Texas Department of Banking: Regulatory Overview and Financial Supervision

HOUSE COMMITTEE ON INVESTMENTS HOUSE COMMITTEE ON INVESTMENTS AND FINANCIAL AND FINANCIAL SERVICES SERVICES February 18, 2013 Charles G. Cooper, Banking Commissioner Texas Department of Banking

DEPARTMENT OVERVIEW Established in 1905 by the 29th Legislature. Granted Semi-Dependent, Semi-Independent status by 81st Legislature. Rich tradition of professional and sound regulation. Practices and promotes fiscal responsibility. Reduces regulatory burden by coordinating regulatory activities with other state and federal agencies. Ensures Texas has a safe, sound and competitive financial services system. Regulatory oversight in the banking industry is countercyclical, and during times of economic stress there is an increased need for supervision. Department Motto Tough but Fair. 2 2 Presented by the Texas Department of Banking

PROFILE OF REGULATED ENTITIES Total Assets Total Assets ($ millions) ($ millions) Regulated Regulated Entities Entities Number of Entities Number of Entities As of September 30, 2012 As of September 30, 2012 The Department conducts examinations of entities under its supervision to better evaluate safety and soundness and compliance with state and federal laws. Total assets of the regulated entities represented in the table are approximately $390 billion. Commercial Commercial Banks Banks 295 198,470 ^ 21 Nonexempt 21 Exempt 22,950 NA Public Trust Companies Public Trust Companies 10 FBAs/FBB 15 Representative Offices 75,691 NA Foreign Foreign Bank Agencies Bank Agencies Money Service Money Service Businesses Businesses 133 89,819 Prepaid Funeral Contract Prepaid Funeral Contract Sellers Sellers 395 3160 Perpetual Care Perpetual Care Cemeteries Cemeteries 243 260 Private Child Support Private Child Support Enforcement Enforcement Agencies 10* NA Agencies Check Verification Check Verification Entities Entities 4* NA ^ FDIC financial data for insured institutions. Year-end data not available at this time. * Registration requirement only. 3 3 Presented by the Texas Department of Banking

ASSETS UNDER SUPERVISION IN TEXAS Assets of Federally Insured Texas Financial Institutions Assets of Federally Insured Texas Financial Institutions $803.4 Billion $803.4 Billion As of September 30, 2012 Out-of-State Federally- Chartered Savings Institutions $ 1 Billion <1% Texas State Texas State- -Chartered Banks Chartered Banks $198.5 Billion 25% Out-of-State Texas State-Chartered Savings Institutions $9.8 Billion 1% Nationally Chartered Banks $265.6 Billion 33% Out-of-State State-Chartered Banks $38.4 Billion 5% Texas State-Chartered Credit Unions $28.0 Billion 3% Texas Federally-Chartered Credit Unions $51.1 Billion 6% Texas Nationally-Chartered Banks $147.5 Billion 18% Texas Federally-Chartered Savings Institutions $63.5 Billion 8% Source: FDIC 4 4 Presented by the Texas Department of Banking

REVENUE SOURCES Fees and assessments paid by regulated entities fund 100% of the agency s expenditures. By statute, the Department of Banking is limited to collecting fees and assessments that cover only the agency s direct and indirect expenditures. EXPENSES A public hearing is held annually on the agency s proposed budget. The final budget is approved by Finance Commission on an annual basis at their August meeting. The agency follows the State Payroll, Travel, Purchasing and Procurement rules and standards for all agency expenditures. Salaries and other personnel expenses average 81% of total expenditures. Travel related expenses, mainly to conduct examinations, average 10% of total expenditures. 5 5 Presented by the Texas Department of Banking

BANK FAILURES COMMERCIAL BANKS 6 6 Source: FDIC

BANK FAILURES IN TEXAS SINCE 2008 Bank Name Bank Name Type Type City City Month Month 2008 2008 Franklin Bank, SSB State Savings Houston November Sanderson State Bank 2009 2009 State Bank Sanderson December Millennium State Bank of Texas State Bank Dallas July Guaranty Bank Federal Thrift Austin August Citizens National Bank National Teague October Madisonville State Bank State Bank Madisonville October North Houston Bank 2010 2010 State Bank Houston October The La Coste National Bank National La Coste February 2011 2011 First International Bank State Bank Plano September 7 7 Source: FDIC

FDIC PROBLEM BANKS The FDIC defines problem banks as any financial institution with a composite rating of 4 or 5 . 900 884 800 700 813 702 600 # of Problem Banks # of Problem Banks 694 500 400 300 200 252 100 76 0 2007 2008 2009 2010 2011 2012* Years Years * As of September 2012 8 8 Presented by the Texas Department of Banking

DEPARTMENT PROBLEM BANKS The DOB defines problem banks as any financial institution with a composite rating of 3 , 4 or 5 . 60 57 57 54 54 50 49 49 40 38 38 38 38 30 30 30 58 58 56 56 51 51 42 42 41 41 20 38 38 21 21 10 14 14 9 9 0 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Nov-10 Aug-11 Aug-12 12-Sep Aug-13 Actuals January 2009 Projections February 2011 Projections 9 9 Presented by the Texas Department of Banking

AGENCY HIGHLIGHTS Limited Number of Bank Failures Limited Number of Bank Failures: : From 2008 through 2012, 462 banks failed nationwide while only five Texas state-chartered were closed in Texas. Experienced Staff Experienced Staff: : Through enhanced training and education and the ability to offer competitive salaries, the Department has been able to attract and retain a highly-qualified professional staff implementing the Tough but Fair motto. Sound Fiscal Management Sound Fiscal Management: : No material changes to bank assessments since 2003. In FY 2012 In FY 2012: 95% of the banks received examinations when due. 254 examinations performed 100% bank, foreign bank, trust company, trust department, IT, and other specialty examinations or reviews were performed. 440 examinations performed 92% Special Audit licensee examinations were performed by the Department. 542 examinations performed 10 10 Presented by the Texas Department of Banking

AGENCY HIGHLIGHTS Leadership Role in Promoting Cyber Security Leadership Role in Promoting Cyber Security: : Corporate Account Takeovers (CATO) is a form of identity theft where cyber thieves gain control of a business s bank account and then initiate fraudulent wires and ACH transactions. The Texas Department of Banking and banking industry representatives in conjunction with the U.S. Secret Service formed the Texas Bankers Electronic Crimes Task Force. The Task Force developed a list of best practices and the Department issued minimum standards to Texas state-chartered banks to enhance risk management in this area. This initiative has proven to be very successful and in December 2012, the Conference of State Bank Supervisors (CSBS), the U.S. Secret Service, and the Financial Services-Information Sharing and Analysis Center (FS-ISAC) announced the adoption of these best practices to be utilized by financial institutions nationwide. 11 11 Presented by the Texas Department of Banking

STATE BANK CHALLENGES IN TODAYS ECONOMY Increasing regulatory burden stemming from the financial crisis, i.e. Dodd-Frank, Basel III. Monitoring and evaluating the drought conditions on communities and institutions, especially in regard to credit availability and other services. Managing troubled assets and engaging in robust servicing and collection practices. Managing a narrowing net interest margin in a low rate environment. Seeking revenue diversification through noninterest income sources. 12 12 Presented by the Texas Department of Banking

POSSIBLE LEGISLATION Banks and Trust Companies: Banks and Trust Companies: Change requirement for monthly board meetings, revise loan production office requirements, define surplus, clarify ability of advisory directors to receive confidential information, revise terms to be consistent with the Business Organization Code, and correct references. Prepaid Funeral Contracts: Prepaid Funeral Contracts: Clarify permit renewal types, grant authority to issue subpoenas for investigations, clarify hearing process, and grant authority to issue prohibition orders. Perpetual Care Cemeteries: Perpetual Care Cemeteries: Clarify when it is necessary to file an amended plat map, clarify the minimum capital requirement for each cemetery, and make it a criminal offense for unauthorized multiple burials. Money Services Businesses Money Services Businesses: Allow the agency to use the National Mortgage Licensing System database, define prepaid access, eliminate license renewals, broaden the definition of currency exchange and correct references. Criminal History Information Criminal History Information: Add authority to obtain criminal history information on perpetual care cemetery owners, clarify authority to obtain criminal history on department employees, and correct references. 13 13 Presented by the Texas Department of Banking