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.