Legislature(2003 - 2004)
03/25/2003 01:32 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SB 113-FINANCIAL INSTITUTION EXAMINATIONS/CFAB CHAIR BUNDE announced SB 113 to be up for consideration. MR. MARK DAVIS, Director of Banking, Securities and Corporations, said SB 113 makes two changes; the first is to the banking code, Title 6, which governs small loan companies (loans of $25,000 or less). Right now, Title 6 requires that small loan companies be examined every year; the rest of the banking industry is on an 18-month examination schedule. SB 113 proposes [changing Title 6 companies] to an 18-month schedule also. That does not mean a small loan company would not be examined more frequently if examiners felt it should be for some reason. It would allow the division to eliminate a banking position. The second change is to Title 44, which deals with state government. The Alaska Commercial Fishing Agriculture Bank (CFAB) falls under Title 44. SB 113 proposes to drop CFAB's required annual qualitative examination by the division. By statute, CFAB must provide the legislature with an audited financial statement performed by outside auditors and that has always been done and is still being done. He feels the outside audit report is sufficient to let the members of CFAB know the financial condition of CFAB or whether their loans are in bad condition. CFAB was created in 1980 and experienced some difficulties in 1985. The banking examiners were used in 1985 to examine the bank and then about two years later the legislature passed the current statute. He explained that the banking section of the division does not make money. It requires more funds to run than it generates in fees. Dropping that requirement would save an examiner's position and the time could be used to focus on other state banks, which he views as the department's primary mission. CFAB no longer has state funds; it once had $32 million in state funds but paid those back early in 1998. CFAB is not open to the public, except for some very small loans and one must be a member to borrow money. CHAIR BUNDE asked if it is fair to say that the CFAB examination isn't really so much a consumer protection effort as it is an effort to give it the state's imprint of quality. MR. DAVIS said he thought that was the intent when the statute was passed as CFAB had some financial difficulties in the 80s that it worked through. It is not a regular bank and the bank examiners' function is to look at state charter banks and make sure they are sound. CHAIR BUNDE asked if it is fair to say that the external audit that CFAB goes through every year is comprehensive and would provide members with needed information to make judgments about the quality of CFAB. MR. DAVIS replied the portion of the CFAB statute in Title 44 requires that outside auditors provide financial statements - a full audit. By statute, the financial statements must be provided to the legislature. The division is also proposing that legislative audit functions be removed but remain in statute. That means if any problem should arise, the legislature has full subpoena power and could use the banking examiners if it wanted to. An acceptable accounting principle statement would contain much of the same information and non-performing loan or asset information would show up. SENATOR STEVENS said he wanted a definition of what the qualitative examination actually entailed and asked who reviewed the CFAB audit if not the division. He noted, "It would be wasted time spent with me giving me an audit." MR. DAVIS replied that by statute, CFAB is required to provide the legislature and the governor's office with an outside audit, which is unique. When it's sent to the governor's office, he assumed it would be sent to his division as it has been before. He understood that it goes to the Division of Legislative Budget and Audit when it's sent to the legislature. SENATOR STEVENS asked to know more about the qualitative exam and how much it cost. MR. DAVIS responded that is language used in the statute and he doesn't know what it means. It doesn't appear in any other banking statute. The examination last year took 10 days and cost $6,300; in FY03, it's going to cost the division about $635,000 to do bank exams. The division will accept $276,000 in fees and therefore lose about $359,000. The division is trying not to lose so much money. To reduce costs, the last administration decided not to go through every loan, but when examining an FDIC state charter bank, the division goes through every loan. SENATOR SEEKINS said it seems to him like the audits that are currently done are not a consumer protection feature, but more of a membership assurance project. MR. DAVIS replied that's how CFAB views it. CHAIR BUNDE said SB 113 will not balance the division's budget and asked Mr. Davis if he would entertain the notion that the cost of doing the examinations should be borne by the people he examines on a break-even basis. MR. DAVIS replied that would be a goal, but he needed to work on it. Overall the division makes a fair profit; the Securities section makes a greater profit. It puts $10 to $12 million into the general fund and provides a good service; the Banking section loses $359,000. SENATOR FRENCH asked if the division would save about $6,000 per year by eliminating the examination. MR. DAVIS said yes and that right now an examiner spends 10 days at CFAB and that time could be spent somewhere else with another entity. He said they are working at Bidcos [ph], the relatively new private financial groups of which there are two in the state. They inject money into the economy. SENATOR FRENCH asked if the division won't gain a whole examiner's position for the entire year, but instead will get 10 days worth of work out of a person on another project. MR. DAVIS said that is right and to put it in perspective, the state bank, which is much larger, will take the same time as CFAB. He would rather spend the time on the state bank and have the examiners available to shift to the securities section, as a lot of new securities brokers have opened for business in Alaska within the last couple of years. CHAIR BUNDE asked if the division anticipates saving $126,000. MR. DAVIS replied yes and said that bank examiners are paid well and are highly skilled. SENATOR SEEKINS said the bill changes the examination requirement to once every 18 months instead of once every 12 months. He asked Mr. Davis if he anticipates any unnecessary risk in small loans. MR. DAVIS answered that right now there are eight licensees, seven are owned by Wells Fargo. At the present time, given that ownership structure, he didn't think there would be any risk from changing to 18 months. He emphasized that if the division needs to examine someone more frequently, like a new licensee that is having difficulty, it would do so. CHAIR BUNDE thanked participants for their comments and said the committee would bring SB 113 up again next week.