Lessons from Georgia: What is a Good Banker to Do?

1. Lessons from Georgia:What is a Good Banker to Do? Walter G. Moeling, IV Bryan Cave, LLP Louisiana Bankers Association Bank Counsel Conference December 12, 2013

2. Industry Note – November 27, 2006 Why Georgia Should Be on Your Mind • “We think the positive tailwinds for banking will persist and likely accelerate as the baby-boom generation continues to retire and migrate to the region.” • Loan Mix Tends to be Heavily Weighted Toward Real Estate. “Real estate-related lending is the engine that drives balance sheet growth for Georgia-based banks.” “In metro-Atlanta, the pace of construction of homes … should remain healthy.” • “In summary, we believe Georgia is a great market for banking owing to very attractive demographics, a healthy economy and prospects for continued strong loan and deposit growth.”

3. Banking Note – December 11, 2006 Still Bullish on Atlanta Banking Market • “Robust population growth, home affordability, the lack of individual real estate speculator participation and a highly fragmented home builder market all translate to relatively more lending opportunities for Atlanta area banks over the next few years, in our opinion.” • On Housing Supply - “There is less than six months oversupply currently in the market today.” • “Credit concerns for those Georgia-based banks with high levels of construction/CRE/A&D loans appear to be largely selective as inventory levels remain only slightly elevated.”

4. Atlanta Business Chronicle – December 2006 Georgia will outpace the nation in growth, regain leading rank • “Georgia looks to beat the U.S. economy on virtually every yard-stick, whether it’s employment or gross product or personal income.” University of Georgia Economist • “Obviously there is softening in the housing market and that will have some impact on those community banks that have been heavy in construction and development of residential housing.” Trade Association President

6. Georgia • 88 Receiverships • “Georgia is basically the Chernobyl of banking right now; it’s radioactive down there.” • Cam Fine, ICBA, WSJ, June 10, 2009 • “What’s the matter with Georgia?” • Paul Krugman, NY Times, April 10, 2010

7. Overview • What did we miss? • Where are the lessons? • What is the Regulatory reaction?

8. What Happened? • D-Day was 2005 • Sun-Belt Migration • Bank Profitability • Housing a Priority • Regulators and Bankers Thought Prepared • FDIC Risk Management pilot program re: CRE Lending

9. What Did We Miss? • Role of Land Speculators and Fraud • Role of Interest Reserves • Loans to Projects vs. Loans to Customer

10. What Did We Miss? • Impact of Lack of Core Deposits • Concentrations of Loans and Deposits • “Free Market” De Novo Bank Formation: Deregulation • Investment in Banks as “Safe” Real Estate Alternative • Compensation Structures that Focused only on Volume

11. What Did We Miss? • Effect of Loan Loss Methodology Changes • Effect of Loan Participations/Bankers Banks • Effect of Deregulation going back 10 years • Remote Examinations • Reduced Regulator Headcount • Impact of Mortgage Securitization on Overall Economy • Demand for Mortgages • Lowered Underwriting Standards • Role of Fannie, Freddie and FHLB’s • 300% Growth from 1992 through 1999: 2004 Hearings

12. What Did We Do WrongAfter Crisis Began? • Crisis NOT Caused by Regional Regulatory Failures • Competition in Regulatory Toughness (and fear of Regulatory Reform) • Self-fulfilling Prophecy of Asset Value Deterioration • Role of FDIC/Treasury Asset Dumps • Legislating in a Crisis is Not Productive

13. FDIC Community Banking Study (2012) Three Primary Factors of Bank Failures • Rapid Growth/DeNovos • Excessive Concentrations in Commercial Real Estate Funding • Funding Through Highly Volatile Deposits

14. Comparison Today to Pre-2007 • Higher capital/less leverage • Similar ROAA but lower ROE • Higher costs: Compliance • Growth v. income • Need to review strategic plans

15. General Regulatory Approach • Quest for stability • Rule-based v. principle-based

16. Protecting the Board: Effective Risk Management Proactive and forward-looking Risk varies among banks; one size does not fit all The past is not a prologue of the future Enterprise, as opposed to silo, risk management Board’s role in setting the overall risk appetite for an organization

17. The Aftermath: FDIC v. Directors and Officers

18. Different Regulatory ApproachAfter 1988-1992 Prior emphasis was more on wrong-doing (S&L’s; Chas. Keating) Claims against attorney, accountants and consultants

19. Present FDIC Emphasis Simple v. Gross Negligence State Statute of Limitations Express Approval: Focus on Loan Committee/ Violations of Policies

20. Supporting Theories Excessively Risky Business Plan Overly Aggressive Growth Risky Concentrations, Especially ADC Lending

21. Ongoing Issues Gross v. Single Negligence Impact of Tolling Agreements/Statute of Limitations Access to Internal FDIC Documents

22. Different D&O Carrier Emphasis Insured v. Insured Defense Early Reduction of Coverage Loan Contract Exclusions (Loan Loss)

23. BankBryanCave.com • Free Resource to the Community Bank Industry • TARP, Examination Tips, CFPB, JOBS Act, FDIC Litigation, LIBOR Scandal, etc. www.BankBryanCave.com

24. About Bryan Cave LLP • International Business and Litigation Firm • 24 Offices around the Globe • Over 350 Bank Clients from Miami, FL to Anchorage, AK • Expertise in Strategic Planning, M&A and Branch Transactions, Loan Portfolio Management, Capital Raising, Going Private, Regulatory Enforcement Actions, Representation of Directors and Officers, Payment Systems and Consumer Compliance

26. For further information: Walt Moeling | Walt.Moeling@bryancave.com www.bankbryancave.com