Legislature(2003 - 2004)

04/22/2003 10:06 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                                                                                                                                
     HOUSE BILL NO. 159                                                                                                         
     "An Act  relating to the frequency  of examinations  of certain                                                            
     persons licensed  to engage in the business of  making loans of                                                            
     money,  credit,  goods,  or things  in  action;  repealing  the                                                            
     requirement  for  a state  examination  and evaluation  of  the                                                            
     Alaska Commercial  Fishing and Agriculture Bank;  and providing                                                            
     for an effective date."                                                                                                    
                                                                                                                                
                                                                                                                                
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Co-Chair  Wilken announced  that the House  Rules Committee,  at the                                                            
request of  the Governor,  sponsors this bill.  He stated that  this                                                            
legislation would  "decrease the frequency of State  examinations of                                                            
Small Loan  Companies from  twelve months  to eighteen months,"  and                                                            
eliminate the  annual examination  of the Alaska Commercial  Fishing                                                            
and Agriculture Bank (C-FAB).                                                                                                   
                                                                                                                                
MARK   DAVIS,   Director,   Division  of   Banking,   Securities   &                                                            
Corporations,  Department  of  Community  and  Economic Development                                                             
testified via  teleconference from  an offnet site in Anchorage  and                                                            
stated that  this legislation would  change State statute  to extend                                                            
the  required  Small Loan  Company  (SLC)  examination  from  twelve                                                            
months to eighteen months.  He informed that this action would align                                                            
SLC  codes  with the  examination  requirement  timeline  for  State                                                            
chartered banks.  He assured the Committee  that the eighteen-month                                                             
timeline would  be sufficient, and  he stressed that, were  the need                                                            
to arise, the  Department would retain the authority  to examine the                                                            
eight operating SLCs more frequently.                                                                                           
                                                                                                                                
Mr. Davis explained  that C-FAB does not receive State  funding and,                                                            
unlike banks  and credit  unions, does not  accept public  deposits.                                                            
Instead, he  continued, it is "a cooperative  which operates  to the                                                            
benefit of  its members and  is required by  statute" to undergo  an                                                            
annual  audit by  independent,  outside auditors.  Additionally,  he                                                            
noted that  State banking  auditors are also  required to conduct  a                                                            
"qualitative examination"  of C-FAB, which, he asserted, is the only                                                            
qualitative  examination   conducted  on  a  non-chartered  bank  or                                                            
lending  institution  in  the  State.  Therefore,  he  stated,  this                                                            
legislation   would  allow   the  qualitative   examination   to  be                                                            
eliminated  due to the  fact that  C-FAB "has paid  back all  of its                                                            
State  funding;  additionally,  it  is not  a  bank lending  to  the                                                            
public,  is subject to  an independent  audit, and  is subject  to a                                                            
legislative  audit."   He  furthered  that,  under   Title  44,  the                                                            
Department's  banking section has  no authority in regard  to C-FAB,                                                            
"meaning that  were problems detected  with C-FAB, there  is nothing                                                            
the Department could do."                                                                                                       
                                                                                                                                
Mr. Davis  detailed that  the independent  audit conducted  on C-FAB                                                            
examines  types of  loans, such  as whether  loans  were awarded  to                                                            
seafood  harvesters,  tourism  entities,  or  fish  processors,  and                                                            
identifies  loans that are "paid in  full; loans for which  interest                                                            
has  been  paid in  full  but  are not  paying  the  principle;  and                                                            
identifies  loans that are  not performing  either with interest  or                                                            
payment."  He stated  that  State bank  examiners  also examine  the                                                            
latter, which  are referred to as "non-accruing loans."  He attested                                                            
that  "much  of  the work  performed  by  the  outside  auditors  is                                                            
duplicated" by State bank  examiners, "and in essence, C-FAB has two                                                            
exams."  In  consideration  of  Department   budget  restraints,  he                                                            
contended  that  this  duplication  of  efforts is  the  reason  the                                                            
Department  is  requesting  that  the  requirement  for  the  State-                                                            
conducted C-FAB examination be eliminated.                                                                                      
                                                                                                                                
Senator Taylor asked C-FAB's position on the legislation.                                                                       
                                                                                                                                
Mr. Davis voiced that C-FAB  opposes the legislation as specified in                                                            
a letter  [copy on  file] C-FAB  sent to Governor  Frank  Murkowski,                                                            
dated March 19, 2003.                                                                                                           
                                                                                                                                
Senator Taylor  inquired as to the savings the State  would incur by                                                            
eliminating the C-FAB audit.                                                                                                    
                                                                                                                                
Mr.  Davis  responded that  were  the  SLC audits  conducted  on  an                                                            
eighteen-month cycle and  the C-FAB audit eliminated, the Department                                                            
could eliminate a currently  unfilled senior bank examiner position.                                                            
He disclosed  that, while  the Division has  been unable to  conduct                                                            
the entirety  of  its bank  examinations  in previous  years, it  is                                                            
anticipated  that  these changes  would  allow the  Division,  "with                                                            
present  personnel…to  complete all  bank examinations  required  by                                                            
statute."                                                                                                                       
                                                                                                                                
Senator  Taylor surmised  therefore  that  the elimination  of  this                                                            
position's   salary   and   benefits   would   save   the   Division                                                            
approximately $100,000.                                                                                                         
                                                                                                                                
Mr. Davis concurred.                                                                                                            
                                                                                                                                
Co-Chair  Wilken asked whether  C-FAB funds,  as opposed to  general                                                            
funds, support the cost of the audit.                                                                                           
                                                                                                                                
Mr. Davis explained  that the $5,300 audit fee charged  to financial                                                            
entities is deposited into  the general fund. He noted that C-FAB is                                                            
charged  the  same examination  fee  as  banks.  He shared  that  in                                                            
contrast  to  the  Securities  and  Corporations   sections  of  the                                                            
Division  "which both report  profits," these  audit fees equate  to                                                            
approximately  half of the  Division's banking  section's  operating                                                            
expenses.                                                                                                                       
                                                                                                                                
Co-Chair  Wilken understood  that C-FAB pays  for the total  cost of                                                            
the audit.                                                                                                                      
                                                                                                                                
Mr. Davis clarified  that C-FAB pays  the examination fee,  which is                                                            
specified in statute;  however, he disclosed that  the total cost of                                                            
conducting an audit is approximately $13,000.                                                                                   
                                                                                                                                
Co-chair  Wilken stated,  therefore,  that  C-FAB does  not pay  the                                                            
total cost of the audit.                                                                                                        
                                                                                                                                
Mr. Davis  agreed,  but clarified  that, "nor  do any  of the  state                                                            
banks."                                                                                                                         
                                                                                                                                
Senator  Hoffman  asked whether  audit  fees  could be  adjusted  to                                                            
offset the  cost of the audit. Furthermore,  he asked whether  C-FAB                                                            
would support a fee change.                                                                                                     
                                                                                                                                
Mr.  Davis  stated   that  the  aforementioned  letter   from  C-FAB                                                            
indicates that C-FAB would  not desire State fees to increase beyond                                                            
what is charged  by federal regulatory  agencies to national  banks.                                                            
In other  words, he qualified;  they do not  want state banks  to be                                                            
"discriminated" against.  He verified that it would be difficult "to                                                            
capture all the costs with the present structure."                                                                              
                                                                                                                                
Mr.  Davis asserted  that  the majority  of the  Division's  savings                                                            
would  result from  the elimination  of the  aforementioned  "highly                                                            
paid" bank  examiner position.  He further  affirmed the  Division's                                                            
position that  C-FAB is not the type  of bank that requires  a State                                                            
examination.                                                                                                                    
                                                                                                                                
Senator  Olson  asked   whether  the  audits  have  revealed,   "any                                                            
surprises."                                                                                                                     
                                                                                                                                
Mr.  Davis  communicated  that  the  bank  is  performing  well.  He                                                            
reminded  that  C-FAB's  audit,  unlike  a  bank's  examination,  is                                                            
available  to the  public. He  noted that  the current  C-FAB  audit                                                            
requirement  was  mandated  in  1987  to  address  some "perceived"                                                             
performance  questions  and, he opined,  that  upon satisfaction  of                                                            
that situation,  the audit requirement should have  been eliminated.                                                            
                                                                                                                                
Senator   Olson  asked   whether   C-FAB  would   agree  with   that                                                            
determination.                                                                                                                  
                                                                                                                                
Mr. Davis stated that while  the aforementioned letter contends that                                                            
the audit is  considered useful and  provides "an element  of credit                                                            
worthiness" to C-FAB, he  questioned whether the State, "as a matter                                                            
of policy,"  should provide  State bank examiners  "as a tool"  to a                                                            
cooperative such as C-FAB  for a credit evaluation. He argued that a                                                            
credit  evaluation  could   be  performed  as  a  component  of  the                                                            
independent audit or through other mechanisms.                                                                                  
                                                                                                                                
Senator Hoffman  asked the location  and projected termination  date                                                            
of the examiner position that would be eliminated.                                                                              
                                                                                                                                
Mr. Davis specified  that the position  is located in Juneau  and is                                                            
currently vacant.                                                                                                               
                                                                                                                                
Co-Chair Wilken  asked the identity of "C-FAB's lender"  as referred                                                            
                                 th                                                                                             
to on page three of the March 19 letter.                                                                                        
                                                                                                                                
Mr.  Davis  clarified  that  the lender  is  the  Spokane  Bank  for                                                            
Cooperatives.  He noted  that the  entity has  recently undergone  a                                                            
name change that he could not recall.                                                                                           
                                                                                                                                
Co-Chair Wilken communicated  that, during conversations with C-FAB,                                                            
it appeared "that the audit,  more than anything, lent creditability                                                            
to C-FAB." He asked the testifier to comment on this.                                                                           
                                                                                                                                
Mr. Davis  responded that  while C-FAB professes  that position,  he                                                            
stressed, "that  creditability is not the issue of  an examination."                                                            
The  intent of  the  examination,  he asserted,  is  for State  bank                                                            
examiners to review  the financial "condition of an  institution and                                                            
identify whether  it should remain chartered, whether  it is meeting                                                            
its requirements."  He noted that the Division works  in conjunction                                                            
with the federal  Deposit Insurance Corporation in  conducting these                                                            
examinations. He reiterated  that the function of State examiners is                                                            
not to  provide "credit worthiness,"  and he  opined that,  "this is                                                            
misuse of the  State bank examination system." Again,  he noted that                                                            
the   Legislature   requested   the  Division   to   conduct   C-FAB                                                            
examinations  at  a time  when  C-FAB's financial  position  was  in                                                            
question, and he reiterated  that the examination requirement should                                                            
have been eliminated when the question was resolved.                                                                            
                                                                                                                                
Co-Chair  Wilken  asked  whether C-FAB  could  contract  with  other                                                            
entities  to conduct  an  audit similar  to  that conducted  by  the                                                            
State.                                                                                                                          
                                                                                                                                
Mr. Davis responded  that other entities  currently conduct  similar                                                            
audits with  the exception  being that the  State investigates  non-                                                            
accruing  loans  to discern  whether  a  bank  "has loans  that  are                                                            
labeled as being current  which are not." He stated that independent                                                            
auditors could perform this sort of evaluation upon request.                                                                    
                                                                                                                                
Senator B.  Stevens asked regarding  the FY 03 operational  costs of                                                            
$635,069 as specified  in the Department's testimony  [copy on file]                                                            
dated April 17, 2003.                                                                                                           
                                                                                                                                
Mr.  Davis  responded  that  this  amount   pertains  to  the  total                                                            
operational  expenses of  the Division's banking  section.  He noted                                                            
that this  section  "loses money;  however, the  other two  sections                                                            
make a substantial profit for the general fund."                                                                                
                                                                                                                                
Senator  Taylor  moved  to  report  the  bill  from  Committee  with                                                            
individual recommendations and accompanying fiscal note.                                                                        
                                                                                                                                
There being  no objection, HB 159  was REPORTED from Committee  with                                                            
fiscal note  #2 in the amount of ($126,000)  from the Department  of                                                            
Community and Economic Development.                                                                                             
                                                                                                                                

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