1. House Appropriations Regulatory Subcommittee Budget Hearing Texas Department of Banking Testimony of: Randall S. James – Commissioner February 6, 2007

2. Offered by: Texas Department of Banking February 6, 2007 Budget Hearing Page 2 Statutory Mandates  The Department of Banking is entrusted with insuring the safety of the public’s money held by institutions that provide financial services. We charter and/or license the following businesses: Chapter 31 of the Texas Finance Code requires the Banking Commissioner to examine each state bank annually or more often as the Banking Commissioner considers necessary to safeguard the interest of depositors, 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. 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.  Banks, Trust Companies and Offices of Foreign Bank Agencies

3. Offered by: Texas Department of Banking February 6, 2007 Budget Hearing Page 3  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. Statutory Mandates

4. Offered by: Texas Department of Banking February 6, 2007 Budget Hearing Page 4 Profile of Regulated Entities Information as of September 2006. * Does not include 17 out-of-state, state-chartered banks operating in Texas ($16 billion). Regulated Entity Number of Entities Total Assets $(billions) Commercial Banks*321 $80 Foreign Bank Agencies7 23 Public Trust Companies22 27 Prepaid Funeral Licensees419 3 Perpetual Care Cemeteries241 0 Money Service Businesses123 66 Private Child Support Enforcement Agencies 14 N/A Totals1,147 $199

5. Offered by: Texas Department of Banking February 6, 2007 Budget Hearing Page 5 Supervisory Information The total number of state-chartered banking organizations has declined. Most of this reduction is the result of merger activity. As a result, the surviving banks are substantially larger in size and operate many more branch locations. As the size of the organization increases, so does the complexity of its operations. Larger banks engage in more sophisticated investment ventures and provide a greater variety of products and services to their customers. Even though the number of banking organizations has decreased, the assets and branches have increased, and agency resources needed to appropriately supervise these businesses have not diminished. Larger and more complex banks also necessitate a better trained and experienced staff of examiners, including more subject matter specialists, to review their operations. BANK INFORMATION 12-31-909-30-06 Percent Increase / (Decrease) Number of Texas State-Chartered Banks [1] 577321(44%) Number of Branches of Texas State- Chartered Banks 4671,318182% Total Assets of Texas State-Chartered Banks $45 billion$80 billion78% Average Assets Per Bank $78 million$249 million219% STAFFING INFORMATION 8-31-909-30-06 Percent Increase / (Decrease) Total Agency Staffing 210157(25%) Number of Financial Examiners [2] 14096(31%) [1] Does not include out-of-state, state-chartered banks operating in Texas. [2] Includes Bank and Trust field examiners and related directors.

6. Offered by: Texas Department of Banking February 6, 2007 Budget Hearing Page 6 Department Staffing by Strategy STRATEGY STAFFING LEVELS [1] Financial Examiners, Program Administrators and Related Directors Other Total Bank Examination 988106 Non-Bank Examination 16319 Application Processing 426 Administration 26 Regulatory Oversight 11 TOTALS 11840158 TURNOVER Fiscal Year 2006 14.0%19.0%15.1% Fiscal Year 2005 21.2%16.3%20.9% Fiscal Year 2004 12.0%22.5%14.4% Fiscal Year 2003 8.8%14.3%10.2% Fiscal Year 2002 12.0%22.5%14.1% Fiscal Year 2001 21.7%20.0%21.0% [1] Represents actual staffing as of 12-31-06.

7. Offered by: Texas Department of Banking February 6, 2007 Budget Hearing Page 7 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 related to bank supervision (Chapter 31.106 of the Texas Finance Code).  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, are 10% of total expenditures. Primary Expenses

8. Offered by: Texas Department of Banking February 6, 2007 Budget Hearing Page 8 Summary of L.A.R. for FY 2008 and 2009 Texas Department of Banking Amount for Each FY Lump Sum Leave Payments to Retirees$219,000 $62,000 Provides funding for lump sum vacation accrual payments to employees who retire and opt for lump sum payments of leave benefits. Our calculation is that 14 employees are eligible to retire in fiscal 2008 and six in fiscal 2009. This appropriation would only be used for retirements that actually occur. Without this rider, the agency will be required to defer promotions and/or hiring of new employees to fill vacant positions left by the retirees. Exceptional Item Requested for Fiscal Years 2008 and 2009

9. Offered by: Texas Department of Banking February 6, 2007 Budget Hearing Page 9 Summary of L.A.R. for FY 2008 and 2009 Texas Department of Banking Requested Language Amount for Each FY Comments Continue the Regulatory Response Contingency Rider b. None of the funds appropriated in item (a) above may be expended by the Department of Banking unless the Finance Commission files a finding of fact with the Governor and the Legislative Budget Board and neither the Governor nor the Legislative Budget Board issues a written disapproval not later than: (1) the 10th day after the date the staff of the Legislative Budget Board concludes it’s review of the findings of fact along with the conclusions or comments of the Legislative Budget Board staff to the Chair of the House Appropriations Committee, Chair of the Senate Finance Committee, Speaker of the House, and Lieutenant Governor; and (2) within 10 business days of the receipt of the finding of fact by the Governor. b. None of the funds appropriated in item (a) above may be expended by the Department of Banking unless the Finance Commission files a finding of fact with the Governor and Legislative Budget Board and neither the Governor nor the Legislative Budget Board issues a written disapproval within 30 days of the receipt of the finding of fact. From Funds Already Appropriated None of the funds in the Department’s contingency rider may be expended unless the Finance Commission files a finding of fact with the Governor and LBB and neither the Governor nor LBB issues a written disapproval within 30 day of the receipt of the finding of fact. This revision provides a date certain that the agency will receive either approval or denial of a request to activate the contingency rider. This revised language is from the 78 th Legislative Session General Appropriations Act. Revised Rider for Fiscal Years 2008 and 2009

10. Offered by: Texas Department of Banking February 6, 2007 Budget Hearing Page 10 Summary of L.A.R. for FY 2008 and 2009 Texas Department of Banking Newly Requested Riders for Fiscal Years 2008 and 2009 Requested Language Amount for Each FY Comments Out-of-State Travel Out of the funds appropriated above, expenditures for out-of- state travel by the Texas Department of Banking are limited to $70,000 in fiscal year 2008 and $70,000 in fiscal year 2009. Travel related to regulatory matters, including examinations, inspections and the training of financial examiners, inspectors, investigators, attorneys and related directors is exempt from any out-of-state travel cap limitation. From Funds Already Appropriated Travel related to regulatory matters, including examinations, inspections and training of examiners, inspectors, investigators, attorneys and related directors is exempt from any out-of-state cap limitations. This rider allows the agency the flexibility to continue its mission without a break in activities while an exception is being reviewed. Our current cap is approximately $145,000. Annual waivers have been received by the Department each year requested beginning in fiscal year 2004. This rider is patterned after a State Securities Board rider. Overnight Travel Stipend Employees of the Department of Banking, when traveling on examination assignments relating to the agency’s regulatory responsibilities may be authorized to receive an overnight travel stipend for any overnight stays in excess of 60 days out per fiscal year. This stipend will be paid annually in August and the daily rate may not exceed the rate set by the FDIC. This stipend will not be considered a one time merit and may be paid to the eligible employees regardless of their last merit pay or promotion action. From Funds Already Appropriated Employees of the agency when traveling on examination assignments relating to the agency’s regulatory responsibilities may be authorized to receive an overnight stipend for all overnight stays in excess of 60 days out per fiscal year. This stipend will be paid annually in August and the daily rate may not exceed the rate set by the FDIC (currently $50 per day.) Our projections are that 41 examiners would qualify for this stipend with a total annual cost of approximately $43,000. Appropriation of Unexpended Balances within the Biennium The unobligated and unexpended balances of appropriations to the Texas Department of Banking for the fiscal year ending August 31, 2008, are hereby appropriated to the Texas Department of Banking for the same purposes for the fiscal year beginning September 1, 2008. From Funds Already Appropriated Unobligated and unexpended balances of appropriations to the agency for the fiscal year ending 8-31-08, are appropriated to the Department for the same purposes for the fiscal year beginning 9-1-08. This rider, which is patterned after a State Securities Board rider, will allow greater flexibility to the agency during the biennium.