Legislature(1999 - 2000)
04/15/2000 02:50 PM Senate L&C
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 339-CFAB LOANS FOR TOURISM & NAT RESOURCES
CHAIRMAN MACKIE announced HB 339 to be up for consideration.
MR. DALE ANDERSON, staff to Representative Mulder, explained the
measure expands the lending authority of the Commercial Fishing and
Agriculture Bank (CFAB) to two new areas: tourism and natural
resource development. Nearly 20 years ago the State appropriated
$32 million to CFAB, which has been repaid. At this point, CFAB is
operating as a private enterprise lending institution in Alaska.
HB 339 will expand and strengthen the portfolio of the
organization. He offered to answer questions.
SENATOR TIM KELLY asked what CFAB knows about natural resource
extraction.
MR. ANDERSON replied CFAB representatives were available to answer
that question.
SENATOR TIM KELLY asked if natural resource development will
include oil and gas projects.
MR. ANDERSON said, that like any private lending institution
getting involved in a new area, CFAB may not have the expertise in
that area at this time but it could hire a loan officer with that
expertise. He does not think it is unusual for an institution to
expand its scope of operations but it must be done with care.
SENATOR TIM KELLY noted CFAB will be competing with banks in the
private sector that make loans in these areas.
MR. ANDERSON said CFAB will be in competition. He explained that
the only tie CFAB has to the State at this juncture is the seed
money, which was paid back in full. CFAB employees are not State
employees. CFAB currently operates in areas of Alaska that other
banks do not. CFAB has been involved with the fishing industry.
Many people have told Representative Mulder that HB 339 is the
answer to their needs in rural Alaska because of the effective way
that CFAB has dealt with small businesses in those areas.
SENATOR LEMAN asked how CFAB will secure loans in the areas of
tourism and natural resource development.
MR. ANDERSON said the only restriction in the bill is that CFAB
cannot hold a limited entry permit as collateral for a loan outside
of a fishing industry use.
SENATOR TIM KELLY asked if CFAB is subject to the Alaska Banking
Code.
MR. ANDERSON said it is not.
SENATOR TIM KELLY asked if CFAB pays taxes.
MR. ANDERSON replied CFAB pays income tax to both the State and
the federal government. He added that CFAB has given many other
benefits to the state in the form of donations for the fight to
keep the IRS's hands off of limited entry permits. He noted that
CFAB serves a niche that banks do not always extend into.
SENATOR LEMAN asked if this bill will dilute CFAB's commitment to
the fishing industry in Alaska.
MR. ANDERSON said he believes the bill will strengthen it by giving
CFAB an expanded portfolio. Right now the borrowers are the owners
of CFAB. The CFAB board of directors is made up of fishermen
except for one farmer. They will be monitoring the growth of the
organization. The House Labor and Commerce Committee placed loan
limits in the bill and the House Finance Committee tightened it
further so that borrowers must be residents, must use the funds in
Alaska, and must use the funds directly in the industry they are
borrowing for.
SENATOR TIM KELLY asked if the board of directors, made up of
fishermen, will be making decisions on tourism loans and natural
resource loans.
MR. ANDERSON replied the make-up of the board can be changed.
SENATOR TIM KELLY asked if CFAB has changed the make-up of the
board yet.
MR. ANDERSON said it has not because right now CFAB is a fishing
bank.
SENATOR TIM KELLY again asked what fishermen know about tourism
loans and natural resource loans.
SENATOR LEMAN noted, as others get involved, they may be elected to
the board.
Number 352
SENATOR TIM KELLY asked if a person becomes a member by getting a
loan.
MR. ANDERSON said that is correct.
CHAIRMAN MACKIE commented he is somewhat sympathetic to CFAB's
desire to expand its portfolio and financial strength. He asked a
CFAB representative to respond to the fact that CFAB was created to
help Alaskan fishermen purchase permits and boats at a time when
many wealthier people from out of state were buying up permits and
boats. He also asked what kind of a guarantee CFAB can give to
ensure that rural Alaskans will be able to come to CFAB to get into
the fishing industry if this legislation passes.
MR. ED CRANE, President and CEO of CFAB, replied that CFAB's first
internal discussion about this expansion was in 1990 so this idea
is not new. Regarding CFAB's original purpose and mission,
Chairman Mackie is correct. CFAB learned how to do what it does
the hard way as it made mistakes in its early years. Since 1985
however, CFAB has been a contradiction in terms. It has been
relatively conservative when financing commercial fishermen,
processors and agricultural projects. The most significant
practical restraint on CFAB is that in order to maintain its
current source of funding, which is borrowed from the National Bank
of Cooperatives, the majority of CFAB loans must be to producers
that are fishermen. Beyond that, six of CFAB's seven directors are
commercial fishermen. The orientation of the bank is commercial
fishing and CFAB does not intend to change that. CFAB sees now and
in the years ahead a greater need for CFAB's services in that area
simply because so many of the people who obtained the original
permits in 1975 are reaching the age of retirement.
MR. CRANE stated that HB 339 was not introduced so that CFAB could
find something else to do. The fact is that CFAB's concentration
on commercial fishing has had some negative impacts from time to
time in terms of cash flow and operations. During 1997 and 1998,
when Bristol Bay had salmon run failures, CFAB had a difficult
time. In addition, that concentration makes lenders extremely
nervous. Ten years ago CFAB was one of the largest borrowers from
the Spokane Bank for Cooperatives - CFAB was important to them.
Due to mergers and consolidations, CFAB now represents only .003
percent of the loan volume of the National Bank of Cooperatives.
CFAB is the only borrower of its kind and that makes the National
Bank very nervous.
MR. CRANE repeated that concentrating in one area is too risky.
CFAB addressed natural resource industries and tourism for a number
of reasons. Both industries are spread throughout the State and
exist in rural Alaska. The smaller operators, from a credit
standpoint, tend to look like the fishermen that CFAB is familiar
with. Regarding CFAB's knowledge of the oil and gas industry,
CFAB's current knowledge is very limited but the expertise is
available. Beyond that, CFAB is not looking to get a piece of BP's
business, but many support activities will need financing. CFAB is
thinking about the entrepreneurs and small businesses that are
part of the total infrastructure.
MR. CRANE commented that State agencies like AIDEA or the
Agricultural Revolving Loan Fund have a board that functions as the
loan making body. CFAB's board does not do that; instead it
represents the owners, the stockholders, and the established
standards and they approve the hiring of staff. CFAB's
professional staff make the loan decisions. The Board's function
is to ensure that the staff conforms to basic credit standards.
CHAIRMAN MACKIE asked if CFAB was developed because the fishermen
and farmers had difficulty getting commercial loans.
MR. CRANE said the amount available for loans through CFAB is based
on CFAB's capital, which is presently just under $20 million, as
well as the quality of its loans. Based on CFAB's current loan
agreements, it could actually make 3½ times the loans it currently
has before it would run up against any borrowing constraints.
CFAB's board of directors is totally committed to expanding. In
addition, CFAB informed fishermen statewide about HB 339 and asked
them to respond. Of the 26 percent who responded, 82 percent were
in favor of pursuing HB 339. These fishermen understand that it is
their capital that is at risk because if CFAB fails, part of the
$20 million will be lost.
CHAIRMAN MACKIE asked if the initial investment in CFAB has been
paid back to the State.
MR. CRANE replied CFAB retired the last of that stock in September
of 1998.
CHAIRMAN MACKIE asked Mr. Crane to address the Alaska Banker's
Association question regarding why CFAB would make a loan that a
traditional bank would reject and how that will strengthen CFAB's
financial portfolio.
MR. CRANE stated it is an oversimplification on the part of the
Alaska Bankers' Association to say that if a borrower cannot borrow
from them, it is because the borrower is weak. He noted that most
of the loans that CFAB makes today to commercial fishermen are
loans that commercial banks are not likely to deal with, simply
because of the relatively small size or, from a credit standpoint,
they are "messy." CFAB applicants tend to be relatively
unsophisticated financially. Commercial banks serve their
stockholders and do not have CFAB's mission. CFAB has found that
in communities like Sitka, Petersburg, and Kodiak, when a
commercial bank wants a particular borrower, CFAB cannot compete
because it does not have the physical presence nor does it offer
the services that commercial banks do. He maintained that he does
not understand the Alaska Bankers' Association's concern about
competition because there is nothing wrong with competition. On
the other hand, if CFAB is making unsound loans, who would it being
competing with? He said CFAB is certainly not going to put anyone
out of business.
Number 502
SENATOR HOFFMAN asked if the Alaska Bankers' Association's
opposition was made known to the House.
MR. CRANE replied it was from day one.
CHAIRMAN MACKIE said he just wanted to be sure that CFAB's mission
is intact.
SENATOR TIM KELLY asked why CFAB decided to expand into both the
tourism and natural resource industries when it decided to increase
its risk factor. He noted that is a big bite for a small operation
with 13 employees.
MR. CRANE replied that HB 339 is broad in that respect. CFAB has
no plans to make big splashes but it is looking for diversification
and as much flexibility as possible. In addition, he would prefer
to make the changes at one time rather than approach the
legislature several times. He stated that he suspects that the
current players will be gone before HB 339 has an impact on CFAB's
portfolio. He repeated that CFAB is not thinking that by next year
it will have invested $15 million in these new industries.
SENATOR TIM KELLY asked if CFAB is regulated by the Banking
Securities Act.
MR. CRANE replied CFAB is audited by the State, through the
Legislature and the Executive Branch.
SENATOR TIM KELLY asked if CFAB is subject to the Alaska Banking
Code.
MR. CRANE said it is not. He noted that subject is misleading.
CFAB is not subject to the Alaska Banking Code because 20 years ago
the Legislature concluded it should be called a bank rather than a
loan company. CFAB does not take deposits or establish trust
accounts. CFAB borrows and lends money only. CFAB is incorporated
under a specific statute. He said he does not know what provisions
of the Alaska Banking Code would apply to CFAB anyway. CFAB's
statute is fairly comprehensive in terms of clarifying what it can
and should do. Beyond that, CFAB is required to make annual
reports to the Legislature. It must be audited by public auditors
and provide the audit to the public, the Legislature and the
Executive Branch. The State bank examiners report on CFAB each year
and that report is distributed to legislators. In addition, the
Legislature could send its own auditor to audit CFAB's books. The
final point of regulation is that CFAB is member owned. It's board
of directors is elected by its members.
CHAIRMAN MACKIE stated the issue is why the Legislature would be
unwilling to let CFAB expand when it has met its obligations to the
State and its stockholders stand to lose.
MR. CRANE agreed and pointed out if the Legislature could invest
$32 million in a capital project that would create economic
opportunities and had no maintenance costs, and then be paid back,
it would be a good investment.
SENATOR TIM KELLY asked if the $32 million investment in CFAB was
paid back in cash.
MR. CRANE replied it was paid back on a discounted present value
basis. The actual amount of cash paid between 1992 and 1998 was
$23 million. The money was not due until July 20, 2000. CFAB had
entered into an agreement with the Department of Revenue to pay in
installments and the amount was indexed to U.S. government agency
obligations. The idea behind the arrangement was that the State
could invest in that mix of treasury obligations, pay State debt
down or put that money into higher-yielding State loan funds and
come out with the equivalent of $32 million.
TAPE 00-15, SIDE B
There being no further testimony, SENATOR LEMAN moved HB 339 from
committee with individual recommendations and its accompanying
fiscal note. There being no objection, it was so ordered.
| Document Name | Date/Time | Subjects |
|---|