Can I Sign Kansas Banking Document

Can i industry sign banking kansas document now

got the uh the status of banks in kansas so with no further ado uh welcome commissioner you're up good morning thank you mr chairman committee members ranking members that's good morning my name is david herndon and it is my pleasure to appear before you virtually this morning to provide you an overview of the state of the office of the state bank commissioner the state agency where it is indeed my pleasure to serve as commissioner the office of the state bank commissioner has been around since 1891 we are the agency that regulates all state chartered banks trust companies mortgage businesses supervised lenders credit service organizations and money transmitters doing business in kansas our mission is to ensure the integrity of regulated providers of financial services through responsible and proactive oversight while protecting and educating consumers chairman longbine referenced a handout that was delivered and contains my presentation this morning and i appreciate the committee allowing me to appear remotely so i'll refer you to that handout now on page two the handout identifies the five divisions that compose my agency the division of banking and trust the division of consumer and mortgage lending legal division the division of administration and information technology i'm going to focus most of my comments today on the first two the division of banking and trust and the division of consumer and mortgage lending the division of banking and trust performs safety and soundness compliance and i.t exam on all state chartered banks and trust companies the division of consumer mortgage lending or cml licenses all non-depository entities conducting consumer lending activities in kansas and performs compliance and i t or information technology exams on those entities assuring compliance with state and federal laws ospc office of state bank commissioner currently employs 104 people with three current openings for which recruitment is now underway of the 104 employee current employees 77 are financial examiners or reviewers or managers for the examination function our agency is 100 fee funded through bank assessments and fees and penalties assessed by our cml division we receive no funding from the state's general fund and our 2021 budget totals 11.1 million dollars on page four of the handout highlights the supervisory duties of the banking division as mandated by statute we examine all state banks and trust companies at least once every 18 months some or more frequently if they are of significant asset size or are considered problem banks banks that have or are operating in unsafe and unsound activities or are non-compliant with state or federal laws are considered problem banks we have strong relations with our federal counterparts the federal reserve bank and the fdic or federal deposit insurance corporation that allows us to alternate those safety and soundness exams with those other agencies further on some occasions we will conduct joint exams with those agencies there were 187 kansas state chartered banks as of september 30 2020. today there are 186 and i'll speak to more on that in just a moment 35 of those banks have active trust departments in addition to 10 which is now 11 as one opened on january 2nd standalone trust companies that are chartered in kansas the combined total assets of kansas state chartered banks and trust companies now exceeds 100 billion dollars december as of the end of the third quarter in 2020 december 31 2020 numbers are not yet available as year in reports of conditions are being prepared and will be filed by january 31st page 5 gives a map of how we divide the state geographically into three regions with a goal of balancing the number of institutions per region and maintaining regional knowledge of the state's varied economies in which our institutions operate safeties and soundness exams are are referenced on page six using a a camel's an acronym a supervisory rating system to classify an institution's overall condition this system is applied to every bank and credit union in the united states as well as outside the u.s by various banking supervisory regulators camels is an acronym the c being capital adequacy a being asset quality of the institution m the management capacity of the institution that's the board and senior management typically earnings self-explanatory liquidity can can the institution meet the demands of its depositors and sensitivity and to market risk that would address fluctuations in interest rates and the impact on a bank's balance sheet bankers should strive to achieve a camel's rating of one in all cases in my opinion but as page seven shows a rating of three four or five brings with it the definition to the institution of being a problem institution and that in in turn brings various level of regulator imposed enforcement actions typically annexed and acted against these problem banks again more detail on that and on the ratings in kansas banks in a few moments but i'd like first to address your attention to excuse me to the next page that will reflect two important trends that is affecting our industry the united states operates a dual banking system national banks are chartered by the office of comptroller and currency state banks chartered by individual states i've included national banks in this information even though we don't regulate or have standing to regulate them for just for demonstration purposes the top graph of this on this page breaks down the state chartered banks with those that have voluntarily been chosen to be federal reserve members the number of national banks courted in kansas and the movement between charters changing from national to state we of course are big advocates for encouraging national banks to become state chartered banks and and are actively involved in recruiting the those national banks to consider making a charter change notice the number of banks that has declined though in the past five years this trend is not unique to kansas in fact it's a nationwide trend that's been going on since the late 1980s when when congress allowed more business activities by banks but note the bottom graph that even though the number of banks has declined the assets of the banks has increased and some of that has has been just as dramatic as the number of of uh bank declines so the osbc is in fact regulating fewer but more complex institutions engaged in many more fields of business than in the past which makes the demands on our staffs time and talents increase maintaining a competently trained and tenured staff is critical to our mission our success and to kansas and certainly one of the goals that we have in the organization i think it's important to note here too that 2020 asset growth was rapidly fueled by the economic recovery actions enacted through the cares act last year brought on by the coven 19 pandemic the next page will indicate how kansas banks were active in specifically the payroll protection plan or the ppp programs that congress authorized ppp loans inflated in a very short time period the bank's balance sheets and reflected in their september 30 2020 quarterly call reports those balance sheets will shrink back down a little bit as loans go off the bank's books but the overall asset growth remains and by the way i'm proud to report that eligible kansas state charter banks were very active in ppp lending and in some cases saving kansas businesses thereby helping keep our state's economy from further pandemic disruption last year's ppp program ended in august of 2020 can't that was the initial ppp program another one begins today uh but in in the first program kansas banks generated nearly 52 000 loans totaling 2.8 billion dollars and on page nine of this handout you can see the top 10 bank state bank lenders in kansas by the dollar amount of those loans and the percentage impact those loans had to their respective loan portfolios on page 10 and 11 we're going to demonstrate graphically that the decline in the number of banks but but offset by the increase in bank and trust assets to since 2008 that's you'll recall when the great recession began and that the line of total assets under supervision is dramatically on the rise also on page 11 deals with the trust assets under supervision also a dramatic increase since 2008 where it has gone from 30 million to almost 60 million dollars i mentioned there are 186 banks operating in kansas right now page 12 identifies the five largest banks state kansas state charter banks by asset size in millions of dollars so cross first bank in leewood is the state's largest state chartered bank at five and a half billion dollars in assets the five smallest are also identified on page 12 with the smallest one being the walton state bank in walton kansas with just under 10 million dollars in assets so there is a significant difference between the largest and the smallest organizations and our exam staff takes takes the appropriate size and time to examine those so when i commented earlier about uh the mandate being at least once every 18 month but could be adjusted by size clearly a bank that has a significant asset base is likely to have a more complex and diverse type of balance sheet so it takes longer and more people to examine that that bank but i believe that when you look at the the overall profitability in terms of net income for the kansas state banks which is on page 13 and then capital levels on page 14. and then a a breakdown of how the kansas banks balance sheets works you can see that we are overall healthy banks are well capitalized they are profitable and importantly they take their their deposits and reinvest them in the kansas economy with nearly two-thirds of their assets representing loan advances that's those are loans that fuel and enhance our citizens livelihoods and our state's economy another 23 percent almost a quarter of the bank's assets are in securities these are both united states uh treasury obligations bonds and that sort of thing as well as a significant portion of municipal investments and and that helps funds the the cities and counties operations in our state a moment ago i deferred a summary of the camel's ratings for our banks examination findings and examination reports are highly confidential so institutions names or their locations cannot be disclosed but on page 16 we summarize the kansas state bank's camels ratings for the past five years regrettably in october 2020 the one five-rated bank did in fact fail reducing the number of banks from 187 to 186 at the end of 2020. however many of the problem banks that are the three and four rated banks on this graph are working hard and have in fact improved their condition during the fourth quarters so the number of problem banks has declined at year end and we are working closely with those banks that that remain on the problem bank list as well as any new entries that might be added as time progresses and and banks balance sheets react we are working closely with those banks to resolve their many any remaining troubles pages 17 through 20 speak for themselves in terms of the number of state charter conversions that i talked about a moment ago there were none from national state charters in 2020 one in 2019 uh three in in 2018 no new bank charters in recent years but we have had a trust charters approved and open assured trust company and and moneta trust both in overland park the summary of the division for applications in 2020 and 2019 is there on page 18. the change of control and mergers and acquisitions are primarily the drivers that that we've had uh in the last couple of years i'd point out that that um 10 mergers purchases and acquisitions in the past you two years demonstrate my earlier point regarding the reduction in the number of banks some of those cases were simply mergers of affiliates to take advantage of efficiencies within an organization two examples five kansas commonly owned banks became one in 2019 through the merger of those banks three kansas commonly owned banks became one in 2020 again representing a merger but not a a loss of those banks page 20 our banking points out some of the highlights of our of our quality of our agency we are a nationally accredited financial regulator a designation for which we are quite proud and the accreditation is a five-year award and then eligible and subject to re-accreditation we are currently under a the five-year reaccreditation process and expect that to happen later this year and we certainly expect to remain accredited we also have our staff involved in federal and state legislation processes actively involved in the leadership of those and those are pro those are spots that we are quite proud of we also have are seeking accreditation for the first time for our consumer and mortgage lending division so i will now address some some comments about that cml beginning on page 22 where we give the two primary responsibilities of cml if a lender does not accept deposits but is licensed to extend consumer credit provide debt management services transmit money for consumers or provide mortgages mortgages to kansans it is regulated by our cml division the division also provides grants funded by fines and penalties collected as a result of enforcement actions to organizations that provide consumer education and awareness activities as well as responding consumer to consumer questions and concerns i mentioned earlier that our banking division conducts several different types of examinations but because the entities regulated by our cml division do not accept or hold deposits their examinations are more compliance related there are several federal laws and statutes that businesses must abide by as well as the four primary state laws that are identified on page 23. once again the number of players in this field is growing rapidly on page 24 you can see the growth and the number of entities licensed in kansas that grew so by by 16 percent in 2020 and now totals 12 433 individuals and entities most of the growth was in the mortgage origination sector spurred by generationally low mortgage interest rates managing this rapid growth certainly poses challenges in but based on both the sheer number of new players and especially the fact that many of the new mortgage originators are entrepreneurs with little or limited knowledge of the industry oftentimes these people are recruited by nationwide internet-based mortgage lenders such as quicken loans rocket mortgage other names that you see every day advertised on your television but unlike banks these lenders do not file quarterly reports and conditions they only do it annually therefore the data for 2020 is being assembled now but not yet available however on on page 25 we do point out that through 2019 the growth of loan volume rapidly increasing expected to continue through uh 2020 and as long as interest remember remaining low we also supervise the rapidly expanding money transmitter industry money transmitters highlights are on page 26 of your handout but kansas law does not currently regulate the virtual currencies bitcoin and that sort of thing but it does regulate money transmitters the traditional ones that we've all heard of western union moneygram paypal and other very recognizable businesses and this set segment of the industry and its spin-offs are frequently identified as fintechs financial technology firms and that certainly will continue to grow our cml division has the statutory authority to take a range of import enforcement actions in non-compliant circumstances these actions include consumer restitution orders when we find that a lender has overcharged a consumer we can order restitution to that consumer we can also assess fines penalties and even license revocation if the violations warrant the fines and penalties that are collected by cml are redistributed to kansans in the former in the form of consumer education efforts osbc has provided over 5 million dollars in grants since 1999 to schools students non-profits that support consumer financial education programs statewide in 2020 more than 18 000 students and consumers benefit benefited from these grants and we partner with the kansas securities commissioner to sponsor the kan as financial scholars essay scholarship contest on pages 28 and 29 and you can see the highlights of those activities and the recipients it is my indeed my pleasure to serve as bank commissioner and in conclusion the osbc receives inquiries regarding our regulated entities and provides answers from consumers whenever possible or resolves or or refers those consumers to the proper entities or agencies so that their issues are resolved we addressed over 1500 inquiries last year and 190 specific complaints in 2020 we were able to resolve or close or refer to the appropriate offices 152 of those complaints the other 38 remain open we accomplished this with a very dedicated professional efficient educated staff and again it is indeed my pleasure to serve as the kansas state bank commissioner and work with these fine individuals so mr chairman that concludes my remarks but i readily stand for any questions thank you hernan thank you very much for the very thorough presentation it appears that our kansas banks are doing very well and very solvent which is always good news i do have uh some committee members that are new to this committee and i know oftentimes we will have comments or concerns from constituents or in conversations could you talk a little bit about the separation between osbc and other entities such as the federal reserve federal homeland bank osbc is a regulator and you do not get into monetary policy or those type of things so could you talk a little bit about your role versus their roles yes sir our role is is as a regulator so we do not involve ourselves and specifically as a regulator to kansas state chartered banks and and consumer lending firms we are not a policy maker although we oftentimes are asked to opine on policies either on the books or being considered to be on the books and in fact from time to time we will address bills or or ask that bills be introduced to affect changes in economies changes in statutory laws at the federal level so that our bank our state banks are on the same footing as a national bank as i mentioned the united states operates a dual banking system so banks are national banks are chartered and and regulated by the office of the comptroller of currency and the federal reserve bank state banks are regulated by my office the office of the state bank commissioner as well as the fdic the federal deposit insurance corporation and if a state bank chooses and it is their option to choose to to be a member of the federal reserve bank then they are examined by the federal regulated by the by the federal reserve bank as well other entities that operate as lenders in in the state um federal agencies as you mentioned federal home loan bank of farm credit places like that are are quasi-governmental entities established by usually by the by federal actions and statutes credit unions are not involved we do not regulate credit unions there is a separate state agency for that purpose and such but ours is absolutely a regulatory supervisory agency to determine the safety and soundness and the compliance of state chartered banks and state licensed lenders thank you i hope that answered your question it does we will now turn to committed questions uh senator pittman thank you mr chair um and thank you chairman herndon for um is it chairman i think it's chairman commissioner i'm sorry um i am new to this committee and i appreciate the overview of the banking industry i appreciate our banks and how much of a role they played in the ppp loan program obviously so i'm glad you covered that um i've got so many questions i'd love to get together with you at some point but i guess i'm i'm a little concerned about the two ratings that we're getting on all these camels camel ratings the uh the standardized ratings uh that looks very low to me and and there's a large number of banks in that category um and as you said the number five uh end up failing um we're in a very hot period in terms of consumer lending i know with all the mortgage rates can you comment on what's the you know these are state chartered and we want to have more state chartered banks i would i would guess to keep the capital here what's going on with all those low ratings in general well first off um banks that have camel's ratings of one or two are considered healthy and not wrong so it's reversed it's reversed we want a whole bunch of ones and twos very few threes three fours and fives if if if a bank is one or two it is deemed to be operating in safe and sound manner it has efficient and thorough management and board of director oversight it is in compliance with all state and federal regulations that that it is subject to banks that are three are beginning to eat are either beginning to show signs of weakness or they are recovering from more severe weakness points and typically are under some corrective action a four and five rated banks are definitely under corrective action supervisory action that typically starts in the least severe being a board resolution that identifies points of concern and and the board of directors of that subject institution makes a commitment and a pledge to address those those deficiencies four or five rated banks are typically under more severe actions the the most severe being a public order called a consent order and and assert that is typically a joint order between our office and the fdic since that's the prudential federal regulator for state chartered banks that is a public document and can be located on the fdic's website with us just a search of consent orders and you can find all consent orders across the country there are a couple of banks in kansas that are under consent orders and there are very very specific points and time frames in which to address the issues that have created the problems for that bank that's that's sufficient for this i mean we only have a limited amount of time but that's a fantastic answer and i really appreciate that uh sorry about that misinterpreter and and i would welcome the opportunity to meet with you individually and and fill you in on on other information olsen thank you mr uh chairman um mr commissioner thank you for being here for being on um tv uh my question is uh i got a couple and i've been through a few of these bank exams so two is a really pretty good number um you might not get a one on everything you might get a two there's multiple classes that you're rated on and so um and and the ones are really really hard to achieve a good number but um is do you see the the more paths dues more challenges by banks having more past dues i know the pp money helped them out i know there's another round but i mean are you concerned you know six months from now if we keep the level of past dues that we might be going back down another path to where we see more failures or more banks classified certainly is a possibility i have been very encouraged by the performance of of kansas banks through the first almost year of the pandemic they are working closely with borrowers and borrowers were working closely with with their banks so in the third quarter of 2020 the first time that we really had the opportunity to look at bank performance through the call reports did not see that decline that that we had feared we'll see but but the short answer is we are prepared to for an uptick in problem credits as the effects of the pandemic bear down on on kansans and kansas businesses one more the bank that failed i'm familiar with it had i understand the reason it failed was a lot of sba loans uh that went bad i don't know it was not it's in an ag area so it wasn't driven by ag it was more driven by business loans i don't know if you can say or not but is that a true statement um yes it is the the risk of sba lending oftentimes becomes for profitability that an institution will generate an sba loan which carries a guarantee of the small business administration typically 75 of the loan is guaranteed sometimes that number goes up or down but there is a an opportunity to sell the guaranteed portion on a secondary market for a premium that helps the bank short term but it leaves the bank with the unguaranteed portion of the credit so if that credit gets in trouble or ultimately defaults the unguaranteed portion lies to the bank the guaranteed portion goes to the secondary market buyer we did see that at almena but that was one of the issues that was resulted in that bank's failure thank you thank you mr chairman give me the additional questions senator peck thanks mr chairman looking at chart on page 16 just a i think a quick question how easily or how quickly can a bank change in their numerical rating from a one to a two or a two to three my my concern would be more from a two to a three because you said three is where we start having concern so is it something that you can fairly quickly change ratings or is it something you see coming and they try to take corrective steps we certainly try to see it coming and take those corrective steps sometimes we can identify that typically from one examination to another which would be an 18 months time frame for for most of those banks we can identify or the the event has already occurred sometimes it could be a stroke of the pen type of action sometime it could be a geopolitical event sometimes it could be weather kansas has a no everybody knows a significant imp uh influence and if we have a geopolitical event that sets an embargo the farmer in western kansas uh his crop value could you know change just through just through that event if it doesn't rain or if it rains too much you know so a lot of those things are well beyond the bankers and and and our perusals but we certainly uh pay attention to those things senator senator pittman thank you mr chair uh turn it over to the money transmitters does the commission track the i mean one of the things that happens with my constituents and i hear about every so often and i know what happens a lot is um you know requests for for funds to be transferred often out of country out of state um by uh by by bad actors does the commission track and then coordinate with the attorney general on those types of uh activities and if they do is there any kind of order of magnitude that you're seeing in terms of fraudulent uses of money trans transmissions we certainly pay attention to the compliance and that sort of thing of money transmitters and when we see something that would be suspicious or something that is apparent we would certainly make the appropriate referral to attorney general's office or law enforcement could be as as much as the state attorney general it could be as much as the secret service but you don't necessarily attract that across time and look at the the amount of fraud that might be occurring right um other than through examinations and reports and sharing information through the trade associations and that sort of thing we monitor it that way hernan i greatly appreciate you uh taking the time to join us today with a very thorough overview i see we do have melissa waggaman has joined us melissa did you have bill introductions that you wanted to do today i i do mr chairman and i apologize for not being on the line earlier i i thought we were introducing him next week but i appreciate the opportunity to get him in the hopper a little sooner can you hear me okay can okay so we have two bills um one is what i'm calling a technical cleanup in the banking code we're just adding two words the words trust company in about four statutes and it's to allow national banks to convert to state trust companies this might have been an oversight in the past by not including those two words in our conversion statutes so we just want to add those um to those types of conversions and then the second bill is it's a little bit longer a little bit bigger it relates to updating and modernizing the kansas mortgage business act and that's the law that governs mortgage companies and mortgage business in our state melissa do you happen to have rs numbers on either one of those eileen has been working on the bigger one uh i do not have it i don't know if she does but no i do not have one for either one of those i'll uh i'll get with eileen and we'll get rs numbers and we'll introduce those as soon as those numbers are available to us so that we can make sure that we keep our paperwork done properly and that everything flows smoothly i appreciate it thank you so much i noticed that we have a number of people on the line if you are someone who anticipates joining uh this committee via webex each day would you please send your uh email or your link information to my committee assistant suzanne nelson so that we can make sure that we are getting those links to you each and every day that you wish to join if you're someone who's joining on youtube then we'll let you do it that way committee is there any other business that needs to come before us today with that tomorrow we will have a similar presentation from our state insurance commissioner commissioner vicki smith and so we will look forward to that no further business we are adjourned thank you