House Appropriations Subcommittee on Business and Economic Development Budget Hearing Texas Department of Banking Testimony of: Charles G. Cooper – Banking Commissioner February 26, 2009

Department Overview Offered by: Texas Department of Banking February 2009 Budget Hearing 2  Established in 1905 by the 29th Legislature.  Rich tradition of professional and sound regulation.  Practices and promotes fiscal responsibility.  Reduces regulatory burden by coordinating regulatory activities with other state and federal agencies.  Our mission is to ensure Texas has a safe, sound and competitive financial services system.  Regulatory oversight in the banking industry is countercyclical, and during times of economic stress there is an increased need for supervision.

Statutory Mandates Budget Hearing 3 Banks, Trust Companies, Foreign Bank Agencies and Check Verification Companies:  Chapter 31 of the Texas Finance Code requires the Banking Commissioner to examine each state bank annually or on another periodic basis the Banking Commissioner considers necessary to safeguard the interest of depositors, creditors, shareholders, participants and participant transferees.  Chapter 181 of the Texas Finance Code requires the Banking Commissioner to examine each state trust company annually or more often as the Banking Commissioner considers necessary to safeguard the interest of clients, creditors, shareholders, participants and participant-transferees.  Chapter 204 of the Texas Finance Code requires the Banking Commissioner to examine each Texas state branch, agency or representative office of a foreign bank annually or more often as the Banking Commissioner considers necessary to determine if the office is operated in a safe and sound manner.  Section of the Texas Finance Code requires the Banking Commissioner to register check verification entities and operate a secure electronic system to facilitate notification of closed bank accounts subject to fraud. Offered by: Texas Department of Banking February 2009

Statutory Mandates … Continued Offered by: Texas Department of Banking February 2009 Budget Hearing 4 Prepaid Funeral Contract Sellers, Perpetual Care Cemeteries, Money Service Businesses and Private Child Support Enforcement Agencies:  Chapter 154 of the Texas Finance Code requires that the Banking Commissioner examine each prepaid funeral contract seller annually or more often as deemed necessary to protect the prepaid funds and to assure that the contracted services and merchandise are provided at the time of death.  Chapter 712 of the Texas Health and Safety Code requires that the Banking Commissioner examine each perpetual care cemetery annually or more often as deemed necessary to protect and safeguard the perpetual care trust funds and to assure that the fund income is used to maintain and support cemetery maintenance.  Chapter 151 of the Texas Finance Code (Money Services Act) requires that the Banking Commissioner examine each money service business (currency exchange, transportation, transmission, stored value cards, and third party bill payers) annually to protect and safeguard customer funds and prevent money laundering and funding of terrorist activities.  Chapter 396 of the Texas Finance Code requires the Banking Commissioner to monitor private child support enforcement agencies through registration and investigation of consumer complaints.

Assets Under Supervision in Texas Offered by: Texas Department of Banking February 2009 Budget Hearing 5

Revenue Sources  The Department is fully self-funded and fully self-leveling. Fees and assessments on regulated entities fund 100% of the agency’s expenditures. Expenditure reductions will not benefit the state’s General Revenue Fund. By statute, the Department of Banking is limited to collecting fees and assessments that cover only the agency’s direct and indirect expenditures. Primary Expenses  The Department’s expenditures are mainly personnel related. Salaries and other personnel expenses average 80% of total expenditures. Travel related expenses, mainly to conduct examinations, average 11% of total expenditures. 6 Budget Hearing Offered by: Texas Department of Banking February 2009

Summary of L.A.R. for FY 2010 and 2011 Texas Department of Banking 7 Budget Hearing Offered by: Texas Department of Banking February 2009 Revised RiderComments Contingency Appropriations – State Regulatory Response Amendments to rider: (1) Allow the agency the ability to seek examiner salary adjustments if salary levels are not competitive with the FDIC; (2) Make interim salary adjustments a component of future base appropriation requests; and (3) Assign a unique pay code to these type of salary adjustments. Summary of L.A.R. for FY 2010 and 2011 Texas Department of Banking

8 Budget Hearing Offered by: Texas Department of Banking February 2009 Summary of L.A.R. for FY 2010 and 2011 Texas Department of Banking

9 Budget Hearing Offered by: Texas Department of Banking February 2009 Summary of L.A.R. for FY 2010 and 2011 Texas Department of Banking

Exceptional Items Requested for FY 2010 and 2011 Texas Department of Banking 10 Budget Hearing Exceptional Items Amount for Each FY Comments Continue Funding of Interim Contingency Rider Appropriations (original LAR request) $278,376 $287,948 (Amount not funded in base bill) Provides continued funding for the 2008 interim appropriations received for the oversight of Comerica Bank and examiner and related directors market salary adjustments. Without the continuation of the appropriations, the agency will be unable to adequately regulate Comerica Bank and examiners will likely leave if salary adjustments are taken back. The amount included in the base bill was calculated from partial funding for 2008 (beginning January 2008) and full funding for 2009 of the market salary adjustments. This unfunded amount represents monies needed each year to completely fund the market salary adjustments in 2010 and Career Path Promotions for Financial Examiners I-VI $282,231 $562,259 Provides funding for promotions in the Financial Examiner I-VI series. Career path promotions based on performance will enable the agency to build an experienced workforce and demonstrate to employees that state service can be a viable long term career. Commissioner Salary Adjustment$28,809 Provides a salary adjustment for the Commissioner to $165,000 annually to align the position’s salary to market competition. This increase is comparable to the State Auditor’s Office August 2008 market analysis on exempt position salaries. Offered by: Texas Department of Banking February 2009

New Exceptional Item Amount for Each FYComments Funding for Additional Senior Level Experienced Examiner Staff $2,058,980 (14 examiners) $2,058,980 (14 examiners) Regulatory oversight in the banking industry is countercyclical, and during times of economic stress there is an increased need for supervision. When the original LAR was prepared, we did not expect the number of problem banks to rise so quickly. (See details of the problem bank analysis and expenditure detail at Appendix A) 11 Budget Hearing Offered by: Texas Department of Banking February 2009 Possible New Exceptional Items Requested for FY 2010 and 2011 Texas Department of Banking Problem banks require experienced examiners that can adequately identify weak lending practices that may further deteriorate the bank financial condition. Problem banks are examined every six months. Problem banks increase the number of examination hours by approximately 56% due to the expanded work procedures in high risk areas. Problem banks require continuous monitoring of compliance with administrative and enforcement actions. 11

New Exceptional Item Amount for Each FYComments Funding for Competitive Salary Adjustments $422,953 To retain senior personnel by remaining competitive with the FDIC. Will bring the Financial Examiner VII through Director series average salaries to within 90% of the FDIC average. (34 FTEs) Possible New Exceptional Items Requested for FY 2010 and 2011 Texas Department of Banking Hiring and Staffing Losses: January 2009 – Unable to rehire senior examiner with 16 years of experience. Examiner went to work with FDIC for a salary $12,000 above our offer. February 2009 – Review Examiner with 23 years regulatory experience resigned to go work for the FDIC with an approximate salary increase of $10,000. February 2009 – Senior Examiner with 15 years regulatory experience is in negotiations with FDIC for an undisclosed salary increase. Within the last six months, we have had 6 Financial Examiner VII postings with only 2 qualified external candidates. 26% or 9 of our Financial Examiner VII through Director series are eligible to retire today. In the next three years, 44% or 15 of our Financial Examiner VII through Director series are eligible to retire. In the next five years, 65% or 22 of our Financial Examiner VII through Director series are eligible to retire. 12 Offered by: Texas Department of Banking February 2009 Budget Hearing 12

13 Budget Hearing Offered by: Texas Department of Banking February 2009 Texas Department of Banking Salary Comparison

Profile of Regulated Entities Budget Hearing 14 Information as of September * Does not include 22 out-of-state, state-chartered banks operating in Texas ($28,108 million) Regulated EntityNumber of Entities Total Assets $(billions) Commercial Banks*329$156 Foreign Bank Agencies9$ 51 Public Trust Companies22$ 29 Prepaid Funeral Licensees412$ 3 Perpetual Care Cemeteries243$ 0 Money Service Businesses128$ 75 Private Child Support Enforcement Agencies13N/A Check Verification Entities6N/A Totals1,162$316 Offered by: Texas Department of Banking February 2009

Department Staffing by Strategy 15 Budget Hearing STRATEGY STAFFING LEVELS [1] Financial Examiners, Program Administrators and Related Directors OtherTotal Bank Examination Comerica Bank Examination8210 Non-Bank Examination16420 Application Processing527 Administration 25 Regulatory Oversight 11 TOTALS TURNOVER [2] Fiscal Year %22.5%13.6% Fiscal Year %14.6%10.8% Fiscal Year %19.0%15.8% Fiscal Year %16.3%20.9% Fiscal Year %22.5%14.4% Fiscal Year %14.3%10.2% Fiscal Year %22.5%14.1% Fiscal Year %20.0%21.0% [1] Represents actual staffing as of 12/1/08. [2] Including interagency transfers. Offered by: Texas Department of Banking February 2009

Appendix A