    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

                           POTENTIAL MIXED MESSAGES:
                          IS GUIDANCE FROM WASHINGTON
                          BEING IMPLEMENTED BY FEDERAL
                                BANK EXAMINERS?

    =======================================================================

                                 FIELD HEARING

                                   BEFORE THE

                     SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                              AND CONSUMER CREDIT

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                   __________

                                AUGUST 16, 2011

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 112-54

                                   ----------
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                       SPENCER BACHUS, Alabama, Chairman

    JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts,
        Chairman                             Ranking Member
    PETER T. KING, New York              MAXINE WATERS, California
    EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
    FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
    RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
    DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
    WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
    JUDY BIGGERT, Illinois               BRAD SHERMAN, California
    GARY G. MILLER, California           GREGORY W. MEEKS, New York
    SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
    SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
    RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
    PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
    JOHN CAMPBELL, California            JOE BACA, California
    MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
    THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
    KEVIN McCARTHY, California           DAVID SCOTT, Georgia
    STEVAN PEARCE, New Mexico            AL GREEN, Texas
    BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
    MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
        Pennsylvania                     KEITH ELLISON, Minnesota
    LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
    BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
    BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
    SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
    NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
    JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
    ROBERT HURT, Virginia
    ROBERT J. DOLD, Illinois
    DAVID SCHWEIKERT, Arizona
    MICHAEL G. GRIMM, New York
    FRANCISCO ``QUICO'' CANSECO, Texas
    STEVE STIVERS, Ohio
    STEPHEN LEE FINCHER, Tennessee

                       Larry C. Lavender, Chief of Staff
           Subcommittee on Financial Institutions and Consumer Credit

                 SHELLEY MOORE CAPITO, West Virginia, Chairman

    JAMES B. RENACCI, Ohio, Vice         CAROLYN B. MALONEY, New York,
        Chairman                             Ranking Member
    EDWARD R. ROYCE, California          LUIS V. GUTIERREZ, Illinois
    DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
    WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
    JEB HENSARLING, Texas                RUBEN HINOJOSA, Texas
    PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
    THADDEUS G. McCOTTER, Michigan       JOE BACA, California
    KEVIN McCARTHY, California           BRAD MILLER, North Carolina
    STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
    LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
    BLAINE LUETKEMEYER, Missouri         GREGORY W. MEEKS, New York
    BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             JOHN C. CARNEY, Jr., Delaware
    FRANCISCO ``QUICO'' CANSECO, Texas
    MICHAEL G. GRIMM, New York
    STEPHEN LEE FINCHER, Tennessee

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        August 16, 2011..............................................     1
    Appendix:
        August 16, 2011..............................................    57

                                   WITNESSES
                            Tuesday, August 16, 2011

    Barker, Gil, Southern District Deputy Comptroller, Office of the
      Comptroller of the Currency (OCC)..............................    11
    Bertsch, Kevin M., Associate Director, Division of Banking
      Supervision and Regulation, Board of Governors of the Federal
      Reserve System.................................................    12
    Copeland, Chuck, CEO, First National Bank of Griffin.............    33
    Edwards, Bret D., Director, Division of Resolutions and
      Receiverships, Federal Deposit Insurance Corporation...........     9
    Edwards, Jim, CEO, United Bank...................................    39
    Fox, Gary L., former CEO, Bartow County Bank.....................    41
    Rossetti, V. Michael, President, Ravin Homes.....................    36
    Spoth, Christopher J., Senior Deputy Director, Division of Risk
      Management Supervision, Federal Deposit Insurance Corporation..     7

                                    APPENDIX

    Prepared statements:
        Barker, Gil..................................................    58
        Bertsch, Kevin M.............................................    81
        Copeland, Chuck..............................................    89
        Edwards, Bret D., joint with Christopher J. Spoth............    93
        Edwards, Jim.................................................   113
        Fox, Gary L..................................................   116
        Rossetti, V. Michael.........................................   142
        Spoth, Christopher J., joint with Bret D. Edwards............    93

                  Additional Material Submitted for the Record

    Westmoreland, Hon. Lynn:
        Written responses to questions submitted to Gil Barker.......   146
        Written responses to questions submitted to Kevin M. Bertsch.   151
        Written responses to questions submitted to Bret Edwards and
          Christopher J. Spoth.......................................   155
        Letter from the American Institute of Certified Public
          Accountants (AICPA)........................................   160
        AJC op-ed....................................................   162
        Letter to Chairman Bachus and Chairwoman Capito from Andrew
          Alexander..................................................   164
        Written statement of the American Association of Bank
          Directors..................................................   166
        American Banker op-ed........................................   170
        Written statement of the Community Bankers Association of
          Georgia (CBA)..............................................   172
        Written statement of First Cherokee State Bank...............   176
        Written statement of the Georgia Bankers Association (GBA)...   180
        Letter to Chairman Bachus and Chairwoman Capito from William
          and Deborah Lytle..........................................   183
        Written statement of Jerry Ownby.............................   186
        Letter to Chairman Bachus and Chairwoman Capito from K.J.
          Sturhahn & D'Aunn Sturhahn.................................   187
        Written statement of the American Land Rights Association
          (ALRA).....................................................   190
        Written statement of Hon. Jaime Herrera Beutler, a
          Representative in Congress from the State of Washington....   200

                           POTENTIAL MIXED MESSAGES:
                          IS GUIDANCE FROM WASHINGTON
                          BEING IMPLEMENTED BY FEDERAL
                                BANK EXAMINERS?

                                  ----------

                            Tuesday, August 16, 2011

                 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 9:05 a.m., in
    the Coweta County Performing Arts Center, 1523 Lower
    Fayetteville Road, Newnan, Georgia, Hon. Shelley Moore Capito
    [chairwoman of the subcommittee] presiding.
        Members present: Representatives Capito, Westmoreland; and
    Scott.
        Ex officio present: Representative Bachus.
        Chairwoman Capito. This hearing will come to order.
        First, I would like to thank Mr. Westmoreland for bringing
    this issue to the attention of the Financial Institutions and
    Consumer Credit Subcommittee. He has been a tireless advocate
    in the House--as all of you in the audience know--for his
    constituents and the financial institutions in his district.
        And I would also like to thank our witnesses for traveling
    to Newnan to testify and answer questions.
        For those of you in the audience, we will be maybe a little
    less formal than we might be in the regular committee hearing
    room.
        I should introduce myself. I'm Shelley Moore Capito, the
    Chairwoman of the Financial Institutions and Consumer Credit
    Subcommittee of the Financial Services Committee. Spencer
    Bachus, from Alabama, is the chairman of the full Financial
    Services Committee.
        Let me just explain the format, so you will all understand
    what we are going to do. We will do opening statements as
    Members, and then we will have two panels, which will consist
    of regulators and then bankers from in and around the region.
    They will have 5 minutes to give an opening statement and then
    we will be able to ask them questions. I am going to be pretty
    lenient on the question-and-answer period because I think that
    is where we glean the most information. But I do have my handy-
    dandy gavel that made it through TSA, so we are very happy
    about that.
        I also wanted to thank you for welcoming us to Georgia. By
    way of information, my grandparents were born in Perry,
    Georgia, so I have good credentials for Georgia. And I have
    quite a bit of family over in Columbus. And of course, I do
    remember the 2006 Sugar Bowl when West Virginia beat Georgia,
    but we will not talk about that. Sorry, I just had to bring it
    up.
        Anyway, the topic of this field hearing is critical to the
    overall economic recovery in the United States. Over the past
    few years, members of this subcommittee have heard accounts
    about over-zealous regulators and bank examiners from small
    business owners and financial institution executives. The
    subcommittee has held two hearings this year on the issue of
    mixed messages from Washington.
        In the sense that regulators in Washington are encouraging
    institutions to lend, while examiners in the field are applying
    restrictive standards that make it very difficult to lend, this
    hearing is a continuation of the mixed messages discussion. One
    of the major hurdles to a true economic recovery for both small
    businesses and financial institutions is uncertainty.
        New regulations created by the Dodd-Frank Act are only
    furthering the uncertainty for institutions, and subsequently
    our small businesses. We must work together to closely examine
    the application of regulations on financial institutions to
    ensure that the appropriate balance is reached between ensuring
    safe and sound institutions and providing the certainty
    necessary for encouraging economic growth.
        I want to stress that these concerns are not rooted in an
    effort to return to the regulatory landscape in the pre-
    financial crisis levels. There should be a healthy level of
    regulation of financial institutions. However, there needs to
    be room for institutions to take calculated risks when lending
    to spur economic development. Many members of this subcommittee
    fear that the pendulum has potentially swung too far to one
    extreme. We will continue to examine the issue of mixed
    messages from Washington-based regulators throughout this
    Congress.
        Finally, I would like to thank our second panel of
    witnesses for providing their perspective today. I know that
    many financial executives are hesitant to come forward publicly
    with their experiences with financial regulators. But it is
    important that their accounts be part of the public record.
        Again, I would like to thank my very good friend, Mr. Lynn
    Westmoreland, for graciously hosting the subcommittee in his
    district this morning.
        I look forward to hearing the testimony of all of our
    witnesses and I hope this continues a productive discussion
    forward.
        Now, I will recognize the chairman of the Financial
    Services Committee, Mr. Bachus, for 5 minutes for the purpose
    of making an opening statement.
        Chairman Bachus. I thank the chairwoman of the subcommittee
    for holding this hearing, and I particularly thank her for
    holding it outside Washington. I think it is important for
    Congress and for the regulators to actually visit Main Street,
    visit really in this case almost ground zero with many of our
    banks. I would also like to thank Mr. Westmoreland who, along
    with Mr. Scott, introduced a bill last month that actually came
    out of the committee on a unanimous vote and passed the
    Congress 6 days later. You hear a lot about partisanship. That
    was bipartisanship. And it expressed a concern that I think we
    all share, and when I say that, I mean the regulators, the
    bankers, Members of Congress, and business people, that we can
    do better in addressing the problems in our economy and
    problems in our community banks.
        America is made up really in our diversity and our
    diversity in our financial system is one of our strengths. One
    of the biggest strengths is the fact that we have many choices
    for consumers, and many times those choices are Main Street
    banks or local banks. People deal with people that they know,
    they know their reputation, they can--they do not have to bank
    with an institution where decisions are being made thousands of
    miles away. They can bank with an institution that is locally
    owned. And that is something that I know the regulators are
    committed to preserving.
        I was looking at the numbers on Georgia. About 1 out of 6
    bank failures in the country have occurred here in Georgia, and
    in fact, over the last year it looks like it is more like 24 to
    25 percent, which is pretty astounding.
        The bank regulators--to their credit--on February 10th of
    last year issued a joint policy statement. They all came
    together and I really believe that policy statement, which I am
    sure we will go into a little this morning, if we abide by that
    policy statement at the local level, we will be successful. And
    basically one thing it said, it actually specifically permitted
    reputational loans. It permitted banks to make decisions which
    did--in fact, all loans incur a certain amount of risk, but it
    actually enabled banks to make loans based on reputation.
        Many of our bankers tell us that they cannot make
    reputational loans, that the bank examiner simply will not
    allow that. And of course, a reputational loan has to have
    certain basic things, the borrower has to have the ability to
    pay it back, he has to have an income stream. So it is not just
    based on someone with a good reputation; it is someone who can
    pay that back.
        Let me close by saying two things. One thing is as we have
    this hearing, I think it is important to distinguish between
    the word ``regulation'' and the word ``management.'' I have
    talked to bankers, regulators, and Members of Congress, and I
    think we all agree that the regulators are to regulate, the
    bankers are to manage. Sometimes, the boundary between that
    line is blurred or difficult. But it is important that we
    allow, in the final instance, the bankers to make the
    decisions, as long as those decisions do not violate safety and
    soundness.
        Let me say one last thing. There is also a difference
    between liquidation and resolution. I have often heard the
    regulators say, ``We have resolved this situation.'' What
    actually has been done is they have liquidated the bank. And
    that is a failure. I think ultimate success would be restoring
    that institution to health and that ought to always be the
    priority. Sometimes, that is simply not possible. I can tell
    you that there have been banks in my hometown of Birmingham,
    Alabama, which simply could not be restored to health, and the
    longer they operated, the more exposure to the taxpayer. But I
    have also on occasions felt as if the message coming from the
    regulators was, ``we have successfully resolved this
    institution,'' and that ought to always be a last resort. And
    sometimes, I fear that it has been done, and actually because
    of loan loss agreements and sharing agreements, actually the
    cost has been greater than restoring that institution to
    health. But at the same time, I do not want to second-guess the
    regulators.
        Thank you, Chairwoman Capito, for allowing me to
    participate and thank you, Mr. Scott and Mr. Westmoreland, two
    fine Members of Congress. And Mr. Westmoreland, as we all know,
    and Mr. Scott, have been bipartisan leaders in this issue.
    Thank you.
        Chairwoman Capito. Thank you, Mr. Chairman.
        I would like to recognize Mr. Lynn Westmoreland, Third
    District of the beautiful State of Georgia, for an opening
    statement.
        Mr. Westmoreland. Thank you and I want to welcome everybody
    to Georgia's Third Congressional District and I want to thank
    Chairwoman Capito and Chairman Bachus and Congressman Scott for
    coming down. I want to thank all the witnesses for coming.
        Madam Chairwoman, will we have 5 days for people to
    submit--5 business days--
        Chairwoman Capito. Yes.
        Mr. Westmoreland. Thank you.
        Chairwoman Capito. Actually, we will have 30 days. The
    hearing record will stay open for 30 days to submit statements.
        Mr. Westmoreland. Thank you.
        And again, thank you, Chairman Bachus, for helping us move
    this bill so quickly and Subcommittee Chair Capito, especially
    for--Spencer, you did not have that far to come, but Shelley
    did, so thank you all for coming to listen to this hearing on
    our bank failures and the mixed messages that the regulators
    are sending to our community bankers.
        I would also like to thank the witnesses for traveling here
    today and all those in the audience who have made this trip to
    join us.
        In Georgia, bank failures are the major threat to the well-
    being of our communities. Banks in Georgia, both strong and
    weak, big and small, are trying to survive in a market where
    the government is picking winners and losers every day, and
    especially on Fridays. I know, I wait every Friday for the
    dreaded email to come from the FDIC that yet another bank in
    Georgia has failed.
        As many of you know, and we have experienced personally, 67
    Georgia banks have failed since 2008. That is 25 percent of our
    banks. Sadly, there are some communities in my district that no
    longer are served by a community bank. If you ride up and down
    34 highway, and I am sure it is a wonderful bank, but you will
    see the Bank of the Ozarks in our community.
        I hear every week from bankers across Georgia that
    regulators just are not listening, or being able to use any
    common sense or even wanting to help. And curiously, some of
    these regulators have never even worked in a bank and never
    even made a loan.
        In the 1980s, the agencies testifying today took much
    criticism from the handling of the savings and loan crisis. Lax
    enforcement of the rules created more failures. However, the
    great community bank crisis of 2008 has seen regulatory swing
    in a completely opposite direction. Now, strict enforcement has
    created more failures. Banks that were too-big-to-fail have
    survived; banks too-small-to-save have been cut loose. I am
    convinced there must be some middle ground between these two
    extremes.
        Our communities every day are losing generational wealth
    that the pillars of these communities have put into these
    banks. That money will never come back.
        The main problem I have experienced is there is both too
    much and too little information to evaluate the job the
    regulators have been doing. Without a doubt, the FDIC is a
    wealth of information about the health of banks if you have the
    time and resources to go through it. However, I felt more
    analysis was needed. Therefore, myself and Congressman Scott
    introduced H.R. 2056 to study the underlying fundamentals that
    continue to cause bank failures across this country. The bill
    directs the FDIC Inspector General, in consultation with the
    Treasury and Federal Reserve IGs, to study the FDIC policies
    and practices with regard to shared-loss agreements, the fair
    application of regulatory capital standards, appraisals, the
    FDIC procedures for loan modifications, and the FDIC's handling
    of consent orders and cease and desist orders. Further, the GAO
    also has a study in the bill to pursue those questions the FDIC
    IG is unable to fully explore, such as the causes of the high
    number of bank failures, the impact of fair value accounting,
    the analysis of the impact of failures on the community, and
    the overall effectiveness of shared-loss agreements for
    resolving banks.
        Thanks to Chairman Bachus and Subcommittee Chair Capito,
    this bipartisan bill moved quickly through the Financial
    Services Committee and passed the House on July 28th by voice
    vote.
        On the other side of the Capitol, our colleague from
    Georgia, Senator Saxby Chambliss, took this on and tried to get
    it passed before the August recess in the same bipartisan
    spirit in which it passed the House. Unfortunately, the FDIC
    and the American Institute of Certified Public Accountants have
    both blocked the study from moving forward. I hope the FDIC and
    the AICPA will state here for the record that they will reach
    out to the Senate so all objections will be removed and this
    bill will pass quickly in early September.
        To the bankers and small business owners testifying here
    today, I appreciate the honest assessment of your experience in
    this tough business environment. There has been a longstanding
    struggle from my office to receive an honest assessment of the
    job the regulators are doing, from the businessmen willing to
    come forward and share their experience for the record. And I
    appreciate your courage. We had a number of people who would
    tell us their story, but were unwilling, because of fear of
    retaliation, to come testify today. And that is a shame.
        To those in the audience, know that while I would like to
    have everyone testify today, my office is always willing to
    submit your experience for the record and we have 30 days to do
    that. And furthermore, I hope the regulators on this first
    panel will remain in the room for the second panel and listen
    to what they have to say. Too many times, the first panel of
    the government officials will come in, testify, and then leave.
    We are not in D.C., I hope you do not have anywhere to go, and
    we will make sure you get a good lunch if you will stick around
    and listen to some of these people that we listen to each and
    every day.
        In closing, Georgia is in a banking crisis. To overcome
    this crisis, regulators, examiners, and bankers must work
    together to further investment in our small businesses and
    create jobs.
        With that, Madam Chairwoman, I yield back.
        Chairwoman Capito. Thank you.
        I would like to introduce Congressman David Scott from the
    13th District of Georgia. Mr. Scott is a very forceful member
    of the subcommittee and the full committee and he has been out
    front with Mr. Westmoreland on this particular issue. Welcome,
    Mr. Scott, and thank you.
        Mr. Scott. Thank you, thank you very much. And I certainly
    want to welcome you, Chairwoman Capito, to Georgia and our
    chairman, the distinguished chairman who does an extraordinary
    job on our committee and is a great personal friend to me,
    Chairman Bachus, thank you for coming. And of course, Lynn, it
    is always a pleasure working with you. Lynn and I go all the
    way back to our days in the Georgia legislature, and it has
    been a pleasure working with you, bringing forward this very
    important bill.
        This is a very, very serious issue and we will never be
    able to find our way out of this economic doldrum that we are
    in and get the kind of recovery that we need unless our banks
    are thriving and they are able to lend money.
        Our banks are like the heart of our system. Like the heart
    pumps out the blood, banks pump out the credit and pump out the
    cash and pump out the lending to small businesses, to
    individuals so that our economy can grow.
        But when we have a rash of bank failures in one geographic
    area of the United States which account for over 25 percent of
    all of the bank closures, and in less than 4 years, over 60
    banks in this one State fail, we have to dig deep and find out
    what happened. And I think that is one of the biggest
    contributions that we can make today with our distinguished
    committee and representatives. We have to find out from the
    FDIC, the Office of the Comptroller of the Currency, and the
    Fed, all of our examiners and regulators, what went wrong, why
    did this happen. And if the discovery comes out to be, as many
    have said, that so many of our banks overleveraged their
    portfolios into real estate, well if we knew this, why didn't
    some red flags go up? So, we have some serious questions to ask
    here.
        And then secondly, what can we do now to make sure that we
    have no more bank closures in this State? Just recently, we had
    a couple of banks close. So the situation goes on.
        I think there have to be some very serious questions asked.
    I think that we have to examine the impact of mark-to-market
    accounting, what role that played in it. I think we also have
    to make sure--and I want to echo what Lynn said, because we
    have two panels here: we have the regulators; and we have the
    examiners. It is important that the examiners stay so that you
    can hear from our banking folks, so they can have an
    opportunity to put the issues right before them.
        We have had many hearings on this issue. We hear from our
    friends in the banking community who basically say the
    regulations are too stringent, they are putting too much
    pressure, particularly pressure in terms of an issue just
    simply as asset write-downs, which require and put enormous
    amounts of pressure on banks that go out in a hurry and raise
    capital. We need to examine this to see if this is the correct
    procedure. And then we need to come out of this figuring out
    what, in Washington, are we doing that we need to correct
    ourselves. And I think if we look very closely and examine each
    of these questions and really be as frank and as honest as we
    can today, we will make a great contribution, not just in terms
    of the banking situation here in Georgia, but this is the
    epicenter and I think the great contribution we will make here
    is that we will be able to provide valuable information going
    forward for our entire country because other parts of the
    United States are suffering from this as well.
        I look forward to this hearing. I also would like to get
    some opinions from our panelists on the impact of our bill. Is
    it enough? Can we do more? In the process, as we go and
    continue to negotiate this bill, are there some more things we
    need to add to it to make it stronger?
        So this is going to be a good hearing, and I am really
    looking forward to it. And I thank you all for your
    participation.
        Chairwoman Capito. Thank you, Mr. Scott.
        Now, we will go to the panel. Our first witness is Mr.
    Christopher J. Spoth, who is the Senior Deputy Director,
    Division of Risk Management Supervision for the Federal Deposit
    Insurance Corporation, better known as the FDIC. Welcome, Mr.
    Spoth.

      STATEMENT OF CHRISTOPHER J. SPOTH, SENIOR DEPUTY DIRECTOR,
       DIVISION OF RISK MANAGEMENT SUPERVISION, FEDERAL DEPOSIT
                         INSURANCE CORPORATION

        Mr. Spoth. Chairman Bachus, Chairwoman Capito, and members
    of the subcommittee, Congressman Westmoreland, Congressman
    Scott--
        Chairwoman Capito. If I could ask you--I think you have to
    really lean into the microphone so everybody can hear you.
        Mr. Spoth. I apologize.
        Thank you so much for the opportunity to testify here
    before the committee. As the Senior Deputy Director of the
    Division of Risk Management, I oversee the FDIC's safety and
    soundness examination program. Twice in my FDIC career, I lived
    in Georgia, and it is a pleasure to be back today, and outside
    of Washington, as you say.
        The FDIC is the primary Federal regulator for State-
    chartered banks that are not members of the Federal Reserve
    System. We supervise 4,700 banks. Georgia has 261 banks and the
    FDIC is the primary Federal regulator for 211. We have field
    offices in Atlanta, Albany, and Savannah, plus a regional
    office in Atlanta. Our examiners are knowledgeable about the
    economic challenges confronting banks and their customers. The
    FDIC works closely with the Georgia Department of Banking &
    Finance.
        Georgia's economy was hit especially hard by the housing
    market collapse in 2007 and the financial crisis and economic
    recession that followed. The pace of economic recovery has been
    slow, and conditions in Georgia remain challenging. The State's
    unemployment is higher than the national average, and its banks
    have lost money for 10 consecutive quarters. The non-current
    rate for construction and development loans in Georgia has been
    over 20 percent for 2 years. High levels of construction and
    development lending have been a common characteristic of failed
    banks, and Georgia had the highest construction rate of any
    State in 2007.
        We are keenly sensitive to the hardship that bank failures
    pose to communities and borrowers. Our supervisory goal is
    always to avert a bank failure by initiating timely corrective
    action. Most problem banks do not fail. In fact, most banks
    across the country are in sound condition, well-capitalized and
    profitable, although Georgia has been affected more than most.
        Community banks play a vital role in credit creation. While
    community banks represent only 11 percent of industry assets,
    they provide 38 percent of bank loans to small businesses and
    farms. However, surveys of bankers and businesses have
    identified three primary obstacles to making loans at this
    time: lack of demand from creditworthy borrowers; market
    competition; and the slow economy.
        In response, the FDIC has adopted policies that can help
    community banks and their borrowers. Since 2008, the banking
    agencies have issued statements encouraging banks to lend to
    creditworthy borrowers, to prudently restructure problem
    commercial real estate loans, and to meet the credit needs of
    small business. The FDIC sponsored a small business forum
    earlier this year. Chairman Bachus attended and spoke at that
    forum.
        The FDIC's examination program strives for a balanced
    approach. Examiners conduct fact-based reviews of a bank's
    financial risk, the quality of its loan portfolio, and
    conformance with banking regulations. In analyzing a loan, our
    examiners focus on the borrower's cash flow. If the borrower
    cannot pay the principal and interest, then the examiner will
    consider any collateral or guarantees. We do not focus on
    distressed property sales. Loans at risk of non-payment are
    usually identified by the bank itself. At the conclusion of
    their examination work on site, FDIC examiners always discuss
    their preliminary findings with the bank management. This
    provides an opportunity to express the bank's point of view on
    findings, recommendations, and the supervisory process. We
    conduct more than 2,500 on-site examinations annually, and we
    recognize that questions and disagreements may arise,
    especially during difficult economic times.
        The FDIC has a number of channels available for bankers to
    appeal examination matters. Care is taken to ensure national
    consistency. We ensure that examiners follow prescribed
    procedures and FDIC policy through our national training
    program and commissioning process, internal quality reviews,
    and ongoing communication at every level. Members of our board
    of directors and all of our Washington and regional executives
    are dedicated and involved in this effort.
        The FDIC welcomes feedback and relies on bankers' informed
    perspectives. We meet regularly with banker groups to discuss
    the examination process. A significant resource is our advisory
    committee on community banking established in 2009. This
    committee, which includes a community banker from Georgia,
    provides us with advice and guidance on a range of policy
    issues. Our Atlanta regional office meets regularly with banker
    groups and has welcomed all opportunities to meet with bankers.
    The FDIC's Regional Director, Tom Dujenski, is here in the
    audience today.
        I will now turn it over to my colleague, Bret Edwards. I
    will be pleased to answer any questions, and I heartily accept
    the invitation to stay and listen to the banker panel.
        [The joint prepared statement of Mr. Spoth and Mr. Bret
    Edwards can be found on page 93 of the appendix.]
        Chairwoman Capito. Thank you, Mr. Spoth.
        And now our second witness is Mr. Bret D. Edwards,
    Director, Division of Resolutions and Receiverships at the
    FDIC. Welcome, Mr. Edwards.

    STATEMENT OF BRET D. EDWARDS, DIRECTOR, DIVISION OF RESOLUTIONS
        AND RECEIVERSHIPS, FEDERAL DEPOSIT INSURANCE CORPORATION

        Mr. Bret Edwards. Thank you. Chairwoman Capito, Chairman
    Bachus, and members of the subcommittee, I appreciate the
    opportunity to testify on how the FDIC resolves failed banks,
    and in particular on the shared-loss agreements we have
    employed during the current crisis.
        Throughout the financial crisis, the FDIC has worked to
    maintain financial stability and public confidence in the
    banking system by giving insured depositors of failed banks
    quick and easy access to their funds.
        When a bank is closed by the Comptroller of the Currency or
    a State banking commissioner, the law requires the FDIC to use
    the least costly method of resolving the failed bank in order
    to minimize the costs of bank failures to the Deposit Insurance
    Fund or the DIF.
        With each bank failure, we use a bidding process to find a
    bank to take over the performing and non-performing assets of
    the failed bank, along with the bank's deposits and other
    liabilities. Such a whole bank resolution has benefits for the
    failed bank's borrowers and the community, as well as the DIF.
    The bank's borrowers benefit because the assuming bank is a
    potential new source of credit. And the community benefits from
    stabilized asset values. In addition, because the failed bank's
    assets are managed by the assuming bank, the FDIC's asset-
    related expenses are significantly less than they would be if
    the FDIC were to manage and liquidate these assets on its own.
    Finally, everyone benefits when these assets are managed rather
    than put into an already strained market at fire sale prices.
        During the current financial crisis, turmoil in the economy
    and significant uncertainty about future loan performance and
    collateral values have made potential buyers of failed banks
    reluctant to take on the risk of the failed bank's non-
    performing loan portfolios. As a result, the FDIC has often
    been required to use a modified version of the whole bank
    resolution that includes a shared-loss agreement. This was
    particularly true during the early stages of the crisis. The
    FDIC estimates the use of shared-loss agreements has saved the
    DIF, and the thousands of banks that fund the DIF, almost $40
    billion during the current crisis.
        Unfortunately, a small percentage of failing banks still do
    not attract viable bids because they have little or no
    franchise value, and the quality of their assets is very poor.
    In those instances, the FDIC pays the depositors the insured
    amount of their deposits and depositors with uninsured funds
    and other general creditors are given receivership certificates
    entitling them to a share of the net proceeds from the
    liquidation of the failed institution's assets. Typically in a
    payout like this, there is no new source of credit available
    for troubled borrowers.
        Since the crisis began in 2007, the FDIC has successfully
    found banks to take over 61 of Georgia's 67 failed banks.
    Forty-one of the 67 banks were acquired by Georgia-based
    institutions, while 10 other acquirers are from contiguous
    States.
        Under shared-loss agreements, the assuming bank takes
    ownership of the failed bank's assets and the FDIC agrees to
    absorb typically 80 percent of the losses on a specified pool
    of assets, while the assuming bank is liable for the remaining
    20 percent of the losses. Each assuming bank is required to
    utilize a least loss strategy in managing and disposing of
    these assets.
        Shared-loss agreements soften the effect of bank failures
    on the local markets by keeping more of the failed bank's
    borrowers in a banking environment. The assuming bank can more
    easily work with the borrowers to restructure problem credits
    and advance additional funding where prudent. And in fact,
    shared-loss agreements require assuming banks to review
    qualified loans for modification to minimize the incidences of
    foreclosure. Because the assuming banks share approximately 20
    percent of any losses on covered loans, they are motivated to
    restructure a loan whenever a modification would produce a
    greater expected return than a foreclosure or short sale. We
    also require assuming banks to manage covered assets just like
    their own portfolio, consistent with prudent business practices
    and the bank's credit policies. The incentives for pursuing
    modifications and the requirement for consistent treatment of
    assets work together to prevent a fire sale strategy.
        The FDIC monitors compliance with the shared-loss
    agreements, including the requirement to consider loan
    modifications through quarterly reporting by the assuming bank
    and performing periodic reviews of the assuming bank's
    adherence to the agreement terms. To enforce compliance with
    the agreement, the FDIC will delay payment of loss claims until
    compliance problems are corrected. We can also deny payment of
    a claim altogether or cancel a shared-loss agreement, if
    compliance problems continue.
        While we believe the shared-loss agreements have
    significant benefits, as the economy improves, we expect to see
    fewer resolutions with loss share.
        Thank you for allowing me to testify today and I look
    forward to your questions.
        [The joint prepared statement of Mr. Spoth and Mr. Bret
    Edwards can be found on page 93 of the appendix.]
        Chairwoman Capito. Thank you.
        Our third witness will be Mr. Gil Barker, the Southeast
    District Deputy Comptroller for the Office of the Comptroller
    of the Currency. Welcome, Mr. Barker.

    STATEMENT OF GIL BARKER, SOUTHERN DISTRICT DEPUTY COMPTROLLER,
            OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC)

        Mr. Barker. Chairwoman Capito and members of the
    subcommittee, I appreciate this opportunity to discuss the
    OCC's supervision of community banks and the steps that we take
    to ensure that our supervision is balanced, fair, and
    consistent with OCC policies.
        My district supervises more than 650 federally-chartered
    community banks and thrifts, including 45 national banks and
    thrifts in the State of Georgia. I have been involved in the
    direct supervision of community banks for most of my career, so
    I have a deep appreciation for the challenges that these
    bankers face.
        Community banks play a crucial role in providing consumers
    and small businesses with essential financial services and
    credit that is critical to economic growth and job formation.
    Our goal is to ensure that these banks have the strength and
    the capacity to meet these credit needs.
        I understand that some bankers believe that they are
    receiving mixed messages from regulators about the need to make
    loans to creditworthy customers, and I appreciate the
    opportunity to address these issues today.
        The OCC's policies encourage banks to make loans to
    creditworthy borrowers and to work constructively with
    borrowers. We have mechanisms to help ensure that our examiners
    apply these policies in a consistent and balanced manner. We
    alert our examiners to new policy issuances via weekly updates.
    When warranted, we supplement these issuances with targeted
    supervisory memos that provide additional direction for
    implementing on a consistent basis. We reinforce these messages
    through periodic national teleconferences and meetings at our
    local field offices.
        We have quality assurance processes to ensure that our
    examiners are applying our guidance consistently. Every report
    of examination is reviewed and signed off by an appropriate
    Assistant Deputy Comptroller before it is finalized. Additional
    levels of review occur when enforcement actions are involved.
    Our formal quality assurance processes assess the effectiveness
    of our supervision and compliance with OCC policies through
    quarterly randomly selected reviews of the supervisory record.
    While a bank's supervision policies and procedures establish a
    consistent framework and expectations, our examiners tailor
    their supervision to each bank and its individual risk profile
    and business model.
        Our front line managers who are located in the local
    communities are given considerable decision-making authority,
    reflecting their on-the-ground knowledge of the institutions
    that they supervise. To support our local examiners, we have
    district analysts who monitor and provide information on local
    markets and conditions. This information allows us to tailor
    our supervisory activities to unique challenges being faced
    within local economies and business sectors.
        We also have an extensive outreach program with State trade
    associations and we meet with our State and Federal regulatory
    counterparts to share information and discuss issues.
        OCC examiners assess the quality of the bank's loan
    portfolio during each examination cycle. The goal of our
    reviews is to confirm the accuracy of bank management's own
    assessments of credit quality. If a borrower's ability to repay
    a loan becomes impaired, we expect the bank to classify the
    loan to recognize the increased risk.
        To provide consistency in the examination process, the OCC
    and other bank agencies use a uniform risk scale to identify
    problem credits. Consistent with generally accepted accounting
    principles, the call reports require that a loan be put on non-
    accrual status when full repayment of principal and interest is
    not expected. In making these decisions, each loan must be
    evaluated based on its own structure, terms, and the borrower's
    ability to repay under reasonable repayment terms. A loan is
    not classified simply because a borrower is based in a certain
    geographic region, when they operate in a certain industry, or
    because the current market value of the underlying collateral
    has declined. Our supervision strives to ensure that problems
    are identified and addressed at an early stage before they
    threaten the bank's viability. When these efforts are not
    successful and the bank is not viable, we work closely with the
    FDIC to effect early and least cost resolution of the bank.
        The OCC's supervisory philosophy is to have open and
    frequent communications with the banks that we supervise. While
    I believe that OCC examiners are striking the right balance in
    their decisions, my management team and I encourage any banker
    who has concerns about a particular examination finding to
    raise these concerns with their examination team, with the
    supervisory office, with me directly, with the OCC's
    independent ombudsman.
        Thank you, and I would be happy to answer questions
    afterwards.
        [The prepared statement of Mr. Barker can be found on page
    58 of the appendix.]
        Chairwoman Capito. Thank you, Mr. Barker.
        And our final witness on this panel is Mr. Kevin Bertsch,
    Associate Director, The Board of Governors of the Federal
    Reserve System. Welcome.

    STATEMENT OF KEVIN M. BERTSCH, ASSOCIATE DIRECTOR, DIVISION OF
     BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE
                         FEDERAL RESERVE SYSTEM

        Mr. Bertsch. Thank you.
        Chairwoman Capito, Chairman Bachus, and members of the
    subcommittee, I appreciate the opportunity to appear before you
    today to discuss the Federal Reserve's efforts to ensure a
    consistent approach to the examination of community banking
    organizations. Community banks play a critical role in their
    local communities. The Federal Reserve very much values its
    relationship with community banks and is committed to
    supervising these banks in a balanced and effective way.
    Developments over the past few years have been particularly
    challenging for these institutions, and the Federal Reserve
    recognizes that, within this context, supervisory actions must
    be well considered and carefully implemented.
        The Federal Reserve conducts its supervisory activities
    through its 12 Federal Reserve Banks across the country. This
    means that supervision is guided by policies and procedures
    established by the Board, but is conducted day-to-day by the
    Reserve Banks and their examiners, many of whom have lived and
    worked within the districts they serve for many years. We
    believe this approach ensures that Federal Reserve supervision
    of community banks is consistent and disciplined and that it
    also reflects a local perspective that takes account of
    differences in regional economic conditions.
        There has been much discussion recently about whether
    examiners are unnecessarily restricting the activities of
    community banks. The Federal Reserve takes seriously its
    responsibility to address these concerns, and working with the
    other agencies, the Board has issued several pieces of
    examination guidance over the past few years to stress the
    importance of taking a balanced approach to supervision. The
    Federal Reserve has complemented these statements with training
    programs for examiners and outreach efforts to the banking
    industry. In addition, the Federal Reserve continues to
    strongly reinforce the importance of these statements with its
    examiners and has taken steps to evaluate compliance with the
    guidance as part of its regular monitoring of the examination
    process.
        First, all examination findings must go through a thorough
    review process before being finalized. Local management teams
    vet the examination findings at the district Reserve Banks to
    ensure that problem areas are addressed consistently, findings
    are fully supported, and supervisory determinations conform
    with Federal Reserve policies. If these vetting sessions
    identify policy issues requiring clarification, local Reserve
    Banks contact the Board in Washington for guidance.
        In addition, Board analysts sample recently completed
    examination reports to assess compliance with policies.
    Potential deviations from policy requirements that are
    identified through this process are discussed with Reserve
    Banks and corrected as needed. Board analysts also review
    quarterly off-site financial surveillance reports with the
    Reserve Banks to ensure identified issues are consistently and
    promptly addressed.
        Board staff also conduct periodic reviews of specific
    examination activities. For example, recently we undertook a
    focused review of commercial real estate loan classification
    practices in the districts. We initiated this review to assess
    whether Federal Reserve examiners were implementing the inter-
    agency policy statement on commercial real estate loan workouts
    as it was intended. Based on this review, we concluded that
    Federal Reserve examiners were appropriately implementing the
    guidance and were consistently taking a balanced approach in
    determining loan classifications.
        Overall, our monitoring efforts to date suggest that
    Federal Reserve examiners are following established guidance in
    evaluating supervised institutions. However, if any banking
    organizations are concerned about supervisory actions that they
    believe are inappropriate, we continue to encourage them to
    contact Reserve Bank or Federal Reserve Board supervisory staff
    to discuss their concerns.
        We at the Federal Reserve are acutely aware of the need for
    a strong and stable community banking industry that can make
    credit available to creditworthy borrowers across the country.
    We want banks to deploy capital and liquidity, but in a
    responsible way that avoids past mistakes and does not create
    new ones.
        The Federal Reserve is committed to working to promote the
    concurrent goals of fostering credit availability and
    maintaining a safe and sound banking system. Through our
    ongoing communication with Reserve Banks and bankers, the
    Federal Reserve will continue to strive to ensure our guidance
    is applied in a fair, balanced, and consistent manner across
    all institutions.
        Thank you again for inviting me to appear before you today
    on this important subject. I will be pleased to take your
    questions. Thank you.
        [The prepared statement of Mr. Bertsch can be found on page
    81 of the appendix.]
        Chairwoman Capito. Thank you. I appreciate the testimony
    and we will begin with questioning. Each member will have 5
    minutes on the first round, and I am going to begin.
        I think the question I am asking could be appropriate to
    everybody, but it might be most appropriate to the FDIC
    witnesses. Being a resident of a different State and coming to
    Georgia and seeing 25 percent of the bank failures occurring in
    this particular region, my question is, what is different in
    Georgia? We know that the recession is a national one, we know
    that half of the houses in Las Vegas are in neighborhoods that
    are underwater. What is particular to Georgia in the regulatory
    review that causes it to have the greater share of the bank
    failures?
        Mr. Spoth. I am happy to start to answer that question,
    Chairman.
        It is a very thoughtful question and one that I think about
    all the time. What is it that happened in Georgia? And as I
    said, I lived here, I left in 2002, the second time that I was
    here living in the Atlanta area. What the numbers show, and
    what my feeling was at the time, was that Atlanta had, or more
    generally, the State of Georgia had high economic growth in the
    run-up to the housing collapse in 2007. Credit was available,
    readily available, for construction supporting that growing
    economy, and there were rising real estate prices. Not many
    expected the collapse of housing. Some of the issues that
    caused that collapse were masked in the non-bank arena through
    subprime mortgages and some similar issues. I think that is
    what happened. Why it affected Georgia more than others was
    probably, as a principal reason, the high amount of exposure to
    construction and development lending.
        Chairwoman Capito. Mr. Edwards, do you have another
    comment?
        Mr. Bret Edwards. I would concur with that, that is exactly
    right, the high level of construction and development loans on
    the books of the banks, especially as we got to the peak of the
    market, was a big factor.
        Chairwoman Capito. So that is different than what is
    occurring in some of these other high real estate areas--
    Florida, Arizona, New Mexico, Texas?
        Mr. Spoth. It is somewhat different in scale. All of those
    States experienced a similar phenomenon with rising real estate
    prices.
        Chairwoman Capito. Right, right.
        Mr. Spoth. What was different in Georgia is that it had the
    highest concentration of construction and development loans
    relative to the capital base, compared to others.
        Chairwoman Capito. So then my follow-up question would be
    during that period of time when you were conducting reviews of
    these particular banks, that was not a red flag at the time?
        Mr. Spoth. It was a red flag. Maybe some of my other
    colleagues will talk about it. We issued guidance in 2006 to
    the industry talking about concentrations and risk management
    around commercial real estate and acquisition, development and
    construction lending generally. Would there be lessons learned
    behind that and mistakes made? Probably so.
        Chairwoman Capito. In the regulatory reaction, you are
    talking about?
        Mr. Spoth. Yes. The red flags were not always carried all
    the way through to the supervisory process.
        Chairwoman Capito. Mr. Bertsch, in our conversation before
    we began our testimony, you mentioned that you have sort of
    ridden through this tide before when you were in Boston as a
    regulator in the downturn of the real estate market in Boston
    in the early 1990s, and that you are seeing a lot--a lot of
    what you are hearing us talk about is a lot of what was talked
    about in the 1990s. What were the solutions at that time and, I
    guess, how do we find ourselves back in the same position,
    understanding that there are economic issues here on a national
    basis that are sort of more beyond control of community bankers
    in Georgia and others?
        Mr. Bertsch. I think a lot of what the regulators have been
    doing has been, to some degree, looking back in history to see
    what helped the New England crisis sort of slow down and how
    that was sort of addressed. I think if you look at, for
    example, the prudent commercial workout, commercial real estate
    workout guidance that all the agencies issued after the initial
    guidance that Chris referenced, that is basically designed to
    encourage banks to work with their borrowers and do formal
    restructurings of loans because that actually did work fairly
    well in terms of addressing some of the issues that occurred in
    New England.
        Now neither situation was very good for the banking
    industry. Just as now Georgia is experiencing a very high level
    of failures, it was similar in New England back in the late
    1980s and early 1990s, and some of these same questions were
    being asked.
        But I think the thing we learned through the New England
    issue was that we need to give the banks an opportunity to
    restructure the loans and that if they restructure the loans,
    they can, some of them, can survive. But that does mean that
    some of them have to recognize some losses and some problems in
    some of the transactions before they can move forward and see
    those transactions come back to a performing asset.
        Chairwoman Capito. Thank you.
        Chairman Bachus is recognized for 5 minutes for questions.
        Chairman Bachus. Thank you.
        Let me ask the FDIC this question. Loss sharing agreements,
    obviously that has been a real focus and area of concern. My
    first question would be--and these are things we have heard
    from more than one source--is that banks who come in and take
    over these loans do not have the incentive to modify those
    loans when the borrower gets in financial trouble. There is
    almost maybe an incentive to close those loans out. And that is
    particularly problematic when there is a participation
    agreement I guess would be the word, between other banks on
    those loans. That is sometimes where we hear the complaints.
        Do you monitor those and is there a possibility of maybe--
    or have you changed the way those are structured maybe to
    address that? Have you heard that before?
        Mr. Bret Edwards. Yes, we have heard that before and
    obviously it is a concern to us, because we took a lot of care
    in crafting those agreements as what we feel is the best
    solution to dealing with the assets coming out of failing
    banks.
        We do believe that the way the shared-loss agreements work,
    we share the losses, 80 percent with us, 20 percent with the
    assuming bank, we believe that gives them a pretty significant
    incentive, as we call it, skin in the game, to ensure that
    their behavior, their incentives in these agreements are
    aligned with ours--which is, we want them to pursue the least
    loss strategy for each and every asset.
        Additionally--and I will get to the monitoring in a
    second--I just want to make it clear that the agreement
    basically says they must manage the assets that they take in
    through a shared-loss agreement the same as their assets that
    are already on their books. So let us talk about compliance for
    a second. They do extensive reporting to us, we have compliance
    management contractors go out and do a thorough review of their
    compliance with these agreements. The agreement requires them
    to consider modifications in doing an analysis. So we have a
    bank credit, we look at all the disposition alternatives. If it
    is a troubled credit, they are required to do an analysis and
    demonstrate to us or our contractors as we go in to check with
    compliance, that they have documented, analyzed, and are
    following the least loss strategy on every credit.
        So we are relatively comfortable that the banks are
    incented to follow the least loss strategy--and they are also
    required to--and we also check that they are doing that. So I
    feel that is--but again, I have heard the same things and that
    concerns us and what I would say with respect to that is, if
    there are specific instances where folks feel that they are
    seeing behavior where that is not occurring, we would want to
    know about that.
        Chairman Bachus. Okay. Have you heard any complaints from
    other banks when there are participation agreements?
        Mr. Bret Edwards. Sure. With participation agreements--and
    again, generally what happens with those participation
    agreements is it depends on whether you are the lead
    participant, in other words you are the manager of that loan,
    or you are a downstream participant, as we say. Where the
    assuming institution is under a shared-loss agreement, they
    take the lead, from our perspective, again, the requirement in
    the agreement is they should be managing that loan just like
    any other loan in their portfolio and that includes, with
    respect to participation agreements, and I am sure my
    examination colleagues would tell you, they should be regularly
    and actively communicating with the other participants in that
    loan about what their disposition strategy is if it is a
    troubled credit, and follow the terms and conditions of that
    participation agreement.
        Chairman Bachus. I know that Congressman Westmoreland and
    Congressman Scott both mentioned mark-to-market. And I know
    that even in 2008, when we first ran into trouble, mark-to-
    market came up. Chairman Bernanke actually, within 6 months or
    a year, said mark-to-market is a problem. In some cases, it is
    exacerbating the problem. He testified probably on at least two
    or three occasions that it was a concern to the OCC, which has
    expressed concerns.
        In fact, we actually passed a provision that the SEC would
    look at the impact of mark-to-market and consult with the
    banking regulators. And they actually came out and instructed
    the accounting, the different accounting boards, to address the
    problem, which they sort of did in what has been called by many
    in the academic field a superficial addressing, because you had
    sort of a conflict between investors and the institutions as to
    what those assets were valued.
        Can you update me on any of your thoughts on mark-to-
    market? In fact, two former OCC Chairmen have testified that
    had mark-to-market been in effect in earlier recessions, there
    would have been many more bank failures than they had. And they
    were quite outspoken about that. I had a conversation with Don
    Powell--whom you are very familiar with--who headed up the
    agency, and he said that was a real problem. He had left the
    agency at that time.
        But would you comment on that?
        Mr. Barker. Congressman Bachus, I can tell you that from
    the examiner's perspective, when they go in and they conduct
    reviews of a loan portfolio, they are looking to see the
    ability of the borrower to make repayment. They look at the
    cash flow, they look at the current status of the loan, they
    look at the prospects for continued payment. In fact, the only
    time that mark-to-market would come into play is when the loan
    is no longer being able to be repaid, and then the valuation of
    the collateral comes into play. So it is at that point when the
    examiners would go beyond an assessment of the cash flow and
    make a determination as to whether there is sufficient
    collateral, and then apply mark-to-market standards as they
    exist right now, as part of their examination activity.
        Chairman Bachus. Okay. So you do not always follow mark-to-
    market in just determining whether a loan needs to be further
    reserved?
        Mr. Barker. We apply the standards first looking at the
    cash flow and the borrower's ability to make the payments. As
    long as those payments are continuing to be made, the
    assessment of the collateral position is very secondary, much
    after the cash flow analysis.
        Chairman Bachus. All right. That is good news, thank you
    very much.
        Chairwoman Capito. Thank you.
        Mr. Westmoreland?
        Mr. Westmoreland. Thank you, Madam Chairwoman.
        Mr. Barker, you mentioned in your testimony that you have a
    deep appreciation for the challenges of those bankers.
        Mr. Barker. Yes.
        Mr. Westmoreland. Have you ever been in the banking
    business?
        Mr. Barker. Only as a regulator, sir.
        Mr. Westmoreland. Only as a regulator. And how long have
    you been there with the regulators?
        Mr. Barker. I have been with the Comptroller of the
    Currency's Office for 33 years.
        Mr. Westmoreland. So you must have gone straight to work
    there after you graduated college?
        Mr. Barker. Yes, I did.
        Mr. Westmoreland. So you have never actually made a loan to
    anybody?
        Mr. Barker. No, I have not.
        Mr. Westmoreland. You have never been on the banker's side
    of the desk making a loan?
        Mr. Barker. No.
        Mr. Westmoreland. Have any one of you ever--since we have
    had 67 bank failures, how many times have you all been to
    Georgia to actually go into some of these banks or communities
    that have had the large number of failures? I will start with
    you, Mr. Spoth.
        Mr. Spoth. I have been to our--this microphone again.
        Chairman Bachus. These microphones are not as sensitive as
    those in Washington, so you might want to pull them pretty
    close.
        Mr. Spoth. I have been to our offices here in Atlanta.
        Mr. Westmoreland. No, I mean how many banks have you been
    to?
        Mr. Spoth. I meet with the bankers when they are in the
    Washington office.
        Mr. Westmoreland. How many local banks have you been to
    here?
        Mr. Spoth. Meet with Georgia banks in Georgia?
        Mr. Westmoreland. Yes.
        Mr. Spoth. I have not met with any in Georgia in recent
    years. Regional Director Dujenski meets with them all the time.
        Mr. Westmoreland. Good. Mr. Edwards?
        Mr. Bret Edwards. No, I have not. I assumed this position
    in January of this year.
        Mr. Westmoreland. Okay. Mr. Barker?
        Mr. Barker. I have met with several community banks in the
    State of Georgia as part of our supervisory process.
        Mr. Westmoreland. So you went physically to those that were
    being audited I guess or whatever?
        Mr. Barker. Yes.
        Mr. Westmoreland. And how many of those closed?
        Mr. Barker. Three of those banks have closed.
        Mr. Westmoreland. And so you went to three and all three
    closed?
        Mr. Barker. Yes.
        Mr. Westmoreland. Okay. Sir, do you ever get out much?
        [laughter]
        Mr. Bertsch. When they let me out, periodically I do get
    out.
        Chairman Bachus. He is out today.
        Mr. Bertsch. I have not been in any of the banks in
    Georgia. I would refer you back to our testimony that we do our
    supervision directly through the Reserve Banks and that is
    typically how our visits are conducted.
        Mr. Westmoreland. Okay. Now I know that the shared-loss
    agreements--Mr. Edwards, you spoke about them and I guess their
    intention, at least from what I am reading, is to soften the
    blow to the community.
        Mr. Bret Edwards. Yes, that is correct.
        Mr. Westmoreland. And I read in your testimony about--I
    guess it was your testimony, it did not have anybody's name on
    the front of it, but it talked about loss share, that they were
    open to modification and that you were willing to work with
    people and that the reason these shared-loss agreements came in
    was so the acquiring bank could go in and work with these
    different people to see if they could not save the loans; is
    that correct?
        Mr. Bret Edwards. Yes.
        Mr. Westmoreland. Okay, you need to get out more. And I
    hope you will stick around and listen to some of this testimony
    because that is not what happened. That may be what you all
    think is going on in Washington, but that is not what is
    happening here in our local communities, I can promise you
    that.
        You also mentioned, or somebody mentioned, that a large
    percentage--I guess it was you, sir--that a large percentage of
    the loans here were A&D and construction. And that is true. And
    I think Ms. Capito asked a question about how many--because of
    so many banks in Georgia, and we did have a large part of that.
    Did you ever take into consideration that because of maybe some
    type of a uniqueness, that somebody would need to come down
    here and look at it? And if that was recognized by the FDIC as
    being a problem, then you cannot manage all problems the same
    way? And if you recognize this, and I am sure it was much the
    same in Nevada where 40-something percent of their banks have
    closed, why wouldn't you come in here and look at maybe some
    special circumstances of the A&D and the construction loans?
        Mr. Spoth. As you know, we issued guidance from Washington
    about restructuring troubled real estate loans that was
    designed to reflect what was going on in Georgia, Florida, and
    some other States that have been mentioned here. We addressed
    how to restructure loans on the cash flow from the development
    or from the commercial property and to try and keep the
    borrower with that property.
        Mr. Westmoreland. How often did you inquire to how that
    process was going and how did you--when you looked at that
    process, how did you see it going?
        Mr. Spoth. We asked bankers and examiners whether they are
    able to follow the guidance. The particular guidance that I am
    talking about is about 19 pages long and has all kinds of
    examples in it. So we have asked people to go back and look at
    troubled real estate loans and see if the examiners--
        Mr. Westmoreland. But from your personal experience, what
    has been the result of going back and doing these things?
        Mr. Spoth. Bankers tell me that they are more comfortable,
    and importantly, examiners too tell us that they are more
    comfortable working on restructured loans than they would have
    otherwise been without the guidance.
        Mr. Westmoreland. You need to stick around too.
        Mr. Spoth. I will do that, sir.
        Mr. Westmoreland. Now let me just--
        Chairwoman Capito. Sure. We will do another round.
        Mr. Westmoreland. Okay, if I am going to get another round,
    I will yield back.
        Chairwoman Capito. Okay. Mr. Scott?
        Mr. Scott. Thank you very much, Madam Chairwoman.
        One of my favorite actors is Paul Newman and he made a
    wonderful picture called ``Cool Hand Luke'' and in there, there
    was this line that said, ``What we've got here is failure to
    communicate.'' And I think that--and I want to talk about that
    for a moment because we have Federal regulators in Washington,
    field examiners and then the banks. And they have not been on
    the same page. We have had complaints after complaints. And I
    think at the core of part of our problem here in Georgia has
    been just that. What have you all done to correct this, to
    address the concern that there has been a lack of communication
    between the Federal bank regulators in Washington and the
    examiners in the field? And in relationship to what they are
    doing on a consistent manner with the banks.
        Mr. Spoth. At the FDIC, one of the things that we did,
    having heard that, Congressman, is we informed our community
    bank advisory committee and had community bankers come to
    Washington and try to tell us their experience in their banks,
    in the field, and how it is with those they are representing,
    their peers. That has been very helpful; I have met with that
    committee every time they have been in Washington. That has
    probably been 7 or 8 times now they have come in.
        The other thing that we do--I talked about the commercial
    real estate loan restructuring guidance--is to have conference
    calls with bankers and invite them to participate. People like
    myself and the leadership that I work for participate on those
    calls with bankers and try to cut through the layers of
    communication that could break down somewhere.
        Mr. Scott. Let us just take one of those areas. We have
    come to the conclusion, I think you talked about the major
    cause, because I think we need to zero in on that, being that
    overleverage of bank foreclosures into the real estate and the
    construction area that caused a lot of what we have down here.
    So what have we moved or what are we going to put in place to
    make sure that does not happen again? Have we addressed that?
    Why didn't the examiners, why were they not able to communicate
    that as they examined the banks? Why were banks allowed to, if
    we knew that this would be a problem--some of them I think had
    70, more than 70 percent of their portfolios were in this.
    Wasn't that a red flag going up? Didn't somebody see that? If
    not, have we moved in to correct that, to put something in
    place, some kind of triggering mechanism, something that would
    prevent that?
        Mr. Spoth. I can take an initial stab at that. One of the
    things that we think about when we see that is to recall--and I
    referenced earlier--how strong the Georgia economy was, and for
    the Georgia banks, the high capital ratios that existed at that
    time, say in 2006 and into 2007, and the high earnings. All
    this was largely driven by real estate, which masked the levels
    of exposure that were going on, both to examiners, I think, and
    to the bankers. So we look at techniques and perhaps go back to
    our 2006 guidance and see if there is something that we could
    or should do different there. What we know is that it is not
    necessarily the level, although we have talked about it some
    here, it is not necessarily the level of construction and
    development loans; it is also the management of risk around the
    loans. So it is a two-part story, and it is complicated, but I
    think that some of the solution is to look at risk practices.
        Mr. Scott. Let me just ask one because here in Georgia--I
    want to bring one incident to illustrate, particularly some of
    the requirements on what is known as asset writedowns. Let us
    just take the situation with a bank that was called Buckhead
    Bank, and it was run by a friend of mine, Charlie Loudermilk,
    who was the chairman and talked to me about that, to see what
    we could do.
        Is there a consistent procedure in place for asset
    writedowns in terms of the amount of cash capital that bank has
    to go and raise and are there too restrictive requirements on
    where they can go or cannot go to raise that capital? Because I
    think that is at the core of a lot of the problems with why
    some of the banks went down. There were very strong, stringent
    requirements on certain standards that might not--that it seems
    to me could have been adjusted. I think that some of these
    banks really had no business failing if we were more on the
    case and were adapting procedures that fit tough economic times
    as opposed to just bringing down the hammer. And one of those
    is the asset writedowns. And if we are going to get a troubled
    bank to have to go and to raise capital, there ought to have
    been some elasticity there. I do not know the particulars, but
    I think there is so much you could get from shareholders, or
    non-shareholders, there had to be--could you address that?
        Mr. Spoth. I will be happy to touch on that. At the
    beginning, what we try to do when a bank gets in--
        Mr. Scott. Specifically, if you could refer to that case. I
    know somebody here dealt with the Buckhead case because if you
    did not and did not know about that, that is another part of
    the problem. Were you familiar with that case or the closing of
    that bank?
        Mr. Spoth. I am. I cannot recall right now the details of
    that bank. I would be happy to look into it and get back with
    you on the specifics of that case. I can talk generally about
    what we do when a bank's viability is threatened or when its
    closure is near because of its insolvency. I can talk about
    that kind of corrective program. I just cannot remember the
    story behind Buckhead at this moment.
        Mr. Scott. All right, before you leave, some of our banking
    friends come and tell us that they fear retaliation. Could each
    of you respond to that? What is that about? Why is there a fear
    among the bankers of retaliation just to come forward publicly?
    Where is this fear coming from and what is this retaliation?
        Mr. Barker. Congressman Scott, let me first address the
    comment itself, and I think that it is very understandable that
    examiners have considerable power, and each one of the
    regulatory agencies have considerable power over the
    institutions themselves. We have the opportunity to make
    recommendations to the board of directors, we have the
    opportunity to assess fines and penalties, to pursue
    enforcement actions. We have a great deal of authority over the
    institutions themselves.
        I think in recognizing that, there is concern about what
    will happen if there are disagreements or arguments over
    different opinions that are expressed during the course of an
    examination. But I can tell you in the strongest terms--and
    again, I operate in the Dallas office and supervise this
    region, that it has been emphasized a great deal that there is
    no retaliation that will take place in any of our supervisory
    activities. I am as concerned about that as I am anything else
    that we do. We have active involvement with the institutions
    themselves, with the bankers associations, I meet with the
    institutions, and we are very concerned about any kind of
    feedback or comments that would suggest any kind of
    retaliation.
        Mr. Scott. What would that retaliation be? How would any of
    our Federal regulators--each of you sitting there are
    regulators--what would be a retaliation? How would that happen?
    It is a part of the culture there, we hear it all the time, so
    we might as well get it out in the open so we can correct it,
    so we do not deal with it. What are some of the--could you
    describe an action that would be considered retaliation that
    our bankers would have to worry about, from an examiner?
        Mr. Barker. Again, I go back to concerns about what actions
    the regulators could pursue. For example, fines and penalties
    and violations and weaknesses could all be cited in an
    examination report. Again, we have a series of checks and
    balances that take place to make sure that does not happen. And
    again, I cannot emphasize enough that any kind of retaliation,
    it is a four-letter word, it is identified as something that we
    just will not allow to take place in any of the institutions.
        Chairwoman Capito. Would anybody else like to comment on
    that?
        Mr. Bertsch. I would just add on the question of
    retaliation, we take it very seriously too, and would not
    tolerate it. We have an ombudsman function in Washington that
    is separate and distinct from our supervisory function that can
    investigate any specific cases that people identify of
    retaliation. That ombudsman has the ability to investigate
    through the Reserve Banks and identify any cases that might
    rise to that and to take appropriate action if anything of that
    nature is identified. But as Gil said, and I know my other
    colleagues from the FDIC share this, we do not expect examiners
    to retaliate. We understand there are differences of opinion
    but we do not tolerate retaliation.
        Chairwoman Capito. Thank you. I am going to take the
    liberty of having another round. I am going to have one quick
    question.
        All three of you have mentioned guidance as a policy,
    guidance from Washington to try to spur lending. I know that
    guidance is different than regulation and this is maybe
    Washington bureaucratic speak, but it has great impact I think
    in terms of how it is carried forward. So I would ask you, how
    do you distinguish guidance from regulation, and then if
    guidance is a weaker form of regulation, more as an advisory
    opinion, how do you follow up with that in terms of your
    quality control to make sure it is consistent across all
    regions and all types of institutions and lending practices?
        So I will start with you, Mr. Bertsch.
        Mr. Bertsch. As I touched on in our testimony, we have done
    a number of things to try to look specifically at how the
    examiners are implementing the guidance. So one of the things
    we have to do is rely on our local reserve banks to monitor the
    work that the examiners are doing and take into account their
    knowledge of the local business market, their conversations
    with bankers, and make sure the examiners are taking a balanced
    approach to looking at loans.
        Beyond that, we have done specific testing to look at the
    particular area that seems to be raised most frequently, which
    is concerns about how we are treating commercial real estate
    loans. And so we took a look at a large sample of those loans
    across the country to see how our examiners were treating them,
    compared that to the guidance that we set out and make sure
    that the examiners were consistently following that.
        Chairwoman Capito. What did you find?
        Mr. Bertsch. We found that in our opinion, the examiners
    were carefully following that guidance. And in many instances
    were giving bankers reasonable and, for good reason, benefit of
    the doubt on loans that they reviewed when there were pending
    actions or there was additional collateral that was going to be
    offered, or things of that nature. So we conclude from that--
    and we continue to test that--that the examiners are hearing
    the guidance and that they understand that we need to be
    careful to consider and listen to what the bankers have to say
    when we are making our classification determinations. And we
    think that the guidance is effective, regardless of the fact
    that it's not regulation, as you mentioned.
        Chairwoman Capito. Right. Mr. Barker?
        Mr. Barker. Madam Chairwoman, I guess the way I would
    respond to your comment is the difference between guidance and
    regulation, that specific point itself, because issuing
    guidance provides a lot of flexibility for the institutions to
    be able to take an approach and implement what the intentions
    and the objectives of the guidance actually is. So it is very
    much a principles-based rather than rules-based approach, which
    I think again allows the institutions to go ahead and adopt
    policies, develop business plans, and it provides them some
    flexibility in how they comply with the regulatory issuance
    that is out there. I think that is very important because
    banking is an innovative, creative process and we see that take
    place all the time and it is up to the experience of the
    examiners to make sure that guidance is being followed, that
    the risks are being identified and that the controls are in
    place to minimize that risk.
        Chairwoman Capito. Thank you. And then, anybody at the FDIC
    on that point?
        Mr. Spoth. I think I can probably comment for both of us
    there. The guidance does not have the force of law.
        Chairwoman Capito. Right.
        Mr. Spoth. It is a communication vehicle with the industry
    and our examiners, and during the tough times that we have
    here--particularly we are all talking about the same main three
    pieces of guidance--trying to convey a message to both the
    bankers and the examiners about what the expectations are. So
    we expect sound loans to be made.
        Chairwoman Capito. I expect we will hear from the second
    panel that in the three guidance areas maybe the guidance is,
    on the one hand, one thing, and then when the rubber meets the
    road, so to speak, it ends up converting into something else.
        I will just make a quick comment and then go to Mr. Bachus.
    When I hear bank failures and folks taking over assets, it is
    consolidation. We just went through too-big-to-fail in a big
    way in this country and certainly the community banks were not
    the problem. But I, as chairwoman of the Financial Institutions
    Subcommittee, am beginning to get very concerned about bank
    consolidation, because from what we are hearing, the
    institutions are getting larger and larger. And from a lessons-
    learned aspect, I am not sure--I need to be assured that is the
    direction we need to go and that you all as regulators are
    overseeing this as a potential red flag.
        So I just put that out as a comment, a source of concern. I
    think most of my colleagues share this and certainly some of
    the controls that were put in place in Dodd-Frank, whether it
    is the FSOC or some other things to look at, kind of over the
    horizon, systemic risk areas, are still very unformed and, I
    don't know, they do not make me sleep all that great at night.
    And then when you see the markets just going crazy here,
    particularly with the financial institutions, it is a source of
    concern.
        Chairman Bachus?
        Chairman Bachus. Thank you.
        I would say this to the regulators, but also to the
    audience, it is very difficult here on Main Street, the
    environment, the demographics, the economy, the loss of jobs.
    It is also, I think, a very difficult time for regulators and
    they have many challenges there. You will hear sometimes as a
    Member of Congress conflicting information even from the
    bankers or from the borrowers. You talk to a borrower and
    sometimes he will say that the banks say the regulators don't
    want me to make that loan. And let me say this, it is not up to
    a Member of Congress to tell people or encourage people to make
    loans or not to make loans. That is certainly not our job,
    ethically. But when we have made inquiries as to just what is
    the situation here, a lot of times the bankers tell us that
    they do not want to make the loan and they actually do sort of
    shift that by saying--and it is an easy answer to say--we are
    afraid of the regulators. And that is often the case.
        I know many bankers will maybe tell you that is not the
    case, but I have had some of them who have said that is the
    case. Not that they intentionally do that, and maybe it is
    someone, a loan officer who is saying that, not someone in
    management.
        Mr. Barker, you, as a District Director, are in the banks
    quite often. And I think Mr. Westmoreland mentioned something--
    Mr. Spoth--and Mr. Edward, you have been on the job since
    January--and you are actually in Washington and you supervise
    the District Directors, so they are going into the banks. But I
    think maybe Mr. Westmoreland has hit on something in that I
    think--I believe it could be beneficial to sometimes go with
    the District Directors or even the bank examiners and listen.
    Oftentimes, my staff will meet with constituents and then I
    will talk to constituents and the staff will think they are
    getting the message, but I may actually say, I think we can do
    something.
        I would actually encourage you to do that because we
    sometimes don't--at the Washington level, they say they are
    sending a message to the bank examiners, the bank examiners on
    the local level sometimes feel as if it is Washington, that if
    they do something, they may have a problem with Washington. And
    it is very difficult for us as Members of Congress or for
    bankers or for borrowers to know exactly if there is a problem
    or where there is a problem.
        I will close by saying that--and I know for many of the
    bankers here, this may not be a popular thing for me to say,
    but I am going to say it anyway, because I do not run in this
    district.
        [laughter]
        One of the bankers in my district who was the most critical
    of the bank regulators, vehemently critical, and was always
    calling with various examples of overreach, I had been told a
    year before by other bankers that that bank had done all sorts
    of imprudent lending and that there was no way they were going
    to pull out. And they were closed, at a considerable loss to
    the taxpayer and to some depositors who, during that period of
    time, came in and deposited money above what their protection
    rates were. And to the last day, I was being told that this
    bank was in great shape, by the management. But everyone else
    realized that was not the case.
        That is human nature to say that someone else caused your
    problem. The bottom line is the regulators may have made
    mistakes, but I do not think in many cases they forced the
    failure of banks. They may not have done everything that they
    could have, they may not have done a perfect job. And I worry
    going forward the level of regulation and the cost of
    regulation and Dodd-Frank is going to--the interchange fee on
    debit cards, of all things, which impacts community banks
    particularly--is going to be another hurdle for our community
    banks. And I know the Fed has been outspoken on that and very
    concerned about it, that it would be a problem.
        Credit cards were not addressed on the interchange fee.
    Those are the seven largest banks. So we have had--that
    provision that only dealt with debit cards is going to make
    the--it is not a level playing field between our community
    banks, regional and community banks, and our largest
    institutions.
        So I would just simply say to you I think more
    communication always helps. I appreciate the fact that the FDIC
    sent its top people from Washington. It was good that we had a
    District Director from the OCC because it is a slightly
    different point of view, and I think they were both good. But I
    would encourage you, with Mr. Westmoreland and Mr. Scott, to
    look at their legislation, offer comments to them, if you have
    a provision that you think is a problem. But if you can work
    with them on this, at least sit down and see if you can agree.
        I appreciate your attendance today and it is not--we are
    not one big happy family, we are never going to be, but we are
    all Americans, we are all concerned about the economy, we all
    want the financial system and the American people to prosper.
    So we are all on the same page, we all want the same goals. But
    as you will probably find out on this second panel, they do not
    consider you family. But they should not, because you are not
    there to--you have a duty you have to discharge. It is not
    always popular, but I do--as I appreciate the challenges with
    the bankers, I appreciate the challenges you have, too.
        I have no further questions.
        Chairwoman Capito. Thank you.
        Mr. Westmoreland?
        Mr. Westmoreland. Thank you. To the gentlemen from the
    FDIC, can you both confirm to me for the record that no one on
    the FDIC asked any Senator in the United States Senate to hold
    H.R. 2056?
        Mr. Spoth. May I take some liberty with that question, to
    offer our support. For one, we think it is the right thing to
    do, to have our Inspector General and anyone else look over the
    FDIC's operation. We support that initiative and are happy to
    work with it.
        Mr. Westmoreland. So if anybody told us that, they were
    mistaken?
        Mr. Spoth. I would not know about that.
        Mr. Westmoreland. All right. Mr. Barker, in your testimony,
    you said, ``Thus, a key part of our job is to work with bankers
    to ensure that they recognize and address problems at the
    earliest possible stage when remedial action is likely to be
    most effective. The simple truth is that seriously troubled
    banks cannot effectively meet the needs of their local
    communities.''
        And you testified or spoke that you had gone I think to
    three banks that eventually went. What prior steps had been
    done, what remedial actions had been taken to get them back on
    the road I guess to recovery. And how long back had those
    remedial actions been put in place before the failure?
        Mr. Barker. I think that in every single case where we have
    a bank failure, examiners are responsible for conducting
    examinations on a routine basis, based on the size of the
    institution. Once we identify problems at an institution--
        Mr. Westmoreland. But how many of those banks--had there
    been problems identified with those banks that you visited?
        Mr. Barker. Yes.
        Mr. Westmoreland. And how far back had those problems been
    identified?
        Mr. Barker. Varying degrees.
        Mr. Westmoreland. Okay. Because we have bankers telling us
    that the OCC comes in and they get an A+ on their report card
    and then the next report, they not only get an F, they are
    called everything but a felon.
        How often do you do examinations on banks?
        Mr. Barker. Depending on the size, either 12 or 18 months.
        Mr. Westmoreland. Okay, 12 or 18 months. So, one year, you
    make all A's and then the next year, you get F's, you are
    called everything but a felon and you make a D in conduct. Now
    somewhere, somebody missed those remedial steps I guess,
    because I don't know how it goes from an A+ to an F in 12
    months.
        Mr. Barker. Let me say a couple of things. One is that the
    uniqueness of the Georgia markets included, as was spoken
    before, the size of the concentrations in commercial real
    estate and I think what has not been spoken is the significant
    economic impact that hit at one particular time. In the past,
    it was a slow downturn or the economy slowed, but it was just a
    significant economic event that just completely shut down the
    markets in Georgia. So it happened very, very quickly.
        As part of our supervision, we not only examine banks once
    every 12 or 18 months, we have quarterly contacts with the
    institutions. And the purpose is to do those very things, to
    highlight trends in financial condition, to talk about new
    products and services--
        Mr. Westmoreland. I understand. And I am not trying to cut
    you off, but some of these loans that are now F's were A's. It
    is just hard for me to believe a loan goes downhill that fast,
    especially when it is a performing loan.
        But I want to get back to the FDIC because I know we are
    running out of time. How often do you take a performing loan
    with a failed bank, and when it comes into receivership of the
    FDIC, how does it become a non-performing loan?
        Mr. Bret Edwards. Are you talking a bank fails and the
    loan--
        Mr. Westmoreland. The FDIC took over as a receivership.
        Mr. Bret Edwards. Okay. If a performing loan goes into
    receivership, it would depend on where it gets managed
    obviously, but you are asking how it would become non-
    performing?
        Mr. Westmoreland. No. What do you do with it?
        Mr. Bret Edwards. With a performing loan?
        Mr. Westmoreland. When a performing loan comes in.
        Mr. Bret Edwards. Sure. Again, we have tried to use the
    whole bank structure as much as possible, so the performing
    loan would be sold to the acquiring institution and become an
    asset of that institution.
        Mr. Westmoreland. The FDIC is the receivership--no?
        Mr. Bret Edwards. Okay. If there is no acquiring
    institution, then we would take that onto the receivership's
    books and we would manage it--either manage it ourselves or
    package it into a package to sell, or perhaps to put into a
    limited liability structure to have--
        Mr. Westmoreland. Okay. But the rules and regs that we are
    supposed to be, as the chairman said, at least applying
    consistency, if you go in and put a bank in receivership
    yourself, you work out these loans or at least you should be
    following your own guidelines to work out these loans, but
    isn't it true that most loans that the FDIC wants to modify,
    they want 50 percent of loan to value?
        Mr. Bret Edwards. I am not familiar with that requirement.
        Mr. Westmoreland. Okay, so that is not a requirement?
        Mr. Bret Edwards. No.
        Mr. Westmoreland. That it would be 50 percent. So you would
    be more than willing to help somebody with a loan that the FDIC
    had, to soften the blow, to do what you are encouraging other
    banks to do, to have shared-loss agreements, you would be
    willing to go in and do that?
        Mr. Bret Edwards. What I described earlier about our
    expectations on acquiring institutions when they take over
    these loans under a loss sharing agreement, we follow exactly
    the same standard. We are going to look at a performing--if a
    loan becomes non-performing, we are going to look at the
    alternative disposition strategies and we are going to follow
    the one that we believe is going to minimize the loss.
        Mr. Westmoreland. Okay. Let me follow up for just a minute
    here. With Rialto being a partner of the FDIC, Rialto is a
    group of people, I think out of Florida, that has partnered
    with the FDIC, correct? FDIC, 60 percent partner?
        Mr. Bret Edwards. That is correct.
        Mr. Westmoreland. They are 40 percent. They purchased $3.2
    billion worth of loans I believe from the FDIC--and you are a
    partner, right?
        Mr. Bret Edwards. Yes.
        Mr. Westmoreland. --for about 40 cents on the dollar.
        Mr. Bret Edwards. Okay, yes.
        Mr. Westmoreland. And I think the actual money they put in
    cash, 300 and some million dollars, was about 8 percent of
    that, right?
        Mr. Bret Edwards. Okay, yes.
        Mr. Westmoreland. And you are a partner with them?
        Mr. Bret Edwards. Right.
        Mr. Westmoreland. It is zero percent interest for 7 years,
    is that correct?
        Mr. Bret Edwards. I believe that's right.
        Mr. Westmoreland. So the taxpayers--let me get this
    straight, we are a 60 percent partner and we took on another
    entity, an LLC. They got the stuff with just cash money for
    about 8 percent down, right? Would you do that for anybody else
    out in the audience there who wanted to do that?
        Mr. Bret Edwards. When we put those LLC structures
    together, we put--
        Mr. Westmoreland. No, I am just asking you, would you do
    that with anybody else out there?
        Mr. Bret Edwards. Anybody who is qualified to bid on those
    kind of structures. When we put those--
        Mr. Westmoreland. So if they had 8 percent of what the deal
    was, you would take them on as a 40 percent partner?
        Mr. Bret Edwards. As long as it is the highest bid for
    the--
        Mr. Westmoreland. I am sorry?
        Mr. Bret Edwards. When we put those deals together, we take
    those assets, put them together in a pool, we bid them out
    competitively.
        Mr. Westmoreland. Okay, so your 40 percent partner was just
    lucky to get the bid?
        Mr. Bret Edwards. We think we do an excellent job of
    marketing these things--
        Mr. Westmoreland. I know, but I am just asking you.
        Mr. Bret Edwards. Yes.
        Mr. Westmoreland. Because it sounds like a sweetheart deal,
    and all these people may want to get involved with you to be
    able to do that.
        [applause]
        Mr. Westmoreland. And let me ask you this--
        Chairman Bachus. It was bid, though.
        Mr. Bret Edwards. Correct, that is absolutely right.
        Mr. Westmoreland. I don't care. With all due respect, Mr.
    Chairman.
        Chairman Bachus. I know.
        Mr. Westmoreland. When you go and buy other people's loans
    that are supposed to be in the constant consistency of what we
    are doing, that is supposed to soften the effect on the
    community and work them out, now they are auctioning them off.
    And let me go one step further. Typically, you would foreclose
    on a property if it was a non-performing loan?
        Mr. Bret Edwards. If that is the best disposition
    alternative after we have done the analysis.
        Mr. Westmoreland. Okay. Would the best dispositional thing
    to do be to go immediately to court and file for a judgment and
    let the borrower continue to accrue interest and let the
    borrower be responsible for the taxes, rather than foreclosing
    and taking the property over and putting it back out and
    selling it. Would it be the FDIC's decision, since you are a 60
    percent partner, to go to court first and go after these people
    personally, because we are wanting to do a consistency of the
    regulations? So it is the FDIC's position that their managing
    partner go to court first, sue these people personally, try to
    get control of the property and even though they have control
    of the property, the borrower is still responsible for the
    taxes and the interest? Is that what I am hearing from you?
        Mr. Bret Edwards. It sounds like this is a fact-specific
    situation. I would be happy to talk to you about that.
        Mr. Westmoreland. You know the situation, I mean it is
    Rialto.
        Mr. Bret Edwards. Right. I will tell you that the LLC
    structure has served the FDIC well. We take the loans--
        Mr. Westmoreland. You are a 60 percent partner.
        Mr. Bret Edwards. --we put them out for bid.
        Mr. Westmoreland. You put them out for bid and then do you
    tell them to go straight to court? I am not going to argue with
    you here, but we are going to look further into this because I
    am telling you, there is something that is not right with it.
        [applause]
        Mr. Westmoreland. And we are going to continue to pursue
    it.
        Chairwoman Capito. Mr. Scott?
        Chairman Bachus. Mr. Edwards may want some time to explain.
    I know he was kind of--
        Chairwoman Capito. Mr. Edwards, did you have another
    response?
        Mr. Bret Edwards. Again, let me just explain. Our LLC
    program is essentially designed to keep as many of the assets
    in the private sector, just like the shared-loss program is. If
    we are incapable of getting a loss share deal or a whole bank
    deal first of all and then a shared-loss deal, we then take
    those assets back onto the books of the receivership. Rather
    than manage those assets ourselves with our own employees, we
    put these assets into an LLC structure. These equity partners
    bid competitively to get a piece of that deal and then they
    have their own capital at risk. Again, they are putting up
    substantial amounts of capital, these are not--these are some
    of the most poor quality assets we have and they are incented
    to follow the same disposition strategies that we would or our
    loss share partners would. It is their money at risk, they are
    going to follow the disposition strategy that has the highest
    net present value for that asset.
        Chairwoman Capito. Thank you.
        Mr. Scott?
        Mr. Scott. Thank you.
        Let me ask you, are there any banks now currently, in your
    opinion, or your understanding, that are in trouble or close to
    closing now that are under review?
        Mr. Spoth. Yes.
        Mr. Scott. And how many would that be?
        Mr. Spoth. The problem bank list has 888 on it, it has been
    trending down some. Not nearly all of those do we expect would
    fail. There is a subset of those, there is a possibility that
    some of those could fail, not all of them will.
        Mr. Scott. But relative just to Georgia, how many?
        Mr. Spoth. I do not have that information.
        Mr. Scott. But there are some?
        Mr. Spoth. There are banks struggling in Georgia, yes.
        Mr. Scott. And if you had to put your hand on one basic
    area that was a causal effect, what would that be? Why?
        Mr. Spoth. This is still the workout of the overhang in the
    real estate markets.
        Mr. Scott. One of the problems that we have that I would
    like for you to address is that we get to hear from our friends
    in the banking community when we ask them to lend more. We
    faced it most recently, a lot of closing of car dealerships,
    for example, and their biggest problem was we would go to the
    bank, we could not get the money, we would go to the bank and
    when we get to the bank, the bank would say, we are not
    lending, we cannot lend because of the overly restrictive
    standards and application of regulations that the FDIC, the
    Office of the Comptroller, the Fed, all the regulators,
    examiners, are putting on us. Do you agree with that? Is that a
    fact?
        Mr. Spoth. No. I do not doubt that it is a fact that you
    are hearing it, but I do not think that it is a fact that it
    could be occurring that way.
        Mr. Scott. You mean you do not feel that what you are doing
    is hindering the banks from lending money?
        Mr. Spoth. That is correct.
        Mr. Scott. Why would they say that it is then? That is what
    I mean; there is this disconnect. We cannot get the banks to
    lend because they say you are putting so much pressure on with
    these restrictions that they cannot lend and then you say these
    restrictions can. So something has to give, we have to get the
    money out into these small businesses.
        Mr. Spoth. I think this may go back to the chairman's point
    about the guidance and the like. This is why, along with the
    other regulators, we would put out guidance that we are
    encouraging loans to creditworthy borrowers, and that goes
    right to, if it is a car dealership, do they have the ability
    to cash flow whatever kind of loan that they are applying for.
    We are happy to see those kinds of credits made.
        Mr. Scott. But let me just ask you, what are these
    restrictive standards? What would they be? What are the bankers
    talking about? I do not think they are just making this up.
    There has to be something that you are doing. What is it--I am
    trying to get at a point, not sort of he said-she said, but
    what in your opinion are they talking about in terms of these
    restrictive standards?
        Mr. Spoth. I will try to work with you on that. It is a
    communication piece, I think. The only banks that are
    restricted on the amount of lending that they can do, unless it
    would be State law, there are limits on how much you can lend
    to any borrower, but setting that aside, the only restrictions
    that are on banks are banks that are in serious trouble, and we
    usually have a formal or informal agreement with them about how
    they plan to work out their problems. Even then, you would not
    usually see the kind of restrictions that you may be hearing
    about.
        Mr. Scott. Let me ask one for you to respond to. There have
    been complaints about the consistency of procedures used by
    examiners for appraising collateral values. Is that, in your
    opinion, legitimate? Is there a problem of not being consistent
    in applying those procedures?
        Mr. Spoth. Our procedures at the FDIC, and I think the
    other regulators as well, are to review the appraisals that the
    bank itself has gotten. So you would not be expecting, and you
    would not see, a bank examiner conducting appraisals. We may
    ask about an appraisal or an evaluation that a bank has in its
    files, but--
        Mr. Scott. And so you do not see, there is no legitimacy to
    the concern that there is inconsistency in the procedures?
        Mr. Spoth. I don't think there is inconsistency in the
    procedures, but I do hear the concern. It is certainly true
    that there is a concern about that. We put out guidance
    specifically on this issue. I think it was in December of 2010
    that we reissued appraisal guidance.
        Mr. Scott. What about the factors that the examiners
    consider when assessing capital adequacies?
        Mr. Spoth. The assessment of capital adequacy is a case-
    specific situation, according to the risk profile of the
    institution, unless they are not meeting the absolute minimum
    standards of the regulation. So there is a minimum standard, as
    you know, and there may be a requirement above that, depending
    on the risk profile.
        Mr. Scott. What about the impact of the cease and desist
    orders?
        Mr. Spoth. This is one that we do hear a lot about when
    banks are in troubled condition. We try to work with the bank
    management to reach a bilateral agreement, which would include,
    if we agree, that an increase in capital is necessary, and we
    try to agree with the bank on what that number should be. And
    we think what that leads to is a consistency of approach. If
    the bank has to talk to their existing shareholders or new
    shareholders, what exactly is the road map forward. So if we
    can agree on an order, which we do substantially all of the
    time, everybody knows what the road map is to avert that
    failure.
        Mr. Scott. Okay. And so what would you say, because the
    bankers are going to come up here and speak in the next panel,
    I would like to give you an opportunity, what would you say--we
    have asked questions here, and there are two thoughts of
    opinion here. There are areas of disagreement. I think you saw
    and heard some of the reaction from the audience with their
    applause in making a point, but there seems to be some
    difference here. You are the examiners, you are the regulators,
    they are the banks. What would you say to the bankers, what do
    they need to do that they are not doing, and where are some of
    the miscommunications that are taking place, because there
    obviously is miscommunication here? How would you address that?
        Mr. Spoth. I would just stipulate that these are the very
    toughest conversations that a regulator and a banker can have,
    if the bank is in a seriously threatened condition. Investors
    could lose money, borrowers, communities could potentially lose
    their local community bank. These are the very toughest
    conversations you can have and you would expect that informed
    people on both sides of the table would be trying to come to a
    solution. And I believe that is the case substantially all of
    the time. So it is getting around to just what you are asking,
    what needs to be done. Usually if capital has been depleted, it
    will need to be replaced at some level so that the institution
    has time to work out its issues.
        Mr. Scott. Yes?
        Mr. Barker. I would like to make a couple of comments. In
    my experience over the years, we have difficult times like
    this, but there are institutions that not only survive, but
    those that thrive. And there are two elements in those two
    individual cases. One is a management team that recognizes the
    issues and is prepared to address them. The second issue is
    having access to capital in order to have them last through the
    difficult periods. The access to capital is really a key.
        But I think what I would pass along to the bankers who are
    coming up next is as examiners, our window into the bank, our
    window into their borrowers is through the credit files and
    through the discussions of management. So the best they can do
    is to help us understand what the situation is, help us to see
    the things that they see, have that dialogue, and the
    communication is critically important to us making accurate
    assessments.
        Mr. Scott. Finally, I don't want to take up too much time,
    but Congressman Westmoreland and I are working on this bill and
    in the legislative process, you are always looking for
    vehicles. And while the paramount purpose of this bill is to
    really get a good study and get some answers to questions, and
    we can also use this--as a result of this hearing, there may be
    some things that come about where we can improve the situation
    and that is why I really asked those questions about some of
    the points and some of the concerns that have been raised. And
    I would hope that you all would have an open mind here that as
    we get back, the bill gets over to the Senate, that we might be
    able to add one or two items into this bill that can be
    executed to help with one or two of these problems. Would you
    all be amenable to that?
        Mr. Spoth. Yes.
        Mr. Scott. Okay, thank you.
        Chairwoman Capito. All right, thank you. I want to thank
    the first panel. I think we have had a very good discussion. I
    want to thank you for traveling to Georgia and I want to thank
    you for--
        Mr. Westmoreland. May I make one comment? It will take 5
    seconds.
        Chairwoman Capito. He said 5 seconds.
        Mr. Westmoreland. Mr. Edwards, could you just get me a list
    of every entity that the FDIC is in partnerships with?
        Mr. Bret Edwards. Absolutely.
        Mr. Westmoreland. Thank you.
        Mr. Bret Edwards. Absolutely.
        Chairwoman Capito. And also, I would like to echo the
    chairman's comments in terms of thanking you for your service
    in the financial sector, I know sometimes it is not easy work,
    and we appreciate that. You have certainly had lengthy service
    there.
        My final comment before I call the second panel up would be
    that one of the big solutions to a lot of the issues that we
    have heard today is a roaring and vibrant economy. And this is
    something that we are all four here tasked with, but so is
    everybody in this audience. So I look forward to those days in
    other such hearings.
        Thank you all very much. I will dismiss the first panel and
    I would like to call up our second panel of witnesses.
        We will go ahead and get started. If everyone could take
    your seat quickly, we will go ahead and start the second panel.
    They have been very patiently waiting. I know the chairman will
    be back in the room--there he is.
        Chairman Bachus. Madam Chairwoman, Mac Collins, who was a
    colleague of mine, we came into Congress in 1992 together--Mac,
    would you stand up? You represented this district?
        Mr. Collins. I had the pleasure of representing this
    district for 12 years. It is in good hands now with Lynn
    Westmoreland. We appreciate you all being here; this is an
    issue that really needs to be addressed. There are a lot of
    problems around the country with our community banking system
    and I do think a lot of it has come from the regulators. In
    fact, I know it has. And I appreciate you all being here, and I
    appreciate them being here and facing up to the issue, too.
        You all take care and have a good day. I hate to beg off,
    but I have to go to Forsyth for a conference.
        Chairwoman Capito. Thank you, Mac.
        Our colleague, Mr. Scott, probably will be coming in here
    shortly. So with your permission, I am going to go ahead and
    start. I will introduce each panelist individually for the
    purpose of giving a 5-minute opening statement and then we will
    get to the question portion.
        Our first witness is Mr. Chuck Copeland, who is the CEO of
    the First National Bank of Griffin. Welcome.

       STATEMENT OF CHUCK COPELAND, CEO, FIRST NATIONAL BANK OF
                                GRIFFIN

        Mr. Copeland. Committee Chairman Bachus, Subcommittee
    Chairwoman Capito, and Representative Westmoreland and
    Representative Scott in absentia, welcome to my congressional
    district and thank you for affording me the opportunity to
    provide my comments during these times which have been so
    detrimental to our communities.
        First National Bank of Griffin is a 78-year old community
    bank chartered in Griffin, Georgia, in 1933, literally rising
    from the ashes of the 1929 financial collapse, to serve the
    citizens and merchants of our community. For all of these 78
    years, service to and access to credit for our citizens and
    merchants have been our principal tenets of business.
        Being located less than 50 miles from downtown Atlanta, our
    community has served as a long-time bedroom community for those
    commuting daily into Atlanta for work. As such, as the metro
    Atlanta economy prospered in the 1990s and early 2000s, the
    demand for housing in our banking markets blossomed. Being a
    community bank, we responded to this by providing both
    construction and development financing to many of the builders
    and developers. We provided responsible conventional long-term
    mortgage financing to many of the home buyers through our
    longstanding, direct-delegated authority through Freddie Mac.
    We did not knowingly participate in the subprime game of hybrid
    loan structures and perilously relaxed mortgage underwriting
    standards and we often questioned the soundness and
    appropriateness of those activities. What we failed to
    anticipate in our risk management practices at that time was
    the degree to which this subprime activity was propping up the
    unprecedented demand for new housing our market was
    experiencing. We also failed to understand the degree to which
    misrepresentation and manipulation were masking huge
    fundamental flaws in the mortgage securitization market.
        We monitored our concentration risk in the areas of
    residential construction and development, comparing our levels
    against the regulatory guidelines, and against the levels of
    our market peers. Due to our 7 decades of retained earnings and
    careful and prudent past dividend policies, our higher than
    peer capital levels helped mitigate our risks, and our
    concentrations in these loans as a percentage of capital
    generally came in at the lower end of our market peers, which
    was not substantially out of line with regulatory guidance.
    Regardless of these circumstances, no amount of forward
    analysis or stress testing anticipated the depth and length of
    the real estate housing collapse we were about to face in the
    closing months of 2007.
        We were early to recognize our problems, mainly due to the
    fact that we had used loan structures which were more stringent
    than many of our peers. We commonly required hard equity and
    monthly payment of interest on our construction lines. In
    addition, it was the exception where we permitted borrowers to
    draw funded interest reserve to carry their development loans.
    Because of these practices, in many cases, we knew our problems
    the first time a monthly payment was missed as opposed to not
    discovering the depth of the problem until loan maturity. In
    spite of these efforts, the pace and magnitude of the
    residential collapse quickly overwhelmed our early warning
    devices.
        We are a core-funded community bank. As we entered the
    recessionary cycle, we enjoyed the number one deposit market
    share position in our home market and had no wholesale or
    brokered deposit funding on our balance sheet. In spite of the
    significant credit stresses we have endured over the past 4
    years, we continue to demonstrate an underlying core earnings
    stream. In other words, once the cloak of this real estate
    collapse is finally lifted, our bank can not only survive, but
    prosper for another 78 years.
        I recognize that the title of this hearing is, ``Potential
    Mixed Messages.'' My frustration is not so much one of mixed
    messages, but one of changing messages. As this cycle began, we
    sensed a reaction from our regulator of supportive cooperation.
    They knew our bank. Many of the field examiners had been in our
    bank through multiple exam cycles for as long as 25 years. The
    general message coming from examiner comments in 2008 was one
    of acknowledging that the same core fundamentals which had
    sustained our bank for decades were still evident, but that we
    had become victims of an unprecedented real estate market
    collapse. The beginning of the shifting message became evident
    when we received our written reports of examination, and many
    times the narrative seemed more harsh than the discussions.
    Unfortunately, it is the written narrative which becomes the
    written record, and the document by which we will all be judged
    in history. Did we have a role in setting ourselves up to
    become victims? No doubt. But did we recklessly pursue growth
    and earnings at all cost with no regard to the other elements
    of our mission? Never.
        Fast forward to subsequent exam cycles and we have found
    the field examiners less willing to disclose conclusions and
    very guarded in acknowledging progress in those areas where we
    had been performing well. These are many times the same
    examiners we have worked with for years. We understand that
    this is not a personal affront; it is simply this environment
    of second-guessing and weariness in which we are all operating.
    But as the field examiners have become less comfortable in
    making casual assessments of progress or acknowledgement of
    bright spots within our banks, such as our extreme customer
    loyalty and core funding, the written reports of examination
    have taken on a clear pattern of excessive criticism and legal
    edification. So much so that one can find nearly contradictory
    statements within the same paragraph or section of a current
    report.
        We understand our shortcomings, and you can rest assured
    that we are working diligently to improve our banks in the
    areas we can control and influence. But, the inflammatory and
    demoralizing tone found in many of the examination reports only
    tends to send us clamoring for cover. We are trying to improve
    our banks and preserve our chances of survival, not because of
    heightened rhetoric or threat of repercussion, but because for
    most of us, our banks are a substantial part of our being. We
    are the ones leading our community's economic development
    activities and trying to attract jobs for our citizens. We
    carry the daily weight of knowing the importance of a paycheck
    to the roughly 100 people we employ in our bank. This is bigger
    than pride, deflection of responsibility, or self-preservation.
        I have observed some of the testimony of the regulators and
    the academic experts in earlier hearings on the subject of
    regulatory practices or behavior. A recurring theme seemed to
    be the position that forbearance in regulation is inappropriate
    and would only lead to greater potential losses to the fund. I
    would argue that forbearance is a necessary and logical part of
    any healing process. And that is exactly what is taking place
    in our banks; we are attempting to heal our banks, our local
    economies, and where salvageable, our borrowers. That is why I
    support the flexibility being offered in some of the proposed
    legislation such as smoothing out the effects of loan and asset
    impairments resulting from declining real estate values. The
    current methods of write-down being employed today have the
    potential to wipe out all of the capital in our banks with no
    chance of living to see the eventual real estate market
    recovery. Unfortunately, by that point, our community will have
    been stripped of a valued commodity. My bank and its resources
    will have been extinguished and the beneficiary will be a
    faceless, opportunist investor with no ties to my community.
        Chairwoman Capito. Mr. Copeland, could you kind of
    summarize the end there? Sorry. I'm trying to keep it in a
    reasonable timeframe.
        Mr. Copeland. Certainly.
        In spite of the imperfections and the public's general
    distaste for it, I was an early proponent of the TARP program.
    Unfortunately, our bank was not allowed to participate in that.
    This has created a system of two different classes of banks:
    those that can afford to and are motivated to dump problem
    assets at substantial discounts; and those of us who are
    clinging to our remaining capital like a shipwreck survivor
    clinging to debris.
        Theoretically, had we received the TARP funding which the
    funding formula indicated we were eligible for, our current
    leverage ratio would still be at a respectable 8.25 percent and
    our total risk-based capital at 15 percent.
        And with that theoretical capital level, I am sure it would
    be much easier for my bank to attract additional shareholder
    investment to bring us into compliance with the regulatory
    order my bank entered into with the OCC almost 2 years ago. The
    capital cushion would add badly needed flexibility as we
    consider loan requests from borrowers and we would find
    ourselves in a position to operate our bank for the benefit of
    our community, its employees, and the broader economy, as
    opposed to the regulatory paralysis which we suffer from today.
        Cycles eventually come to an end. We have endured this one
    for 4 years. We realize that much of what has been done cannot
    be changed or its effect reversed. We kindly ask that through
    forbearance and flexibility, our regulators give us time and
    support us as we try to lead our communities to recovery.
        Thank you for your time.
        [The prepared statement of Mr. Copeland can be found on
    page 89 of the appendix.]
        Chairwoman Capito. Thank you.
        Our next witness is Mr. Michael Rossetti, who is president
    of Ravin Homes. Welcome.

        STATEMENT OF V. MICHAEL ROSSETTI, PRESIDENT, RAVIN HOMES

        Mr. Rossetti. Thank you, Chairwoman Capito. I would like to
    welcome you and Chairman Bachus to Georgia. And Lynn
    Westmoreland, David Scott, it is good to see you guys again. I
    sincerely appreciate the honor and the opportunity to testify
    before you on this subject. It is my opinion that our
    Representatives genuinely want to foster and promote a healthy
    banking environment so that citizens and businesses can
    prosper.
        I have been directly involved in the banking business as a
    director since 1999. And my primary business, as Chairwoman
    Capito mentioned, is homebuilding. I have owned and operated
    Ravin Homes for 30 years.
        In your letter inviting me to testify, the first two bullet
    points request comments on the policies and procedures of the
    FDIC and whether they are being applied uniformly across the
    country.
        Although I have read about certain banks getting favorable
    treatment from regulators, I can say that my experience has
    generally been that they have acted reasonably with our bank.
    The problem is with the regulations and the lack of common
    business sense used in the interpretation of these regulations.
    We are being regulated so heavily that we cannot function as a
    facilitator in the community.
        When Sarbanes-Oxley was implemented, our bank decided to go
    private so we would be exempt from the duplication of
    regulatory reporting. We were already performing the regulatory
    requirements of the FDIC. The costs and manpower required to do
    redundant reporting under Sarbanes would have been crippling to
    our institution.
        Now, we have Dodd Frank to contend with. This a 2000+ page
    bill that will have 10 times the regulations attached to it
    after bureaucrats get through with writing all the rules. I see
    more of an issue with the amount of regulations rather than the
    regulators. We are being regulated to death in all of our
    personal and business lives.
        Your next point of interest concerns regional economic
    conditions and adjusting exam standards.
        In my banking world, as well as most banks in Georgia, real
    estate loans, which we call AD&C loans, were and still are a
    large part of our portfolios. In accumulating these large
    portfolios, the bank's customers were simply supplying the
    product that the Federal Government, through Fannie Mae and
    Freddie Mac, were giving away money to buy.
        The current huge overhang that this created in all levels
    of housing development is going to take years to work down. If
    the regulators were able to adjust to this fact and be less
    onerous on banks to write down loans, I believe that the
    liquidation of assets would be more orderly and more lucrative
    and create considerably less stress on our banks. I will have
    more on this when I discuss loss share.
        The second to last point of discussion concerns safe and
    sound operation of banks while promoting economic growth. In my
    mind, there are two entities that need to be considered in the
    economic growth equation for this topic--the banks and their
    customers. At the present time, we are restricted from doing
    any new AD&C lending, no matter how secure it is, due to the
    concentration limitations imposed by the regulators. We cannot
    take advantage of doing a good loan and the customer cannot
    find a bank to do that same loan. Both get hurt and the economy
    loses jobs and suffers.
        My grandfather told me when I was younger that there were
    only two ways to get out of debt: stop spending; and start
    making. If banks are going to survive, we need to make a
    profit. And the only way that banks make money is to lend it.
    Right now, we are prevented from doing that.
        Banks that are in this position, basically community banks,
    are completely defensive in this arena. As of this date, we do
    not lend unless it benefits the bank in the disposal of
    foreclosed property. New loans to new or existing customers do
    not exist at our bank.
        I would respectfully request that you investigate H.R.
    1755, the Home Construction Lending Regulatory Improvement Act.
    It addresses this issue and several other regulatory issues
    that are very germane to our discussions here today.
        Now we have the last point in your letter, and my
    favorite--winding down failed institutions and the liquidation
    of assets by the acquiring institutions, which we will call
    loss share.
        This shared-loss agreement allows banks to operate
    completely outside of normal banking policies because they are
    guaranteed to make money, no matter what they sell the asset
    for. The same banks operate completely differently--and I have
    found this directly and heard this from other people--they
    operate completely differently under a loan that was originated
    in their original bank. To add insult to injury to our bank and
    the community, they will dump the assets acquired at a rock-
    bottom price, thereby destroying local property values. In my
    opinion, loss share has done more to destroy property values
    than any other economic factor in this downturn.
        Concerning troubled and failed institutions, from what I
    have seen, the FDIC declares that anywhere from 25 to 35
    percent of the failed institution's assets are declared as a
    loss when they close that bank.
        Using our bank as an example, we are a $380 million bank,
    the Bank of Georgia. If we were closed, the loss to the FDIC
    Insurance Fund would be between $95 million and $133 million.
    If our bank could borrow, or be supplied through TARP like
    Chuck mentioned, $6 million to $10 million to use as capital,
    we would return to being well-capitalized and we would be
    profitable. In addition, we would be able to pay this back over
    a period of time in the future.
        My point is that many banks could survive with a minimal--
    compared to closing the bank--capital injection. This is what
    should have been done with TARP funds instead of forcing them
    on healthy institutions and telling them that they were too big
    to fail.
        I also want to mention--it is not in my testimony, but Lynn
    brought up this Rialto/FDIC partnership. In my opinion, these
    public/private partnerships are terribly--they are perverted.
    That just leaves the door open for a private company to make a
    ton of money. And from what I have heard recently over the past
    2 weeks of investigating this, that Rialto/FDIC partnership is
    bad news. And I would highly recommend that you investigate
    that.
        It is my sincere hope that my testimony today has given you
    a constructive view of these items of interest. Again, I would
    like to thank you for your time today and I look forward to
    answering any questions that you may have.
        [The prepared statement of Mr. Rossetti can be found on
    page 142 of the appendix.]
        Chairwoman Capito. Thank you.
        Our next witness is Mr. Jim Edwards, the CEO of United
    Bank. Welcome.

               STATEMENT OF JIM EDWARDS, CEO UNITED BANK

        Mr. Jim Edwards. Good morning. Chairman Bachus,
    Subcommittee Chairwoman Capito, Representative Lynn
    Westmoreland, Representative Scott, I am delighted to be here
    today.
        My name is Jim Edwards, and I am CEO of United Bank which
    is based in Zebulon, Georgia. I appreciate the opportunity to
    speak to you today concerning the state of banking in Georgia
    and our bank's experience working with the FDIC's shared-loss
    agreements.
        I want to tell you a little bit about our bank. United
    Bank's corporate office is located 50 miles south of Atlanta
    and 40 miles east of where we are today in Newnan. I joined
    United Bank in 1993 and I became CEO in 2002. I am proud to say
    that I represent the third generation of my family to work with
    United Bank and the banks from which it was created. I am
    active in both State and national bank trade associations and
    currently serve as chair-elect of the GBA or the Georgia
    Bankers Association, and also serve as a member of the American
    Bankers Association Community Bankers Council.
        United Bank traces its roots back to the founding of its
    predecessor, The Bank of Zebulon, in 1905. Over 100 years
    later, more than 90 percent of our company's stock continues to
    be owned by our employees and our directors who live in and
    care very deeply about the local communities that we serve. We
    operate 21 banking offices in 11 contiguous counties ranging
    from 35 to 65 miles southwest, south and east of Atlanta. Our
    total assets are just over $1 billion and we offer traditional
    banking services along with mortgage, trust and investment
    products. We are pleased that we have been able to grow our
    employee base through this economic downturn and we now provide
    jobs and benefits to nearly 400 people and their families.
        The economic downturn which Georgia and our entire Nation
    have endured over the last several years has created the most
    challenging operating environment for banks that I have ever
    experienced. United Bank has historically maintained above-
    average capital levels and worked to make sure that our loan
    portfolio was well-diversified among different types of
    lending. This conservative philosophy has served our company
    well during the past century of operations. This same cautious
    approach encouraged our board to make the decision to apply for
    the Capital Purchase Program funds, more commonly known now as
    TARP, from the U.S. Treasury in late 2008. After a rigorous
    application process, we were approved for a little over $14
    million in funding. Even though we were already well-
    capitalized at the time, the new capital has provided an
    additional buffer in what has certainly been a worsening
    economy, and has allowed us to maintain our employment and
    continue to make loans to qualified borrowers in the
    communities that we serve.
        Since accepting this funding in 2009, United Bank has paid
    just over $2.6 million in quarterly interest payments at an
    approximate rate of 8 percent to the Treasury. Our current
    plans are to begin repaying our TARP funding in May of 2012,
    assuming the economy begins to improve by then.
        United Bank has acquired 3 failed banks from the FDIC
    during the last 3 years. We purchased the deposits in all these
    transactions and loans in two of the transactions. In the early
    stages of the recession, the FDIC liquidated failed banks
    primarily by auctioning off the deposits to another financial
    institution and then retaining the loans themselves for
    disposition at a later time.
        In December of 2008, United Bank purchased the deposits of
    First Georgia Community Bank in Jackson, Georgia, using this
    ``clean bank'' type transaction without a shared-loss
    agreement. A group of FDIC contractors stayed onsite and
    managed the failed bank's loan portfolio for over a year, but
    they had little authority to make decisions or to offer options
    to work with customers experiencing financial difficulties.
    Ultimately, the FDIC bundled all the failed bank's loans into
    several groups and bulk sold them through an internet-based
    auction. The winning bidders were mostly located several States
    away; therefore, they knew very little about the local
    community. And as a result, they had minimal incentive, in my
    opinion, to try to take any long-term approaches to working
    with troubled borrowers.
        In August of 2009, United Bank entered into its first
    shared-loss agreement with the FDIC for the purchase of
    deposits and loans of First Coweta Bank here in Newnan. In
    contrast to our earlier acquisition in Jackson, we are fully
    responsible for managing this loan portfolio. In return, the
    FDIC reimburses us for essentially 80 percent of the credit
    losses we experience in the loan portfolio. This reimbursement
    is effective for the first 5 years for commercial loans and for
    10 years for one-to-four family residential loans. The shared-
    loss agreement does not reimburse United Bank, however, for the
    expenses associated with funding these loans, nor does it cover
    the considerable overhead needed to manage this loan portfolio
    and remain in compliance with what are very extensive
    requirements involved with the shared-loss agreement.
        In the fall of last year, the FDIC informed us that First
    National Bank in my home town of Barnesville, Georgia, soon
    would fail and they asked us to consider submitting a bid,
    along with other banks. Although we were competitors, this was
    shocking and very sad news. Our employees in Barnesville had
    always enjoyed a very good relationship with First National's
    employees and we historically had worked together to improve
    the local community for decades. Our board ultimately decided
    not to submit a bid for First National due to our recent growth
    and due to the fact that we felt like the economy was
    continuing to turn down. However, shortly after the bid
    deadline, the FDIC contacted us and explained that they had
    received no qualifying bids from any financial institutions and
    that they were preparing to close the doors of First National,
    terminate all the employees, and simply send checks to all the
    depositors. They also communicated that unfortunately it
    appeared some customers might exceed deposit coverage limits
    and so there could be depositor losses from some of the First
    National Bank accounts. After considering how devastating this
    would be to one of our most important communities, our
    management team and board decided to submit a bid to prevent
    the bank payout. And I am pleased to share with you today that
    we were able to hire a majority of First National Bank's
    employees and continue banking services without any disruption
    to customers in Barnesville.
        Through these experiences, I have seen the advantages of
    how a loss share arrangement works, as compared to the FDIC's
    earlier practice of using outside contractors to manage a
    failed bank's loan portfolio. When a local community bank, such
    as United Bank, manages a loan portfolio, in my opinion, it has
    a very strong vested interest in trying to take a long-term
    approach and work with customers to overcome their financial
    challenges. The primary reason for this is so that we can make
    the borrower a life-long bank customer. The secondary reason,
    and you heard the regulators talk about this earlier today, is
    that because the bank participates in any future loan loss, we
    do have skin in the game and we work hard to try to minimize
    any future losses. We have worked very hard here in Newnan and
    in Barnesville to find solutions for struggling loan customers
    and have offered modifications and forbearance agreements. And
    we have had a number of successes with this type of approach.
        Under our agreement with the FDIC, United Bank is
    essentially required to manage the loss share loan portfolio in
    essentially the same manner as we handle our non-loss share
    portfolio. The FDIC has encouraged us to work with customers
    whenever possible. The FDIC also audits our bank regularly to
    make sure that we remain in compliance with all the elements of
    the shared-loss agreement. This enhanced scrutiny has
    necessitated us having to hire a number of new employees, just
    to make sure that we are in compliance with the shared-loss
    agreement.
        No, there is absolutely nothing good about any bank
    failure. We all know that. Customers, bankers, businesses, and
    in effect, entire communities, suffer in a variety of ways.
    However, as I mentioned, in our experience, the current system
    of utilizing a shared-loss agreement is preferable to the
    others used earlier in this economic cycle by the FDIC. In
    general, the resolution process works to keep the transition
    organized, it provides maximum depositor protection, encourages
    confidence in the safety of deposits at a critical time, and it
    minimizes more broad-based market disruptions.
        Thank you again for the opportunity to share our
    perspective and our experience in working with the FDIC in
    these shared-loss agreements, and I look forward to answering
    your questions.
        [The prepared statement of Mr. Jim Edwards can be found on
    page 113 of the appendix.]
        Chairwoman Capito. Thank you, Mr. Edwards.
        And our final witness is Mr. Gary Fox, former CEO, Bartow
    County Bank. Welcome, Mr. Fox.

        STATEMENT OF GARY L. FOX, FORMER CEO, BARTOW COUNTY BANK

        Mr. Fox. Thank you. Chairwoman Capito and members of the
    committee, thank you for inviting me to participate in your
    hearing today. My name is Gary Fox and I was in the banking
    business in Georgia from January 1981 until April 2011, when
    our bank was closed by the Georgia Department of Banking &
    Finance and sold with a shared-loss agreement to Hamilton State
    Bank. I started my career as a bank examiner with the State of
    Georgia and began working at the Bartow County Bank in May of
    1983. I am also a certified public accountant and am now in
    private practice.
        I divided my remarks into three categories. First, how we
    got here, to give you some historical perspective. Second, what
    made it worse, where I will mention issues such as appraisal
    policies, market disruptions caused by unprecedented government
    involvement, and the application of certain regulatory and
    accounting policies. And third, I will mention some real
    concerns I have with how the loss share is playing out in the
    market.
        Included in my testimony are slides that I will be
    referring to that were furnished to me by John Hunt of Smart
    Numbers, which would be a good resource for you going forward.
        I saw a lot of changes in our industry in 30 years and had
    the pleasure to meet and know a lot of great community bankers
    during that time. I have a depth of knowledge about the
    community banking industry in Georgia that few other people
    have.
        The biggest change that I saw over the years, other than
    regulatory, was the ease of entry. When I first got into the
    business, it was quite difficult to get a bank charter. In
    fact, it was quite a chore to even get a branch application
    approved. At that time, you had to convince the chartering
    authority of convenience and need. Sometime in the mid-1990s,
    that went out the window and it seemed to me the only
    requirement became whether or not you had enough initial
    capital to meet the chartering authority's requirement. As a
    result, we had an overabundance of banks. Many banks relied
    heavily on brokered deposits since there really was not a need
    for the bank in that particular community in the first place.
    It was also a reason why so many banks did out-of-market
    lending and participation lending since there was not enough
    demand in the community they operated in. On top of that, in
    1996, Georgia passed statewide branching. Previously, Georgia
    had been a State that only allowed a bank to operate in the
    county in which it was chartered unless it formed a bank
    holding company and entered a new market by buying another bank
    in a whole bank transaction. So as a result, many of the banks
    in markets that were not as robust branched into the metro
    Atlanta area to take advance of metro Atlanta's growth. This
    only compounded the problem. After all, it only takes a couple
    of folks polluting the pool to ruin the swimming for everyone.
        Another thing that got us here was prompt corrective
    action, which was put into law in 1991 as a result of the S&L
    crisis. While in theory, it sounded reasonable to mandate FDIC
    to take progressively punitive action against a bank as its
    initial capital falls towards 2 percent, in this environment,
    it was and is a bank killer. It immediately put you in a death
    spiral that you could not escape. Capital dried up, liquidity
    dried up, customers lost confidence, employees left, and
    regulators no longer were allowed to exercise judgment, as they
    were required to follow a set of draconian guidelines.
        And you cannot talk about how we got here without
    mentioning two government programs that have created market
    disruptions--the Troubled Asset Relief Program and the FDIC
    selling failed banks with shared-loss agreements given to the
    acquiring bank.
        Most banks in Georgia that have failed have been appraised
    out of business. To give a specific example of the appraisal
    problem, in the metro Atlanta area, historically the cost of a
    lot is 20 percent of the overall cost of a home. That means if
    you had a new home that cost $200,000, the lot cost would be
    $40,000. Today, the cost of a lot is 5 percent of the overall
    cost of a home, meaning that in the same $200,000 home, that
    lot cost is now $10,000. We have gone from a cost norm of 5-to-
    1 to an abnormal TARP and loss share induced 20-to-1. This is
    visually demonstrated by slide 13, which is part of the set of
    slides that I have included in my testimony.
        There is another slide, number 20, that shows real estate
    asset disposals by TARP and loss share banks. The size of the
    yellow dot represents the number of lots liquidated, and they
    were all sold at less than $10,000 per lot. Unless you were one
    of the fortunate ones who received the government assistance,
    you had no chance to avoid significant charges against your
    capital due to undue influence of government money in the
    marketplace.
        Another example specific to my community was a subdivision
    where the lots had sold in the $90,000 to $120,000 range in
    2007. The loan amount was around $43,000 per lot, which at the
    time seemed to be a safe margin. Most recently, those lots were
    sold for $9,500 apiece by a loss share bank. That is a decline
    of 89 percent at the minimum. This was a fully developed
    subdivision in a highly desirable area with a first class
    amenities package.
        Additionally, these types of appraisal-driven declines
    permeate throughout the local economy. You would think that
    what it costs to create something would have some relevance to
    its value, but not in today's world. Under new appraisal
    standards, many appraisers will tell you that cost is not
    relevant. All that matters is the market approach, and to a
    lesser extent, the income approach. Therefore, since the market
    approach is the most heavily favored approach and you have
    federally-funded asset disposal by TARP and loss share banks,
    we have an incredible disruption in our real estate markets
    here in metro Atlanta and Georgia in general.
        Think about how this affects the general public. Consumers
    cannot refinance their homes to a lower payment because their
    home will not appraise. The municipalities that rely on real
    estate taxes can no longer fund schools or police and fire
    protection. And to make matters worse, many bankers are telling
    me that new appraisals are coming in 40 percent less than last
    year.
        In Georgia, until recently, building and building-related
    businesses had made up 20 to 25 percent of our economy.
    Referring back to the Smart Numbers slides, notice slide number
    15, which shows permits issued since 1996. The norm appears to
    be 3,500 to 4,000 per year. The current number is around 500,
    which is a drop of about 86 percent. In Georgia, we have had an
    industry that represented 20 to 25 percent of our economy not
    just slow down, but literally cease to exist.
        Another side that demonstrates the same point is slide
    number 3. Normally, new homes make up about 50 percent of the
    home sales, but most recently, they represent less than 10
    percent of that total. The decline is not only a result of lack
    of inventory from lack of funding, but it is also because of
    the undue influence of TARP and loss share money in the real
    estate market. If you take a look at slide number 8, you will
    see that the average new home in the first quarter of this year
    sold for around $225,000 while the average resale was $97,000,
    primarily due to foreclosures. A lot of asset devaluation has
    to do with a regulatory system trying to flush out the overall
    system as quickly as possible. As a result, the economy in
    general is being significantly hindered.
        A couple of other accounting-related issues of great
    importance are loan loss reserves and the deferred tax asset.
    Historically, banks use the experience method, called FAS-5, to
    fund their loss reserve. In May of 1993, an additional loss
    measure called FAS-114 was put into place, which I will not
    discuss today. Under the experience method, banks looked back
    at their average 5-year loan losses and set aside an amount
    that would cover those same losses as if they were going to
    happen again. In the 5-year look back, some years were better
    than others and the reserve balanced out. Over the last few
    years, banks have been required to shorten their look-back
    period to anywhere from 2 quarters to 5 quarters. This
    basically has the effect of capturing your worst historical
    loss periods and having to fund your loss reserve as if it were
    going to happen again. This has a direct effect on reducing
    capital, since only part of your loss reserve is allowed to be
    counted toward risk-based capital, and none of it counts
    towards tangible equity, which is the ultimate measure under
    prompt corrective action.
        Also of importance is the deferred tax asset. The deferred
    tax asset is a balance sheet account that is the result of
    timing differences between financial accounting and tax
    accounting. A deferred tax asset is a benefit you stand to gain
    in the future and in our current environment, this is primarily
    a loss carryforward. So if you had a couple of years of net
    losses, those losses would carry forward to reduce future tax
    liability when you have net income. Unfortunately, regulatory
    requirements state that you must disallow the amount of your
    deferred tax asset that you cannot demonstrate you can recoup
    in net income within the upcoming 12 months. When the entire
    amount becomes disallowed, it must be subtracted from tangible
    equity. In this environment, a 12-month look forward for the
    deferred tax asset should be reconsidered and a longer look put
    in place.
        In my home county, Bartow County, there are three loss
    share banks. The fact that there are so many loss share banks
    in this area has only exacerbated the asset value problem. It
    is clear to me that loss share banks stand to make more money
    by forcing the issue rather than working with the customer. In
    Georgia, community banks generally do balloon notes on
    commercial properties. This is done as an interest rate risk
    management tool. So at the end of 18, 24, 36 months, the entire
    balance of the loan is due. The commercial loss share part of
    the acquiring bank's agreement, which is 4.15B, is for 5 years.
    I fear that as the fifth year anniversary of the shared-loss
    agreements comes closer, rather than losing the protection of
    the loss share, many of these loss share banks will pursue
    judgments and foreclose so as to maximize financial gains,
    regardless of the borrower's past performance or capacity to
    pay.
        Another loss share issue is home equity lines of credit.
    While they generally fall within the provisions of the single
    family shared-loss agreement, which is 4.15A, which has a 10-
    year duration, they are specifically separated from the
    mandatory loss mitigation provisions required for single family
    loans. Instead, they fall within the other shared loss loans
    category, which simply requires the acquiring bank to try to
    mitigate loss consistent with its own policies. Since this
    product became popular in the early 2000s and originally had a
    15-year maturity, later a 10-year maturity, many will be coming
    due in the next 4 to 8 years. What could easily happen is the
    loss share bank will get an updated appraisal, which will
    probably be valued down and then it will have to mitigate loss
    consistent with its own policies. Basically, this means there
    will be a whole lot more pressure on an already stressed
    consumer. And since there is no incentive to allow those loans
    to get outside of the loss share period, we could see another
    round of judgments and foreclosures. As a result, I think we
    will be mired in this real estate mess for quite a long time.
        Another problem I see with the loss share is it does not
    allow the loss share bank any judgment in its collection
    practices. Several months ago, one of these loss share banks in
    our community filed suit against a borrower. This particular
    borrower had had a debilitating stroke and would never be able
    to work again, and had lost everything. In prior years, the
    bank would have written the loan off and gone on down the road.
    I called someone I knew who worked at the loss share bank and
    asked, ``Considering the circumstances, why are you suing this
    person?'' He simply replied, ``That is the only way we can
    collect on the shared-loss agreement.'' I cannot imagine that
    is our government's intent.
        In closing, I also want to point out that the regulators I
    dealt with at all levels were both courteous and professional.
    I do not believe they take any joy in closing banks. I also
    want to point out that, particularly during the prompt
    corrective action process, I was told many times by the
    regulators that their hands were tied, they had no choice but
    to follow the requirements of prompt corrective action.
    Therefore, it is clear to me it is not an issue of regulators;
    it is an issue of regulations. So if this committee truly wants
    to make a positive change, it is going to have to come on a
    legislative level, not a regulatory level, to deal with these
    particular issues.
        Again, I want to thank you for inviting me to be part of
    this hearing and I hope that something positive comes from it.
        [The prepared statement of Mr. Fox can be found on page 116
    of the appendix.]
        Chairwoman Capito. Thank you.
        I want to just ask a quick question, and then a follow up,
    and then we will move on.
        Mr. Copeland, each one of you, will you tell me who your
    regulators are?
        Mr. Copeland. The Office of the Comptroller of the
    Currency.
        Mr. Rossetti. FDIC.
        Mr. Jim Edwards. State-chartered bank, also regulated by
    the FDIC.
        Chairwoman Capito. And you were?
        Mr. Fox. State and FDIC.
        Chairwoman Capito. FDIC, okay. Now, you have made your
    statements and they are all very, very good. But you had the
    benefit of being the second panel, so you also heard the
    regulators. What, in your mind, Mr. Copeland--and Mr. Scott
    talked about this a lot in the first panel, the sort of talking
    past each other, lack of communication--if there was something
    glaring that came out of some of the statements the regulators
    made that did not fit with what you see in practice in your
    bank, what would that be?
        Mr. Copeland. I was not at great disagreement with any of
    the statements made by the regulators. However, because this is
    not a personal issue, I do not believe--
        Chairwoman Capito. Right.
        Mr. Copeland. --there are no personal attacks involved. But
    I will say we have seen a clear difference in the tone of
    particularly the written reports of exams that we have
    received, as we have moved further out, that risk compendium in
    the eyes of our regulator. Whereas the initial reports of
    examination that we got had a very clear tone of understanding
    with regard to what got us here in this unforeseen catastrophic
    collapse, I believe it was Mr. Barker, my own regulator, who
    talked about this was not a steady slowing market, but
    literally we fell off the cliff. And what we have seen is a
    change in those reports, with an understanding that is what got
    us here and this is still a competent management team, for
    example, running this bank. And we do see positive aspects to
    this bank with regard to liquidity for funding and so forth.
    You see a change in tone in the reports of examination that
    clearly show what I would describe as legal edification where
    you are seeing verbiage come into these reports that is
    designed to bring it into step with prompt corrective action
    and other regulatory tools that are out there. And that is not
    for our benefit, I feel. It is for the benefit of being able to
    look back and kind of self-justify why particular actions may
    have been taken with the bank or might be taken in the future.
    So that is a tough thing to articulate and it should not come
    across as, for lack of a better word, whining, ``they are
    picking on me on the playground'' sort of thing. So we try to
    be careful as we say those things, because again, I do not
    believe it is personal.
        Chairwoman Capito. Right. Mr. Rossetti, do you have a
    comment?
        Mr. Rossetti. Yes, ma'am. There are two things. The first
    is when the regulators come in to regulate us, one of the first
    questions that the directors ask is what is the regulator like,
    what is the personality, how are they going to be on us. And
    that should not be a concern if they are dealing equally with
    all of the regulations. But a lot of the time it comes down to
    personality and that is something that I think the guys up in
    Washington do not understand, that it does depend a lot on who
    the regulator is and what they are like as to how that exam is
    going to come out.
        The second thing is their misunderstanding I believe of the
    loss share and how effective it is. I think you need to look at
    the two types of banks out there--a community bank under the
    loss share who has a stake in that community is going to
    administer the loss share differently than a large bank where
    you are just a number. And it has been my feelings with those
    large banks that they are very onerous and very stiff with
    their dealings with the loss share. They want that out of the
    bank, they do not care if it is performing, non-performing,
    whatever. They want it out of that bank and they want to get
    their money off the loss share. So those two things.
        Chairwoman Capito. Thank you. Mr. Edwards?
        Mr. Jim Edwards. Being a State-chartered bank, we are
    regulated one year--we will have the State Department of
    Banking & Finance in one year and the FDIC will come in the
    following year. And we have not--we are now due, although I
    probably should not remind my regulators of this, but I am sure
    we will have an FDIC exam before long. I hope I do not say
    anything today that causes that to be any sooner.
        But in terms of what they said, I think we have found
    certainly maybe a more challenging time with regulators but I
    think we all have to understand the backdrop here, how
    difficult these economic times are. The way you could structure
    something maybe in better times is not the way you can do it
    today unfortunately. And I look forward to those days when
    things will be better.
        I think in our discussions with regulators, obviously there
    are new requirements that come out, but we have felt like there
    has at least been a dialogue with them about that. And
    certainly I do not know a banker working today who believes or
    agrees with the regulators about everything they say. But I
    think in general terms, we have felt that they are trying to
    work through this situation too, in most cases.
        Chairwoman Capito. Mr. Fox?
        Mr. Fox. I think the loss share is having a far greater
    effect on local communities than maybe what they feel like
    right here. And it is a difference. There are some banks, while
    they may be locally chartered in the State of Georgia, they are
    funded by huge dollars from Wall Street or wherever, by venture
    capitalists. And those guys did not get into banking because
    they want to make 2 percent on assets, I promise.
        Chairwoman Capito. Thank you.
        Chairman Bachus?
        Chairman Bachus. Thank you.
        I want to commend all you gentlemen for the tone of your
    testimony and for the specificity. I think you have actually
    given us some real meat.
        Mr. Fox, I especially appreciate you being here. As a
    former banker, you could just walk away, but you are still
    obviously concerned about your colleagues and the business, and
    I think that speaks well of your character.
        Mr. Fox. Thank you.
        Chairman Bachus. I commend you for that.
        We mentioned shared-loss agreements, that keeps coming up.
    I think there is a problem there and I think it is something
    that needs to be looked at again. I think particularly--not
    particularly, but also when you have participation agreements,
    it can be a problem for those institutions.
        One thing that came up that I do not think we talked about
    on the first panel was writing down a performing loan, which at
    least two of you mentioned. We have often used the words
    ``paper profit'' or ``paper loss'' where you write down
    performing loans and you have to raise capital and then an
    institution has restrictions or challenges because of, not
    actual losses but just the write downs of performing loans. And
    I think that is particularly frustrating and bears more
    watching.
        So I appreciate what you said about the prompt corrective
    action, that it may be the regulation, it may not be the
    regulators in those cases. They are following the law. And then
    that becomes our duty to review.
        And finally, Dodd Frank--2,400 pages--and I can tell you
    the regulators appreciate that you are concerned about them
    because they are pretty much struggling with it on a daily
    basis, they are overwhelmed by that regulation. So the
    regulators are even overwhelmed by the regulations. And when it
    gets to that point, you know you have a problem.
        I know one Georgian, Newt Gingrich, has actually said we
    need to repeal Dodd-Frank.
        We seriously need to take a strong look at it, I will tell
    you that. We are going to have a hearing on that in October, as
    to how the economy is going to swallow that massive
    undertaking.
        I will yield the balance of my time to Mr. Westmoreland.
        Mr. Westmoreland. Thank you, Mr. Chairman.
        Before we close, I want to thank Mr. Don Mixon for allowing
    us to use this Performing Arts Center. It is a beautiful
    building. Thank you for allowing us to use the facility.
        And I also want to thank Chief Deputy Mr. Riggs for being
    here today and for the whole staff of the Newnan Police
    Department for being here and providing the security. So thank
    you all for what you do.
        Let me say just for the benefit of maybe everybody in the
    audience, I think most of you are familiar, but to some of
    these gentlemen who have great careers with the FDIC and the
    OCC and with the Federal Reserve, and I want to thank you all
    for your 30+ years of service or whatever you have been there.
    But you need to talk to some of these guys on a regular basis,
    some of these guys who are out there actually making the loans.
    Not your regulators, but talk to some of the people making the
    loans, talk to some of the people who are being punished by
    some of your regulations. And believe it or not, until the
    construction business comes back, our unemployment is going to
    stay high and this economy is not going to get going again.
    That is just a fact.
        Now let me say, what happened is a lot of these TARP banks,
    and we had some come into our communities that had gotten a lot
    of money and they fire sold, they did public auctions and sold
    these properties. And that brought the value down. So then some
    of our community banks were demanded to write down these loans
    immediately. Is that not true? And so they wrote down the loans
    immediately and had to have more--a loss of I guess reserve,
    grow their capital, were told to reduce their real estate
    portfolios in many cases.
        Then after that wave, we had the shared-loss agreements.
    Now Jim Edwards--if everybody who came into a community was
    like Jim Edwards, especially down in Barnesville and the
    relationship he had with that bank across the street, we would
    not have a problem. But when you have banks coming in here from
    California--and I am not picking on them--or Arkansas or
    others--I know we had testimony that said that these other
    banks were 10 banks adjoining Georgia. That is not true. So
    they do not know the community and so with their loss share, I
    think as Mr. Fox pointed out, the quicker they flushed these
    things, the better off they were.
        So we had another round with our community banks. And now
    we have communities that do not even have a community bank. And
    why people who have been regulating for 30+ years at the FDIC
    and the OCC could not see that this ball was going downhill, it
    was going downhill. We were losing thousands of jobs,
    generational wealth was being sucked out of our communities.
    People were losing their investments. We were losing our
    community banks, pillars of the community lost everything they
    had. Why could we not recognize that and see if we could not
    come in to see a Chuck Copeland or a Michael Rossetti or Jim
    Edwards or Mr. Fox and say, what we might need is some advice
    on how to do this because I have been in Washington for 30
    years?
        Is what I have described basically what happened to our
    economy, especially here in the Third Congressional District?
        Mr. Copeland. There is no doubt, it is the massive
    devaluation of real estate that has impacted all of our banks.
    And there are many reasons for that.
        Mr. Westmoreland. Right. And Mr. Fox, you mentioned that we
    do not need to do anything with the regulators, we need to do
    something with the regulation. I could not agree with you more.
    But say you do something legislatively, what would you propose
    that we could do legislatively that would help?
        Mr. Fox. It seems to me--and this is a double-edged sword,
    probably the reason we have prompt corrective action is you all
    wanted to take judgment away from the regulators. I think they
    need to be given some amount of judgment. And of course, if
    they are given that judgment, they need to use it wisely.
    Because when you look at the way real estate values have
    collapsed in Georgia, a non-assisted community bank, it is
    going to be a struggle. If this does not correct itself within
    the next 4 or 5 years, I do not know what is going to be left.
    But we cannot survive such an asset devaluation. And I think
    you would just have to give these banks some time through some
    kind of regulatory--I mean legislative--leeway for them to
    have.
        Mr. Westmoreland. So how about if there was a 5-year period
    to write down some of these loans, that some of them are even
    performing, where people are paying their interest, they are
    meeting their takedown schedules, and they are still being made
    to write these loans down because somebody is saying that it
    will not ever be worth that much money or they cannot pay it.
    Would it be of any assistance if there was some room to where
    they would write this down for a certain period of time, maybe
    even go back 24 months and go forward say 36 months, or
    whatever, if they were still in business, to be able to adjust
    some of these loans?
        Mr. Fox. Sure, it would be helpful, yes. I think that
    approach may have been tried back in the S&L days, and that has
    been brought up. I know another banker, Chris Maddox, brought
    it up to the FDIC.
        Mr. Westmoreland. Chuck, would that have hurt you?
        Mr. Copeland. Oh, there is no doubt it could make a
    difference. I do think there is this whole issue of
    transparency though and someone being able to pick up a call
    report or a financial statement and truly be able to assess the
    condition of a bank that is using some of these smoothing
    techniques with regard to funding writedowns, but I would think
    that that could be handled through memorandums to call reports
    or whatever, as a way to capture how much a bank does have in
    this pool of asset writedowns that it is accreting onto its
    books, and a process for how you re-evaluate values there and
    you adjust that pool, so that someone can pick up my call
    report and know exactly what sort of hangover effects I am
    still dealing with from the real estate meltdown versus say
    Jim's bank, who might be in a different situation.
        Mr. Westmoreland. You would be glad to work with any of
    these folks to give them an idea, wouldn't you?
        Mr. Copeland. Oh, no doubt about it. And you have to cut
    through some of the rhetoric too, because when you talk about
    writedowns on performing loans, I think there is a bit too much
    anecdotal jargon getting thrown in there. And for example, I
    know our experience with our regulator, I cannot say I have
    ever experienced having to write down a performing loan. But
    there is a point at which the regulator--
        Mr. Westmoreland. Even if the appraisal had come back for
    half the price of the loan?
        Mr. Copeland. Again, there is a difference between being
    forced by a regulator to write it down and having to reserve.
    The nuance in that, though, is the effect on my capital is the
    same. I have had to remove it from earnings and either put it
    into my loan loss reserve as a specific earmark against that
    credit or I have had to take the writedown. So the impact on my
    capital ratio is the same.
        I think we have to remove some of this rhetoric and
    anecdote from some of this if we are going to get to real
    solutions.
        Mr. Westmoreland. I will go ahead and close because I know
    we are running out of time. But let me just thank all of you
    for coming and thank all of you for doing this. I would hate
    for the FDIC to get the same reputation as the IRS.
        Chairman Bachus. I think you have your own time now.
        Mr. Westmoreland. Oh, I do.
        Chairman Bachus. You can start the timer again.
        Mr. Westmoreland. That is Ellen, and she has just given me
    five more--I will take just a couple more minutes then. I know
    lunch is getting near.
        But it is amazing that the FDIC when they come in and
    actually be the receiver does not want to work with a lot of
    these people. I have had a number of them call and tell me that
    they had loans that they offered to buy or whatever and then
    they were put up for auction. And then, they are sued
    personally by a partner with the FDIC. That just does not sit
    well with me. In a non-recourse loan for 7 years, interest
    free, there is something wrong with that. Really and truly,
    there is something wrong with that. When we put out banks and
    we suck this money out of the community and we are in business.
    It would be a little bit different if this company, Rialto, was
    not--I think most of them are from a home building company and
    I think 5,100 of the 5,500 loans were actually residential
    loans. So there is just something weird with that. But I know
    there are a lot of new partners for the FDIC out there right
    now just waiting to put together their money and call them and
    say, look, we want to be in business.
        But thank you all very much for coming and I hope we all
    learned something today. I hope we will take it back to
    Washington--Chairman Bachus, Chairwoman Capito, and Congressman
    Scott--so that we can write some legislation that will help out
    here in the real world. Maybe not in Washington, but out here
    in the real world with people who sit across the desk from
    these folks who have to make a decision on whether to loan
    money or not.
        I do think we need to look at some of those regulations
    that Mr. Fox mentioned about having to sue somebody to be able
    to get your loss share part of it. So there are a lot of
    different things that we can look at. I know that Chairman
    Bachus has been great about looking at this, about having the
    hearings and I want to push forward with it.
        So with that, I will yield back the balance of my time. And
    again, I thank everybody for coming.
        Chairwoman Capito. Thank you.
        Mr. Scott?
        Mr. Scott. Thank you.
        I would just like to start off by commending each of you
    for excellent testimony, very thorough, very informative, and
    providing us with a lot of good information.
        I would like for my line of questioning to kind of zero in
    on this area of conflicting communications--the banks and the
    regulators. I think you all were probably here when I asked the
    regulators if they felt that their standards were so
    restrictive that it was inhibiting lending, and their basic
    response was that they did not feel it was.
        And I would like for you to address that. Do you feel so?
    If I remember, I think, Mr. Copeland, you said they were
    sending shifting messages and the examiners were making
    contradictory statements that sent you clamoring for cover.
        Mr. Copeland. Correct.
        Mr. Scott. That is certainly a stark difference from what
    the regulators said.
        Mr. Copeland. I can tell you there is a marked difference
    between how we feel and how we maneuver through our normal day-
    to-day in the management of our banks during times when we do
    not feel the cloak of the regulator. And that cloak of the
    regulatory being most present during periods of exam, where you
    truly do feel almost paralyzed in terms of dealing with the
    day-to-day running of your bank.
        With regard to the contradiction, there are two things
    there that I would point to. One is--and this is somewhat of a
    selfish statement--one of the tenets of the CAMELS rating is
    the management component. We have the same management team and
    same board of directors in our bank that was there in the
    period of the early 2000s when our bank was generating record
    earnings and receiving nothing but the highest of regard from
    our regulator.
        My reports of examination today have a very indictful tone
    towards management and the board of the bank. But it is the
    very same people.
        Mr. Scott. Did you say indictful?
        Mr. Copeland. Indictful, yes. So it tends to put you in a
    very guarded position. The other thing with regard to
    contradiction; again, in our report of examination, we never
    had any significant reliance upon wholesale funding, brokered
    deposits or those things, we were always a core funded
    community bank. And that gets a brief acknowledgement in a
    passage in a report, but then it will go on to say in the same
    paragraph, ``but due to the bank's high level of non-performing
    assets and its elevated risk profile, liquidity is
    insufficient'' and it may even go in some passage to take it a
    step further and say, ``and this constitutes an unsafe and
    unsound banking practice.'' Back to prompt corrective action.
    The trump card that has to be there before they can play prompt
    corrective action is they need to be able to assert these
    unsafe and unsound banking practices.
        Mr. Scott. So with the regulators here in the audience
    listening to what you have to say, what two major recommended
    changes would you like to see in their procedures?
        Mr. Copeland. I would like to see patience exerted in how
    verbiage and terminology finds its way into the report of
    examination. I want a report of examination that 20 years from
    now my 5-year old child would not be embarrassed and ashamed to
    read about his dad.
        Mr. Scott. Okay.
        Mr. Copeland. In simple terms.
        Mr. Scott. Right.
        Mr. Copeland. But in addition to this patience,
    forbearance. And an example of that would be we are under a
    public regulatory order, so I am not disclosing anything that
    is not out there in the world to see, which requires that we
    achieve and maintain 9 percent tier 1 leverage and 13 percent
    total risk-based capital. We were in excess of those levels by
    and away during good times because that is the way we ran our
    bank. We understand the core principle of capital being your
    cushion against bad things that can happen in a risk-associated
    industry. Bad things happened to us, our capital has eroded. We
    need forbearance to work with our regulator on how we get back
    to that 9 and 13 over a reasonable period of time. There is no
    capital out there to a community bank in a community of my
    demographics, 13 percent unemployment, 30-odd percent of my
    population not being high school graduates, housing prices in
    the tank. There is no--outside of perhaps maybe with the beauty
    of a nice FDIC 80/20 loss share, some venture capitalist from
    New York who might like to take a bite out of our bank.
        So we do not disavow the importance of the capital, but to
    have an expectation and a demeanor in how that expectation is
    communicated that we be able to restore those capital levels to
    that 9 and 13 in an environment that just for all practical
    purposes and common sensical analysis will not support that.
        Mr. Scott. Okay.
        Mr. Copeland. The tools are already there with regard to
    what is defined as adequately capitalized. The trigger is there
    within prompt corrective action with regard to the forced
    dissolution of a bank. We understand the need to abide by those
    and will continue to do our dead level best to do it. But it is
    indeed crippling to realize that is not enough.
        Mr. Scott. Okay. They are sitting out there, they are
    listening. So we hope that they hear what you are saying and we
    can move to correct.
        But going a little bit further, of course, lending--we have
    been touching upon that, that is a great concern, it is really
    at the core of this field hearing, the whole issue, of course
    lending is the key. Banks cannot make money if they do not
    lend, and we cannot recover our economy if they are not
    lending.
        Mr. Rossetti, you came right out in your statement and said
    in fact it is preventing you from lending. How is that?
        Mr. Rossetti. Our lending guidelines for AD&C lending, the
    FDIC has written them down to 100 percent of capital. We are at
    450 percent of capital. We will not get down there in 30 years.
        Mr. Scott. Repeat that again.
        Mr. Rossetti. They have put such an onerous guideline on us
    to lend money for AD&C lending, acquisition, development and
    construction lending, that--they put a guideline on us that we
    cannot achieve. And we are just prevented from bringing in any
    new business to lend money to people doing AD&C lending.
        Mr. Scott. And what would you recommend that formula be?
        Mr. Rossetti. It gets back to what Chuck says, common
    sense, if you get a loan, say a builder comes in, he has a
    presale home to build on somebody else's lot and the customer
    that he is building for is completely qualified. It is a
    commonsense loan. We cannot do that. We could not lend money in
    that situation because it is outside of our guideline.
        Mr. Scott. And have you presented this particular issue to
    the examiner or to the regulator in any way?
        Mr. Rossetti. I am sure it has been discussed.
        Mr. Scott. But have you yourself discussed it?
        Mr. Rossetti. Not myself, no. No, I have not, but I know
    what the guidelines are and I know the revised guidelines that
    they put us under to do that kind of lending, and it is just
    going to be impossible for us to get there for a long period of
    time.
        Mr. Scott. And you had some things to say about the shared-
    loss agreement, which you felt was the most onerous. And I
    think it might have been you, Mr. Edwards, I wonder if you
    might--you said that, if I understand you correctly, that there
    is a requirement that you hire new people in order to be in
    compliance with the shared-loss agreement.
        Mr. Jim Edwards. Yes, sir. They did not require that we
    hire new people per se in the contract, they just--we entered
    into a contract and it has a number of obligations and we have
    to make sure that we comply with all different things in the
    contract.
        Mr. Scott. And when you say ``they,'' you are talking about
    the FDIC?
        Mr. Jim Edwards. Yes.
        Mr. Scott. Okay. Do you believe--do each of you believe
    that there ought to be some restructuring in Washington
    regarding the regulation of our financial institutions to fit
    these economic times, that would be different? And if so, what
    would those be?
        Mr. Copeland. I think without a doubt. And honestly, it had
    not occurred to me until Mr. Fox's testimony just what a hurdle
    prompt corrective action creates for the regulator, and that
    perhaps it is not so much the regulator, but the regulation.
    And I understand the 2 percent capital minimum and the time in
    which that came from, but I would assert that there are banks
    out there that have a strong enough core element to their DNA
    that they could survive with negative capital. Now, you could
    not survive indefinitely, but you could certainly survive at
    less than a 2 percent capital level.
        Mr. Scott. Okay. And just a final question. If you could
    zero in on and categorize--we have discussed many issues here,
    what would be the single deterrent to banks lending more now?
    What would that be?
        Mr. Fox. Most banks, or a lot of banks in Georgia, a high
    number, are under a regulatory order of some sort. And usually
    in those orders, there is a limitation on your lending, there
    is a limitation on how much you can grow. So by virtue of that,
    you have to meet a minimum capital standard and every time you
    make a loan, it usually goes, based on risk-based capital, that
    is going to reduce your capital ratio. So basically, once you
    come under order, all you are managing from that point forward
    is liquidity in capital, that is all you can really do.
        Mr. Scott. Just one last question, if I may, Mr. Chairman,
    this will be my last one. But it just intrigues me that you,
    Mr. Fox--I think you mentioned that you were once an examiner,
    is that correct?
        Mr. Fox. Yes.
        Mr. Scott. So that puts you in a pretty unique position
    here, to be able to add some perspective. And I really want to
    try to get to this, because as I mentioned before, Lynn and I
    find ourselves in a pretty good position with our bill having
    passed the House, and over in the Senate, and we have a pretty
    good bipartisan approach to this bill. That, unfortunately,
    does not happen very often. So we have a very live vehicle here
    and I am wondering--you remember I asked the regulators when
    they were here what they were doing that was so restrictive
    that stopped the lending, and they basically said, it is not
    our fault. But you hear from the bankers here that yes, some of
    this is their fault.
        What is the true story here? You have sat in both seats
    here. Who is telling the truth?
        Mr. Fox. I am not going to call anybody a--
        [laughter]
        Mr. Scott. Let us put it this way, who is more accurate? I
    did not say it correctly; who is more accurate? We really have
    to get to--
        Mr. Fox. Mike made probably one of the best points I have
    heard today about the fact that if someone comes to his bank
    right now, because they are restricted from increasing their
    concentrations in real estate--construction lending, it is a
    presale, it probably has a mortgage takeout--he cannot make the
    loan. That does not make sense. So that's a great example. You
    really need to be able to use some common sense like he is
    saying. Does this credit stand on its own and if it does, then
    we ought to be able to make it.
        Mr. Scott. Okay. So there is some truth to that statement
    and we will just say that we will work with our regulators to
    see what we can do here.
        Thank you very much, it has been a very good session. Thank
    you.
        Chairwoman Capito. Thank you. Before I dismiss the panel, I
    would like to thank them for their very great comments and
    answers to questions and their statements. We will be taking
    this back to Washington, working with this bill and others to
    try to strengthen the possibility of a faster rebound for
    everybody.
        I would like to thank the audience for being a great
    audience and being so attentive and sticking with us. This has
    been a very lengthy hearing. I would also like to thank panel
    one, the four regulators, they are all in the audience, so I
    would like to thank you all for staying and listening as we
    requested, and that is duly noted. Right, Lynn?
        Mr. Westmoreland. Yes.
        Chairwoman Capito. And I would like to also thank Mr.
    Westmoreland's staff for putting this together and at such a
    beautiful facility and I think creating two panels that have
    been very enlightening.
        So with that, 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 30 days for members to submit written questions
    to these witnesses and to place their responses in the record.
        With that, this hearing is adjourned.
        [Whereupon, at 12:20 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                August 16, 2011

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