Legislature(2003 - 2004)

03/25/2003 01:32 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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.                                                                                

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