and CEO 

cc: Members oflhe Senate Banking Committee 

Members of the House Financial Services Committee 
97 


80875.054

QI:ll1t!}tl.'SS of tJp~ UniteD §iail.'9 

mUEI)illghm, D<C 211515 

February 19, 2013 

The Hon. Ben Bernanke 

Chairman 

The Federal Reserve 

System 

20th Street and Constitution Ave, NW 

Washington, D.C. 20429 

The Hon. Thomas Curry 

Comptroller 

Office of the Comptroller of the 

Currency 

400 7th Street, SW 

Washington, D.C. 20219 

Dear Sirs: 

The Hon. Martin Gruenberg 

Chairman 

Federal Deposit Insurance 

Corporation 

550 17th Street, NW 

Washington, D.C. 20429 

We are writing to express our continued concern with the current approach 

to implementation of the Basel III capital requirements for u.s. financial 

institutions. 

On November 29, 2012, representatives from your agencies testified at a 

joint hearing of the Financial Institutions and Consumer Credit Subcommittee and 

the Insurance, Housing, and Community Opportunity Subcommittee on the joint 

proposed rulemakings to implement Basel III. During the hearing, members of the 

subcommittees expressed near unanimous concern about the blanket application of 

the proposed rules to all financial institutions regardless of their asset size or 

business models. Members also received testimony from a diverse group of financial 

institutions that highlighted the significant consequences of your proposed rule for 

our financial system. We strongly encourage you to consider the concerns raised by 

members ofthe subcommittees as you finalize the proposed rules. 

As many of the witnesses reinforced during the hearing, the Basel III capital 

requirements were designed for large banks that conduct business globally. We 
98 


80875.055

Basel III Letter to Regulators 

Page 2 

believe the application of these standards to regional and community banks could 

have a significant negative economic effect. Therefore, we urge you to tailor the 

capital requirements to ensure they are appropriate for the wide range of 

institutions that comprise our financial system 

Unique among the world's developed countries, the United States is served by 

a large number of relatively small depository institutions. These institutions did not 

cause the financial crisis-rather they have continued to serve their communities in 

a prudent manner, and in many cases have played a critical role in the recovery of 

local economies. We are concerned that the compliance costs of implementing the 

Basel III framework will force many institutions that are not engaged in global 

banking to consolidate or go out of business altogether. 

We are also concerned that the cost. will ultimately be borne by consumers in 

the form of higher down payments and higher interest rates on residential 

mortgages. The Basel III standardized approach for risk-weighted assets could 

severely limit the types of mortgages smaller banking institutions can feasibly offer 

in their communities and hold in portfolio. Traditional community banking 

mortgage products that help lower-income consumers finance their homes will 

become scarcer and more expensive, as the regulatory capital needed to originate 

and hold these loans will increase substantially. This impact will be especially 

pronounced in underserved areas, in both rural towns and metropolitan 

neighborhoods across the nation, where smaller institutions are often the primary 

source of credit. 

The diversity of lenders in this country has traditionally meant that 

consumers, small businesses, and other borrowers have many sources of credit from 

which to choose, adding to the resiliency of the U.S. economy. To maintain this 

valuable benefit, we urge you to tailor the new capital rules in way that is 

appropriate for the wide range of financial institutions that comprise our financial 

system and that reflects and preserves its diversity. 

We thank you in advance for your consideration ofthis matter. 

Sincerely, 

~1111O«¥- Rep. Shelley Moore Capito, M.C. 
99 


80875.056

Representative Tom Graves Opening Statement 

"State of Community Banking: Is the Current Regulatory Environment Adversely Affecting 

Community Financial Institutions'!" 

Wednesday, March 20, 2013 

Subcommittee on Financial Institutions and Consumer Credit 

I would like to thank Chairwoman Capito, Ranking Member Meeks, and Representative 

Westmoreland for allowing me to submit an opening statement for this hearing. I commend the 

Members of this Subcommittee in particular for their efforts to address the issue of bank failures. 

My friend Lynn Westmoreland has been a relentless defender before this Committee of the 

financial institutions that serve our families, businesses, and communities in Georgia, and I want 

to thank him for his service on our behalf. This hearing is possible today because of his efforts 

to craft meaningful legislation in P.L. 112-88 to address widespread concerns regarding the 

procedures used by the FDIC in resolving troubled and failing institutions. 

The banks in Georgia serve as the lifeblood of our communities, lending valuable loans and 

services to our families and small businesses. They are unfortunately a dying breed for us back 

home. Since 2008, a staggering 84 Georgia banks have been taken over by the FDIC. This may 

seem like just a number to some, but for us it represents the leaders of families of our community 

as well as the demise of nearly 35% of the banks based in our home state. 

We continue to hear from our President and other leaders in Washington that our economy is on 

the road to recovery. Unfortunately, the unemployment rate remains at a sluggish 8.7% in 

Georgia as our banks struggle to survive, our small businesses fail to receive the valuable loans 

that allow them to expand, and our constituents continue to fight to find meaningful employment. 

This continued economic uncertainty is no doubt a direct result of the sea ofred tape that is 

coming in the form of nearly 400 new rules and regulations created by the Dodd-Frank Act in 

addition to excessively stringent bank examinations by federal regulators such as the FDIC. 

I have met with many of the bankers in the 14th district of Georgia and have been very disturbed 

to hear that more time is being spent on compliance than on customer service, innovation, or 

expansion. I have been troubled to hear that many of the examiners coming into our 

communities have never serviced a loan or lived remotely close to the banks that they are 

shutting down. Most disturbing of all, I have heard far too often that the bankers in my district 

are afraid to exprcss their honest concerns about the manner in which they are regulated because 

they fear retribution by their regulator. This is simply not acceptable. I hope to work with my 

colleagues in the 1 1 3th Congress to provide the bankers in my district with a voice to let us know 

what we can do in Washington, D.C. to make it easier for them to invest in our communities 

back home. 
100 


80875.057

I am grateful to the GAO for their attention to this issue and for conducting this important study 

in a timely manner. I believe that we must continue to investigate FDIC loss-share agreements 

and their effect on our troubled community banks and their customer base to ensure that the 

shareholders of failing institutions have a voice in their acquisition. We must also continue to 

ensure flexibility in the enforcement of accounting standards for banks during difficult financial 

times. Finally, I must urge regulators to find the balance between prudent capital in good times 

and flexibility for loan losses in bad times. Too often the regulatory pendulum swings to the 

extremes and it is the customers and small business owners who ultimately suffer. Regulations 

have consequences and right now, the consequence of banks hoarding capital to meet loan loss 

requirements and impairment accounting standards means there is less money for businesses to 

create jobs. 

It is my hope that we can all work together to find meaningful solutions to the problems facing 

our bankers back home in Georgia. They deserve a voice now more than ever. Thank you. 
101 


80875.058

GAO Questions for the Record 

Question from Representative Capito, Chairman, Subcommittee on Financial Institutions and 

Consumer Credit 

Question: On page 35-39 of the study on recent bank failures, you outlined efforts by the 

federal financial regulatory agencies and FASB to develop models for financial institutions to 

estimate credit losses. FASB proposed a new model in 2012 and is in the process of refining 

their approach. While I agree that giving financial institutions and examiners a better method to 

develop loan loss allowances may provide more stability in the system, I am concerned that the 

end result may not be workable for community banks. Do you have the sense that federal 

regulatory agencies and FASB are committed to ensuring that community banks will have the 

capacity to implement these dynamic cash flow models? 

Response: We have not conducted the work necessary to answer this question. OUf 

discussions with the regulatory agencies focused on the need for these revised models and not 

the development of the models. Therefore, we do not have information on what considerations 

the agencies have given to community. banks' capacity to implement these models at this time. 

However, FASB's Proposed Accounting Standards Update, Financial Instruments-Credit 

Losses (Subtopic 825-15) is open for comment until May 31,2013. Comments on this proposal 

may provide information about concems community banks may have, if any. Additionally, FASB 

posted a podcast on its website detailing its proposed credit loss model as well as a "Frequently 

Asked Questions" document. 
102 


80875.059

Questions for the Record 

Questions from Representative Posey 

Question 1: The GAO found that earlier recognition of loan losses could have reduced the 

need for banks to recognize a sudden series of loan losses that reduced earnings and 

regulatory capital. Would this actually be the case, would earlier recognition simply have caused 

more bank failures? 

Response: Earlier recognition of loan losses is associated with an expected loss model. In our 

report, we noted the views of staff from the Federal Deposit Insurance Corporation (FDIC) that 

had the expected loss model been in place instead of the incurred loss model, loan loss 

allowances would certainly have been higher than they were at the beginning of the financial 

crisis, which would have provided banks' earnings and capital more protection against the rising 

credit losses. Although it is not clear what effect an expected loss model would have had on 

bank failures given the unprecedented nature of the financial crisis, earlier recognition of loan 

losses would have helped address the cycle of losses that eventually led to failures in the recent 

crisis as banks were forced to increase loan loss allowances and raise capital when they were 

least able to do so. Moreover, as we detailed in our report, Federal Reserve staff noted that if 

management at the failed banks had been required to recognize loan losses earlier for the types 

of loans they were underwriting, it might have provided an incentive for them to not concentrate 

so heavily in the loans that later resulted in significant losses. 

Question 2: Most banks that failed after 2010 were on their 2nd or 3rd bank examination since 

the crisis and on their 3'd or 4th round of asset write-downs. At this point, it was not the shock 

after the crisis, but the impact of regulatory policies, like T ARP and Loss Share Agreements, 

driving down asset prices. What would you have banks do - recognize all their loans as 

immediately uncollectible and write them down to zero on Day One? 

Response: Pub. L. No. 112-88 asked GAO to study the causes and potential solutions for cycle 

of write downs, capital raising and failures. We concluded that loan loss allowances were not 

adequate to absorb the wave of credit losses that occurred when the financial crisis began, in 

part because current accounting standards for loan loss provisioning require banks to estimate 

losses using an incurred loss model. Furthermore, we noted that earlier recognition of loan 

losses could have potentially reduced the procyclicality in the recent crisis. In contrast to the 

current accounting model for estimating credit losses under Generally Accepted Accounting 

Principles (GAAP), FAS8's proposed model for estimating credit losses would incorporate 

forward-looking information about expected losses such as changes in the credit risk of assets 

held by the entity and changes in conditions since the previous reporting date. Again, given the 

severity of the declines in the value of assets during the crisis, it is not clear that to what extent 

the bank failures would have been prevented had an expected loss model been in effect. 

However, such a model would result in comparatively larger loan loss allowances and thus 

provide a greater cushion for financial institutions in times of stress. 
103 


80875.060

Question 3: The GAO conducted a study on eRE loans in 2011. In it, the GAO reported that 

banks from across the country had identified multiple concerns with examiner treatment of eRE 

loans and loan losses. Did the GAO find the situation had improved between the 2011 study 

and the study we're looking at today? If, not why not? 

Response: We have not conducted the work necessary to answer this question. While we 

released the bank failure report in 2013, the mandate for our study required us to examine bank 

failures between 2008 and 2011 and did not require us to review examiners' treatment of eRE 

loans after that period. 

Question 4: In your reviews of studies of various accounting and regulatory policies that may 

or may not have led to more bank failures than necessary, what other factors did you uncover in 

your work that could be helpful for us to know if you were authorized to dig a little deeper? 

Response: Within the scope of our work examining the causes of the bank failures, we did not 

identify additional issues related to accounting and regulatory policies that would warrant 

greater audit authority. GAO plans to continue to monitor the progress of the ongoing activities 

of the accounting standardsetters to address concerns with the loan loss provisioning model. 

Question 5: From your research, do you believe impairment accounting (FAS 5 and FAS 114), 

as applied in the examination process, fuels the vicious spiral or negative balance sheet 

pressures, leading to more failures and write-downs? 

Response: As we stated in our report, the failures were largely related to nonperforming real 

estate loans. While data are not publicly available to determine the extent to which losses at the 

failed banks were driven by declines in the fair value of the collateral, several state regulators 

and community banking association officials told us that declining collateral values of impaired 

collateral-dependent loans drove both credit losses and charge offs and resulted in reductions 

to regulatory capital at some small banks. Two state banking associations said that these 

effects were exacerbated by federal bank examiners' adverse classification of performing 

collateral-dependent loans. We did not conduct additional analysis on the examination process 

but we noted regulatory guidance issued in 2006 was at odds with this experience. The FDIC 

IG study covered the role offield examinations and appraisals more exhaustively. The IG found 

that examiners generally followed relevant policies and implemented them appropriately, 

although it noted several areas for improvement For example, the IG noted that examiners did 

not always document the procedures and steps that they performed to assess institutions' 

appraisal and workout programs and that the regulators had different approaches to 

enforcement actions, particularly related to non-problem banks. 
104 


80875.061

Questions for the Record 

Questions from Representative Westmoreland 

Question 1: GAO noted that bank failures significantly impacted market concentration in a few 

metro areas and rural counties. Will you please provide for the record a list of counties in 

Georgia that experienced increased bank concentration? 

Response: 

As discussed in the report, we analyzed the impact of bank failures and failed bank acquisitions 

on local credit markets using data for the period from June 2007 to June 2012 to calculate the 

Herfindahl-Hirschman Index (HHI), a key statistical measure used to assess market 

concentration and the potential for firms to exercise their ability to influence market prices. We 

described an increase in market concentration as significant if the difference between pre- and 

postfailure HHI in a local market was at least 100 and the postfailure HHI was 1,500 or more. 

We described an increase in market concentration as small if the difference between the preand postfailure HHI in a local market was between 1 and 100 and if the post failure HHI was 

between 1 and 1,500. 

Table 1 below provides a list of metropolitan areas and rural counties in Georgia that 

experienced a potential increase in market concentration between June 30, 2007 and June 29, 

2012 as a result of bank failures. 

Table 1: Metro Areas and Rural Counties in Georgia that Experienced Potential Increases in Market 

Concentration Due to Bank Failures, June 30, 2007 -June 29, 2012. 

Metropolitan area or Name of Metropolitan Potential change in 

Yeara Rural county area or Rural county market concentration 

June 30, 2008- Atlanta-Sandy SpringsJune 29, 2009 Metropolitan area Marietta, GA Small increase 

June 30, 2008-

June 29, 2009 Metropolitan area Dalton, GA Small increase 

June 30, 2008-

June 29, 2009 Rural county Banks, GA Sj~njficant increase 

June 30, 2008-

June 29, 2009 Rural county Glascock, GA Significant increase 

June 30, 2008-

June 29, 2009 Rural county Jackson, GA Small increase 

June 30, 2009- Atlanta-Sandy SpringsJune 29, 2010 Metropolitan area Marietta, GA Small increase 

June 30, 2009-

June 29, 2010 Metropolitan area Columbus, GA-AL Significant increase 

June 30, 2009-

June 29, 2010 Metropolitan area Macon, GA Small increase 
105 


80875.062

June 30, 2009-

June 29, 2010 Metropolitan area Savannah, GA Small increase 

June 30, 2009-

June 29, 2010 Metro[>olitan area St. M~JYS, GA Sianificant increase 

June 30, 2010- Atlanta-Sandy SpringsJune 29,2011 Metropolitan area Marietta, GA Small increase 

June 30, 2010-

~une 29, 2011 Metropolitan area Cornelia, GA Siqnificant increase 

June 30, 2010-

June 29, 2011 Metropolitan area Gainesville, GA Small increase 

June 30, 2010-

June 29, 2011 Metropolitan area Tifton, GA Sianificant increase 

June 30,2010-

June 29, 2011 Metropolitan area Toccoa, GA Small increase 

June 30, 2010-

June 29, 2011 Rural countv Gilmer, GA Sianificant increase 

June 30, 2010-

June 29, 2011 Rural county White, GA Sianificant increase 

June 30, 2010-

June 29, 2011 Rural county Wilcox, GA Siqnificant increase 

June 30, 2011- Atlanta-Sandy SpringsJune 29, 2012 Metropolitan area Marietta, GA Small increase 

June 30, 2011-

June 29, 2012 Metropolitan area Macon, GA Sianificant increase 

June 30, 2011-

June 29, 2012 Metropolitan area Statesboro, GA Siqnificant increase 

Source. GAO analysIs of Census Bureau, FDIC, and oce data 

'We did not find potential increases in market concentration during the June 30, 2007 to June 29, 2008 period in 

those local markets that experienced bank failures. 

Question 2: On page 46 you state "8 of 188 metropolitan areas", met the criteria for raising 

significant competitive concerns," Additionally, "62 of 68 rural counties .... likely experienced no 

change in concentration," Please submit for the record a list of the 188 metro areas and 68 rural 

counties and identify if each increased, decreased, or registered no change in market 

concentration. 

Response: See table 2 below for potential changes in market concentration in those 

metropolitan areas and rural counties in the U.S. between June 30, 2009 and June 29,2010 

that experienced bank failures. 

Table 2: Potential Changes in Market Concentration in Metropolitan Areas and Rural Counties in the U,S. that 

Experienced Bank Failures, June 30, 2009-June 29, 2010. 
106 


80875.063

Metropolitan area or Name of Metropolitan area Potential change in 

~,,-~.t}' or Rural county market concentration 

Aguadilla-Isabela-San 

Metropolitan area Sebastian, PR Significant increase 

Metropolitan area Akron,OH No change 

Metropolitan area Albertville, AL No change 

Metropolitan area Albuquerque, NM No change 

Metropolitan area Alexander City, AL No change 

Metropolitan area Altus, OK No change 

Metropolitan area Anniston-Oxford, AL Significant increase 

Metropolitan area Athens-Clarke CounlY...~ ~g~, 

Atlanta-Sandy SpringsMetropolitan area Marietta, GA Small increase 

Metropolitan area Auburn-Opelika, AL No change 

Austin-Round Rock-San 

Metropolitan area Marcos, TX Small increase 

Metropolitan area Bakersfield-Delano, CA Small increase 

Metropolitan area Baltimore-Towson, MD Small increase 

Metropolitan area Baraboo, WI Significant increase 

Metropolitan area Beatrice, NE No change ,-

Metropolitan area Beaumont-Port Arthur, TX Small increase 

Metropolitan area Bellingham, WA Small increase 

Metropolitan area Bend, OR No chanoe 

Metropolitan area Birmingham-Hoover, AL No change 

Metropolitan area Bloominqton, IN No chanqe 

Metropolitan area Bloomington-Normal, IL Small increase 

Boston-Cambridge-Quincy, 

~QQIi!"-fI area MA-NH NO,c;hange 

Metropolitan area Bremerton-Silverdale, WA Small increase 

Metropolitan area Brenham, TX No change 

Metropolitan area Buffalo-Niaoara Falls, NY Small increase 

Metropolitan area Calhoun, GA No change 

Metropolitan area Cape Coral-Fort Myers, FL Small increase 

Metropolitan area Carson City, NV Significant increase 

Metropolitan area Centralia, WA No change 

Chicago-Joliet-Naperville, 

Metropolitan area IL-IN-WI Small increase 
107 


80875.064

Cincinnati-Middletown, OHMetropolitan area KY-IN Small increase 

Metropolitan area Cleveland, MS No change 

Cleveland-Elyria-Mentor, 

Metropolitan area OH No change 

Metropolitan area Clewiston, FL No change 

Metropolitan area College Station-Bryan, TX Small increase 

Metropolitan area Columbus, GA-AL Significant increase 

Metropolitan area Columbus, IN Significant increase 

Metropolitan area Columbus, NE No change 

Metropolitan area Cornelia, GA e 

Crestview-Fort Walton 

Metropolitan area Beach-Destin, FL No change 

Dallas-Fort Worth-Arlington, 

Metropolitan area TX Small increase 

Metropolitan area Dalton, GA No change 

Metropolitan area Danville,IL Small increase 

Metropolitan area Daphne-Fairhope-Foley, AL No change 

Deltona-Daytona BeachMetropolitan area Ormond Beach, FL Small increase 

Des Moines-West Des 

Metropolitan area Moines,IA No change 

Metropolitan area Detroit-Warren-Livonia, MI Small increase 

Metropolitan area Dixon,IL No change 

Metropolitan area Dothan, AL No change 

Metropolitan area Duluth, MN-WI No change 

Metropolitan area Enterprise-Ozark, AL No change 

Metropolitan area Eufaula, AL-GA I N()change 

Metropolitan area Fajardo, PR Significant increase 

Metropolitan area Fallon, NV No change 

Metropolitan area Flagstaff, AZ No change 

Metropolitan area Fredericksburg, TX No change 

Metropolitan area Freeport,IL No change 

Metropolitan area Fremont, NE No change 

Metropolitan area Fresno, CA No change 

Metropolitan area Gadsden, AL No change 

Metropolitan area Gainesville, GA No change 

Metropolitan area Gardnerville Ranchos, NV No change 

Metropolitan area Georgetown, SC No change 

Metropolitan area Grand Island, NE No change 
108 


80875.065

Metropolitan area Grand Rapids-Wyoming, MI No change 

Metropolitan area Greensburg, IN No change 

Metropolitan area Guayama, PR No chanoe 

Metropolitan area Hastings, NE No change --

Hilton Head Island-Beaufort, 

Metropolitan area SC No change 

Metropolitan area Homosassa Sprinqs, FL Small increase 

Metropolitan area Hood River, OR No change 

Houston-Sugar LandMetropolitan area Baytown, TX Small increase 

Metropolitan area Huntsville, AL No change ,--

Metropolitan area Huntsville, TX No change 

Metropolitan area Indianapolis-Carmel, IN Small increase 

Metropolitan area Jacksonville, FL No change 

Metropolitan area Jacksonville, I L No change 

Metropolitan area Kalamazoo-Portage, MI No change 

Metropolitan area Kansas City, MO-KS No change 

Metropolitan area Kearney, NE No change 

Kennewick-Pasco-Richland, 

Metropolitan area WA No chanqe 

Metropolitan area Kerrville, TX No change 

Metropolitan area Key West, FL Small increase 

Killeen-Temple-Fort Hood, 

Metropolitan area TX Small increase 

Metropolitan area La Crosse, WI-MN No change 

Metroflolitan area LaGrange, GA No change 

Metropolitan area Lakeland-Winter Haven, FL No change 

MetroPolitan area Lansing-East LanSing, MI No change 

Metropolitan area las Vegas-Paradise, NV Small increase 

Metropolitan area Lexington, NE No change 

Metropolitan area lincoln, NE No chanqe 

Metropolitan area Longview, TX No change 

Los Angeles-Long Beach--

Metropolitan area Santa Ana, CA Small increase 

Louisville/Jefferson County, 

Metropolitan area KY-IN No change 

Metropolitan area Macon, GA Small increase 

Metropolitan area Madison, WI No change 

Metropolitan area Marble Falls, TX No change 
109 


80875.066

Metropolitan area Marshall, TX No chanqe 

Metropolitan area MayagOez, PR Significant increase 

Metropolitan area Merced, CA No change 

Miami-Fort LauderdaleMetropolitan area Pompano Beach, FL Small increase 

Metropolitan area MilledQeville, GA No change 

Milwaukee-Waukesha-West 

Metropolitan area Allis,WI No change 

Minneapolis-SI. PaulMetropolitan area Bloomington, MN-WI Small increase 

Metropolitan area Mobile, AL No change 

Metropolitan area Modesto, CA No chanoe 

Metropolitan area Monroe, WI No change 

Metropolitan area MonJgomerv, AL No change 

Mount Vernon-Anacortes, 

Metropolitan area WA Small increase 

Myrtle Beach-North Myrtle 

Metropolitan area Beach-Conway, SC No change 

Metropolitan area Napa, CA Small increase 

Metropolitan area Naples-Marco Island, FL Small increase 

New Orleans-MetairieMetropolitan area Kenner, LA No change 

New York-Northern New 

Jersey-Long Island, NY-NJMetropolitan area PA No change 

Metropolitan area Newton,IA No chanoe 

Metropolitan area Norfolk, NE No change 

Metropolitan area North Platte, NE No change 

North Port-BradentonMetropolitan area Sarasota, FL Small increase 

Metropolitan area Ocala, FL Small increase 

Metropolitan area Ogden-Clearfield, UT Siqnificant increase 

Metropolitan area Okeechobee, FL No change 

Metropolitan area Olympia, WA No change 

Omaha-Council Bluffs, NEMetropolitan area IA Smail increase 

Orlando-KissimmeeMetropolitan area Sanford, FL Small increase 

Metropolitan area Ottawa-Streator, IL No change 

Oxnard-Thousand OaksMetropolitan area Ventura, CA Small increase 

Metropolitan area Pahrump, NV Significant increase 
110 


80875.067

Metropolitan area Palatka, FL No chanoe 

Palm Bay-MelbourneMetropolitan area Titusville, FL Small increase 

Metropolitan area Palm Coast, FL Small increase 

Panama City-Lynn HavenMetropolitan area Panama City Beach, FL Small increase 

Metropolitan area Payson, AZ. No chanqe 

Metropolitan area Pendleton-Hermiston, OR No change 

Pensacola-Ferry PassMetropolitan area Brent, FL Small increase 

Phoenix Lake-Cedar Ridge, 

Metropolitan area CA No change 

Metropolitan area Phoenix-Mesa-Glendale, AZ Small increase -- Metropolitan area Pittsburgh, PA Small increase 

Metropolitan area Ponce, PR Significant increase 

Metropolitan area Port Angeles, WA No change 

Metropolitan area Port S! Lucie, FL No chanQe 

Portland-VancouverMetropolitan area Hillsboro, OR-WA No change 

Metropolitan area Prescott, AZ. No chanqe 

Metropolitan area Prineville, OR No change 

Metropolitan area Provo-Orem, UT Small increase 

Metropolitan area Pueblo, CO Small increase 

Metropolitan area Punta Gorda, FL I Small increase 

Metropolitan area Racine, WI Small increase 

Metropolitan area Reno-Sparks, NV No change 

Riverside-San BernardinoMetropolitan area OntariO, CA Small increase 

Metropolitan area Rochelle,IL No change 

Metropolitan area Rockford, IL No chanQe 

Metropolitan area Rome, GA No change 

Sacramento--Arden-ArcadeMetropolitan area -Roseville, CA Small increase 

Metropolitan area Salem, OR No chanoe 

Metropolitan area Salt Lake City, UT Small increase 

San Antonio-New Braunfels, 

Metropolitan area TX Small increase 

San Diego-Carlsbad-San 

Metropolitan area Marcos, CA Small increase 

San Francisco-OaklandMetropolitan area Fremont, CA Small increase 
111 


80875.068

San German-Cabo Rojo, 

Metropolitan area PR SiQnificant increase 

San Jose-Sunnyvale-Santa 

Metroeolitan area Clara, CA Small increase 

San Juan-CaguasMetropolitan area Guaynabo, PR Significant increase 

Metropolitan area Santa Fe, NM No change 

Metropolitan area Savannah, GA Small increase 

Metropolitan area Scottsbluff, NE No change 

Metropolitan area Scottsboro, AL No change 

Seattle-Tacoma-Bellevue, 

Metropolitan area WA Small increase 

Metropolitan area Sebastian-Vero Beach, FL No change 

Metropolitan area Sebring, FL No change 

Metropolitan area Seymour, IN No change 

Metropolitan area Shelton, WA No change 

~Ef'2litan area Sioux City, IA-NE-SD No change 

Metropolitan area Sioux Falls, SD No change 

Metropolitan area Springfield, IL No change 

Metropolitan area Springfield, MO No change 

Metropolitan area St. Cloud, MN Small increase 

Metropolitan area St. George, UT Small increase 

Metropolitan area St. Louis, MO-IL No change 

Metropolitan area St. Marys, GA Significant increase 

MetropOlitan area Sterling, IL No change 

MetropOlitan area Stockton, CA No change 

Metropolitan area Tallahassee, FL Small increase 

Tampa-St. PetersburgMetropolitan area Clearwater, FL Small increase 

MetropOlitan area The Dalles, OR No change 

MetropOlitan area The Villages, FL No change 

Metropolitan area Toccoa GA No change 

Metropolitan area Traverse City, MI No change 

MetropOlitan area Troy, AL No change 

Metropolitan area Tuscaloosa, Al No change 

MetropOlitan area Tyler, TX Small increase 

Metropolitan area Valley, AL No change 

Metropolitan area Waco, TX Small increase 

Metropolitan area Wamer Robins, GA No change 

Metropolitan area Warrensburg, MO No change 

Washington-ArlingtonMetropolitan area Alexandria, DC-VA-MD-WV No change 
112 


80875.069

Metropolitan area Yakima, WA No chanqe 

Metropolitan area Yauco, PR Siqnificant increase 

Rural county Amador, CA No change 

Rural county Banks, GA No chanqe 

Rural county Boone, NE No change 

Rural county Box Butte, NE No chanqe 

Rural county Butler, AL No change 

Rural county Calaveras, CA No chanqe 

Rural county Cass,IA No change 

Rural county Cheyenne, NE No chanqe 

Rural county Clay, AL Nochange 

Rural county Cleburne, AL No change 

Rural county Conecuh, AL No change 

Rural county Covington, AL No change 

Rural county Crenshaw, AL Significant increase 

Rural county Custer, NE ange 

Rural county DeWitt,ll anqe 

Rural county Douglas,ll Significant increase 

Rural county Escambia, AL No chanqe 

Rural county Falls, TX No change 

Rural county Fannin, GA Decrease 

Rural county Freestone, TX No chanqe 

Rural county Garfield, NE No change 

Rural county_ Gilmer, GA No chanqe 

Rural county Grimes, TX No change 

Rural county Holmes, FL No chanqe 

Rural county Holt, NE Significant increase 

Rural county Hot Sprinqs, WY No chanqe 

Rural county Huron, MI No change 

Rural county Jackson, FL No change 

Rural county Jackson, GA 

Rural county Jefferson, NE I chan:: 

Rural county Jefferson, OR No chanqe 

Rural county Jefferson, WA No change 

Rural county Jo Daviess, IL Significant increase 

Rural county Johnson, NE No chanoe 

Rural county Kittson, MN No change 

Rural county Klickitat, WA No chanqe 

Rural county Knox, NE No change 

Rural county Lafayette, WI No change 

Rural county Limestone, TX No change 

Rural county Lumpkin, GA No change 

Rural county_ Madison, TX No change 
113 


80875.070

Rural county Marshall, KS No chanqe 

Rural county Monona,IA No change 

Rural county Montqomery, IA Siqnificant increase 

Rural county Nemaha, NE No change 

Rural county Otoe, NE No chanqe 

Rural county Page,IA No change 

Rural county Phelps, NE No chanqe 

Rural county Plymouth, IA No change 

Rural county Polk, TX No change 

Rural county Rabun, GA No chanqe 

Rural county Randolph, AL No change 

Rural county Red Lake, MN No chance 

Rural county Red Willow, NE No change 

Rural county Richardson, NE No chanqe 

Rural county Saline, NE No change 

Rural county Sanilac, MI No chanqe 

Rural county Shenandoah, VA No change 

Rural county Stevens, MN No chanqe 

I Rural county Swift, MN No change 

Rural county Tattnall, GA No chanqe 

Rural county Thayer, NE No change 

Rural county Towns, GA No chanqe 

Rural county Union, GA No change 

Rural county Valley, NE No chanqe 

Rural county Walton, FL No change 

Rural county Washinqton, FL No change 

Rural county White, GA No change 

Source. GAO analysIs of Census Bureau, FDIC, and OCC data 

Question 3: The GAO analysis in the study indicates IndyMac was the only bank that failed 

with heavy fair-value losses. Meaning losses from FAS 157. Did GAO conduct an analysis 

comparing the top 10 largest banks and their FAS 157 losses during the 2007-2008 period to 

IndyMac's FAS 157 losses? If not, will you please conduct this comparison and submit it for the 

record? 

Response: 

Our analysis indicated that IndyMac was the only large bank that failed with heavy fair-value 

losses.' As part of our methodology we analyzed, on an aggregate as well as on an individual 

'Statement of Financial Accounting Standards (SFAS) 157, as issued in 2006 and effective for an entity's 

first fiscal year beginning after November 15, 2007, is the standard that defines fair value, establishes a 

framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 

does not determine when fair value should be applied nor does it require that fair value be applied to 

specific assets or liabilities; however, it does clarify how to determine fair value if an asset or liability is to 

be valued according to fair value criteria. The requirement of mark-to-market and fair value accounting is 

set forth in other accounting standards, including but not limited to, SFAS 115, Accounting for Certain 
114 


80875.071

basis, the impact of fair value accounting on the nine large banks and thrifts (those that had $10 

billion or more in assets) that failed between 2008 and 2011. These included three commercial 

banks: (1) United Commercial Bank, (2) Colonial Bank, and (3) Westernbank of Puerto Rico and 

six thrifts:(1) IndyMac, (2) Downey Savings and Loan, (3) Washington Mutual, (4) Amtrust, (5) 

BankUnited, and (6) Guaranty Bank. For each of these large banks and thrifts, we determined 

the extent to which these banks and thrifts' assets were measured at historical cost versus fair 

value and the extent to which losses were credit-related. These analyses can be found in 

appendices IV and V of our report. 

In summary, we found that HFI loans, which are recorded at amortized cost and thus not subject 

to fair value accounting, generally represented the majority of large failed banks and thrifts' 

assets. For example, in 2007 and 2008, HFI loans represented an average 60.80 percent and 

56.25 percent respectively, of the three failed large commercial banks, and an average 68.91 

percent and 75.42 percent, respectively, of the six failed large thrifts. For IndyMac specifically, 

however, HFI loans represented 33.7 percent and 60.9 percent of total assets over these two 

years-the lowest of the six thrifts. 

In contrast, we found that assets and liabilities measured at fair value generally did not account 

for a significant percentage of the assets of large failed banks and thrifts. For example, table 3 

shows the percentage of assets and liabilities measured at fair value through earnings on a 

recurring basis (each reporting period), which comprise mainly trading assets, nontrading 

derivative assets, and nonfinancial assets such as servicing rights for mortgages for which the 

fair value option has been elected. 2 For these assets and liabilities, unrealized fair value gains 

or losses flow through the bank or thrift's earnings in the income statement and affect regulatory 

capital. Table 3 shows that these assets and liabilities accounted for a small percentage overall 

of large failed banks and thrifts' assets during 2007 and 2008. For IndyMac specifically, 

however, the level of these assets it held was relatively higher. In particular, nonfinancial assets 

represented 7.45 percent and 8.15 percent of total assets in 2007 and 2008, respectively. 

These nonfinancial assets included mortgage serviCing rights (MSR), which arise when banks 

sell mortgage loans and keep the right to service those loans, and reflected IndyMac's active 

role in mortgage securitization. 

Table 3: Assets and Liabilities Measured at Fair Value on a Recurring Basis as a Percentage of Total Assets 

for Large Failed Banks, Large Failed Thrifts, and IndyMac, 2007 and 2008 

Institution Description 2007 2008 

Large failed banks Trading assets 0.04% 0.04% 

Nontrading assets 0.00% 0.00% 

Nonfinancial assets 0.00% 0.00% 

liabilities 0.01% 0.02% 

Laroe failed thrifts T radino assets 1.28% 0.35% 

Nontrading assets 0.87% 1.24% 

Nonfinancial assets 2.21% 1.18% 

Liabilities 0.04% 0.15% 

IndvMac Tradino assets 3.42% 1.74% 

Investments in Debt and Equity Securities; SFAS 130, Reporting Other Comprehensive Income; SFAS 

133, Accounting for Derivative Instruments and Hedging Activities; and SFAS 155, Accounting for Certain 

Hybrid Financial Instruments. 

2 ASC 825 (formerly FAS 159), "The Fair Value Option for Financial Assets and Financial Liabilities," 

(February 2007) allows a one-time election to report certain financial instruments at fair value. At initial 

recognition for certain financial assets and liabilities, an entity may irrevocably elect fair value as the initial 

and subsequent measurement attribute, with changes in fair value included in current earnings. 
115 


80875.072

Source: GAO analysis of FDIC call report and thrift financial report data. 

We also analyzed those assets measured at fair value on a nonrecurring basis through income 

(table 4). Such assets include investments in debt securities classified as held to maturity (HTM) 

and as available for sale (AFS). For large failed banks and thrifts, securities AFS represented 

the largest percentage of assets held after loans HFI in 2008. However, fair value changes for 

these securities do not generally impact current earning or regulatory capital. Both HTM and 

AFS securities are measured at amortized cost unless any declines in fair value can be 

categorized as other than temporary, in which case credit losses are recognized in earnings. 

Table 4: Assets and Liabilities Measured at Fair Value on a Nonecurring Basis as a Percentage of Total 

Assets for Large Failed Banks, Large Failed Thrifts, and IndyMac, 2007 and 2008 

Institution Description 2007 2008 -;-. 

Larqe failed banks HTM securities 13.60% 5.04% 

AFS securities 9.94% 16.47% 

Laroe failed thrifts HTM securities 1.79% 4.94% 

AFS securities 8.44% 6.29% 

IndyMac HTM securities 0.00% 9.50% 

AFS securities 14.37% 8.30% 

Source: GAO analysIs of FDIC call report and thrift financial report data. 

Finally, we analyzed those assets that are carried at the lower of cost or fair value. These 

include loans held for sale (HFS), which are loans that are originated with the intent to sell in the 

secondary market, and Other Real Estate Owned (OREO), which comprise those assets 

repossessed through a foreclosure process for defaulted loans. Table 5 shows that loans HFS 

accounted for less than 5 percent of assets held by large failed banks in 2007 and 2008. For 

large failed thrifts, loans HFS accounted for an average of 6.81 percent of assets in 2007, but 

this result is driven by IndyMac, which held a significant level of HFS loans in 2007 due to its 

active involvement in mortgage loan securitization.' 

Table 5: Assets and Liabilities Measured at the Lower of Cost or Fair as a Percentage of Total Assets for 

Large Failed Banks, Large Failed Thrifts, and IndyMac, 2007 and 2008 

Institution Description 2007 2008 

Large failed banks Loans HFS 3.08% 4.19% 

OREO 0.04% 0.39% 

Larqe failed thrifts Loans HFS 6.81% 1.26% 

OREO 0.26% 0.96% 

IndvMac Loans HFS 31.8% 1.40% 

OREO 0.3% 0.90% 

Source: GAO analYSIS of FDIC call report and thnft financial report data. 

'IndyMac was the failed bank with the largest share of HFS loans as a percent of its total assets during 

our period of study. From the first quarter of 2007 to the third quarter of 2007, IndyMac's HFS loans 

ranged between about 36 percent to 42 percent of its total assets. However, as of the fourth quarter of 

2007, it started curtailing the volume of its HFS loans. In its regulatory filing with the Securities Exchange 

Commission, IndyMac reported that in the fourth quarter of 2007, it transferred HFS loans with an original 

cost basis of $10.9 billion to HFlloans as it no longer intended to sell these loans given the extreme 

disruption in the secondary mortgage market. 
116 


80875.073

As discussed in appendices IV and V in our report, with the exception of IndyMac, fair valuerelated losses contributed very little to the decline in net interest income and regulatory capital 

experienced by the large failed banks and thrifts. Instead, we found that the failures were driven 

by rising levels of credit losses related to non performing HFI loans. These losses had a greater 

negative impact on the large banks and thrift institutions' net interest income and regulatory 

capital levels than those recorded at fair value. While IndyMac also experienced significant 

levels of credit losses related to nonperforming HFI loans in 2007 and 2008, it also experienced 

heavy losses related to declines in those assets and liabilities measured at fair value on a 

recurring basis and losses on loans HFSit held in 2007. 
117 


80875.074

Response to Questions from 

the Honorable Spencer Bachus 

by the Federal Deposit Insurance Corporation 

Ql: The FDIC announced community banks initiatives in 2012 including regional round 

tables, community bank study and more importantly examination and rule making review. 

Where arc these in the process; what arc the findings or results? What has been 

implemented as a result of these efforts? What have they done to help our community 

banks? 

AI: The FDIC launched the Community Banking Initiative in February 2012 with a national 

conference on community banking. The FDIC held Roundtable discussions in the FDIC's six 

regions from March 2012to October 2012. The FDIC released the FDIC Community Banking 

Study in December 2012. Throughout 2012, the FDIC's Division of Risk Management 

Supervision and Division of Depositor and Consumer Protection undertook a comprehensive 

review of the examination and rulemaking processes to identify opportunities to make these 

processes more efficient and effective, without altering the FDIC's supervisory standards. A full 

report of the findings from the roundtables and the examination and rulcmaking review is 

available at http://www.fdie.gov/rcgulations/resonrces/cbilrtreport.html#FullReport. 

Overall, the findings from these initiatives indicate the community banking model remains 

viable, and that community banks will be an important part of the financial landscape for years to 

come. The findings also identified financial and operational challenges facing community banks 

as well as opportunities for the FDIC to strengthen the efficiency and effectiveness of its 

examination and rulemaking processes. 

The FDIC has undertaken the following actions to address the examination and rulemaking 

review findings: 

Developed a tool that generates pre-examination request documents tailored to a bank's 

specific operations and business lines; 

Improved how information is shared electronically between bankers and examiners 

through its secure Tnternet channel, FDICconnect, which will ensure better access for 

bankers and examiners; 

Revised the classification system for citing violations in Compliance Reports of 

Examination to better communicate to institutions the severity of violations and provide 

more consistency in the classification of violations; 

Developed and posted a Regulatory Calendar on viww.fClic.gov to kecp bankers current 

on the issuance of rules, regulations, and guidance; 

Released the first in a series of technical assistance videos to provide useful information 

to bank directors, officers, and employees on areas of supervisory focus and proposed 

regulatory changes; and 

Created the Director's Resource Center web page to enhance technical assistance 

provided to bankers on a range of bank regulatory issues. 
118 


80875.075

Response to Questions from 

the Honorable Shelley Moore Capito 

by the Federal Deposit Insurance Corporation 

QI: The Dodd-Frank Act calls for coordination between the CFPB and prudential 

regulators during the rulewriting process. Please provide the subcommittee with an 

account of the advice the FDIC provided to the CFPB of how the recent CFPB mortgage 

rules will affect community banks. Please include a list of recommendations the CFPB 

accepted and a list of recommendations the CFPB ignored. 

AI: As you know, the Dodd-Frank Act established the Consumer Financial Protection Bureau 

(CFPB) and included a series of changes to the laws governing mortgage lending. These 

statutory changes have been the subject of rule making by the CFPB in consultation with the 

FDIC and the other prudential regulators. 

In our experience, the CFPB's consultation process regarding the mortgage rules has been robust 

and useful. The CFPB shares infonnation, convenes meetings regularly, and engages in 

substantive discussions with the FDIC and the other prudential regulators, along with HUD, 

FHF A, and Treasury. 

In requiring these rulemakings, Congress directed the CFPB, the FDIC, and the other prudential 

regulators to be cognizant of the differences that exist among banks, specifically citing rural and 

community banks for somewhat differential treatment. As the primary regulator of the nation's 

community banks, the FDIC has been mindful of these distinctions and of congressional intent in 

this regard. The FDIC engages in frequent communication with community banks, trade 

associations, and other industry stakeholders and with our Community Bank Advisory 

Committee. These interactions provide invaluable and current insight to the FDIC about how 

community banks undertake their mortgage business, and the opportunity to hear directly from 

community bankers about their concerns. We have brought our knowledge and understanding of 

community banks, gained through both these conversations and our examination program, as 

well as our commitment to consumer protection, to the various consultations and mcetings with 

the CFPB on all the mortgage regulations. This includes conveying our understanding of the role 

community banks play in providing mortgage lending services in rural and underserved areas, 

and the challenges and opportunitics these institutions face on an ongoing basis. 

In 2011, the FDIC also launched a Community Bank Initiative that on an ongoing basis updates 

the FDIC's understanding of the role of community banks in the financial marketplace and 

further assists the FDIC in identifying the challenges and opportunities these institutions face 

going forward. Consistent with the results of the knowledge gained through the FDIC's 

Community Bank Initiative, FDIC staff put particular emphasis on the unique business model of 

these community banks in its consultations with the CFPB. 

Community banks have a business model that is based on an overall banking relationship with 

their customers. As a general rule, community banks use a "high touch" model, rather than a 

"high volume, low margin" model. This allows community banks to compete in the mortgage 

marketplace based on customer service and underwriting that is successful because of strong 

relationships with customers. We also have highlighted that, in general, smaller institutions with 
119 


80875.076

a relationship-based model did not face the considerable challenges that affected large financial 

organizations during the mortgage crisis. The majority of community banks used sensible 

mortgage underwriting practices during the pre-crisis years, even as overall market discipline 

declined. 

Specific concerns about the proposed rules that we heard from community bankers and trade 

associations and shared with the CFPB are as follows: 

• Restrictions on the origination of balloon loans would bave a significant adverse effect on 

community banks, particularly those located in rural areas given that balloon loans may 

comprise a significant portion of available and customary mortgage credit in the 

communities they serve. 

• The Qualified Mortgage definitions of "rural" and "underserved" were complicated and, 

in addition, would not cover enough community banks. 

• Mortgage servicing requirements would have a disproportionate impact on small 

mortgage servicers, who have not demonstrated the problems associated with the large 

mortgage servicers. 

• Requiring escrow would drive community banks, particularly rural community banks, out 

of the mortgage business because of the associated costs. 

• Mortgage loan originator rules were making it difficult for community banks to maintain 

their level of personal service. 

In addition to hearing these concems conveyed through the FDIC, we are aware that the CFPB 

also met with community banks and trade associations, and received thousands of comment 

letters from community banking organizations, consumer advocacy groups, and others. The final 

rules promulgated by the CFPB suggest greater sensitivity to the needs and interests of 

community banks, particularly rural community banks, as those needs and interests were 

expressed to the FDIC and subsequently transmitted to the CFPB, than did the proposed rules. In 

addition, several of the final rules reduce requirements for community banks compared to current 

law. 

Q2: Appendix B of the study provides information from interviews with community 

bankers on the growing cost of compliance. While I understand it is difficult to quantify 

this costs as it is a time burden on the institutions; policy makers, regulators, and financial 

institutions have to work together to reduce this burden. Is there anyone within the FDIC 

that is designated as quantifying the overall regulatory burden facing community banks? 

A2: The FDIC takes seriously its commitment to better understand the costs of regulation and 

we have several of our divisions working on initiatives to monitor and find ways to keep those 

costs to a minimum consistent with the imperatives of safe and sound banking and consumer 

protection. 

As described in Appendix B of the FDIC Community Banking Study, community banks often do 

not specifically track and do not specifically report compliance costs. In fact, bankers that 

participated in the interviews indicated that they do not track compliance costs because it is too 

time consuming, costly, and difficult to break out specific costs. Nevertheless, the Study was 

able to make extensive use of the available regulatory data to better understand the factors that 
120 


80875.077

detennine community bank earnings, including changes in noninterest expenses (which include 

compliance costs). We continue to monitor these trends, and have immediate plans to update 

several elements of our analysis of bank earnings. The FDIC actively seeks, receives, and acts 

upon feedback from community bankers about the supervisory process in general and regulatory 

burden in particular. For example, the FDIC has established the FDIC Advisory Committee on 

Community Banking, held FDIC regional roundtable discussions of the community banking 

operating environment, conducted a 2012 review of examination and supervisory guidance, and 

conducted post examination surveys, as well as undertaking other initiatives. 

We have found the interviews and roundtable discussions conducted with community bankers as 

part of the Community Banking Study to be useful in understanding regulatory cost issues. 

Q3: Appendix B identified specific regulations that required significant time and resources 

for compliauce, including HMDA, BSA, UDAP, Fair Lending, USA PATRIOT Act, and 

EFTA. Is the FDIC working with other prudential regulators and the CFPB to review 

these regulations to identify ones that are duplicative, unnecessary, or outdated? If not, 

please identify ways the FDIC is working to review these laws to reduce regulatory burden. 

A3: The FDIC does not have rulemaking authority for the laws listed in this question. However, 

the FDIC undertakes a comprehensive review of its regulations every ten years, has taken steps 

to refine examination and enforcement procedures related to the Home Mortgage Disclosure Act, 

and is taking other steps to identify and eliminate unnecessary regulatory burden generally. 

The FDIC, jointly with the other federal banking agencies, every ten years undertakes a 

comprehensive review of each of its regulations as required by the Economic Growth and 

Regulatory Paperwork Reduction Act of 1996 (EGRPRA). The focus of the EGRPRA 

review is to identify any outdated, unnecessary, or unduly burdensome regulatory 

requirements imposed on insured depository institutions. The FDIC completed its last 

review under EGRPRA in 2006 and must complete the next comprehensive review by 

2016. To prepare for the upcoming EGRPRA review process, the FDIC published on its 

website and sought public comment in early 2012 on a plan outlining the process for this 

review. To the extent the FDIC receives comments on regulations for which it does not 

have rulemaking authority, the FDIC will forward these comments to the relevant 

agencies. 

Examination and enforcement procedures related to the Home Mortgage Disclosure Act 

(HMDA) have been the subject of significant attention by the FDIC during the past 

several years. We have sought to refine our processes to best achieve our supervisory 

objective of the accurate reporting ofloan-level mortgage data by the 60 percent of 

FDIC-supervised institutions subject to HMDA reporting thresholds. The majority of 

HMDA reporters have less than 100 reportable transactions per year. In 2011, the FDIC 

implemented changes related to its examination procedures associated with HMDA data 

validation and submission to improve the efficiency of examinations of large HMDA 

reporters (over 500 reportable transactions in a year). The changes include reviewing 

these data before the start of an examination, segmenting sampling techniques by the size 

of the institution's mortgage activity, and refining statistical methods to increase 

confidence in sampling results. 
121 


80875.078

Based on the experience implementing the 2011 changes and a review of our supervisory 

strategy, the FDIC implemented further refinements in October 2012 to our HMDA 

examination and enforcement procedures. Key changes include: 1) revising sampling 

techniques for small reporters (less than 100 reportable transactions) to avoid triggering 

additional file review for minor errors; and 2) limiting imposition of civil money 

penalties to situations where an institution's level of errors is significantly above the 

threshold for resubmission and the violations are deemed egregious. We are monitoring 

the results of these changes to ensure we achieve our supervisory objectives of accurate 

data reporting in an efficient and reasonable manner. 

As part of the FDIC's Community Banking Initiative, the FDIC undertook 

comprehensive reviews of examination and rulemaking processes and has taken several 

actions to address findings from those reviews. For example, we have developed a tool 

that generates pre-examination request documents tailored to the bank's specific 

operations and business lines. In addition, we revised the classification system for citing 

violations in Compliance Reports of Examination to better communicate to institutions 

the severity of violations and provide more consistency in the classification of violations. 

We also have modified our Financial Institution Letters (FIL), the vehicle we use to alert 

banks to any regulatory changes or guidance, to include a section making clear the 

applicability to smaller institutions (under $1 billion). 

Q4: Representatives from the FDIC often mention the FDIC ombudsman as a way for 

FDIC supervised institutions to appeal the decision of an examiner. Please describe the 

different avenues FDIC supervised institution can appeal a deeision by an examiner. 

A4: The FDIC provides the insured financial institutions it supervises a variety of formal and 

informal processes for appealing examination results. These processes include: an informal 

resolution of issues through the field and regional supervision staffs; an informal resolution of 

issues through the FDIC's Ombudsman; formal and informal reviews by the appropriate Division 

Director; and ultimately a formal appeal to a FDIC Board-level committee, the Supervisory 

Appeals Review Committee (SARC), in appropriate circumstances. The FDIC outlined these 

formal and informal appeals processes to financial institutions in the FIL Reminder on FDIC 

Examination Findings, dated March 1,2011, and in an article published in the Summer 2012 

issue of Supervisory Insights entitled "The Risk Management Examination and Your Community 

Bank." 

Both the FIL and the Supervisory Insights article encourage institutions to discuss concerns 

about examination findings, assigned ratings, or other supervisory determinations with the 

examiner-in-charge or the appropriate field or regional office. They also remind financial 

institutions of the option to contact the FDIC's Office of the Ombudsman, which serves as an 

independent, confidential, and neutral liaison. When contacted, the Ombudsman'S office 

explains and, as appropriate, assists institutions with questions or concerns related to appeals of 

material supervisory determinations; answers questions about FDIC policies and procedures and 

concerns regarding open or closed bank matters; and assists with complaints regarding FDIC 

operations, employees, and contractors. The Ombudsman also can help resolve complaints 

against the FDIC by listening, clarifying the issues, and working with both parties to reach an 
122 


80875.079

acceptable solution. The FDIC Ombudsman docs not take sides and seeks to ensure a fair 

process. 

The FIL also communicates the formal appeals process outlined in the Amendments to the 

Guidelines for Appeals of Material Supervisory Determinations (adopted April 13,2010). Under 

these guidelines, a financial institution may file a request for review of a material supervisory 

determination with the Division Director. The Director issues a written determination, including 

the grounds for that determination, within 45 days of receipt of request. If the institution is not 

satisfied with the results of this review, it can appeal the Director's decision to the SARC. The 

SARC will review the appeal for consistency with the policies, practices, and mission of the 

FDIC and the overall reasonableness of, and the support offered for, the positions advanced. The 

SARC will notify the institution, in writing, of its decision concerning the disputed material 

supervisory determination(s) within 45 days from thc date the SARC meets to consider the 

appeal. 

Q4(a): Please provide the subcommittee with a statistical breakdown of how many 

financial institutions pursued either an informal or formal appeal with the FDIC in 2012. 

A4(a): In 2012, approximately 347 industry representatives contacted the FDIC Ombudsman to 

request assistance. Of this number, 20 lodged complaints about the FDIC. Other informal 

channels encourage financial institutions to resolve disputes during the examination at the field 

office level and review process at the regional office level; however, these discussions are not 

tracked. With respect to formal appeals in 2012, nine institutions filed a Request for Review 

with the Director of the Division of Risk Management Supervision, and one institution filed an 

Appeal with the SARC. During 2012, no institutions filed a Request for Review with the 

Director of Depositor and Consumer Protection or filed an Appeal with the SARC. 

Q4(b): Please include a statistical analysis of the ombudsman decision including the 

number of appeals that were ruled in favor of the institution, the number ruled in favor of 

the agency, and split decisions. 

A4(b): The Ombudsman resolved or mitigated the 20 complaints (referenced in our response 

above) or referred them to another party for resolution when appropriate. In the majority of 

these cases, the Ombudsman was able to provide assistance by explaining FDIC policy and 

procedures and identifying appropriate FDIC contacts. With respect to the nine Requests for 

Review filed with the Director of the Division of Risk Management Supervision, three were 

denied; one was returned because the bank self-liquidated; one was a split decision, with the 

RMS Director finding in favor of the bank on some issues and in favor of the region in others; 

and four were withdrawn, after the material supervisory determinations in dispute were 

satisfactorily resolved in favor of the banks by the applicable regional office. The SARC appeal 

was denied. The FDIC Office oflnspector General's August 2012 Report entitled The FDIC's 

Examination Process for Small Community Banks reviewed the appeals process and slated that 

"determinations provide evidence that the SARC is considering the underlying merits of both the 

institution and the examiners' positions and, as such, is considering the substance of the 

disagreement and not simply whether or not the examiners followed established policy." 
123 


80875.080

Response to Questions from 

the Honorable Steve Pearce 

by the Federal Deposit Insurance Corporation 

QI: Over the past two years the FDIC has taken a position that there is a misconception 

that regulators require the write downs of loans to creditworthy buyers. In recent 

testimony, FDIC directors reasserted that they "are not aware of, and the OIG did not 

identify, any instances where a bank failed due to supervisor required write-downs of 

current loans - so-called "paper losses." I would like the FDIC to provide proof of this 

misconception. 

AI: Public Law 112-88, signed into law on January 3, 2012, required the FDIC Office of 

Inspector General to conduct a study that included a review of the impacts of significant losses 

arising from current loans. In its January 2013 Report to Congress titled Comprehensive Study 

on the Impact of the Failure of Insured Depository Institutions (OlG Report), the Office of 

Inspector General did not note improper classification of performing loans. The OIG Report 

states, "We did not identify any instance of an institution failure caused by significant losses 

arising from loans for which all payments of principal, interest, and fees were current." They 

also found that " ... examiners usually did not classify as loss loans that the institution claimed 

were paying as agreed without justification ... " Additionally, the OIG Report indicated that, 

"Examiners most frequently supported loan charge-offs on current loans for conditions such as 

lack of performance and lack of guarantor support (35 percent of the classification reasons), 

repayment capacity such as inadequate cash flow or unknown ability to service debt (32 percent 

of the classification reasons), or weak or inadequate collateral or collateral-dependent loans (25 

percent of the classification reasons)." The OIG Report states that "[aggressive growth, asset 

concentrations, poor underwriting, and deficient credit administration coupled with declining real 

estate values lied to write-downs and charge-offs on delinquent and non-performing real estate 

loans a~ opposed to examiner-required write-downs or fair value accounting losses." 

It is important to recognize that some loans may be reflected as "current" on a bank's books due 

to the inappropriate use of extensions, renewals, interest reserves, capitalization of accrued 

interest, below market terms, or failure to consider the borrower's ability to repay for the 

foreseeable future on a global cash flow basis. Examiners are instructed in the Risk Management 

Manual of Examination Policies to assess each loan on the basis of its own characteristics and 

consider multiple factors that go beyond payment status, such as: the risk of the project being 

financed; the nature and degree of collateral security; the character, capacity, financial 

responsibility, and record of the borrower; and the feasibility and probability of the loan's 

orderly liquidation in accordance with specified terms. 

Q2: Please provide information as to how the FDIC evaluates the ability of the borrower to 

rcpay. 

A2: As statcd in the FDIC Risk Management Manual of Examination Policies, ability of the 

borrower to repay generally means the borrower must have the earnings or liquid assets 

sufficicnt to meet interest payments and provide for reduction or liquidation of principal as 

agreed at a reasonable and foreseeable date. 
124 


80875.081

Q3: Please provide information on loans that have been or are being written down across 

the United States from 2011- to present date_ Please provide this information nationally, 

and specifically for the state of New Mexico_ 

A3: The following table provides charge-off data for the nation and for the slale of New Mexico. 

The charge-off data are provided as a dollar amount and as a percentage of loans. 

National New Mexico 

2011 Net Charge-Offs ($) $113.2 c-bccill-io-n------·----:S-9-9-.5-m-c-ill---io·-n------

2011 Net Charge-Off Rate 1.55% 1.17% 

2012 Net Charge-Offs ($) $82.8 billion $51.9 million 

_---'2::.0::;1::;2:::N..:.e::.t:::C::.:h:.:a"'rg"'e=--;:.O.:.;ff...:R.:.;a.:.:te=-___ 1.10% 0.61% 
125 


80875.082

Response to Questions from 

the Honorable Lynn Westmoreland 

by the Federal Deposit Insurance Corporation 

Ql: Please provide the perceutage of payouts to date for each SLA (shared loss agreement) 

AI: A chart of Shared Loss Agreements and the percentage of claims paid from the initially 

covered assets for each agreement is attached. 

Q2: How many banks with pre-2007 UFIRs rating of 1 and 2 have failed from 2008-2013? 

Please provide a list of these failed banks. 

A2: Of the 470 banks and thrifts that were closed by their chartering authorities from January 1, 

2008 through April 12,2013, where the FDIC was appointed receiver, 401, or 85 percent, were 

1- or 2-rated on December 31, 2006. The sudden declines in real estate values during the crisis 

caused rapid deterioration in the financial condition of many depository institutions. In its 

Comprehensive Study on the Impact of the Failure of Insured Depository Institutions, the FDIC 

Office of Inspector General found that many banks that failed expanded lending and relaxed 

underwriting standards "to keep pace with rapid growth in construction and real cstate 

development, rising mortgage demands, and increased competition." When the financial crisis 

hit and real estate values declined precipitously (according to the Inspector Gcneral's report, 

commercial real estate values declined by more than 42 percent), many institutions with rapid 

growth in construction and real estate development lending faced significant losses that resulted 

in rapid deterioration in financial condition, and ultimately, in failure. 

A list of the failed banks that were 1- or 2- rated as of year-end 2006 is attached. 
126 


80875.083

Shared-Loss Agreements 

Includes all claim payments through March 31,2013 

Claim Payment as a % of Claim Payment as a % of 

Failed Bank initial covered assets initial covered assets under 

under single family SLA non-single family SLA 

IndyMac Federal Bank, FSB 3% NIA 

Downey Savings & Loan Assn 1% N/A 

PFF Bank & Trust 5% 18% 

Suburban Federal Savings Bank 6% 28% 

County Bank 2% 8% 

Alliance Bank 11% .14% 

Pinnacle Bank of Oregon 0% 12% 

Heritage Community Bank 11% 30% 

Freedom Bank of Georgia 5% 25% 

Colorado National Bank 20% 12% 

Teambank NA 5% 20% 

Cape Fear Bank 4% 10% 

Great Basin Bank of Nevada 2% 7% 

American Sterling Bank 22% 9% 

BankUnrred, FS8 22% 16% 

Strategic Capital Bank 0% 29% 

Cooperative Bank 6% 30% 

First National Bank of Anthony 15% 13% 

Southem Community Bank ~~ 41% 

Neighborhood Community Bank 19'Yo 38% 

Horizon Bank 13% 12% 

Mirae Bank N/A 13% -- Elizabeth State Bank 3% 13% 

Founders Bank -~. 20% 

Rock River Bank 6%) 16% 

The John Warner Bank 0% _._-- 40% 

First State Bank of Winchester 1% 23% ._----- First National Bank of Danville 3% 25% 

Temecula Vallev Bank 0% 0% 

Vineyard Bank 7% 12% 

First Piedmont Bank 3% 33% 

Security Bank of Bibb County Y'lo 22% 

Security Bank of Gv.inett County 43% 51% 

Security Bank of Houston County 8% 18% 

Security Bank of Jones County 9% 29% 

Security Bank of North Futton 3~"'- .. 29% 

Security Bank of North Metro ---- 31% 40% 

Waterford Village Bank 1% 3% 

Community First BanI< 15% 24% 

Mutual Bank 4%. 31% 

Peoples Community Bank 4% 17% 

First State Bank 16% 21% 

Community National Bank of Sarasota County 10% 16% 

Community Bank of Arizona 41% 24% 

Colonial Bank 3% 16% 

Guaranty Bank _6.!o. 5% 

Capital South Bank 9% 14% 

Ebank 14% 34% .- First Coweta 21% 33% 

Bradford Bank 2% 16% 

Affinity Bank 4% -_. 14% 

Page1of6 
127 


80875.084

Shared-Loss Agreements 

Includes all claim payments through March 31,2013 

Claim Payment as a % of Claim Payment as a % of 

Failed Bank initial covered assets initial covered assets under 

under single family SLA non-single family SLA 

Mainstreet Bank 13%, 19% 

Vantus Bank 1% 13% 

Brickwell Community Bank 13% ~ Venture Bank 10% 18% 

Irwin Unioo Bank and Trust Company .. _---.2"~ ___ 9% 

Irwin Union Bank, FSB 5% ~ Georgian Bank 10% 26% 

Southern Colorado National Bank 11% 9% 

Jennings State Bank 19% 15% 

San Joaquin Bank 7% 11% 

American United Bank NIA _;>()"I' 

First OuPage Bank 9% 31% 

Flaqship National Bank 17% 25% 

Riverview Communitv Bank 9% J.~,,-

California National Bank 1% 8% 

San Diego National Bank 2% 7% 

Bank USA, NA 8% .E~ Community Bank of Lemont 14% 36% 

North Houston Bank 14% 10% 

Pacific National Bank 2% 7'~ 

Park National Bank 4% 9% 

Citizens National Bank _0"1"-_____ 5% 

Madisonville State Bank NIA .. 3% 

Prosperan Bank 12% 23% 

United Security Bank 31% 21% 

United Commercial Bank 1% 8% 

CentulY Bank, FSB 19% 40% 

Orion Bank 7% ~~ Commerce Bank of Southwest Florida 25% 20% 

The Buckhead Community Bank 32% 31% 

Benchmark Bank 6% .. 30% 

AmTrust Bank ...§.~ 6% 

Greater AUantic Bank 0% ..!~ First Security National Bank 19% 30% 

Republic Federal Bank, N.A. 3% 10% 

Vallev Capital Bank, N.A. 32% 38% 

SolutionsBank 7% ~ 

Imperial Capital Bank 1% 15% 

New South Federal Savings Bank 7% 20% 

Peoples First Community Bank 8% 34% 

First Federal Bank of California 0% ~"I,,-

Horizon Bank 3% 16% 

SI. Stephen State Bank 5% 19% 

Town Community Bank and Trust 18% 25% 

ank 4% 7% 

Premier American Bank 5% 20% 

harter Bank 2% 9% -- Columbia River Bank 7% 10% ----- First ReQional Bank NIA 12% 

American Marine Bank 6% 10% 

First National Bank of Georgia 16% 23% 

Page 2 016 
128 


80875.085

Shared-Loss Agreements 

Includes all claim payments through March 31, 2013 

Claim Payment as a % of Claim Payment as a % of 

Failed Bank initial covered assets initial covered assets under 

under single family SLA non-single family SLA 

Community Bank & Trust 20% 32'% 

Florida Community Bank 6% ~.- -- I st American State Bank of Minnesota NiA 6% 

Geome Washington Savings Bank 12% 34% 

La Jolla Bank, FSB 5% 13% 

Marco Community Bank - 8% 14%-------

Carson River Community Bank 6% 6% 

Rainier Pacific Bank 2% ]~ Bank of Illinois 5% 10% -- Sun American Bank 9% 17% 

LibertvPointe Bank 0% !% 

The Park Avenue Bank 1% 18% 

Statewide Bank 8% 9% 

Old Southern Bank 26% -.. ~ Centwy Security Bank 0% 27% 

Appalachian Community Bank 13% 38% 

American National Bank NIA .. 5-"/0 

Bank of Hiawassee 6% 21% 

First Lowndes Bank 8% 5% 

Desert Hills Bank 25% 23% 

Kev West Bank 5% 3% 

Mcintosh Commercial Bank 20% .42,% 

Unity National Bank 7% 20% 

Beach First National Bank .9% 24% 

AmericanFirst Bank 11% 16% 

BuUer Bank 2% 15% 

City Bank 1% ~ First Federal Bank of North Florida 3% 12% 

Innovative Bank NiA 9% 

Riverside National Bank of Florida 3% -~ Tamalpais Bank 0% 0% 

Amcore Bank, National Association 3% 13% 

Broadway Bank 14% 28% 

Lincoln Park Savinos Bank 7% 26% 

New Centul'l Bank 10% 30% 

Peotone Bank and Trust Company 11% _~5'Vo 

Wheatland Bank 21% 31% 

BC National Banks 2% 8% 

CF Bancorp 10% ~'Vo_ 

Champion Banks 8% 20% 

Frontier Bank 4% 17% 

Eurobank 1% ~ R-G Premier Banks of Puerto Rico 2% 20% 

Western bank Puerto Rico 1% 14% 

1 st PacifIC Bank of California 8% 4% 

Towne Bank of Arizona 40% 22% 

Midwest Bank and Trust Company 4% 8% 

New Liberty Bank 3% ~ Satilla Community Bank 11% 19% 

Southwest Community Bank 19% ~ Bank of Florida - Southeast 0% 0% 

Page 3 of 6 
129 


80875.086

Shared-Loss Agreements 

Includes all claim payments through March 31, 2013 

Claim Payment as a % of Claim Payment as a % of 

Failed Bank initial covered assets initial covered assets under 

under single family SLA non-single family SLA 

Bank of Florida· Southwest 0% 0% -- Bank of florida· Tampa Bav 0% 0% 

Granite Community Bank, Nalional Association 5% 12% 

Sun West Bank 17% 31% 

Tiemne Bank 3% 9% 

Washin~ton First Inlemational Bank .]~ 14% 

Nevada Security Bank 3% 19% 

High Desert Stale Bank 13% 22% 

Peninsula Bank 11% 37% 

USA Bank 13% ~, 

Home National Bank 10% 19% 

Mainstreet SavinQs Bank, FSB 3% 23% 

Metro Bank of Dade County 7% 16% 

Olde Cypress Community Bank 5% 17% 

T umbeny Bank 4% -~ Woodlands Bank 8% 18% 

First National Bank of the South 7% 12% 

Crescent Bank and Trust Comoanv 7% ._31'% 

Home Valley Bank 4% 13% 

SouthwestUSA Bank 18% 29% 

Stertin~ Bank 6% J8Y, 

Williamsburo First National Bank 4% 7% 

Bayside Savings Bank 13% 20% 

Coastal Community Bank 12% 18% .. Libertybank 9% 14% 

Northwest Bank and Trust 2% 160/, 

The Cowlitz Bank 10% 2% 

Ravenswood Bank 8% ~ Palos Bank and Trust Company 1% 23% 

Butte Community Bank 8% 9% 

Community National Bank al Bartow 10% 6% .. - Independent Nationat Bank 2% 8% 

Los Padres Bank 4% ---~13% ---

Pacific State Bank 9% 14% 

Shorebank 4% 14% 

Horizon Bank 13% 16% 

The Bank of Em· ay 13% .~ First Commerce Community Bank 15% 27% 

ISN Bank 5% 14% 

The Peoples Bank 6% 22% 

Haven Trust Bank Florida 5% 18% 

North County Bank 8% 10% 

Shoreline Bank 13% 4% 

Wakulla Bank 3% 4% 

Premier Bank 4% 15% 

Security Savings Bank, F.S.B. 2% 12% 

Weslhridge Bank and Trust 10% .2~ First Bank of Jacksonville 4% 6% 

First Suburban National Bank 1% ..2'Y'. 

Hillcrest Bank 0% 12% 

Proaress Bank of Florida 5% 26% 

Page40f6 
130 


80875.087

Shared-Loss Agreements 

Includes all claim payments through March 31, 2013 

Claim Payment as a % of Claim Payment as a % of 

Failed Bank initial covered assets initial covered assets under 

under single family SLA non-single family SLA 

The First National Bank of Barnesville 12% ~o/~ 

K Bank 7% 27% 

Western Commercial Sank NlA 15% 

Copper Star Sank 16% 22% 

Darby Bank & Trust Company 9% 21% 

Tifton Banking Company 6% 14% 

Alleoiance Bank Of North America 4% 2% - First Banking Center 4% 13% 

Gulf State Community Bank 6% 14% 

Earthstar Bank 2% 1% 

Paramount Bank 10% 17% 

Appalachian Community Bank, F.S.B. 8% 15%, 

Chestatee State Bank 3% 23% 

United Americas Bank 10% 28% 

The Bank Of Miami 4% 6-'~ First Commercial Bank Of Florida 11% 17% 

Legacy Bank 6% 22% 

Oglethorpe Bank 9% 20% 

CommunitySouth Bank & Trust N/A 9% 

Bank Of Asheville (The) 5% 12% 

United Westem Bank 1% 12% 

American Trust Bank 0% 3% 

Community First Bank-Chicago 9% 16% 

North Georoia Bank 6% 22% 

Peoples State Bank 2% 21% 

Citizens Bank Of Effingham 2% 14% 

Habersham Bank 3% 32% 

San Luis Trust Bank, Fsb 12% .-- . .16~ 

legacy Bank 2% 5% 

The Bank Of Commerce 5% 18% 

Nevada Commerce Bank 1% 25% 

Western Sprinos National Bank & Trust N/A 15% 

Bartow County Bank 2% ..17,/0 

Her~a<1e Banking Group 1% 3% 

New Horizons Bank 9% 20% 

Nexity Bank 4% 17% 

Superior Bank 1% 20% 

Community Central Bank 6% 13% 

Cortez Community Bank 5% 18% 

First Choice Community Bank 1% 20% 

First National Bank Of Central Florida 1% 170/0 

Park Avenue Bank (The) 1% 18% 

Coastal Bank 3% 17% 

Atlantic Southem Bank 5% 22% ---- First GecrQia Bankinq Company 2% 13% 

Summit Bank 11% 14% 

First Heritaqe Bank 10% ~ 

... 3% 9% 

2% 20% 

ntain Heritaoe Bank 7% ~% 

Colorado Capitat Bank 3% 28% 

Page 50f6 
131 


80875.088

Shared-Loss Agreements 

Includes all claim payments through March 31,2013 

Claim Payment as a % of Claim Payment as a % of 

Failed Bank initial covered assets initial covered assets under 

under single family SLA non-single family SLA 

First Chicago Bank & Trust 9% 19% 

HiQh Trust Bank 5% 18% --- One Georgia Bank 5% 11% 

BankMeridian, NA 5% 15% 

Inteqra Bank, National Association 1% 9% 

The First National Bank Of Olathe 2% 25% 

First Southern National Bank 2% 7% 

l ydian Private Bank 3% 8% 

Creekside Bank 13% 25% 

Patriot Bank Of GeorQia 6%_ 30% 

The First National Bank Of Florida 4%) 18% 

Bank Of The Commonwealth 2% 10% 

The Riverbank I 1% 12% 

Sun Security Bank 10% 16% 

Blue Ridge Savings Bank, Inc, 11% 15% 

Piedmont Community Bank 0% 32% 

Community Banks Of Colorado N/A 17% 

Community Capital Bank 1% 25% 

Decatur First Bank 7% 12% 

Old Harbor Bank 4% 7% 

SunFirst Bank 0% 13% 

Premier Community Bank Of The Emerald Coast 6% 18% -- Central Florida State Bank 1% 10% 

The First State Bank 7% 25%> -- First Guaranty Bank And Trust Co, Of Jacksonville 0% 14%J 

Patriot Bank Minnesota NIA 0% 

Charter National Bank And Trust 3% 19% 

Central Bank of Georgia 4% 8% 

Covenant Bank & Trust 1% 11% ------- Inter Savings Bank, F sb 3% 3%1 

Plantation Federal Bank N/A 9% 

Waccamaw Bank 0% -:-----~.!:>---- Putnam State Bank NIA 10% 

Security Exchange Bank NIA 21% 

FIRST CHEROKEE STATE BANK N/A 11% 

GEORGIA TRUST BANK N/A 6% 

HEARTLAND BANK NIA 2% 

Jasper Banking Company N/A 6% 

Truman Bank NIA 4% 

First United Bank 0% 0% 

Excel Bank NIA 0% 

~ozarks 0% 0% 

Payments as a percent of 

initial assets under SLA 6% 15% 

Disclaimer: 

The information presented in the table above has been compiled from loan data supplied by Assuming Institutions as part 

of their reporting requirements under their respective Shared Loss Agreements. This information has not been subject to 

audit and no representation is made as to "the completeness or accuracy of the information. 

Page 6 of6 
132 


80875.089

Failed Banks with pre-2007 UFIRs 1 and 2 

Name City State 

CAPITALSOUTH BANK BIRMINGHAM AL 

NEXITY BANK BIRMINGHAM AL 

SUPERIOR BANK BIRMINGHAM Al 

FIRST LOWNDES BANK ,FORT DEPOSIT Al 

NEW SOUTH FSB IRONDALE AL 

COLONIAL BANK NATIONAL ASSN MONTGOMERY Al 

'ALABAMA TRUST BANK NA SYLACAUGA AL 

FIRST SOUTHERN BANK BATESVILLE AR 

ANB FINANCIAL NATIONAL ASSN BENTONVILLE AR 

FIRST STATE BANK FLAGSTAFF ,AZ 

UNION BANK NATIONAL ASSN GILBERT AZ 

CACTUS COMMERCE BANK GLENDALE AZ 

TOWNE BANK OF ARIZONA MESA AZ 

BANK USA FSB PHOENIX AZ 

DESERT HillS BANK PHOENIX AZ 

WESTERN NATIONAL BANK PHOENIX AZ 

SUMMIT BANK PRESCOTT AZ 

COPPER STAR BANK SCOTTSDALE AZ 

FIRST ARIZONA SAVINGS A FSB SCOTTSDALE AZ 

LEGACY BANK SCOTTSDALE AZ 

; ,-

SAN JOAQUIN BANK BAKERSFIELD CA 

,FIRST BANK OF BEVERLY HilLS CALABASAS :CA 

BUTTE COMMUNITY BANK CHICO CA 

ALLIANCE BANK CULVER CITY CA 

GRANITE COMMUNITY BANK N A GRANITE BAY ,CA 

IMPERIAL CAPITAL BANK lAJOLLA CA 

LA JOLLA BANK FSB lA JOLLA CA 

CALIFORNIA NATIONAL BANK LOS ANGELES CA 

SECURITY PACIFIC BANK LOS ANGELES CA 

COUNTY BANK MERCED CA 

CHARTER OAK BANK NAPA CA 

CITIZENS BANK OF NORTHERN CA NEVADA CITY CA 

FIRST HERITAGE BANK N A NEWPORT BEACH :CA 

, PALM DESERT NATIONAL BANK PALM DESERT CA 

CANYON NATIONAL BANK PALM SPRINGS CA 

INDYMAC BANK FSB PASADENA CA 

PFF BANK& TRUST POMONA CA 

VINEYARD BANK NATIONAL ASSN RANCHO CUCAMONGA CA 

1ST CENTENNIAL BANK ,REDLANDS CA 

PACIFIC COAST NATIONAL BANK SAN CLEMENTE CA 

1ST PACIFIC BANK OF CA SAN DIEGO CA 

SAN DIEGO NATIONAL BANK SAN DIEGO CA 

CALIFORNIA SAVINGS BANK SAN FRANCISCO CA 

UNITED COMMERCIAL BANK SAN FRANCISCO CA 
133 


80875.090

Failed Banks with pre-2007 UFIRs 1 and 2 

TAMALPAIS BANK SAN RAFAEL CA 

LOS PADRES BANK SOLVANG CA 

SONOMA VALLEY BANK SONOMA CA 

PACIFIC STATE BANK STOCKTON :CA 

TEMECULA VALLEY BANK TEMECULA CA 

AFFINITY BANK VENTURA CA 

BANK OF CHOICE COLORADO ARVADA .CO 

COLORADO CAPITAL BANK CASTLE ROCK CO 

COLORADO NATIONAL BANK COLORADO SPRINGS CO 

UNITED WESTERN BANK DENVER CO 

NEW FRONTIER BANK GREELEY CO 

COMMUNITY BANKS OF COLORADO GREENWOOD VlllAG CO 

FIRSTIER BANK LOUISVILLE CO 

SOUTHERN COLORADO NB PUEBLO CO 

SIGNATURE BANK WINDSOR CO 

SOUTHSHORE COMMUNITY BANK APOLLO BEACH FL 

TURN BERRY BANK AVENTURA Fl 

COMMUNITY NB OF BARTOW BARTOW FL 

CENTRAL FLORIDA STATE BANK BELLEVIEW FL 

SUN AMERICAN BANK BOCA RATON FL 

BANK OF BONIFAY BONIFAY FL 

FIRST PRIORITY BANK . BRADENTON FL 

FLAGSHIP NATIONAL BANK BRADENTON FL 

FREEDOM BANK BRADENTON Fl 

HORIZON BANK . BRADENTON .FL 

CORTEZ COMMUNITY BANK BROOKSVILLE FL 

RIVERSIDE BK GULF COAST CAPE CORAL FL 

GULF STATE COMMUNITY BANK CARRABElLE ,FL 

OLD HARBOR BANK CLEARWATER FL 

AMERICANFIRST BANK CLERMONT FL 

OLDE CYPRESS COMMUNITY BANK CLEWISTON FL 

BANKUNITED FSB CORAL GABLES FL 

WAKULLA BANK CRAWFORDVILLE FL 

GULFSOUTH PRIVATE BANK DESTIN FL 

PENINSULA BANK ENGLEWOOD Fl 

BANK OF FLORIDA SOUTHEAST FORT LAUDERDALE FL 

COMMERCE BANK OF SW FL FORT MYERS FL 

RIVERSIDE NB OF FLORIDA FORT PIERCE FL 

FIRST BANK OF JACKSONVILLE JACKSONVILLE FL 

FIRST GUARANTY B& T JACKSONVI JACKSONVILLE FL 

INTEGRITY BANK JUPITER FL 

KEY WEST BANK KEY WEST FL 

STERLING BANK LANTANA FL 

HERITAGE BANK OF FLORIDA LUTZ :FL 

MARCO COMMUNITY BANK MARCO ISLAND FL 
134 


80875.091

Failed Banks with pre-2007 UFIRs 1 and 2 

COASTAL BANK MERRITT ISLAND Fl 

METRO BANK OF DADE COUNTY MIAMI 'Fl 

PREMIER AMERICAN BANK MIAMI FL 

FIRST NB OF FLORIDA MILTON FL 

BANK OF FLORIDA SOUTHWEST NAPLES FL 

ORION BANK NAPLES FL --

PARTNERS BANK -NAPLES FL 

SECURITY BANK NATIONAL ASSN NORTH LAUDERDALE eFL 

INDEPENDENT NATIONAL BANK OCALA FL 

OCALA NATIONAL BANK OCALA FL 

FIRST COMMERCIAL BANK OF FL ORLANDO FL -, _.,,-

OLD SOUTHERN BANK ORLANDO Fl 

FIRST FEDERAL BANK OF N FL ,PALATKA Fl 

PUTNAM STATE BANK PALATKA FL 

LYDIAN PRIVATE BANK PALM BEACH .Fl " _. - ., ,-". 

PEOPLES FIRST COMMUNITY BANK PANAMA CITY FL - ~ . '--'." - . --- ." ---

COASTAL COMMUNITY BANK PANAMA CITY BEAC FL 

SUNSHINE STATE CMTY BANK ,PORT ORANGE FL 

BAYSIDE SAVINGS BANK PORT SAINT JOE FL . - . .. FIRST PEOPLES BANK PORT SAINT LUCIE FL 

CENTURYB"NK A FSB SARASOTA FL 

FIRST STATE BANK SARASOTA FL 

LANDMARK BANK OF FLORIDA SARASOTA FL 

BANK OF FLORIDA TAMPA BAY TAMPA 'FL 

FIRST COML BK OF TAMPA BAY TAMPA 'FL .. ~ - _ .. - - --~ 

COMMUNITY NB SARASOTA CNTY VENICE Fl . . _. ".. -_ .. 

FIRST NB OF CENTRAL FLORIDA ,WINTER PARK .FL 

ENTERPRISE BANKING CO ABBEVILLE GA 

NORTHWEST BANK&TRUST ACWORTH GA _."-

MONTGOMERY BANK& TRUST 'AILEY 'GA , • ~ ""0 _. ".. _ '.' ~ 

ALPHA BANK& TRUST ALPHARETTA -GA '. , -."--

INTEGRITY BANK ALPHARETTA GA 

SECURITY BANK OF N FULTON ALPHARETTA GA 

BANKERS BANK ATLANTA ;GA 

BUCKHEAD COMMUNITY BANK ATLANTA GA 

GEORGIAN BANK ATLANTA :GA 

OMNI NATIONAL BANK ATLANTA GA 

ONE GEORGIA BANK ATLANTA GA 

UNITED AMERICAS BANK NA ATLANTA GA 

FIRST NB OF BARNESVILLE BARNESVILLE GA 

HOMETOWN COMMUNITY BANK BRASELTON :GA 

OGLETHORPE BANK BRUNSWICK GA 

GEORGIA TRUST BANK BUFORD GA 

MCINTOSH COMMERCIAL BANK CARROLLTON GA 

WEST GEORGIA NATIONAL BANK CARROLLTON GA 
135 


80875.092

Failed Banks with pre-2007 UFIRs 1 and 2 

BARTOW COUNTY BANK CARTERSVILLE GA 

UNITY NATIONAL BANK CARTERSVillE GA 

HABERSHAM BANK ClARKESVILLE GA 

MOUNTAIN HERITAGE BANK CLAYTON GA 

FREEDOM BANK OF GEORGIA COMMERCE (jA 

COMMUNITY BANK&TRUST CORNELIA GA 

CHESTATEE STATE BANK DAWSONVILLE GA 

DECATUR FIRST BANK DECATUR GA 

GLOBAL COMMERCE BANK DORAVILLE GA 

FIRST COMMERCE CMTY BANK DOUGLASVILLE GA 

CENTURY SECURITY BANK DULUTH GA 

HAVEN TRUST BANK DULUTH GA 

NEW HORIZONS BANK EAST ELLIJAY GA 

APPALACHIAN COMMUNITY BANK ELLIJAY GA 

BANK OF ElUlA Y ELLIJAY GA 

FIRST GEORGIA BANKING CO FRANKLIN GA 

GORDON BANK GORDON GA 

PIEDMONT COMMUNITY BANK GRAY GA 

SECURITY BANK OF JONES CNTY GRAY GA 

BANK OF HIAWASSEE HIAWASSEE GA 

MCINTOSH STATE BANK JACKSON GA 

CRESCENT BANK& TRUST CO JASPER GA 

JASPER BANKING CO JASPER GA 

COMMUNITY CAPITAL BANK JONESBORO .GA 

FRONTIER BANK LAGRANGE GA 

AMERICAN UNITED BANK LAWRENCEVILLE GA 

COMMUNITY BANK LOGANVILLE GA 

AtlANTIC SOUTHERN BANK MACON GA ,-

SECURITY BANK OF BIBB COUNTY MACON GA 

SECURITY EXCHANGE BANK MARIETIA GA 

FIRST BANK OF HENRY COUNTY MCDONOUGH GA 

FIRST COWETA BANK NEWNAN GA 

NEIGHBORHOOD COMMUNITY BANK NEWNAN GA 

FIRST SECURITY NATIONAL BANK NORCROSS GA 

SECURITY BK OF HOUSTON CNTY PERRY GA 

TATINAlL BANK REIDSVILLE GA 

COVENANT BANK&TRUST ROCK SPRING GA 

COMMUNITY BANK OF ROCKMART ROCKMART GA 

AMERICAN SOUTHERN BANK ROSWELL GA 

AMERICAN TRUST BANK ROSWELL GA 

SATILLA COMMUNITY BANK SAINT MARYS GA 

FIRST NATIONAL BANK SAVANNAH GA 

UNITED SECURITY BANK SPARTA GA 

CITIZENS BANK OF EFFINGHAM SPRINGFIELD GA 

FIRST SOUTHERN NATIONAL BANK STATESBORO GA 
136 


80875.093

Failed Banks with pre-2007 UFIRs 1 and 2 

FIRST STATE BANK STOCKBRIDGE GA 

FIRSTCITY BANK STOCKBRIDGE GA 

SOUTHERN HORIZON BANK STOCKBRIDGE GA 

PATRIOT BANK OF GEORGIA SUWANEE GA 

SECURITY BK OF GWINNETT CNTY SUWANEE GA 

TIFTON BANKING CO TIFTON GA 

PARK AVENUE BANK VALDOSTA GA 

DARBY BANK & TRUST CO VIDALIA GA 

COMMUNITY BANK OF WEST GA VILLA RICA GA 

NORTH GEORGIA BANK WATKINSVILLE GA 

FIRST PIEDMONT BANK WINDER GA 

PEOPLES BANK WINDER GA 

CREEKSIDE BANK WOODSTOCK GA 

FIRST CHEROKEE STATE BANK WOODSTOCK GA 

SECURITY BANK OF NORTH METRO WOODSTOCK GA 

POLK COUNTY BANK JOHNSTON IA 

FIRST FEDERAL BANK SIOUX CITY IA 

FIRST BANK OF IDAHO FSB KETCHUM 10 

COUNTRY BANK ALEDO IL 

BENCHMARK BANK AURORA IL 

NATIONAL BANK OF COMMERCE BERKELEY IL 

STRATEGIC CAPITAL BANK CHAMPAIGN IL 

BROADWAY BANK CHICAGO IL 

COMMUNITY FIRST BANK CHICAGO .CHICAGO IL 

CORUS BANK NATIONAL ASSN CHICAGO IL 

FIRST EAST SIDE SAVINGS BANK CHICAGO IL 

LINCOLN PARK SAVINGS BANK CHICAGO IL 

NEW CENTURY BANK CHICAGO IL 

NEW CITY BANK CHICAGO IL 

PARK NATIONAL BANK CHICAGO IL 

RAVENSWOOD BANK CHICAGO IL 

SHOREBANK CHICAGO IL 

JOHN WARNER BANK CLINTON IL 

.. FIRST UNITED BANK CRETE IL 

FIRST NB OF DANVILLE DANVILLE Il 

MERIDIAN BANK ELDRED IL 

ELIZABETH STATE BANK ELIZABETH IL 

MIDWEST BANK&TRUST CO ELMWOOD PARK IL 

FIRST CHOICE BANK GENEVA IL 

HERITAGE COMMUNITY BANK GLENWOOD IL 

. MUTUAL BANK HARVEY Il 

CHARTER NATIONAL BANK&TRUST HOFFMAN ESTATES IL 

FIRST CHICAGO BANK& TRUST ITASCA IL 

COMMUNITY BANK OF LEMONT ,LEMONT IL 

BANK OF LINCOLNWOOD LINCOLNWOOD Il 
137 


80875.094

Failed Banks with pre-2007 UFIRs 1 and 2 

CITIZENS NATIONAL BANK MACOMB IL 

FIRST SUBURBAN NATIONAL BANK MAYWOOD IL 

BANK OF ILLINOIS NORMAL IL 

INTERSTATE BANK OAK FOREST IL 

ROCK RIVER BANK OREGON IL 

GEORGE WASHINGTON SB ORLAND PARK IL 

PALOS BANK&TRUST CO PALOS HEIGHTS IL 

PEOTONE BANK&TRUST CO PEOTONE IL 

CITIZENS FIRST NATIONAL BANK PRINCETON IL 

AMCORE BANK NATIONAL ASSN ROCKFORD IL 

FARMERS &TRADERS STATE BANK SHABBONA ,IL 

BANK OF SHOREWOOD SHOREWOOD IL 

INDEPENDENT BANKERS BANK SPRINGFIELD IL 

VALLEY COMMUNITY BANK ST. CHARLES IL 

WESTERN SPRINGS NB&T WESTERN SPRINGS Il 

FIRST DUPAGE BANK WESTMONT IL 

PREMIER BANK WILMETIE IL 

FIRST STB OF WINCHESTER IL WINCHESTER IL 

BANK OF COMMERCE WOOD DALE IL 

FOUNDERS BANK WORTH IL 

IRWIN UNION BANK FSB COLUMBUS IN 

IRWIN UNION BANK& TRUST CO COLUMBUS IN 

INTEGRA BANK NATIONAL ASSN EVANSVILLE IN 

SHELBY COUNTY BANK SHELBYVILLE IN 

FIRST NB OF ANTHONY ANTHONY KS 

HEARTLAND BANK LEAWOOD KS 

FIRST NATIONAL BANK OF OlA OLATHE KS 

SECURITY SAVINGS BANK FSB OLATHE KS 

HILLCREST BANK OVERLAND PARK KS 

SOLUTIONSBANK OVERLAND PARK KS 

TEAM BANK NATIONAL ASSN PAOLA KS 

THUNDER BANK SYLVAN GROVE KS 

COLUMBIAN BANK& TRUST CO TOPEKA KS 

STATEWIDE BANK TERRYTOWN LA 

'BUTLER BANK lOWELL MA 

: 

BAY NATIONAL BANK BALTIMORE MD 

BRADFORD BANK BALTIMORE ,MD 

IDEAL FEDERAL SAVINGS BANK BALTIMORE MD 

AMERICAN PARTNERS BANK BETHESDA ,MD 

BANK OF THE EASTERN SHORE CAMBRIDGE MD 

SUBURBAN FSB CROFTON MD 

K BANK RANDALLSTOWN MD 

HARVEST BANK OF MARYLAND ROCKVILLE MD 

COMMUNITY BANK OF DEARBORN DEARBORN ,MI 

MICHIGAN HERITAGE BANK FARMINGTON HILLS MI 
138 


80875.095

Failed Banks with pre-2007 UFIRs 1 and 2 

PARAMOUNT BANK FARMINGTON HILLS MI 

PEOPLES STATE BANK HAMTRAMCK MI 

COMMUNITY CENTRAL BANK MOUNT CLEMENS MI 

CITIZENS STATE BANK NEW BALTIMORE MI 

MAIN STREET BANK . NORTHVILLE MI 

NEW LIBERTY BANK PLYMOUTH MI 

CITIZENS FIRST SAVINGS BANK PORT HURON MI 

WARREN BANK WARREN MI 

1ST REGENTS BANK ANDOVER MN 

STATE BANK OF AURORA AURORA MN 

FIRST COMMERCIAL BANK BLOOMINGTON MN 

NORTHWEST COMMUNITY BANK CHAMPLIN MN 

MAINSTREET BANK FOREST LAKE MN 

MARSHALL BANK NATIONAL ASSN HALLOCK MN 

1ST AMERICAN STB OF MN HANCOCK MN 

HOME SAVINGS OF AMERICA LITTLE FALLS MN 

INTER SB FSB D B INTERBANK F MAPLE GROVE MN 

COMMUNITY SECURITY BANK NEW PRAGUE MN 

COMMUNITY NATIONAL BANK NORTH BRANCH MN 

WASHINGTON COUNTY BANK OAKDALE MN 

RIVERVIEW COMMUNITY BANK OTSEGO MN 

HORIZON BANK PINE CiTY MN 

ROSEMOUNT NATIONAL BANK ROSEMOUNT MN 

PINEHURST BANK SAINT PAUL MN 

JENNINGS STATE BANK SPRING GROVE MN 

PATRIOT BANK MINNESOTA WYOMING MN 

RIVERBANK WYOMING MN 

BC NATIONAL BANKS BUTLER .MO 

SUN SECURITY BANK ElliNGTON MO 

GLASGOW SAVINGS BANK GlASGOW MO 

HUME BANK HUME MO 

PREMIER BANK JEFFERSON CITY MO 

BANK OF LEETON LEETON MO 

SOUTHWEST COMMUNITY BANK OZARK MO 

EXCEL BANK SEDALIA MO 

TRUMAN BANK ST.LOUIS MO 

AMERICAN STERLING BANK SUGAR CREEK MO 

COMMUNITY BANK OF THE OZARKS SUNRISE BEACH MO 

HERITAGE BANKING GROUP . CARTHAGE MS 

FIRST NATIONAL BANK ROSEDALE MS 

BANK OF ASHEVILLE ASHEVILLE NC 

BLUE RIDGE SAVINGS BANK INC ASHEVillE NC 

WACCAMAW BANK WHITEVilLE NC 

CAPE FEAR BANK WILMINGTON NC 

COOP BANK WILMINGTON NC 
139 


80875.096

Failed Banks with pre-2007 UFIRs 1 and 2 

TIERONE BANK LINCOLN NE 

SHERMAN COUNTY BANK LOUPClTY NE 

MID CITY BANK INC OMAHA NE 

HIGH DESERT STATE BANK ALBUQUERQUE NM 

CHARTER BANK SANTA FE NM 

FIRST COMMUNITY BANK TAOS NM 

GREAT BASIN BANK OF NEVADA ELKO 'NV 

SILVER STATE BANK HENDERSON iNV 

WASHINGTON MUTUAL BANK HENDERSON NV 

COMMUNITY BANK OF NEVADA LAS VEGAS NV 

NEVADA COMMERCE BANK LAS VEGAS NV 

SECURITY SAVINGS BANK LAS VEGAS NV 

SUN WEST BANK LAS VEGAS NV 

FIRST NB OF NEVADA RENO NV 

NEVADA SECURITY BANK RENO NV 

LlBERTYPOINTE BANK NEW YORK NY 

OHIO SAVINGS BANK FSB CLEVElAND OH 

BRAMBLE SAVINGS BANK MILFORD OH 

AMERICAN NATIONAL BANK PARMA OH 

FIRST STATE BANK OF ALTUS ALTUS OK 

HOME NATIONAL BANK BLACKWELL OK 

FIRST STATE BANK CAMARGO OK 

FIRST NATIONAL BANK OF DAVIS DAVIS OK 

,FIRST CAPITAL BANK GUTHRIE OK 

HOME VALLEY BANK CAVE JUNCTION OR 

lIBERTYBANK EUGENE OR 

COMMUNITY FIRST BANK PRINEVILLE OR 

SILVER FALLS BANK SILVERTON OR 

.COLUMBIA RIVER BANK THE DALLES OR 

ALLEGIANCE BANK OF N AMERICA BALACYNWYD PA 

AMERICAN EAGLE SAVINGS BANK BOOTHWYN .PA 

NOVA SAVINGS BANK PHILADELPHIA PA 

PUBLIC SAVINGS BANK SOUTHAMPTON PA 

EUROBANK HATO REV PR 

R-G PREMIER BANK OF RQ HATO REY PR 

WESTERN BANK PUERTO RICO MAYAGUEZ PR 

BANKMERIDIAN N A COLUMBIA SC 

COMMUNITYSOUTH BANK&TRUST EASLEY SC 

WILLIAMSBURG FIRST NB KINGSTREE SC 

BEACH FIRST NATIONAL BANK MYRTLE BEACH SC 

PLANTATION FEDERAL BANK PAWLEYS ISLAND SC 

FIRST NB OF THE SOUTH SPARTANBURG SC 

TENNESSEE COMMERCE BANK FRANKLIN TN 

BANKEAST KNOXVILLE TN 

FARMERS BANK OF LYNCHBURG LYNCHBURG TN 
140 


80875.097

Failed Banks with pre-2007 UFIRs 1 and 2 

GUARANTY BANK AUSTIN TX 

MILLENNIUM STB OF TEXAS DALLAS TX 

FRANKLIN BANK SSB . HOUSTON :TX .. 

NORTH HOUSTON BANK HOUSTON TX 

LA COSTE NATIONAL BANK LACOSTE TX 

MADISONVILLE STATE BANK MADISONVilLE TX 

FIRST INTERNATIONAL BANK PLANO TX 

SANDERSON STATE BANK SANDERSON TX 

CITIZENS NATIONAL BANK TEAGUE TX 

ADVANTA BANK CORP DRAPER UT 

BARNES BANKING CO KAYSVILLE UT 

AMERICA WEST BANK LAYTON UT 

CENTENNIAL BANK OGDEN JUT 

SUNFIRST BANK SAINT GEORGE UT 

MAGNETBANK SALT LAKE CITY UT 

BANK OF THE COMMONWEALTH NORFOLK VA 

VIRGINIA BUSINESS BANK RICHMOND VA 

NORTH COUNTY BANK ARLINGTON WA 

AMERICAN MARINE BANK BAINBRIDGE ISLAN WA 

HORIZON BANK BELLINGHAM WA 

WESTSOUND BANK BREMERTON WA 

BANK OF WHITMAN COlFAX ;WA 

FRONTIER BANK EVERETT WA 

.VENTURE BANK LACEY WA ... 

COWLITZ BANK LONGVIEW WA ... 

CITY BANK LYNNWOOD WA 

EVERGREEN BANK SEATTLE WA 

WASHINGTON FIRST INTL BANK SEATTLE WA 

SHORELINE BANK SHORElINE WA 

FIRST HERITAGE BANK SNOHOMISH WA 

PIERCE COMMERCIAL BANK TACOMA WA 

RAINIER PACIFIC BANK TACOMA WA 

WESTSIDE COMMUNITY BANK UNIVERSITY PLACE WA 

BANK OF CLARK COUNTY VANCOUVER WA 

FIRST BANKING CENTER BURLINGTON WI 

BADGER STATE BANK CASSVILLE WI 

LEGACY BANK MILWAUKEE WI 

BANK OF ELMWOOD RACINE WI 

EVERGREEN STATE BANK STOUGHTON WI 

MARITIME SAVINGS BANK WEST ALLIS WI 

AMERIBANK INC WELCH WV 

BANK OF WYOMING THERMOPOLIS WY 
141 


80875.098

Hearing: "State of Community Banking: Is the Current Regulatory 

Environment Adversely Affecting Community Financial Institutions?" 

Marcil 20,2013 

FDIC OIG Response to the Question for the Record 

Submitted by Rep. Bill Posey (FL-8) 

Ouestion: On page 59 of the FDIC IG report, you note that "historical cost was proving to be a 

poor measurement approach in inflationary markets." Is it fair to say that impairment accounting 

and fair value accounting is a poor measurement in bubble markets? 

FDIC OIG Response: The referenced statement from our report was an excerpt from a 

December 2011 Federal Reserve Bank of Boston study, Evaluating the Impact of Fair Value 

Accounting on Financial institutions: Implications for Accounting Standards Setting and Bank 

Supervision, (Working paper No. QAU 12-01). This study provides background information and 

a historical context for the development of fair value measurement in accounting standards. Our 

report focused on the impact of fair value and impairment accounting on insured depository 

institutions, especially with respect to losses and regulatory action. We did not perform specific 

work related to the reliability of fair value and impairment accounting measurements in a bubble 

market. 

Our Study notes that loans and leases held-for-investment represent the largest asset class for 

community banks with assets ofless than $1 billion. Loans and leases held-for-investment are 

recorded at historical cost less an Allowance for Loan and Lease Loss. In this regard, the 

Financial Accounting Standards Board (FASB) issued for comment a proposed accounting 

standards update, Financial Instruments-Credit Losses (Subtopic 825-15), dated December 20, 

2012, to make the credit impairment model more forward looking. Specifically, the FASS 

proposed to replace the current impairment model, which reflects incurred credit events, with a 

model that recognizes expected credit risks and would require consideration of a broader range 

of reasonable and supportable information to inform credit loss estimates. The FASB's main 

objective in developing this proposal is to provide financial statement users with more decisionuseful information about the expected credit losses on fInancial assets and other commitments to 

extend credit held by a reporting entity at each reporting date. 
142 


80875.099

Hearing: "State of Community Banking: Is the Current Regulatory 

Environment Adversely Affecting Community Financial Institutions?" 

March 20, 2013 

FDIC OIG Responses to Questions for the Record 

Submitted by Rep. Lynn Westmoreland 

Question la: In your repmt you note that charge-off rates peaked at the end 0£2009 for insured 

depository institutions. This decline is illustrated in Figure 3 on page 4 and Figure 8 on page 51. 

For both graphs, will you please provide a breakdown and corresponding illustrations for net 

charge-offs for banks under $1 billion and banks over $50 billion? 

FDIC QIG Response: Figures 3 and 8 in our report werc devcloped from FDIC-prepared timc 

series supporting schedules that the FDIC publishes along with its Quarterly Banking Profile 

report. Those supporting schedules present quarterly charge-off information by asset typc (c.g., 

Acquisition, Development, and Construction CADe) loans, 1-4 single family loans), but do not 

stratify charge-off information by asset size or by individual institution. While providing the 

information specifically asked for in your question would require a significant audit effmt, we 

offer two items that provide additional perspective on this issue. 

First, in Attachmcnt 1, we are providing two figures (A & B) that stratify the avcrage net real 

estate loan charge-off rate by four asset size segments that correspond with Figure 8 (page 51 of 

our Study). We also included two figures (C & D) that correspond to Figure 3 (page 4 of our 

Study), that stratify the net ADC loan category chargc-offrate by asset size segment and the 1-4 

Family Residential loan category charge-off rate by asset size segment. These two loan 

categories experienced the greatest rate of loan charge-offs during our period of review. 

Second, the publicly available Quarterly Banking Profile also stratifies charge-off information 

by certain bank asset sizes. The Quarterly Banking Profile presents average year-to-date 

information and is a point in time analysis while the time series supporting schedules present 

quarterly information and are updated for subsequent events such as caIl report amendments. As 

such, the Quarterly Banking Profile amounts are slightly different than the charge-off rates 

presented in our report. The Quarterly Banking Profile can be found at 

http://www2.fdic.gov/qbp/. 

Question Ib: Will you provide an analysis for charge-offs at banks who did receive Troubled 

Asset ReIiefProgram (TARP) money and those that did not? 

FDIC QIG Response: Because Public Law 112-88 did not require the FDIC GIG to collect 

information related to T ARP funds, we did not coIlect data which would allow us to distinguish 

bctween banks that received TARP funding and banks that did not during this review. Further, 

as discussed above, information suppOlting Figures 3 and 8 was not itemized by individual 

institution. Identifying which institutions received TARP money and determining T ARP 

institutions' net charge-off rates would require a significant audit effort. 

Question 2: Page 16 of the repOlt states "over 50% of FDIC-supervised financial institutions 

with informal or formal actions received material capital injections within the period 2008-

2011." Please provide a state-by-state breakdown of these numbers, including the number of 

2 
143 


80875.100

banks that raised capital, the number of banks seeking to raise capital but were unsuccessful, and 

the number of banks not seeking to raise capital. 

FDIC OIG Response: The statement on page 16 of our report is from an internal FDIC study. 

In response to our request for supporting information from the FDIC, FDIC officials agreed to 

provide formal enforcement action information by state and informal enforcement action 

information by FDIC region for banks that raised capital. This infomation is contained in 

Attachment 2. We did not independently validate this information. In providing the informal 

action information, FDIC officials expressed concern that the informal action information is not 

public and that, in some states, providing state-by-state'information could enable identification of 

individual institutions, The FDIC does not collect information to distinguish the number of 

banks that were unsuccessful in their efforts to raise capital or the number of banks that did not 

attempt to raise capital. 

Question 3: The study only looked at formal orders and did not have details on the application 

of informal orders. How many informal orders were issued over the study period? Was the 

application of informal orders fair and consistent? Is the FDIC, OCC and Federal Reserve 

uniform in lifting informal orders? 

FDIC OIG Response: Consistent with P.L. 112-88, our report focused solely on formal 

enforcement actions. We presented very limited summary information about informal 

enforcement actions on page 111 of our report to provide perspective for the actions placed on 

3-rated institutions. However, we did not evaluate the fairness or consistency of informal 

actions, whether the regulators terminate infotmal actions uniformly, or the amount of time that 

banks remain under informal or formal actions. To answer such questions related to informal 

actions would require a separate lengthy assigmnent and special privileges to allow our office to 

gather information from the OCC and FRB, as both regulators are outside our audit jurisdiction, 

Questiou 4: For both informal and formal orders, what is the longest a bank has been under a 

formal and informal order since 20087 What was the shortest amount of time a bank has been 

under a formal and informal order since 20087 What is the average amount of time a bank is 

under a formal and informal order since 20087 

FDIC OIG Response: Consistent with P.L. 112-88, our report focused solely on formal 

enforcement actions. As such, we do not have data available to respond to the informal action 

part of the question. Information related to formal enforcement actions based on the information 

we collected for our report is provided below by regulator. 

FDIC Formal Enforcement Actions 

Time Action in Place Days as of 4/30/2012 

Longest 1,560 

Shortest 50 

Average 785 

3 
144 


80875.101

OCC Formal Enforcement Actions 

Time Action in Place Days as ofl2/3112011 

Lon~est 1,437 

Shortest 23 

Average 549 

FRB Formal Enforcement Actions 

Time Action in Place Days 

as of 12/3112011 

Lo~est 1,277 

Shortest 3* 

Average 530 

* This Cease and Desist Order was in place for the institution 

3 days before failure. There was also a formal Written Agreement 

in effect for 343 days before failure. 

Ouestion 5: Please provide a breakdown of return on investment for Shared Loss Agreements 

(SLA) from 2008-2011, compared to SLAs in the 1980s and 1990s. 

FDIC OIG Response: We are not aware of a return on investment calculation pertaining to 

SLAs. As discussed in our report, the FDIC is required to pursue the least costly method of 

resolving a failed bank and maximize recoveries of recei vership assets. One measure that the 

FDIC monitors is the loss rate of failures (Le., the estimated losses from a failure divided by the 

failed bank's total assets). A 1998 FDIC publication, Managing the Crisis: The FDIC and RTC 

Experience 1980-1994, included a chapter on loss sharing and reported that loss rates for the 

16 purchase and assumption (P&A) agreements with loss sharing during the period 1991-1993 

averaged 6 percent of failed bank assets while loss rates for 175 P&As without loss sharing 

averaged 10.5 percent of total assets during the same period. On page 24 of our report, we note 

that the FDIC had determined that the average loss rate during the recent crisis for a P&A with 

loss sharing had been 21.3 percent compared with average loss rates of26.1 percent for a P&A 

without loss sharing, and 35.6 percent for a payout. 

Question 6: Please provide a geographic breakdown, at the county level, of SLA asset 

concentrations in Georgia. 

FDIC QIG Response: Our study did not collect this level of information specific to individual 

states, but we were aware that the FDIC did possess such information. At our request, the FDIC 

prepared a map of Georgia illustrating, by county, the SLA asset concentrations, as of July 2013. 

This map can be found in Attachment 3. As noted in the map's footnote, the information 

contained in the map was compiled from loan data supplied by assuming institutions as part of 

their reporting requirements under their respective SLAs, and has not been subject to audit. We 

did not independently validate this information. 

Question 7: On page 64 of the report you cite that nine institutions failed because Fannie Mae 

and Freddie Mac were put into conservatorship. Please identifY those nine banks for the record. 

4 
145 


80875.102

FDIC OIG Response: The nine banks appear ill the table below. 

---

Number Institution Name City State 

1 Madisonville State Bank Madisonville TX 

2 North Houston Bank Houston TX 

3 Citizens National Bank Teague TX 

4 National Bank of Commerce Berkeley IL 

5 San Diego National Bank San Diego CA 

6 Pacific National Bank San Francisco CA 

7 Park National Bank Chicago IL 

8 California National Bank Los Angeles CA 

9 Bank USA, National Association Phoenix AZ 

5 
146 


80875.103

Attachment 1 

The following two figures correspond to Figure 8 (page 51) of our Study. 

Fi ure A: Net Real Estate Loan Char e-OffRate for Failed Institntions by Asset Size Se ment 

9.00% 

8.00% -4- < $100 Million 

7.00% -!lil- $100 Million to < $1 Billion f---------j"---

.s ~ 6.00% 

rn'$. 

~ ~5.00% 

-0= $1 Billion to $10 Billion 

..... >$10 Billion 

'" '" j ; 

; .:1 4.00% o .. 

~ ~3.00% +----------------,~~~---------~~~--- ~e: 

~ ~ 2.00% +---------------------/--;112''------------------------

,,-

~ ~ 100% +--------------;i~~:.......------.... '---------------- z!-< 

0.00% +-__ -"!"'!"~~~;II~..__-.,.-_-,- ----.----., 

Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Dec-20lO Jun-2011 

For the Period Ended 

Source: OIG analysis of UBPRs for failed financial institutions. 

Fignre B: Net Real Estate Loan Charge-Off Rate for all FDIC-insured Institutions by Asset Size 

Se ment 

2.50% ,-;:.::::;::==.::;::;;::;::;;.;;::===:::::;-------------- -4- < $100 Million 

2.00% 

1.50% 

-!lil- $100 Million to < $1 

Billion 

-t:.- $1 Billion to $10 Billion 

....... >$10Billion 

1.00% +------------;l-;l-----.;"!!'=""""'"iik::------

0.50% +--------------------I~~~~~----------------~~-

0.00% L.JII~!';""'~~~~~::---r---r---.---.., Dec-200S Dec-2006 Dec-200? Dec-2008 Dec-2009 Dec-201D Iun-2011 

For the Period Ended 

Source: OIG analysis of the FDIC's Quarterly Banking Profile reports for all FDIC-insured institutions. 
147 


80875.104

Attachment 1 

The following two figures con-espond to Figure 3 (page 4) of our Study. Loan data is presented 

for only the ADC and 1-4 Family Residential Loan categories - the two most significant loan 

categories. 

o 

~~ 

7.00% ,------------------------------------------------------

6.00% 

5.00% 

~ < $100 Million 

-4!!l- $100 Million to < $1 

Billion 

=f'f- $1 Billion to $10 Billion 

VJ~ 

~:- 4,00% 

j; 

..... >$10Billion 

" 0 

~G 3.00% +---------------.-----------t~--~f_--------~~~==---

G~ 

~ '3 2.00% +------------;P--/--/----------

~~ 

1.00% +-------------------~~~~~-------------------------

0.00% +--Ir--"!"" .... ~~=~_.----r---r_--._-___. 

Dec-200S Dec-2006 Dec-2007 Dec-200S Dec-2009 Dec-2010 Jun-2011 

For the Period Ended 

Source: OIG analysis of the FDIC's Quarterly Banking Profile reports for all FDIC-insured institutions. 

Fi nrc D: Net 1-4 Famil Residential Loan Char 

2.50% ,-------------------

~ < $100 Million 

.... $100 Million to < $1 

Billion 

--c,- $1 Billion to $10 Billion 

r-~r---------------~--

..... >$108illlon 

Dec-200S Dec-2006 Dec-200? Dec-2008 Dec-2009 Dec-2010 Jun-2011 

For the Period Ended 

Source: OIG analysis of the FDIC's Quarterly Banking Profile reports for all FDIC-insured institutions. 

2 
148 


80875.105

Attachment 2 

Number of Institutions with FDIC Formal Actions 

that Received Material Capital Injections 

State Count of Banks 

AL 10 

AR 4 

AZ 4 

CA 25 

CO 7 

CT 2 

DE 1 

FL 23 

GA 51 

HI 3 

IA 5 

ID 1 

IL 27 

IN 3 

KS 9 

KY 4 

LA 2 

MA 0 

MD 2 

ME 1 

MI 7 

MN 32 

MO 8 

MS 3 

MT 4 

NC 5 

ND 4 

NE 3 

NJ 2 

NM 3 

NV 7 

NY 3 

OH 5 

OK 3 

OR 4 

PA 2 

SC 2 

SD 3 

TN 11 

TX 16 

UT 9 

VA 0 

WA 12 

WI 12 

1 
149 


80875.106

Attachment 2 

Number of Institutions with FDIC Informal Actions that 

Received Material Capital Injections 

Geographic Region Count of Banks .. 

ATLANTA 71 

CHICAGO 73 

DAllAS 64 

KANSAS CITY 74 

NEW YORK 14 

SAN FRANCISCO 50 

2 
150 


80875.107

Attach ment 3 

Georgia Shared Loss Asset Concentration 

$0 - $100,000 

$100,000 - $500,000 

$500,000 -$1,000,000 

$1,000,000 - $10,000,000 

$10,000,000 - $50,000,000 

'$50,000,000+ 

The information presented in the map above has been complied from loan data supplied by Assumlng Institutions as part of their reporting 

requirements under their respective Shared loss Agreements, This information has not been subject to audit and no representation is 

made as to the compliance or accuracy of the information. 

o