HB 85-FINANCIAL INSTITUTIONS; LIABILITY  2:22:58 PM CHAIR COSTELLO reconvened the meeting and announced the consideration of CS FOR HOUSE BILL NO. 85(L&C) "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." 2:23:16 PM REPRESENTATIVE BART LEBON, Alaska State Legislature, Juneau, Alaska, sponsor of HB 85, stated that HB 85 seeks to achieve parity and level the competitive playing field between state chartered banks and national chartered banks. Alaska has seven commercial banks, three of which are nationally chartered and four that are state chartered. The bill also has language that levels the playing field between a mutual bank, of which there is one in Alaska, and state stock-owned banks. He noted that the sectional analysis references mutual banks. REPRESENTATIVE LEBON related that he was previously employed at Mount McKinley Bank in Fairbanks, which is a mutual bank, and at the National Bank of Alaska that is now Wells Fargo. He related that he worked with the Alaska Bankers Association and the state Division of Banking and Securities to update state banking statutes to ensure that all banks have an equal opportunity to offer Alaskans and businesses banking services. HB 85 is the result, and all seven commercial banks and the Division of Banking and Securities support HB 85. 2:25:45 PM SENATOR STEVENS asked for the difference between national and state chartered banks. REPRESENTATIVE LEBON provided a personal experience to respond to the question. When he worked on commercial loans at the National Bank of Alaska, national banking law allowed him to loan at 80 percent of the value of the asset, whereas state law allowed state chartered banks to loan at just 75 percent of the value of the asset. That is a competitive disadvantage to state chartered banks. SENATOR STEVENS asked how HB 85 fixes that issue. REPRESENTATIVE LEBON explained that it would align loans to value, types and dollar amounts of loans, management of banks' deposit base, and investment and loan portfolio management. SENATOR REVAK made a motion to clarify that the committee was considering CSHB 85(L&C), which was the version that passed the House. CHAIR COSTELLO asked Joseph Byrnes to walk through the sectional analysis for HB 85. 2:27:54 PM JOSEPH BYRNES, Staff, Representative Bart LeBon, Alaska State Legislature, Juneau, Alaska, presented the sectional analysis for HB 85 on behalf of the sponsor, which read as follows: [Original punctuation provided with some formatting changes.] 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. MR. BYRNES added that the requirement that a copy of the report of condition be supplied upon request at no cost is unchanged, but it makes state law more consistent with federal regulations for nationally chartered banks that do not have the requirement to post notices of financial reports. 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 non-opening 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). MR. BYRNES explained that this changes aligns with the barring limit for national banks 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). MR. BYRNES explained that this is consistent with federal regulations governing nationally chartered banks. 2:31:43 PM 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. MR. BYRNES explained that this achieves parity by authorizing state chartered banks to pledge assets for interest rate swaps the same as for nationally chartered banks. National banks are regulated by Section 610 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 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. MR. BYRNES noted that federal regulation requires all nationally chartered banks to be FDIC insured and all banks in Alaska are so insured. 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. [This is the same as Section 19 for state chartered 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. MR. BYRNES stated that this brings parity with nationally chartered banks that do not have a required number of board meetings. 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. 2:35:06 PM 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. MR. BYRNES explained that this raises the amount that may be borrowed from a mutual bank from five percent to no more than 15 percent of assets. Sec. 15. AS 06.15.190 Expands the deposits that mutual banks can accept. MR. BYRNES noted that Sec. 15 allows state mutual banks to accept the same deposits as nationally chartered mutual banks, which received expanded authority to accept deposits under the federal Depositary Institutions Deregulation and Monetary Control Act of 1980. 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. 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. 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. 2:39:05 PM 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. 2:40:38 PM 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". 2:42:36 PM 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. MR. BYRNES stated that the effective date currently is set to January 2022 but the sponsor would like the committee to conceptually amend that date to January 2023. Sec. 28. Immediate Effective Date MR. BYRNES explained that the immediate effective date would apply to all but those sections listed in Section 27. 2:44:34 PM At ease 2:46:37 PM CHAIR COSTELLO reconvened the meeting and turned to invited testimony. 2:46:54 PM JOE SCHIERHORN, Chair, President, and Chief Executive Officer (CEO), Northrim Bank, Anchorage, Alaska, stated that he is a member and past president of the Alaska Bankers Association, which represents the seven banks that operate in Alaska. These include: the state chartered Denali State Bank, Mt. McKinley Bank, 1st Bank of Ketchikan, and Northrim Bank, as well as KeyBank, Wells Fargo, and First National Bank Alaska, which are national banks chartered by the Office of the Comptroller of the Currency. He reported that all seven banks support HB 85, and the four state chartered banks have submitted letters that are in the bill packets. MR. SCHIERHORN stated that the Alaska Bankers Association has worked in concert with the Division of Banking and Securities on HB 85, the provision of which will provide meaningful updates to the banking code. He expressed gratitude to the sponsor for introducing the bill which is essential to better serve bank customers in Alaska; create parity between laws and regulations governing the various types of financial institutions that operate in Alaska; keep Alaska chartered banks competitive with other financial institutions; keep pace with the technology advances in banking; and enable efficient operations. 2:50:39 PM DAVID DURHAM, Executive Vice President and Chief Credit Administrator, Mt. McKinley Bank, Fairbanks, Alaska, stated that he is also the secretary-treasurer for the Alaska Bankers Association. He related that Mt. McKinley Bank is Alaska's only mutual bank. It is owned by its depositors and its structure lies between a commercial bank and credit union. The focus is to provide customer service to local communities rather than generating dividends for shareholders. He shared that Mt. McKinley Bank recently earned another outstanding CRA rating from the FDIC, demonstrating its commitment to serving the banking and commercial needs of communities. MR. DURHAM opined that HB 85 will modernize banking regulations in Alaska and provide parity for Alaska banks chartered under AS 06.05 with national banks. It also modernizes and gives parity to the state's home and mutual banks regulated under AS 06.15, which still contains provisions for mutual banks that became obsolete when savings and loans were deregulated in 1980. HB 85 seeks to update banking regulations to take advantage of new technology and accounting standards, and levels the playing field. He said Alaska's banks have always enjoyed a friendly competitive environment, but today the competition has grown to include numerous online financial institutions that have captured a significant share of the Alaska market. HB 85 also brings parity between commercial banks and mutual banks for lending, investing, and borrowing. MR. DURHAM said HB 85 repeals AS 06.15.180 and allows mutual banks the same borrowing capacity as commercial banks. It also removes antiquated provisions of AS 06.15.150 - .170, which required mutual banks to sequester up to 10 percent of its annual net earnings into a surplus reserve account that may only be used to meet losses. Since 1970, all financial institutions have been required to reserve for losses under the Financial Accounting Standards Board (FASB) regulation FAS 5 and FAS 114. AS 06.15.150 - .170 require that mutual banks duplicate the reserve requirement. HB 85 repeals these sections and brings parity to both state and national banks. Finally, he said HB 85 adds provisions to AS 06.03 that mirror the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). These regulations protect lenders from environmental liability when they foreclose on contaminated properties. CERCLA requires that lenders cannot participate in the management of the property and must take reasonable steps to divest the property in the earliest practicable and environmentally reasonable manner to avoid liability. This provision gives Alaska lenders the same protections available to lenders in other states and allows continued lending to local businesses vital to the health of Alaska communities. 2:54:45 PM SENATOR STEVENS asked why credit unions are not members of the Alaska Bankers Association and if they have the parity afforded to federal, state, and mutual banks. MR. DURHAM offered that credit unions already enjoy advantages not available to banks. They are not regulated by the Community Reinvestment Act and do not pay tax on their income. SENATOR STEVENS asked the sponsor to supplement the response. REPRESENTATIVE LEBON explained that federal banking laws require banks to offer loans to all parts of the community from which they collect deposits, whereas credit unions are not required to do so. The bill seeks to level the playing field by extending banks the advantages credit unions currently enjoy. He added that he has not heard credit unions in Alaska raise concerns about the bill. SENATOR STEVENS asked if he is saying that the bill bring parity for state, national, and mutual banks to the credit union position. REPRESENTATIVE LEBON clarified that HB 85 seeks to address the major differences between state chartered and federally chartered banks. 2:59:06 PM ROBERT SCHMIDT, Director, Division of Banking and Securities, Department of Commerce, Community and Economic Development (DCCED), Anchorage, Alaska, stated that the division serves as the primary regulator of the four state chartered banks in Alaska, following the Alaska banking statutes. The nationally chartered banks have had the advantage of broader powers from updated federal laws, which has created a disparity between the two banking systems. There has been a collaborative effort between the Alaska Bankers Association and the division to bridge the gap between the state and federal law. HB 85 modernizes Alaska's banking law to bring parity between state and national banks and level the playing field. HB 85 will help banks to become competitive with modern best practices and the evolution of the financial services they provide. The Division of Banking and Securities supports HB 85. 3:00:17 PM CHAIR COSTELLO opened public testimony for HB 85; finding none, she closed it. 3:00:38 PM SENATOR GRAY-JACKSON moved Conceptual Amendment 1 to HB 85. CONCEPTUAL AMENDMENT 1 Page 12, line 6: Delete: "2022" Insert "2023" 3:01:03 PM CHAIR COSTELLO found no objection and Conceptual Amendment 1 was adopted. 3:01:09 PM SENATOR REVAK moved to report the [Senate CS] for CSHB 85, work order 32-LS0371\G, as amended, from committee with individual recommendations and attached fiscal note(s). 3:01:31 PM CHAIR COSTELLO found no objection and SCS CSHB 85(L&C) was reported from the Senate Labor and Commerce Standing Committee.