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Federal Reserve Bank of Atlanta 2009 Annual Report Southeast Banking in the Financial Crisis The Federal Reserve Bank of Atlanta is one of twelve regional Reserve Banks in the United States that, together with the Board of Governors in Washington, D.C., make up the Federal Reserve System—the nation’s central bank. Since its establishment by an act of Congress in 1913, the Federal Reserve System’s primary role has been to foster a sound financial system and a healthy economy. To advance this goal, the Atlanta Fed helps formulate monetary policy, supervises banks and bank and financial holding companies, and provides payment services to depository institutions and the federal government. Through its six offices in Atlanta, Birmingham, Jacksonville, Miami, Nashville, and New Orleans, the Federal Reserve Bank of Atlanta serves the Sixth Federal Reserve District, which comprises Alabama, Florida, Georgia, and parts of Louisiana, Mississippi, and Tennessee. Federal Reserve Bank of Atlanta 2009 Annual Report Southeast Banking in the Financial Crisis Contents 2 4 22 25 38 Letter from the President The Story of the Year in Southeast Banking Is Both Complex and Simple Milestones Sixth Federal Reserve District Directors Sixth Federal Reserve District Officers { Letter from the President Following the turmoil of late 2008 involving very large financial institutions and the interbank market, many banks experienced a year of upheaval and financial pressure in 2009. Home foreclosures, commercial real estate revaluations, and a range of other credit quality problems came to a head for many financial institutions despite encouraging signs that the financial system as a whole had stabilized and a deep and protracted recession was finally coming to an end. This year’s annual report examines how many smaller and midsized banks in the Southeast responded to a series of real estate problems exacerbated by severe job losses, slumping household incomes, and widespread business uncertainty. Financial and economic challenges in the Southeast were magnified by the high concentration of real estate investment in a region that had grown accustomed to strong population and income growth. For many years leading up to the recent recession, builders and developers profited from favorable demographic and economic trends for Sunbelt states. In-migration, homebuilding, and associated manufacturing industries like furniture, textiles, and household appliances fueled growth, and the Southeast had consistently outpaced the rest of the country by a range of economic measures. Development in some coastal markets was even more robust. But fortunes reversed, and growth in the Southeast was slower than in the nation as a whole in 2009. Unemployment in the Atlanta Fed’s six-state region was slightly higher than nationally. The aftermath of the housing bust has been especially challenging for southeastern banks—from small community banks to regional firms. In 2009, forty-two banks failed in the Southeast, and Georgia led the nation in the number of bank failures, although not in terms of assets. Nearly eighty southeastern banks received capital infusions from U.S. Treasury Department programs, although a few began to pay back these funds by year’s end. To further the financial sector’s path to recovery, the Federal Reserve bolstered troubled housing markets by purchasing large volumes of agency-guaranteed mortgage-backed securities, along with agency debt and Treasury securities. Also, the Fed kept the fed funds rate exceptionally low, at just above zero for the entire year, and was explicit in describing this policy. While the low fed funds rate was a macro- Banking Issues in the Southeast 2 Federal Reserve Bank of Atlanta 2009 Annual Report economic monetary policy measure, it also facilitated banks’ efforts to repair their balance sheets. Bankers, regulators, and lawmakers in 2009 began working toward building a better postcrisis financial system. Bankers learned many painful lessons from the financial crisis and have been forced back to basics. Bankers I have spoken with say they understand the need to refocus on strengthening risk management and capital and liquidity buffers. Regulators, meanwhile, are refining their approach to financial supervision in some notable ways. For example, the crisis has made clear the need for greater horizontal supervision. This approach considers interconnections among financial firms and the ways those interconnections could affect the broader financial system and economy. For another, supervisors are transitioning to more forward-looking evaluations of individual institutions’ safety and soundness. Acting on those lessons, the Atlanta Fed began reorganizing its supervision and regulation operations. The aim is to make the supervisory function more flexible, forward-looking, and clear in communicating its messages and expectations to the staff and the institutions they supervise. On the legislative front, Congress initiated deliberations on proposals to reform our nation’s financial regulatory structure. A particular focus of this debate has been on preventing isolated problems from causing broad damage to the financial system and economy. Legislators discussed numerous and multifaceted measures, including ideas that would alter the Fed’s duties in banking supervision. In my view, the Fed should continue to play a strong role in the nation’s financial supervision, not only to help prevent and mitigate potential crises but also to effectively serve as a liquidity provider in times of stress. Only the Fed can act as lender of last resort because only the monetary authority can increase the money supply in an emergency. To make sound decisions, the lender of last resort needs intimate, hard, qualitative knowledge of individual financial institutions, their connectedness to counterparties, and the capacity of management. At the time of this writing, the outcome of the debate on financial reform and the resulting legislation is unclear. It is vital that the regulatory regime for the future truly strengthens our defenses against the recurrence of financial crises. Dennis P. Lockhart, president and chief executive officer Dennis P. Lockhart 3 The Story of the Year in Southeast Banking Is Both Complex and Simple Although the sources of the crisis were extraordinarily complex and numerous, a fundamental cause was that many financial firms simply did not appreciate the risks they were taking. Their risk-management systems were inadequate and their capital and liquidity buffers insufficient. Unfortunately, neither the firms nor the regulators identified and remedied many of the weaknesses soon enough. —Federal Reserve Chairman Ben Bernanke, December 2009 The year 2009 was one of stabilization for the financial system and recovery for the U.S. economy. Yet in the Southeast the banking system fared worse than in previous years and worse than banks in most other regions. This annual report examines what happened to southeastern banks, explores causes of the problems, and assesses factors that will shape the future of banking institutions in the region. The story told is both complex and simple. The financial crisis associated with the economic downturn that began in 2007 resulted from highly complicated and interrelated factors. These factors include growth in the market for mortgage-backed securities and complex investment instruments, unusually large amounts of leverage by households and financial institutions, deterioration in risk management by financial institutions, the growth of off-balance sheet activities by many banks and of the unregulated “shadow” banking system, a flawed business model for the housing-related government-sponsored enterprises, regulatory issues, and the global savings glut. (See the sidebar “Fannie Mae and Freddie Mac: Past, present, and future” on page 6.) Scholars will likely spend years untangling the root causes. At the same time, the problems for most troubled southeastern institutions were straightforward, involving real estate. This report does not delve into the numerous issues that brought on the larger financial crisis but instead focuses on reasons for the problems that plagued many 4 Federal Reserve Bank of Atlanta 2009 Annual Report small and midsized banks in the Southeast. In this report, “Southeast” refers to the states of Alabama, Florida, Georgia, Louisiana, Mississippi, and Tennessee in their entirety. The immediate problem that damaged many southeastern banks was essentially that many banks lent heavily to builders and developers before it became clear that the Southeast’s long jobs-and-building boom was ending. In some cases, institutions strayed from their own guidelines concerning asset allocation by taking on a heavy concentration in real estate loans (see chart 1). In addition, corporate governance may on occasion have been too lenient or even absent. Finally, at many of the troubled institutions, much of the lending was funded not by traditional deposits but by more volatile and sometimes more expensive brokered deposits. The general operating assumption that prevailed in financial institutions before the crisis was that the population influx would continue, buyers would keep snapping up speculative houses, and therefore developers and builders would make profits, repay their bank loans, and borrow more money to build more houses to accommodate the growing population. But this virtuous circle eventually broke. When it did, financial regulators by many accounts did not move aggressively enough to anticipate the downward cycle or its scope and depth. In retrospect, bank examiners found themselves with tools that proved inadequate. Neither the guidance on commercial real estate lending nor separate guidance concerning nontraditional mortgage products included specific limits on those activities. Likewise, neither guidance included minimum capital requirements. For banks in the Southeast, the consequences have been stark. Three performance measures make this clear: • Failures: Seven banks in the six states of the Southeast failed during 2008 and forty-two failed in 2009, after only two failures in the previous five years. • Earnings: After amassing cumulative profits exceeding $50 billion from 2002 through 2007, FDIC-insured financial institutions based in the six states lost $8 billion in 2009 and $8.8 billion in 2008, according to data compiled by the Federal Deposit Insurance Corporation (FDIC) from bank call reports. • Loan quality: At the end of 2009, the region’s financial institutions reported a combined $4.4 billion in loans ninety or more days past due, more than triple the amount at the end of 2006 and six times the level at the end of 2004. Southeast banks ended 2009 with $29.7 billion in assets no longer accruing interest, eleven times the amount at the end of 2006. Bank Failures in Georgia Chart 1 ChartBank1 Loans Portfolios - Exposure through Q4 2009 Bank loan portfolio exposure Southeast 6.1% 5.4% 1% 15.4% 72.2% Rest of nation 8.5% 9.4% 6.3% 57.7% 18% Before the recession, an economic boom These numbers evidence a dramatic reversal. In the years preceding the financial crisis, vigorous economic growth had created a robust banking environment across much of the Southeast. Indeed, rapid population and job growth powered the regional economy. The population of the Southeast had more than doubled since 1960, reaching 46.2 million and far outpacing growth in the country as a whole. Florida’s population alone grew nearly 300 percent, to 18.3 million, while the nation’s population increased by 68 percent. Florida and Georgia were among the nation’s most prolific jobs machines before the economic downturn began in 2007. In total, the region created 5.3 million net jobs during the decade and a half (see chart 2 on page 7). All loans secured by real estate Comercial and industrial loans (including agricultural loans for small banks) Credit card Other consumer All other loans and leases Note: Data are through the fourth quarter of 2009. Source: Bank call reports 5 Source: Bank call reports, 2009 Q4 Fannie Mae and Freddie Mac: Past, present, and future Editor’s note: This is an excerpt from Atlanta Fed economist W. Scott Frame’s April 2009 working paper, “The 2008 federal intervention to stabilize Fannie Mae and Freddie Mac,” available online at frbatlanta.org/pubs/wp/working_ paper_ 2009-13.cfm. Fannie Mae and Freddie Mac are government-sponsored enterprises that play a central role in U.S. residential mortgage markets. In recent years, policymakers became increasingly concerned about the size and risk-taking incentives of these two institutions. In September 2008, the federal government intervened to stabilize Fannie Mae and Freddie Mac in an effort to ensure the reliability of residential mortgage finance in the wake of the subprime mortgage crisis. This paper describes the sources of financial distress at Fannie Mae and Freddie Mac, outlines the measures taken by the federal government, and presents some evidence about the effectiveness of these actions. Looking ahead, policymakers will need to consider the future of Fannie Mae and Freddie Mac as well as the appropriate scope of public sector activities in primary and secondary mortgage markets. u Fact Real estate as a percentage of net loans and leases in three southeastern states: · Florida—70 percent in 1999 to a high of 80 percent in 2008 · Georgia—67 percent in 1999 to a high of 87 percent in 2009 · Alabama—62 percent in 1999 to a high of 74 percent in 2006 and 2007 Source: FDIC 6 This expansion fueled demand for housing, retail centers, office space, and other real estate. Low interest rates and easy access to credit furnished the ideal backdrop for rapid residential and commercial real estate development. Consequently, real estate lending proliferated, and new banks opened across the southeastern region to join with existing institutions. On average, a financial institution opened in the Southeast almost every week from 2000 through 2007, for a total of 327 new banks. Most of them were in Florida, Georgia, and Tennessee (see chart 3 on page 7). Between 2001 and 2007, these three states ranked second, third, and fifth among all states in bank and thrift formations. More than 60 percent of those new institutions were chartered by state banking departments. The region in total was home to 26 percent of the nation’s new bank and thrift formations during these years, according to the FDIC. Though this figure may seem high, it is not far out of line with the growth of the region, as the Southeast accounted for 22 percent of the nation’s population increase in those years, according to Census Bureau estimates. The abundant financing helped to feed the building boom. Among Georgia’s FDIC-insured institutions, CRE lending increased almost eight times from 1999 to the end of 2007, according to FDIC data. Florida-based banks’ loans to buy land and build increased about five times during the period 1999–2006 (see chart 4 on page 9). At the same time, many banks based outside of Florida entered that market to take advantage of the real estate development boom, a move that further fueled increases in credit and development in the Sunshine State. Residential developers put the money to use. According to the U.S. Census Bureau, Florida developers applied for 959,948 housing permits from 2003 through Federal Reserve Bank of Atlanta 2009 Annual Report Florida LA Alabama Mississippi Georgia Tennessee 2006, more than the number of permits applied for in the entire country in the year 2008. The drop in Florida permit requests from 2005 to 2009 was dramatic, falling from a peak of 287,250 down to 35,329. In metropolitan Atlanta, the Southeast’s fastest-growing metro area before the recession, officials issued an average of about 68,000 residential building permits each year from 2000 through 2006 (see chart 5 on page 9). To lend some perspective, the entire city of Tallahassee, Florida, has a little more than 68,000 housing units, according to U.S. Census data. Recession brings a new reality The Southeast’s banks rode the crest of this economic wave through the 1990s and early 2000s, interrupted only by the 2001–02 recession. But as this most recent crisis halted and then reversed the region’s once-spectacular job growth, residential development outstripped demand. Perhaps nowhere were the effects of slowing job ChartChart 2 2 employment Payroll Payroll employment 8,000 Florida 6,000 4,000 Georgia Tennessee Alabama 2,000 0 Louisiana Mississippi 1990 1995 2000 2005 2010 Source: U.S. Bureau of Labor Statistics Chart 3 New banks established in three southeastern states, 2000-07 ChartNote: 3 Numbers are in $thousands. Source: U.S. Bureau of Labor Statistics New banks established in three Alabama states, Louisiana southeastern 2000–07 120 Florida Mississippi Georgia Tennessee 80 40 0 Florida Georgia Tennessee Note: The total number of new banks established in the Southeast during this period was 327, including 28 in Alabama, 6 in Louisiana, and 7 in Mississippi. Source: FDIC Note: The total number of new banks established in the Southeast during this period was 327, including 28 in Alabama, 6 in Louisiana, and 7 in Mississippi. Source: FDIC The region’s many “pipe farms” are visual evidence of the sudden drop in housing construction in 2008. 7 Too big to fail Atlanta Fed economist Larry D. Wall republished in April 2010 an article originally published in 1993 on the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The paper, “Too big to fail: No simple solutions,” says that the intent of the legislation was to reduce taxpayers’ exposure to financial system losses, including their exposure to too big to fail financial institutions. Wall notes in a new preface to the article that the recent financial crisis demonstrated that too big to fail has still not been eliminated for the very largest banks. While too big to fail has not directly affected the Sixth District, the negative effects from the national issue have cast their shadow on us here in the Southeast. The article is available online at frbatlanta.org/cenfis/pubscf/vn_no_simple_solutions.cfm. u Relatively new banks were also hit particularly hard. Among forty-nine southeastern institutions that failed in 2008 and 2009, twenty-two were less than ten years old. 8 growth more apparent than in Florida. As of December 2009, the state had shed roughly 920,000 jobs since its peak nonfarm employment in March 2007, according to the Bureau of Labor Statistics. With fewer jobs to pursue, fewer people moved to the state. In an astounding turnabout, from July 2008 to July 2009, more people left Florida than arrived, according to U.S. Census data. It was the first twelve-month period in sixty-three years in which Florida lost population. The effect of slowing in-migration on the Southeast’s homebuilding industry was sobering. So-called “pipe farms” littered places like metro Atlanta. (The term “pipe farms” refers to land that developers had graded and planted PVC pipes in for subdivisions that they would now never build.) The inventory of the area’s partially developed vacant lots soared from a twenty-one months’ supply during 2005 to more than ten years’ worth by the end of 2008, according to a Federal Reserve Inspector General’s report on a failed metro Atlanta bank. Eighteen to twenty-four months is considered an acceptable inventory. Housing construction came to a virtual standstill during 2009. For instance, in metropolitan Atlanta, builders secured 6,533 construction permits, down from a peak of 74,007 in 2004. The heavy concentration in real estate lending became problematic for many of the region’s financial institutions. As the hammers and saws fell silent, the Southeast shouldered a disproportionate share of bank failures. The region’s forty-two failed institutions in 2009 accounted for 36 percent of the nationwide total, which is more than double its share of U.S. banks. In terms of assets, the region’s banking institutions at the end of 2009 accounted for 6.7 percent of the total assets of all FDICinsured institutions nationally. The state of Georgia led the nation in bank failures in 2008 and 2009, with twenty-five failed institutions in 2009 and five in 2008. Three-fourths of them were based in metropolitan Atlanta. Most of Georgia’s failed banks were relatively small, with less than $1 billion in assets. Relatively new banks were also hit particularly hard. Among forty-nine southeastern institutions that failed in 2008 Federal Reserve Bank of Atlanta 2009 Annual Report Chart 4 Cumulative construction and land development loans Chart 4 Cumulative construction and land development loans 1999 40 2004 2007 30 Fact 20 Of $29.7 billion in assets not accruing interest at the Southeast’s FDIC-insured institutions at the end of 2009, $27.3 billion, or 92 percent were secured by real estate. 10 0 Florida Alabama Georgia Louisiana Mississippi Tennessee Note: Numbers are in $billions, and are from FDIC-insured institutions based in the Southeast. Source: Chart FDIC 5 Building permits in the Southeast Note: Numbers are in $billions, and are from FDIC-insured institutions based in the Southeast. Year–over–year percent change Chart 5 FDIC Source: Building permits in the Southeast Source: FDIC Louisiana 20 Alabama Mississippi 0 Tennessee –20 Georgia Florida –40 –60 2001 2002 2003 2004 2005 2006 2007 2008 Source: U.S. Census Bureau U.S.twenty-two Census Bureau andSource: 2009, were less than ten years old. Fifteen of these were based in Louisiana metropolitanAlabama Atlanta. Florida The small size ofMississippi the Southeast’s failed institutions did not pose systemic risks Tennessee Georgia of the kind associated with much larger financial institutions that failed or required substantial public aid. However, the sheer number of failures often unsettled communities and bank customers and imposed a cumulative cost to the FDIC deposit insurance fund (DIF) of more than $3 billion, according to FDIC estimates as of March 2010. Among the recent bank failures in the Southeast, only two had assets of more than $10 billion, and neither was close to the so called “too-big-to-fail” range (see the sidebar “Too big to fail” on page 8). Thus, the too-big-to fail conundrum has not been predominant in this region. Real estate loans falter By the end of 2009, loans secured by real estate accounted for 82 percent of assets that were ninety or more days past due at FDIC-insured institutions headquartered 9 Who regulates whom? Different types of banking organizations in the United States are chartered and regulated by different federal and state agencies. The Federal Reserve (“The Fed”) is the primary supervisor for bank holding companies, including financial holding companies; state Federal Reserve-member banks; Edge and Agreement corporations; and state-licensed foreign banks operating in the United States, along with foreign banks’ representative offices in the United States. The Office of the Comptroller of the Currency (OCC) charters, supervises, and regulates national banks and federally licensed foreign banking operations in the United States. The Federal Deposit Insurance Corp. (FDIC) is the primary federal supervisor and regulator of nonmember state banks, some savings banks, and certain state licensed and federally licensed foreign banks. The Office of Thrift Supervision (OTS) supervises and regulates thrift holding companies, savings banks, and savings and loan associations. States also maintain financial regulatory agencies that supervise state-chartered banks and certain other state-licensed financial institutions such as insurance companies and nonbank lenders. The National Credit Union Administration (NCUA) charters, supervises, and insures federal credit unions. The following table is a breakdown of institutions headquartered in the Sixth Federal Reserve District, as of December 31, 2009: Entity type Primary regulators National banks OCC Federal savings banks OTS Savings and loan associations OTS State-chartered member banks Fed, FDIC, States State-chartered nonmember banks States State-chartered savings banks States, FDIC State credit unions States, NCUA Federal credit unions NCUA 10 Institutions/ 2009 failures 142/7 62/6 26/0 54/5 731/24 6/0 357/0 508/0 Federal Reserve Bank of Atlanta 2009 Annual Report in the Southeast. Those problem real estate loans amounted to 3.6 percent of total equity capital. That figure is more than triple both the level of troubled real estate loans at the end of 2006 and the amount relative to capital. Florida-based institutions carried the highest level of real estate assets ninety days-plus past due relative to capital, at 4.85 percent. Louisiana banks had the lowest level of problem real estate assets compared to capital: 1.68 percent. Georgia institutions as a group showed the largest three-year increase: 325 basis points (see chart 6). Reviews: Real estate caused most failures For each bank failure resulting in an FDIC payout exceeding the greater of $25 million or 2 percent of an institution’s assets, the inspector general (IG) of the responsible regulatory agency must examine the causes of failure and issue a material loss review Chart 6 ChartSoutheastern 6 loans 90 days past due Southeastern loans 90 days past due 2,000 1,600 1,200 800 Alabama Florida Georgia Louisiana Mississippi Tennessee 400 0 2006 2009 Notes: Numbers are in $millions, and are from Institutions based in the Southeast. Notes: Numbers are in $millions, and are from Institutions based in t Source: FDIC Source: FDIC The Atlanta Fed took several measures in 2009 to keep the foreclosure crisis in its sight, including tapping into the Real Estate Analytics team, planning the Real Estate Research blog to cover foreclosure issues and other real estate topics, enhancing the bank’s online foreclosure resources for consumers, and launching the Foreclosure Response podcast series. (Go to frbatlanta.org.) 11 They conclude that the foreclosure crisis was primarily driven by the severe decline in housing prices... not by a relaxation of underwriting standards on which much of the prevailing literature has focused. 12 (MLR). (The federal regulatory agencies are the FDIC, the Federal Reserve, the Office of the Comptroller of the Currency [OCC], the National Credit Union Administration [NCUA], and the Office of Thrift Supervision [OTS]. See the sidebar “Who regulates whom?” on page 10.) As of the end of January 2010, the IGs had issued MLRs on nineteen southeastern institutions that failed in 2007, 2008, and 2009. These MLRs almost invariably identify excessive real estate lending as the primary cause of failure. Several themes run through the reports. In many cases, as already noted, failed institutions violated their own guidelines regarding both management and board of directors’ oversight of operations and how much of their portfolio could be devoted to any single industry or category. The IG reports attest that a few failed institutions falsified information in call reports that they filed with regulators. Not surprisingly, the most common thread among the MLRs is a focus on problems related to real estate lending. Eighteen of the nineteen MLRs cite inadequate risk management of a heavy concentration in real estate lending as a primary cause of failure. This excerpt from a Federal Reserve IG review of a Georgia institution is typical: “The risks associated with the ADC [land acquisition, development, and construction] portfolio were magnified by the speculative nature of the residential construction loan component; 93 percent of these loans were made to builders for constructing homes that were not pre-sold.” The bank’s own internal policy, the IG report adds, limited such loans to 60 percent of the residential construction loan portfolio. Another MLR, this one from the FDIC’s Office of Inspector General, says a Florida institution “failed primarily due to bank management’s aggressive pursuit of asset growth concentrated in high-risk CRE loans with inadequate loan underwriting and a lack of other loan portfolio and risk management controls.” Other missteps plagued banks Some institutions encountered different types of real estate lending difficulties. For example, a Georgia lender that specialized in loans to redevelop low-income neighborhoods relied too heavily on appreciation in property values at the expense of sound underwriting practices, according to an MLR by the U.S. Treasury Department’s Office of the Inspector General (see the sidebar “Depreciation or bad underwriting?” on page 13). In the report, the IG cites examples of loans originated “with no consideration of borrower credit-worthiness,” including one to a borrower made days after he left prison for mortgage fraud. In another Treasury Department MLR, the inspector general describes how a failed Florida bank installed a relative of the owner as CEO in 2004. This relative had no experience running a bank. As CEO, he directed an aggressive growth strategy relying on high-risk products. Even as the bank incurred operating losses, it continued paying dividends to its holding company. The holding company’s majority shareholders were the bank owner and his family. Regulators also come in for criticism Bank managers and directors are not the only parties faulted for their role in the financial crisis. MLRs frequently report that the regulatory agencies were not forceful enough. Meanwhile, members of the Federal Reserve Board of Governors and officials throughout the Fed conducted a critical self-examination of the Fed’s super- Federal Reserve Bank of Atlanta 2009 Annual Report Depreciation or bad underwriting Editor’s note: This is an excerpt from “Decomposing the foreclosure crisis: House price depreciation versus bad underwriting,” a September 2009 working paper by Atlanta Fed economist Kristopher Gerardi, Boston Fed economist Paul S. Willen, and Adam Hale Shapiro, an economist with the Bureau of Economic Analysis. The paper is available online at frbatlanta.org/pubs/wp/working_paper_2009-25.cfm. The authors, using a data set that includes every residential mortgage, purchase-andsale, and foreclosure transaction in Massachusetts from 1989 to 2008, study the dramatic increase in foreclosures that occurred in Massachusetts between 2005 and 2008. They conclude that the foreclosure crisis was primarily driven by the severe decline in housing prices that began in the latter part of 2005, not by a relaxation of underwriting standards on which much of the prevailing literature has focused. They argue that relaxed underwriting standards did severely aggravate the crisis by creating a class of homeowners who were particularly vulnerable to the decline in prices. In the absence of a price collapse, they conclude that the emergence of this new group of homeowners in itself would not have resulted in the substantial foreclosure boom that was experienced. u vision and regulation function. As a result, the Fed began in 2009 to change how it supervises financial institutions. (See the section “Unsparing self-assessments” on page 18.) Numerous MLRs note that regulators should have considered compelling institutions to curtail their loan concentrations in residential ADC. An FDIC material loss review of a failed Florida de novo bank notes that even though an FDIC examiner recommended more frequent than normal examinations, neither the agency nor state regulators followed the recommendation of quarterly reviews. Instead, the FDIC visited the institution three times in three years. “More timely supervisory action, directed at the performance of [the institution’s] president/CEO, high-risk lending, weak credit underwriting and administration practices, and the bank’s increasing risk should have been taken as a result of the FDIC’s 2006 examination,” the review states. An OCC material loss review on an Atlanta bank that failed in 2009 is equally straightforward: “Until 2008, OCC’s examinations of [the failed bank] were not adequate and allowed the bank’s risky lending practices to continue unabated.” The IG adds that in February 2008, the OCC examiner in charge had stated that formal enforcement action was likely needed against the institution, yet the agency did not enter into a consent order with the bank until eight months later. Some of the content in the MLRs is clearly critical of front-line examiners. Whether supervisory action alone would have prevented the outcomes that occurred is less clear. The Federal Reserve IG states in a report that circumstances at a Georgia community bank warranted “a more forceful supervisory response.” However, the Fact In 2009, commercial banks in the Southeast carried $132.7 billion in CRE loans. Banks with assets under $1 billion carried 42 percent, or $55.3 billion, of these loans. Source: Bank call reports 13 Chart 3 Outstanding commercial mortgage-backed securities by vintage (year) - U.S. only ($Bls) Chart 7 Outstanding commercial mortgage-backed securities by vintage (year )—U.S. only ($Bls) 200 Partial interest-only Interest-only 150 Balloon Fully amortized 100 50 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Bloomberg Source: Bloomberg Smaller institutions hold almost half of all CRE loans, even as they account for only a fifth of the nation’s commercial banking assets . . . . 14 report also notes that such a response might not have mattered anyway. Given the deteriorating real estate market, determining whether more decisive regulatory action would have affected the bank’s subsequent decline or the failure’s cost to the DIF was not possible, according to the review. One reason is that federal regulatory policymakers did not issue guidance on subprime lending and other issues until the elements that contributed to the crisis were firmly in place. And when the crisis came, that guidance did not include specific limits on subprime and nontraditional real estate lending. Moreover, the idea of conducting forward-looking, “what-if” assessments of banks’ portfolios was not instituted until the 2009 Supervisory Capital Assessment Program (SCAP), the stress tests of the nation’s nineteen largest banking companies (see page 18). Commercial real estate issues loom Commercial real estate (CRE) markets were cause for continuing concern through 2009, exacerbating the problems associated with troubled real estate loans. The total dollar value of CRE loans is considerably smaller than that of residential real estate loans. The CRE market is important to commercial banks, however, especially those with less than $10 billion in assets. Total CRE debt in the country amounts to a third of residential mortgage debt, but banks hold a far greater portion of overall commercial real estate debt than residential, in part because investors the world over hold substantial securitized residential mortgage debt (see chart 7). Commercial banks, in fact, hold about 40 percent of all CRE debt in the form of whole loans, Atlanta Fed President Dennis Lockhart noted in a November 2009 speech. That amounts to roughly $1.4 trillion on banks’ books. Smaller institutions hold almost half of all CRE loans, even as they account for only a fifth of the nation’s commercial banking assets, according to bank call report data. The FDIC reports that southeastern banks with assets under $1 billion held forty-two percent of the region’s total CRE loans. The recession weakened these CRE portfolios. Simply put, job losses and a slowing economy sapped demand for CRE, leaving more office space, warehouses, shopping centers, hotels, apartments, and condos empty across the Southeast. In Federal Reserve Bank of Atlanta 2009 Annual Report turn, rental rates fell, reducing cash flows for building owners and making it more difficult for them to service bank debt. This problem could become even more significant. From 2010 through 2012, tens of billions of dollars in commercial mortgages will be up for renewal by banks. In many cases, those properties will be worth less than they were when the loans were made, introducing new challenges to the already stressed smaller banks as well as the CRE market. Some Southeast real estate markets saw signs of equilibrium toward the end of 2009. As unsold condo units and apartment vacancies mounted, builders began taking out far fewer multifamily construction permits. Throughout the Southeast, the number of apartment and condo building permits issued declined on a year-over-year basis in every month from April 2006 through 2009. In addition, inventory was being absorbed more quickly as prices fell and supplies leveled off. For example, sales of existing condos in Florida in December 2009 were 91 percent higher than in December A national real estate slump following a development boom in the Southeast has left the region’s landscape dotted with empty retail space. 15 Chart 6 Commercial real estate vacancy rates Chart 8 Commercial real estate vacancy rates Vacancy rates (percentage) 20 15 Office Warehouse 10 5 Apartment 0 1990 1993 1996 1999 2002 Retail 2005 2008 Source: CBRE Econometric Advisors, Axiometrics Inc. Source: CBRE Econometric Advisors, Axiometrics Inc. Returning to a Healthy Banking System In looking ahead to 2010, the FDIC sees improving conditions for many banks, but also projects that there will be substantially more bank failures through at least the third quarter of 2010. These are lagging results of the difficulties in commercial real estate loans. For more information, go to http:// www2.fdic.gov/qbp/index.asp 16 2008, albeit at an 18 percent lower median sale price, according to the Florida Association of Realtors. The same dynamic of higher year-over-year sales at lower prices held in every month of 2009 in the Sunshine State, though the price declines were smaller later in the year. Problems lingered in other sectors even as the condo market showed some signs of stabilizing. Some Southeast markets still had substantial numbers of apartment units under construction as 2009 ended. Atlanta, Nashville, and Tampa all had more than 2,500 apartment units “in the pipeline” at year end, according to F.W. Dodge Pipeline/CBRE Econometric Advisors. Meanwhile, elusive job growth, along with competition from distressed homes and condos whose owners gave up on selling and decided to rent their properties, also hurt apartment markets. Vacant office space also proliferated. The construction boom early in the decade, followed by pervasive job losses in 2008 and 2009, sent vacancy rates climbing. By the end of 2009, seven southeastern markets—up from just three a year earlier—had vacancy rates above 20 percent. Much the same story played out in industrial real estate. Vacancies across the Southeast began to climb in late 2007 and early 2008. At the same time, development slowed and rents declined, forces that continued through the end of 2009. Similarly, retail vacancies rose throughout 2009. In many cases, shopping centers were nearly empty shells as nearby planned subdivisions were never finished. In the fourth quarter of 2009, twenty-six of the region’s twenty-eight largest markets saw retail vacancy rates climb compared to the year-ago period, according to REIS, a commercial real estate research firm (see chart 8). These indicators of CRE market weakness are a concern to banks, and problem CRE loans could hinder smaller banks’ role in the economic recovery. These banks may have to set aside larger reserves as a cushion against troubled CRE assets. That action could, in turn, limit the amount of credit they can make available to the numerous small businesses that rely on them for financing. With credit tight for small businesses, then, their ability to grow and hire would be limited, undermining one engine of economic recovery. Federal Reserve Bank of Atlanta 2009 Annual Report However, at this writing, some evidence exists that many small firms are not taking on new bank loans. A December 2009 Atlanta Fed survey of 206 small businesses in the Southeast found that nearly half of respondents had not sought a loan or line of credit from a bank in the past six months. The reason they cited most was uncertain sales prospects. Of those businesses that sought credit, about 60 percent said they were able to obtain all or most of the bank financing they requested. Not surprisingly, construction firms had the most difficulty. Seventy percent of those that sought credit were unable to secure it. It is important to keep in mind that survey respondents represented established, relatively successful firms. It is true that the CRE problem does not appear to threaten the broader financial system despite tight credit and underwater CRE loans. The size of CRE debt, as noted, is smaller than that of residential real estate, and the exposure is more concentrated in smaller banks, whose failure does not pose a systemic threat. Nevertheless, CRE debt adjustment and resolution is an important element in economic rebuilding, in large part because of the ripple effect on small banks and the businesses that rely on them. Recognizing this fact, the Federal Reserve and other financial regulatory agencies in October 2009 updated longstanding guidance regarding the workout of CRE loans. The new statement calls for a balanced and pragmatic approach to CRE loan workouts and examiner loan classifications, consistent with accurate and timely recognition of losses. The guidance is intended to promote supervisory consistency, enhance the transparency of CRE workout transactions, and ensure that supervisory policies and actions do not inadvertently limit credit availability to sound borrowers. Properly done, such workouts are often in the best interest of both the institution and the borrower. According to the updated guidance, financial institutions that undertake prudent loan workout arrangements after thorough reviews of borrowers’ financial conditions will not be subject to criticism for these efforts, even if the restructured loans have weaknesses that cause adverse credit classifications. Signs of improvement emerge In 2009, the goal of both banks and their regulators was to try to regain stability. They worked to bolster banks’ capital and enhance liquidity and made some progress. Measures of capital firmed up. Late in the year, signs that the worst of loan quality problems could be easing in the Southeast’s banks were evident. Indeed, the functioning of interbank and other short-term funding markets improved considerably, interest rate spreads on corporate bonds narrowed significantly, prices of syndicated loans increased, and some securitization markets resumed operation. In addition, equity prices of banks whose shares are publicly traded increased sharply, on net, since their low in early 2009. Evidence also suggests that further tightening of lending standards in many loan categories might be coming to an end. According to a January 2010 Federal Reserve national survey of senior lending officers, commercial banks generally ceased tightening standards on many loan types in the fourth quarter of 2009. Banks’ policies on commercial real estate lending were an exception, as large fractions of respondents continued to tighten their CRE credit standards and terms during the quarter. Moreover, respondents have yet to unwind the considerable tightening overall that occurred over the preceding two years Sales of existing condos in Florida in December 2009 were 91 percent higher than they had been in December 2008. A December 2009 Atlanta Fed survey of 206 small businesses in the Southeast found that nearly half of respondents had not sought a loan or line of credit from a bank in the past six months. 17 Regulatory reform principles Editor’s note: The following statements are excerpted from Federal Reserve Chairman Ben Bernanke’s speech to the Economic Club of Washington, D.C., on December 7, 2009. For the full text of the speech, go to federalreserve.gov/ newsevents/speech/bernanke20091207a.htm. First, all systemically important financial institutions, not only banks, should be subject to strong and comprehensive supervision on a consolidated, or firmwide, basis. Second, when a systemically important institution does approach failure, government policymakers must have an option other than a bailout or a disorderly, confidence-shattering bankruptcy. The Congress should create a new resolution regime… to wind down a troubled systemically important firm in a way that protects financial stability. Third, our regulatory structure requires a better mechanism for monitoring and addressing emerging risks to the financial system as a whole. u Credit quality also showed hints of recovery in the final months of 2009. For example, a couple of the Southeast’s largest banking institutions reported in Securities and Exchange Commission, or SEC, filings that their volumes of new nonperforming loans declined in the third and fourth quarters of 2009 from the previous threemonth periods. These developments reflected a positive trend: many financial institutions were clearing problem assets off the books and solidifying their capital bases. Several accessed various sources of funding and raised significant new capital during 2009. The Federal Reserve’s SCAP stress tests played a role. After SCAP results were released in May 2009, the firms that the SCAP determined needed to raise capital increased common equity by more than $75 billion. One of the two southeastern firms that participated in the stress test has also repaid capital from the Troubled Asset Relief Program, or TARP, as did a handful of smaller institutions in the region. Depositors also appeared more comfortable, improving financial institutions’ access to core deposit funding. Concerns about the safety of their funds during the immediate crisis of 2008 largely abated, in part because of expanded FDIC guarantees. Lessons Learned Unsparing self-assessments The banking industry is striving to strengthen risk management models, tighten underwriting standards, fortify capital positions, and regain sound health and consistent profitability. It remains an open question, however, whether the industry has fundamentally changed the way it operates after its most severe crisis in nearly 18 Federal Reserve Bank of Atlanta 2009 Annual Report eighty years. Ongoing issues center on the strength of the nation’s economy, the outcome of changes implemented by regulators, and legislative reforms by Congress. Federal Reserve officials, including Chairman Ben Bernanke, have articulated a set of principles that in their view should underlie the nation’s regulatory framework. (See the sidebar “Regulatory reform principles” on page 18.) Financial regulatory agencies are already undertaking what Bernanke calls “unsparing self-assessments.” “At the Federal Reserve and other agencies, the crisis revealed weaknesses and gaps in the regulation and supervision of financial institutions and financial markets,” Bernanke said during the February 2010 swearing-in ceremony for his second term as Fed chairman. “Working together, the Fed staff and the Board have made considerable progress in identifying problems and improving how we carry out our oversight responsibilities.” Fed Involvement in Bank Supervision Healthier depositor confidence, resulting in part from the FDIC’s expanded guarantees, helped replenish some of the core deposit funding for financial institutions. 19 Domestically, the Fed is implementing standards that require banking companies to adopt compensation policies that link pay to the institutions’ long-term performance and avoid encouraging excessive risk taking. 20 In cooperation with other agencies, the Federal Reserve is also toughening regulations to limit excessive risk-taking and to help banks withstand financial stress. For example, on the international level, the Fed has worked with such organizations as the Basel Committee on Bank Supervision to increase the quantities of capital and liquidity that banks must hold. Domestically, the Fed is implementing standards that require banking companies to adopt compensation policies that link pay to the institutions’ long-term performance and avoid encouraging excessive risk taking. A multidisciplinary approach will be a central feature of the Fed’s supervision. The Federal Reserve’s ability to draw on a range of disciplines, using economists, market experts, accountants, and lawyers, in addition to bank examiners, was essential to the success of SCAP. The Fed has begun using this varied expertise to augment traditional onsite examinations with offsite surveillance programs. In these programs, multidisciplinary teams combine supervisory information, firm-specific data analysis, and market-based indicators to identify problems that may affect one or more banking institutions. Perhaps most importantly, the Federal Reserve is taking a more “macroprudential” approach to bank supervision. Drawing from the Fed’s experiences in conducting the SCAP, this industry-wide approach transcends the health of individual institutions and instead scrutinizes the interrelationships among firms and markets to better anticipate sources of systemic financial contagion. Do no harm The Fed and other regulatory agencies are beginning the necessary process of internal change. Yet there is a balance to be struck. They must take care not to stifle lending and damage the economy as they strengthen oversight of the financial system. To that end, in January 2010, the Federal Reserve joined the other financial regulatory agencies in issuing a statement reassuring banks, businesspeople, and the public that the agencies are working with the financial industry to ensure that supervisory policies and actions do not choke off credit to sound small business borrowers. Many parties must collaborate in strengthening our financial system. Financial institutions, regulators, and lawmakers have important roles in ensuring that lessons learned from the crisis that began in late 2007 are applied in the service of the greater good. How these institutions and individuals perform is critical not just to those who make a living in the financial industry but also to the majority who depend on financial services and the nation’s larger economy. “The country is just now emerging from a long and painful recession caused largely by a crisis in our financial system,” Lockhart said in January 2010. “We need to fix things, but purported reforms that weaken how the country’s economic affairs are governed will be harmful and tough to undo.” The Southeast’s banking industry has made progress in escaping the depths of the crisis. As noted, prospects for longer-term, sustainable recovery in the financial services industry and the broader economy were mixed at the end of 2009. Yet this region boasts a historically dynamic economy. Along with a better capitalized, managed, and supervised financial sector, that dynamism should stand the people of the Southeast in good stead in the coming years. Federal Reserve Bank of Atlanta 2009 Annual Report International institutions face different pressures Dozens of overseas banks maintain a presence in the Southeast. At the end of 2009, sixty-one foreign banking operations (FBO) were doing business in the region, including twenty-six branches and agencies, eleven foreign-owned bank holding companies, sixteen representative offices, and eight Edge Act corporations, which hold special charters to conduct international banking operations. The financial crisis affected foreign banks in the Southeast, but the impact on them was less dramatic than it was on domestic banks because of the smaller scope of their business in the region. None failed, and very few were in severe distress. One major reason is that heavy lending in U.S. real estate was not central to their business plans. However, some FBOs have increased their exposure as they’ve expanded their general banking business in the Southeast. Presence of international banking declines The international banking presence in the Southeast has been declining for more than a decade. In the 1980s and early 1990s, scores of Japanese and European banks had operations in the Southeast, mainly in Miami and Atlanta. Most of those institutions have since pulled out of the region. More recently, though, large Spanish banks have expanded here through acquisitions and new branch offices. These banks have found appealing buying opportunities among troubled U.S. institutions. Acquirers can often pick up the healthy assets and operations of problem banks at a favorable price. The Spanish acquirers became more careful as the crisis spread. They learned from earlier deals, in which the banks they bought had more problems than were at first apparent. The acquiring foreign banks became more adept at taking on only healthy assets, often through arrangements with U.S. regulatory agencies that seek buyers to preserve the working parts of distressed institutions. The primary risks facing FBOs in the Southeast do not change with economic currents. Those risks involve compliance with Bank Secrecy Act provisions regarding matters such as money laundering. Enforcing FBO compliance with Bank Secrecy Act and anti-money laundering regulations is a primary duty of the Atlanta Fed’s Miami-based supervisory group. That work is evolving in response to the growth of certain FBOs. When a foreign institution’s combined U.S. assets exceed $5 billion, a new level of supervision takes effect. This involves collaboration between the Atlanta Fed’s international supervisory team and the group that supervises large domestic banking organizations. u . . . this region boasts a historically dynamic economy. Along with a better capitalized, managed, and supervised financial sector, that dynamism should stand the people of the Southeast in good stead in the coming years. 21 2009 Milestones Patrick K. Barron, the Atlanta Fed’s first vice president and chief operating officer and the retail payments product director for the Federal Reserve System Federal Reserve moves its paper check processing to one office The enactment in 2003 of the Check Clearing for the 21st Century Act, or Check 21, allowed the digitalization of checks, making check processing significantly faster and more efficient. Before Check 21, 100 percent of the checks that the Federal Reserve System processed were paper. Today, almost 99 percent are processed as electronic images. The Atlanta Fed officially discontinued paper check processing in early 2010 but continue to serve as the Reserve Banks’ location for electronic check processing. The Cleveland Fed handles paper checks. 22 Federal Reserve Bank of Atlanta 2009 Annual Report Quarter 1 • The Retail Payments Risk Forum introduced its Portals and Rails blog and hosted the first meeting of its advisory council, bringing together diverse stakeholders to advance action to mitigate risk in the payments system. • The Americas Center and the Retail Payments Office sponsored a meeting with the Center for Latin American Monetary Studies and ten central banks to discuss a framework for cross-border payment exchange between the United States and Latin America. • A consumer banking conference in Miami, sponsored by the Atlanta Fed, explored the impact of access to banking in the United States and Latin America. • Supervision and Regulation’s (S&R) Real Estate Analytics group hosted its third annual Fed System real estate summit on data and information in support of the federal government’s Financial Stability Plan. Quarter 2 • The Atlanta Fed’s economic and financial education assessment initiative, conducted in partnership with the St. Louis Fed, completed a pilot study on teacherfocused economic education and adult financial literacy programs. • Cash services from the Atlanta Fed remained a top-three performer in the Federal Reserve System, providing the highest level of production for customers. • The bank’s Financial Markets Conference examined the challenges of measuring, managing, and regulating risk amid the development of innovative financial instruments. • S&R staff helped conduct the Supervisory Capital Assessment Program— “stress tests”—of the nation’s nineteen largest banking companies, including Atlanta-based SunTrust Banks Inc. and Birmingham-based Regions Financial Corp. • As part of the Atlanta Fed’s Fed Green five-year plan, the bank hired an inhouse environmental coordinator to evaluate the bank’s existing green initiatives and partner with the Green Team to develop an environmental plan that aligns with the bank’s strategic plan. The Miami branch opened a new monetary museum and visitor center. Quarter 3 • As part of the bank’s Regional Economic Information Network (REIN), the five Atlanta Fed regional executives are using sector-specific advisory councils to gather grassroots information on the economic performance of those sectors. • The REIN team also introduced SouthPoint, a regional economics blog. • The Miami Branch opened a new monetary museum exhibit and visitor center. • The Policy and Supervisory Studies group in Supervision and Regulation hosted the Debate and Confirm conference on commercial real estate (CRE) issues, focusing on prospects for CRE in 2010. • The Research Department hosted a conference that examined housing, labor, and the economy, including foreclosure rates and the role that race and education play in neighborhood formation. 23 Quarter 4 • The bank’s new Center for Financial Innovation and Stability sponsored a conference on regulating systemic risk, an especially timely issue in 2009. • The bank’s community and economic development unit’s growing research in community development and consumer policy prompted the unit’s move from S&R to the Research Department. • The bank’s Retail Payments Risk Forum hosted a conference on emerging risks to electronic retail payments systems and consumer data. • Michael Johnson was named senior vice president over the Supervision and Regulation Department. • The bank introduced a redesigned public Web site, frbatlanta.org, with improved navigation and a more robust search engine. • The Real Estate Analytics team launched a new section on the bank’s Web site. The Atlanta Fed launched its redesigned Web site. 24 Throughout the year: • Three Public Affairs forums brought internationally known experts to share economic perspectives on public policy issues, including transportation and water pricing and conservation. • Executives and economists delivered 370 speeches to nearly 30,000 people in 69 cities across the region. Atlanta Fed officials aim to keep the public informed about the state of the economy and the Fed’s efforts to stabilize the economy and financial system. • From the Atlanta Fed-based Retail Payments Office, cost recovery for both checks and ACH—automated clearinghouse—systemwide was below target, due largely to banking consolidations, among other factors. But upcoming changes in infrastructure will improve the cost recovery outlook. • The research team planned a new daily Web feature called the Inflation Project to monitor inflation on a global scale and a new blog called the Real Estate Research Blog to provide an analysis of research and commentary on topics such as foreclosure mitigation and other housing and real estate economics issues. Federal Reserve Bank of Atlanta 2009 Annual Report Sixth Federal Reserve District Directors Federal Reserve Banks each have a board of nine directors. Directors provide economic information, have broad oversight responsibility for their bank’s operations, and, with Board of Governors approval, appoint the bank’s president and first vice president. Six directors—three class A, representing the banking industry, and three class B—are elected by banks that are members of the Federal Reserve System. Three class C directors (including the chair and deputy chair) are appointed by the Board of Governors. Class B and C directors represent agriculture, commerce, industry, labor, and consumers in the district; they cannot be officers, directors, or employees of a bank; class C directors cannot be bank stockholders. Fed branch office boards have five or seven directors; the majority are appointed by head-office directors and the rest by the Board of Governors. 25 { Atlanta Board of Directors D. Scott Davis Chair Chairman and Chief Executive Officer United Parcel Service Atlanta, Georgia James H. McKillop III (Resigned) President and Chief Executive Officer Independent Bankers’ Bank of Florida Lake Mary, Florida Carol B. Tomé Deputy Chair Chief Financial Officer and Executive Vice President The Home Depot Atlanta, Georgia Rudy E. Schupp President and Chief Executive Officer 1st United Bank Boca Raton, Florida Thomas I. Barkin Director McKinsey & Company Atlanta, Georgia Lee M. Thomas Chairman, President, and Chief Executive Officer Rayonier Jacksonville, Florida Teri G. Fontenot President and Chief Executive Officer Woman’s Hospital Baton Rouge, Louisiana James M. Wells III Chairman and Chief Executive Officer SunTrust Banks Inc. Atlanta, Georgia Renée Lewis Glover President and Chief Executive Officer Atlanta Housing Authority Atlanta, Georgia T. Anthony Humphries President and Chief Executive Officer NobleBank & Trust NA Anniston, Alabama 26 FEDERAL ADVISORY COUNCIL MEMBER Richard G. Hickson Chairman and Chief Executive Officer Trustmark Corporation Jackson, Mississippi Federal Reserve Bank of Atlanta 2009 Annual Report Left to right: Humphries, Fontenot, Glover, Davis, Thomas, Tomé, Wells; not pictured: Barkin, McKillop, Schupp, Hickson 27 { Birmingham Branch Directors F. Michael Reilly Chair Chairman, President, and Chief Executive Officer Randall-Reilly Publishing Company Tuscaloosa, Alabama Bobby A. Bradley Managing Partner Lewis Properties LLC and Anderson Investments LLC Huntsville, Alabama Samuel F. Dodson Consultant International Union of Operating Engineers Local 312 Birmingham, Alabama Maryam B. Head Chairman Ram Tool and Supply Company Inc. Birmingham, Alabama 28 Macke B. Mauldin President Bank Independent Sheffield, Alabama C. Richard Moore Jr. Chairman, President, and Chief Executive Officer Peoples Southern Bank Clanton, Alabama Thomas R. Stanton Chairman and Chief Executive Officer ADTRAN Inc. Huntsville, Alabama Federal Reserve Bank of Atlanta 2009 Annual Report Left to right: Stanton, Bradley, Mauldin, Reilly, Dodson, Head, Moore 29 { Jacksonville Branch Directors Linda H. Sherrer Chair President and Chief Executive Officer Prudential Network Realty Jacksonville, Florida Jack B. Healan Jr. President Amelia Island Company Amelia Island, Florida H. Britt Landrum Jr. President and Chief Executive Officer Landrum Human Resource Companies Inc. Pensacola, Florida Alan Rowe (Resigned) President and Chief Executive Officer First Commercial Bank of Florida Orlando, Florida 30 Wendell A. Sebastian President and Chief Executive Officer GTE Federal Credit Union Tampa, Florida Ellen S. Titen President E.T. Consultants Winter Park, Florida Lynda L. Weatherman President and Chief Executive Officer Economic Development Commission of Florida’s Space Coast Rockledge, Florida Federal Reserve Bank of Atlanta 2009 Annual Report Left to right: Weatherman, Landrum, Titen, Sherrer; not pictured: Healan, Rowe, Sebastian 31 { Miami Branch Directors Gay Rebel Thompson Chair President and Chief Executive Officer Cement Industries Inc. Fort Myers, Florida Dennis S. Hudson III Chairman and Chief Executive Officer Seacoast Banking Corporation of Florida Stuart, Florida Leonard L. Abess Chief Executive Officer City National Bank of Florida Miami, Florida Eduardo J. Padrón President Miami Dade College Miami, Florida Walter Banks President Lago Mar Resort and Club Fort Lauderdale, Florida Thomas H. Shea Chief Executive Officer Florida/Caribbean Region Right Management Fort Lauderdale, Florida W. Cody Estes Sr. President and Owner Estes Citrus Inc. Vero Beach, Florida 32 Federal Reserve Bank of Atlanta 2009 Annual Report Left to right: Hudson, Abess, Padrón, Thompson, Banks, Shea; not pictured: Estes 33 { Nashville Branch Directors David Williams II Chair Vice Chancellor and General Counsel Vanderbilt University Nashville, Tennessee Rich Ford President Hylant Group of Nashville Nashville, Tennessee Daniel A. Gaudette Retired Senior Vice President North American Manufacturing and Supply Chain Management Nissan North America Inc. Smyrna, Tennessee Cordia W. Harrington President and Chief Executive Officer Tennessee Bun Company Nashville, Tennessee 34 Dan W. Hogan President and Chief Executive Officer Fifth Third Bank, Tennessee Nashville, Tennessee Debra K. London Retired President and Chief Executive Officer Mercy Health Partners Knoxville, Tennessee Paul G. Willson Chairman and Chief Executive Officer Citizens National Bank Athens, Tennessee Federal Reserve Bank of Atlanta 2009 Annual Report Left to right: Ford, Williams, Gaudette, London, Willson, Hogan; not pictured: Harrington 35 { New Orleans Branch Directors Robert S. Boh Chair President and Chief Executive Officer Boh Bros. Construction Company LLC New Orleans, Louisiana Gerard R. Host President and Chief Operating Officer Trustmark National Bank Jackson, Mississippi R. King Milling Member, Board of Directors Whitney Holding Corporation and Whitney National Bank New Orleans, Louisiana Christel C. Slaughter Partner SSA Consultants LLC Baton Rouge, Louisiana 36 Matthew G. Stuller Sr. Chairman and Chief Executive Officer Stuller Inc. Lafayette, Louisiana José S. Suquet Chairman, President, and Chief Executive Officer Pan-American Life Insurance Group New Orleans, Louisiana Anthony J. Topazi President and Chief Executive Officer Mississippi Power Gulfport, Mississippi Federal Reserve Bank of Atlanta 2009 Annual Report Left to right: Host, Boh, Topazi, Slaughter, Stuller, Suquet, Milling 37 { Sixth Federal Reserve District Officers Management Committee Dennis P. Lockhart President and Chief Executive Officer Patrick K. Barron First Vice President and Chief Operating Officer David E. Altig Senior Vice President and Director of Research Research Division 38 Christopher G. Brown Senior Vice President and Chief Financial Officer Corporate Services Division Anne M. DeBeer Senior Vice President Corporate Services/ Financial Services Division Federal Reserve Bank of Atlanta 2009 Annual Report Left to right: Oliver, Berthaume, Brown, Lockhart, Herr, Jones, Gooding, Barron, DeBeer; not pictured: Altig, Estes William B. Estes III (Retired) Senior Vice President Supervision and Regulation Division Marie C. Gooding Executive Vice President and Corporate Engagement Officer Frederick R. Herr Senior Vice President System Retail Payments Office Richard R. Oliver Executive Vice President System Retail Payments Office Lois C. Berthaume Adviser Senior Vice President and General Auditor Auditing Department Richard A. Jones Adviser Senior Vice President and General Counsel Legal Department 39 { Other Officers Scott H. Dake Senior Vice President James M. McKee Senior Vice President Robert J. Musso Senior Vice President and Regional Executive New Orleans Donald E. Nelson Senior Vice President William J. Tignanelli Senior Vice President Andre T. Anderson Vice President Brian D. Egan Vice President J. Stephen Foley Vice President Amy S. Goodman Vice President New Orleans Cynthia C. Goodwin Vice President John S. Branigin Vice President Lee C. Jones Vice President and Regional Executive Nashville Michael F. Bryan Vice President Mary M. Kepler Vice President Suzanna J. Costello Vice President Robert A. Love Vice President Thomas J. Cunningham Vice President and Associate Director of Research Mary M. Mandel Vice President Leah L. Davenport Vice President 40 Juan del Busto Vice President and Regional Executive Miami Bobbie H. McCrackin Vice President and Public Affairs Officer Federal Reserve Bank of Atlanta 2009 Annual Report Christopher L. Oakley Vice President and Regional Executive Jacksonville Cynthia L. Rasche Vice President John C. Robertson Vice President Melinda J. Rushing Vice President Juan C. Sanchez Vice President Robert M. Schenck Vice President David E. Tatum Vice President Adrienne M. Wells (Retired) Vice President Julius G. Weyman Vice President and Regional Executive Birmingham David J. Christerson (Retired) Assistant Vice President Michael Chriszt Assistant Vice President Chapelle D. Davis Assistant Vice President Robert A. de Zayas (Retired) Assistant Vice President Miami Angela H. Dirr Assistant Vice President and Assistant General Counsel Gregory S. Fuller Assistant Vice President Paul W. Graham Assistant Vice President Miami Todd H. Greene Assistant Vice President Robert D. Hawkins Assistant Vice President Christopher N. Alexander Assistant Vice President Carolyn Ann Healy Assistant Vice President William B. Bowling Assistant Vice President Janet A. Herring Assistant Vice President Joan H. Buchanan Assistant Vice President and Corporate Secretary Kathryn G. Hinton Assistant Vice President Annella D. Campbell-Drake Assistant Vice President Susan Hoy Assistant Vice President and Assistant General Counsel 41 Amelia L. Johnson Assistant Vice President Adrienne L. Slack Assistant Vice President Bradley M. Joiner Assistant Vice President David W. Smith Assistant Vice President Evette H. Jones Assistant Vice President Maria Smith Assistant Vice President Jacquelyn H. Lee Assistant Vice President Timothy R. Smith Assistant Vice President and Community Relations Officer Stephen A. Levy Assistant Vice President Margaret Darlene Martin Assistant Vice President Daniel A. Maslaney Assistant Vice President Marie E. McNally Assistant Vice President Elizabeth McQuerry Assistant Vice President Annita T. Moore Assistant Vice President Nashville Clifford S. Stanford Assistant Vice President Allen D. Stanley Assistant Vice President Jeff Thomas Assistant Vice President Joel E. Warren Assistant Vice President Jacksonville Charles L. Weems Assistant Vice President D. Pierce Nelson Assistant Vice President and Public Information Officer Kenneth Wilcox Assistant Vice President Doris Quiros Assistant Vice President and Assistant General Auditor Christina M. Wilson Assistant Vice President Jacksonville Susan L. Robertson (Retired) Assistant Vice President Stephen W. Wise Assistant Vice President Jeffrey F. Schiele Assistant Vice President 42 Phillip Mark Sparks Assistant Vice President { Auditing In 2009, the Board of Governors engaged Deloitte & Touche LLP (D&T) for the audits of the individual and combined financial statements of the Reserve Banks. Fees for D&T’s services are estimated to be $9.6 million. Approximately $2 million of the estimated total fees were for the audits of the limited liability companies (LLCs) that are associated with Federal Reserve actions to address the financial crisis and are consolidated in the financial statements of the Federal Reserve Bank of New York.1 To ensure auditor independence, the Board of Governors requires that D&T be independent in all matters relating to the audit. Specifically, D&T may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making management decisions on behalf of Reserve Banks, or in any other way impairing its audit independence. In 2009, the Bank did not engage D&T for any nonaudit services. Each LLC will reimburse the Board of Governors for the fees related to the audit of its financial statements from the entity’s available net assets. 1 CREDITS The 2009 Federal Reserve Bank of Atlanta Annual Report was created and produced by the Public Affairs Department. Vice President and Public Affairs Officer Bobbie H. McCrackin Assistant Vice President and Public Information Officer Pierce Nelson Publications Director Atlanta Office 1000 Peachtree Street, N.E. Lynne Anservitz Atlanta, Georgia 30309-4470 Graphic Designer and Birmingham Branch Art Director 524 Liberty Parkway Peter Hamilton Birmingham, Alabama 35242-7531 Writers Jacksonville Branch Charles Davidson 800 West Water Street William Smith Jacksonville, Florida 32204-1616 Editors Miami Branch Nancy Condon 9100 N.W. 36th Street Lynn Foley Miami, Florida 33178-2425 Photographers Nashville Branch Flip Chalfant 301 Rosa L. Parks Avenue Brad Newton Nashville, Tennessee 37203-4407 Printing New Orleans Branch BennettGraphics For additional copies contact Public Affairs Department Federal Reserve Bank of Atlanta 1000 Peachtree Street, N.E. Atlanta, Georgia 30309-4470 404.498.8020 frbatlanta.org 525 St. Charles Avenue New Orleans, Louisiana 70130-3480