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." MARK DAVIS, DIRECTOR, DIVISION OF BANKING AND SECURITIES, DEPARTMENT OF REVENUE, testified in support of the bill. He spoke to the two statutory changes contained in the bill. The first change alters the Banking Code, Title Six. The second change pertains to the State Code, Title 44. Mr. Davis explained that the change to the Bank Code lengthens the exam time for small loan companies from twelve to eighteen months. He noted that this was the only provision of the Banking Code that required an annual examination. He emphasized that, even with the change, the Division would perform more frequent examinations if needed. Mr. Davis explained the change to Title 44 eliminating the provision for a qualitative examination for the Alaska Commercial Fishing and Agricultural Bank (CFAB). He noted that since CFAB is a cooperative, it is required by statute to prepare an annual audit that is provided to the legislature. He also stated that when Title 44 was enacted, CFAB operated using state funds, which it was required to repay. He pointed out that CFAB currently operates with no state funds. He also noted that the deleted provision would still make CFAB subject to a full legislative audit, as well as the annual audit by outside auditors. Mr. Davis further noted that the fees charged by the banking section of the Division do not cover the costs of the examination. Mr. Davis pointed out that the fees leave a deficit of $350 thousand. He noted that by statute the banking fees could not discriminate between state and federal institutions, and must be charged equally. He maintained that a shortfall would exist as long as the legislature required fee equanimity. Mr. Davis clarified the difference between the audited report and the banking exam. He noted that the outside audit report would inform the legislature on the loan portfolio by major category, specifying loan performance and payment history. Mr. Davis summarized that the Division was requesting an exemption from examination under Title 44. He expressed his belief that with the statutory audits required, adequate fiscal provisions were already in place. Mr. Davis also noted that the Division had no enforcement powers with regard to the examination, since it was included under Title 44. He explained that if a problem arose in the examination, the Division could not address it. Representative Croft asked how much of the fiscal note was attributed to each section of the bill. Mr. Davis responded that the CFAB examination required ten days, and that savings were realized by freeing up the bank for other business during that time. Representative Croft questioned whether the change to eighteen months represented the greatest cost savings. Mr. Davis noted that the savings came essentially from eliminating one position. He speculated that the new schedule enabled an efficiency of service. In response to a question by Representative Croft, Mr. Davis stated that examination fees were charged to CFAB of $2.6 thousand. He also noted that the additional ten days in the current cycle created a loss of $6 thousand, as well as the loss of potential paid service to a state bank or credit union. He stressed that as a cooperative, CFAB did not receive money from the public, and focused on other cooperatives. Representative Hawker asked for a distinction in organization between CFAB and commercial banks or credit unions, and whether that difference was part of the justification for the requested exemption. Mr. Davis noted that CFAB was created by the legislature, set up as a cooperative in AS 44.81.014, and required to follow a set structure. He referred to 44.81.200, which requires the bank to provide an audited financial statement to the legislature each year, including discussion of bank circumstances, operating, and "any other information that the Board believes to be of interest to the Governor, the legislature and to the public". He summarized that the bank was required to self regulate. Mr. Davis noted that in 1985, problems occurred with the bank and examiners were asked to complete a report. He suggested that the statute set forth for this purpose in 1987 should have contained a sunset provision. He proposed that the structure of the bank, along with special reporting requirements, made the bill appropriate. Representative Croft MOVED to Adopt Amendment #1: Page 1, Line 13, DELETE: "*Sec.2. AS 44.81.270(d) is repealed." "This amendment keeps the requirement for the [Alaska Commercial Fishing and Agricultural Bank] CFAB to submit to annual bank examinations. The argument for not holding CFAB to this standard is the perception that the requirement is overly redundant, that CFAB is subject to independent audit or legislative audit, should one be requested. CFAB puts forth that the requirement is not overly redundant; that the independent audit only looks at their financial situation, and the bank examiners make sure CFAB is adhering to statute. CFAB argues the bank examinations help them with their accountability to their board (two members of which are appointed by the Governor) and their members and CFAB pays for the examination. Although the Legislature could request Legislative Budget on a regular basis. This last one occurred in 1995." Representative Croft observed that Section 1 of the bill was an appropriate cost savings. He maintained that Section 2 pertained to the CFAB examination, and referred to a letter from CFAB, which expressed a desire for this service. He suggested that the entity should continue to receive a service that they valued. He pointed out that by retaining Section 1, the majority of the savings was still available. Co-Chair Williams asked if CFAB could pay for its own outside examiner. Mr. Davis reiterated that CFAB was required by statute to have an outside auditor. He suggested that CFAB could expand the scope of the audit to include their loan portfolios. He suggested that such an audit could help evaluate the potential of these portfolios. He noted that bank examiners did not traditionally perform such an evaluation. He stated that he did not support the Amendment. Representative Stoltze asked if a sunset might be an alternative to deleting the requirement. He suggested giving two years for the requirement to lapse if a problem arose that necessitated an examination. Mr. Davis emphasized the legislative audit as a mechanism for effectively addressing any potential problems. In response to questions by Co-Chair Harris, Mr. Davis clarified that the CFAB examination period would not be extended to eighteen months, but that the cycle pertained only to small loan companies. He stated that for CFAB the bill addressed their annual examination requirement, which is separate from the annual legislative audit. Representative Hawker recalled a circumstance in the early 1980's during the time when CFAB was subject to an outside audit only, and asked if the outside audit identified circumstances that resulted in the addition of a bank examination by the legislature. Mr. Davis stated that the Division was invited in 1985 to report on the viability of the bank. He observed that the outside auditors identified problems. He explained that the Division turned to bank examiners to help address the potential crisis for the State and for the other investors. Representative Hawker recalled that the examiners were viewed as an effective tool of the state, even though the examiners did not traditionally involve themselves in a cooperative with a limited loan portfolio such as CFAB. He observed that the examination was voluntary and limited. He echoed previous concern that the legislation was not sunsetted, and expressed confusion as to why the bank desired additional regulation. Representative Croft contended that CFAB was requesting the oversight. He suggested that it was unwise to wait until a serious problem arose to engage an outside examiner. He pointed out that CFAB desired the service and was willing to pay for a portion of it. Co-Chair Williams concurred with the Sponsor that Section 2 was a viable cost savings. A roll call vote was taken on the motion to ADOPT Amendment #1. IN FAVOR: Joule, Croft, Harris OPPOSED: Meyer, Stoltze, Whitaker, Foster, Hawker, Williams The MOTION FAILED (3-6). Representative Foster MOVED to report HB159 out of Committee with individual recommendations and the accompanying fiscal note. HB 159 was REPORTED out of Committee with a "do pass" recommendation and a new fiscal impact note from the Department of Community and Economic Development.