HB 85-FINANCIAL INSTITUTIONS; LIABILITY  3:18:51 PM CO-CHAIR FIELDS announced that the first order of business would be HOUSE BILL NO. 85, "An Act relating to the Alaska Banking Code; relating to mutual savings banks; relating to interstate state banks and international banks; relating to the pledging of bank assets as collateral security to tribal organizations; relating to the pledging of bank assets for interest swap agreements; relating to state business licenses; relating to persons who make loans secured by interests in vessels or facilities; relating to liability for the release or threatened release of hazardous substances; relating to the Model Foreign Bank Loan Act; and providing for an effective date." 3:19:18 PM REPRESENTATIVE BART LEBON, Alaska State Legislature, explained that during his 42-year banking career he worked for federally- chartered and state-chartered banks. He described observing an "unlevel playing field" between the large national banks and the smaller state banks. His goal with HB 85, he said, is to level the playing field and to establish parity within Alaska's banking community. He noted that the Alaska Bankers Association, comprising all seven banks in Alaska, supports the proposed legislation. 3:20:57 PM JOSEPH BYRNES, Staff, Representative Bart LeBon, presented the sectional analysis on behalf of Representative LeBon, prime sponsor, which read as follows [original punctuation provided]: Sec. 1. AS 06.05.005(a) Conforming language to changes made under Section 10 to provide Alaska chartered banks parity with credit unions when establishing a bank branch. Sec. 2. AS 06.05.005 Prohibits the Department from placing a regulatory limitation on a credit card that a state bank issues to an officer of a state bank, the statutory authority for which is amended in Section 5 and the regulation (3 AAC 02.121) annulled in Section 24. Prohibits the Department from adopting regulations relating to the setting of time limits on the disposal of real and personal property, the statutory authority for which is amended in Section 6 and the regulation (3 AAC 02.135) annulled in Section 24. Sec. 3. AS 06.05.050 Publication of reports: Adds the option for posting notices of publication of bank reports on a bank's internet website vs. physical posting in the bank lobby. Sec. 4. AS 06.05.166(c) Defines the timeframe not later than 15 days for which a bank must notify the Department after an emergency nonopening or closing of the bank. Sec. 5. AS 06.05.210(a) Increases the amount a director or executive officer of a state bank may borrow to $500,000 (from $100K or $250K for a primary residence). Sec. 6. AS 06.05.245 Disposition of property not needed in the conduct of a banking business: Removes the Department's authority to set a time limit on the disposal of real and personal property. Instead, the carrying value and write-down will be dictated by Generally Accepted Accounting Principles (GAAP). Sec. 7. AS 06.05.260 Allows a state bank to pledge bank assets as collateral security to secure funds deposited by consortiums of federally recognized tribes. Sec. 8. AS 06.05.260 Adds a new subsection to replace the Division of Banking's Parity Orders 12-B (3- 6) regarding the pledging of assets for interest rate swaps. Adds a new subsection to define: ? "federally recognized tribe" as an Indian tribe under the Federally Recognized Indian Tribe List Act of 1994; and ? "interest rate swap agreement" as a stream of future interest payments that are exchanged for another stream of future interest payments. Sec. 9. AS 06.05.355(a) Requires all banks to become a member of the FDIC as a condition for receiving a Certificate of Authority; Intended to maintain trust and level the playing field for the banking industry. 3:25:49 PM CO-CHAIR FIELDS commented that the change detailed in Section 9 would be positive for consumers. REPRESENTATIVE LEBON agreed, and noted that every depositor wants Federal Deposit Insurance Corporation (FDIC) insurance. He said that this section would formalize the requirement for what is currently standard practice. 3:26:22 PM CO-CHAIR SPOHNHOLZ, referring to Section 6, said that she doesn't see anything specific that references using GAAP. REPRESENTATIVE LEBON explained the concept of "write-down" using the example of a bank foreclosing on a piece of property. The bank would hold it as "other real estate owned" and assign a value to the asset. The current statute specifies that the write-down practice decreases the value of the asset by 20 percent per year for five years, until the calculated value of the asset reaches zero, regardless of what it's actual value might be. He noted that this practice is required whether or not the actual value of the asset increases. Section 6, he said, would allow valuation of the asset according to GAAP, with the holding period reflecting the value of the asset. CO-CHAIR SPOHNHOLZ asked him to clarify what requires a bank to adhere to GAAP. REPRESENTATIVE LEBON said that GAAP defines the accepted accounting principles and provides a standard basis for valuation of an asset. 3:28:22 PM MR. BYRNES resumed his presentation of the sectional analysis, which read as follows [original punctuation provided]: Sec. 10. AS 06.05.399 Changes of location; branch banks. Provides Alaska chartered banks parity with credit unions when establishing a bank branch. Banks are currently subject to stricter bank branch application requirements under 3 AAC 02.215. The Division would establish in regulations similar requirements of credit unions as in 3 AAC 03.260. [Same as section 19 for Mutual Banks] Sec. 11. AS 06.05.438(a) Reduces the number of required meetings of a bank's board from 10 to 4 per calendar year. Sec. 12. AS 06.05.555(a) Conforming language to changes made under Section 10 to provide Alaska chartered banks parity with credit unions when establishing a bank branch. Sec. 13. AS 06.05.990(4) Removes "remote service unit" (ATM, etc.) from the definition of "branch bank" and defines "remote service unit" directly under this section. Sec. 14. AS 06.15.180 Allowing mutual banks to have similar borrowing options as state banks. Sec. 15. AS 06.15.190 Expands the deposits that mutual banks can accept. Sec. 16. AS 06.15.220 Allows trustees to delegate their authority to approve interest on deposits. Sec. 17. AS 06.15.240 Provides mutual banks with the same investment opportunities as state banks under AS 06.05.270. 3:31:27 PM CO-CHAIR FIELDS asked Mr. Byrnes to explain the difference between a mutual bank and another type of bank. REPRESENTATIVE LEBON explained that a mutual bank is a non-stock institution. He compared Denali State Bank, a stock-owned institution, with Mt. McKinley Bank, a mutual institution. He said that the depositors at Mt. McKinley Bank are the "owners" of the bank, whereas at Denali State Bank the owners are traditional shareholders. CO-CHAIR FIELDS asked whether it would fair to say that, under HB 85, the consumer protections would be the same regardless of ownership structure. REPRESENTATIVE LEBON replied, "Yes, absolutely." 3:32:17 PM MR. BYRNES resumed his presentation of the sectional analysis, which read as follows [original punctuation provided]: Sec. 18. AS 06.15.250 Providing mutual banks with the same lending opportunities as state banks. Sec. 19. AS 06.15.290 Changes of location; branch banks. Provides mutual banks parity with state banks and credit unions when establishing a bank branch. Alaska chartered banks are currently subject to stricter bank branch application requirements under 3 AAC 02.215. The Division would establish in regulations similar requirements of credit unions as in 3 AAC 03.260. [Same as section 10 for state banks] Sec. 20. AS 43.70.105(a) Exempts depository institutions (banks and credit unions) from the requirement to obtain business licenses for all headquarter and branch locations. Currently, state-chartered institutions receive a Certificate of Authority through the Division of Banking and Securities. Until each institution receives this certificate, they may not transact business. This change would eliminate duplicate licensing, thus reducing regulatory burden. Sec. 21. AS 46.03.822(a) Adds reference to the new language in section 22. Sec. 22. AS 46.03.822 Conforms state law to the Comprehensive, Environmental Response, Compensation, and Liability Act (CERCLA) standard for lender liability. CERCLA Section 101(20) contains a secured creditor exemption that eliminates owner or operator liability for lenders who hold ownership in a CERCLA facility primarily to protect their security interest in that facility, provided they do not "participate in the management of the facility." Generally, participation in the management applies if a bank exercises decision-making control over a property's environmental compliance, or exercises control at a level similar to a manager of the facility or property. Participation in management does not include actions such as conducting property inspections, requiring a response action to address contamination, providing financial advice or renegotiating or restructuring the terms of the security interest. The secured creditor exemption also provides that foreclosure on a property does not result in liability for a bank, provided the bank takes "reasonable steps" to divest itself of the property "at the earliest practicable, commercially reasonable time, on commercially reasonable terms." Generally, a bank can maintain business activities and close down operations at a property as long as the property is listed for sale shortly after the foreclosure date or at the earliest practicable, commercially reasonable time. 3:34:59 PM CO-CHAIR FIELDS asked for some examples of CERCLA properties. REPRESENTATIVE LEBON responded that both federally-chartered and state-chartered banks must align with the environmental laws under which banks must operate. He explained that it's very rare for a bank to engage in the operation of a business on which it foreclosed. For example, he said, if a bank foreclosed on a gas station, the bank would not then continue operation of the gas station, taking on the associated management and environmental risk. CO-CHAIR FIELDS clarified his original question by asking, "What are some other properties that might not be controlled by a bank, but which could potentially be foreclosed on, would be affected by this section?" REPRESENTATIVE LEBON responded that any property that a bank acquires through a foreclosure action must be evaluated for environmental risk. A gas station, dry cleaners, or even a residential property is evaluated, he said, and a bank practices due diligence by conducting, for example, a soil test to determine any possible environmental contamination. He said that once a property is owned by a bank, the bank has an obligation to know of any associated environmental risk, because the bank will eventually sell the property to a new owner. 3:37:24 PM MR. BYRNES resumed his presentation of the sectional analysis, which read as follows [original punctuation provided]: Sec. 23. Repealed Sections ? Repeals AS 06.05.265 Liability of directors for certain loans. Overbroad and unnecessary. ? Repeals AS 06.10.010-050 Model Foreign Bank Loan Act. The Act exempts out-of-state banks from Alaska taxation for certain business types and became obsolete in 1984 due to other tax measures. The Act is an unnecessary administrative burden. ? Repeals AS 06.15.150, 160 & 170 Surplus requirements, additions and limitations. Repealing these statutes would provide parity and allow a mutual savings bank to follow AS 06.05.305 for capital requirements. ? Repeals AS 06.15.230 Withdrawal of Deposits: Language no longer relevant after deregulation of Thrifts and Savings and Loans. Sec. 24. Annulled Regulations ? Annuls 3 AAC 02.121 Credit cards for officers: Removes the regulation limiting uncollateralized credit card balances up to $10,000 for an officer of a state bank. See Sections 2 and 5. ? Annuls 3 AAC 02.135 Disposition of property not needed for banking business. The carrying value and write-down of property will instead be dictated by Generally Accepted Accounting Principles (GAAP). See Sections 2 and 6. Sec. 25. Applicability Uncodified law for sections 3, 4, 6, 9, 10, 12, 16, 18, and 19. Cites definition locations for "branch bank", "department", "international bank", "interstate state bank", "mutual bank" and "state bank". Sec. 26. Transition Provides a transition period relating to sections 1, 10, 12, and 19; provides the Department time to promulgate regulations for changes of bank locations and establishing branch banks. Sec. 27. Delayed Effective Date Sets a delayed effective date for sections 1, 10, 12, and 19 to provide the Department time to promulgate regulations for changes of bank locations and establishing branch banks. Sec. 28. Immediate Effective Date Sets an immediate effective date for all sections except for sections 1, 10, 12, and 19, relating to changes of bank locations and establishing branch banks. 3:39:46 PM CO-CHAIR FIELDS broached a discussion about the best regulatory structure for environmental hazards, noting that the preference would be the maximum remediation economically possible, while not making any remediation laws that could inhibit development. REPRESENTATIVE LEBON noted that Mr. Martin would be able to give insight into that issue. 3:40:40 PM MICHAEL MARTIN, Chief Operating Officer (COO) and General Counsel, Northrim Bank, informed the committee that he is also the president of the Alaska Bankers Association. He said that Northrim Bank is a state-chartered bank serving the banking needs of approximately 90 percent of Alaska's population. The Alaska Bankers Association, he said, represents the seven banks operating in Alaska: state-chartered Denali State Bank, Mr. McKinley Bank, 1st Bank of Ketchikan, and Northrim Bank, as well as KeyBank, Wells Fargo, and First National Bank Alaska, which are the national banks chartered by the Office of the Comptroller of the Currency. He described members of the Alaska Bankers Association as job creators that build Alaska's economy through credit to businesses and families, noting that the banks lent over $1.4 billion in federal paycheck protection program (PPP) money. He stated that all seven banks in Alaska support HB 85, and that the Alaska Bankers Association, along with the four state-chartered banks, have submitted letters of support, which are included in the committee packet. MR. MARTIN said that the Alaska Bankers Association has worked in concert with the Division of Banking and Securities at the Department of Commerce, Community, and Economic Development (DCCED) on the proposed legislation, which, he said, would provide meaningful updates to the banking code. He said that HB 85 is essential to: better serve bank customers in Alaska; expand banking products and services throughout the state; keep state-chartered banks competitive with other finance organizations; create parity in the laws and regulations under which banking institutions must operate; keep pace with technological advances in banking; enable efficiency of operations; ensure safety and soundness of banks; and protect businesses and consumers in Alaska. 3:44:58 PM DAVID DURHAM, Executive Vice-President and Chief Credit Administrator, Mt. McKinley Bank, noted that he is also the secretary-treasurer of the Alaska Bankers Association. He said that Mt. McKinley Bank is a mutual bank owned by its depositors, which gives it special focus on the community in the Fairbanks North Star Borough. He said that profits are held by the bank to benefit depositors through lower deposit rates and loan interest rates. He stated Mt. McKinley Bank's "strong support" for HB 85, especially the sections pertaining to mutual banks. He said that since banking regulations in Alaska have not been updated in some time, the deregulation of national banks by the OCC have granted those banks increasingly broad powers which have served to hinder the ability of state-chartered banks to serve their customers. He offered the belief that HB 85 would allow Mt. McKinley Bank to remain competitive and would establish parity with the other banks. MR. DURHAM explained CERCLA regulations by recalling when Mt. McKinley Bank was preparing to foreclose on a gas station in Delta Junction, and the bank was advised by its attorneys to not touch the title due to environmental actions on the property. He said the property had gone through remediation but, acting on legal advice, the bank chose to not foreclose on the property, instead finding someone to bid on the property at auction and take title, thereby causing a substantial loss to the bank. He said, "We had always been under the impression that the federal law would speak if state law was silent." That was not the case, he said, so the proposed legislation would seek to have CERCLA protections for those who make investments in Alaskan communities. 3:48:45 PM TRACY RENO, Chief of Examinations, Division of Banking and Securities, Department of Commerce, Community, and Economic Development, said that the Division of Banking and Securities serves as the primary regulator of the four state-chartered banks in Alaska, which follow the now-outdated Alaska banking statutes. The federally-chartered banks, she said, have the advantage of the broader powers from updated federal laws, thereby creating disparity between the two banking systems. She noted the collaborative effort between the Alaska Bankers Association and the Division of Banking and Securities to bridge the gap between state and federal banking laws. She said, "HB 85 modernizes and streamlines Alaska's banking law to bring parity between the state and national banks and level the playing field." She said the proposed legislation would help state banks be competitive with modern best practices and the evolution of financial services. She said that while the administration has not yet taken a position on the proposed legislation, the provisions align with the governor's priorities by reducing the regulatory burden and modernizing Alaska laws. She said that the administration is planning to support HB 85 after incorporation of the proposed changes regarding the concerns of the Department of Environmental Conservation (DEC). 3:50:25 PM REPRESENTATIVE SNYDER asked Representative LeBon for further explanation of the national guidelines and how HB 85 would help achieve parity. REPRESENTATIVE LEBON invited one of the invited experts to participate in the response. 3:51:54 PM MR. MARTIN, in addressing Representative Snyder's question, referred to Representative LeBon's earlier reference to the category of "other real estate owned (OREO)," which is added to a bank's balance sheet when there is a foreclosure and a general obligation to sell the property. He said that current statute requires mutual banks to practice a layered write-down of the asset which, he supposed, was originally intended to ensure that banks don't hold assets. The provision is not required of national or state banks, he said, which follow GAAP in asset valuation. 3:53:40 PM REPRESENTATIVE SNYDER clarified that she would like a summary of "these specific things that we're finding parity with." She asked whether Sections 21 and 22 are necessarily limited to CERCLA, otherwise known as Superfund, or whether those sections could apply to other environmentally-contaminated sites not designated as Superfund sites. REPRESENTATIVE LEBON deferred to one of the invited testifiers. 3:54:56 PM MR. DURHAM explained that the site would not have to be designated Superfund, it could simply be a property that has undergone a state environment action. He said that the provisions under HB 85 would allow banks to market the properties in question without assuming the obligation and liability for environmental remediation. 3:55:32 PM MR. MARTIN interjected with the comment that there is a general misunderstanding of how the current statutes work. When a borrower provides a piece of real estate as collateral, he said, the bank does an environmental assessment of the property to verify the value of the collateral, which could be impacted by environmental damage. The general premise under HB 85 is that if a financial institution is taking a piece of real estate as collateral for a loan, there would be no liability unless the bank engages in operation of the business. The general notion, he said, is that everyone on the chain of title is responsible for cleanup of a contaminated property. It's possible for a property to be either devalued or, if the cost of remediation is greater than what the property could be sold for, to have no monetary value. 3:58:01 PM CO-CHAIR SPOHNHOLZ asked Ms. Reno what areas the Division of Banking and Securities is working on with the sponsor of HB 85. MS. RENO clarified that the division is satisfied with the language of the proposed legislation and is not working with the sponsor. She said that in her earlier reference to Sections 21 and 22 she intended to convey that the sponsor is working on language with the Alaska Bankers Association. 3:59:04 PM CO-CHAIR SPOHNHOLZ asked Ms. Larson for information on the issue on which DEC is working with the sponsor. 3:59:12 PM TIFFANY LARSON, Director, Division of Spill Prevention & Response, Department of Environmental Conservation, said that the Alaska Bankers Association wants to include CERCLA language in the proposed legislation. She expressed appreciation for the Alaska Bankers Association's openness about DEC's concerns regarding how HB 85 and CERCLA would work together. CO-CHAIR FIELDS asked for an estimated timeframe for arriving at a consensus. REPRESENTATIVE LEBON said that he doesn't have a timeframe. 4:00:27 PM CO-CHAIR FIELDS thanked the sponsor and testifiers. [HB 85 was held over.]