Legislature(1999 - 2000)
02/25/2000 03:23 PM House L&C
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* 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 ROKEBERG announced the next order of business would be HOUSE BILL NO. 339, "An Act authorizing the Alaska Commercial Fishing and Agriculture Bank to make loans relating to tourism and development or exploitation of natural resources." REPRESENTATIVE ELDON MULDER, Alaska State Legislature, came forward to testify as the sponsor of HB 339. He stated: This bill simply allows for the diversification of CFAB's [Alaska Commercial Fishing and Agriculture Bank's] loan portfolio to provide for greater stability and increase economic opportunity in the state of Alaska. As you know, ... CFAB was created in 1980 to provide loans for the commercial fishing and agriculture communities. We invested, I believe, $32 million in preferred stock to CFAB and under a repayment plan CFAB has in fact paid that money back to the State of Alaska. In '86 the supreme court identified CFAB as a private entity. As such, it pays federal and state corporate income tax, state auditing fees, and is subject to legislative audits. In short, CFAB is now a private lender operating within the free enterprise system with limited ties to the State of Alaska, but those limited ties really tie its arms behind its back. This is the argument that they brought forward to me that I've been sensitive to because, having been on Budget and Audit [Joint Legislative Budget and Audit Committee], we've had audits done consistently on CFAB, and they've had their own auditors, and they consistently give the bank, CFAB, favorable reviews, but consistently note that the concentration of agricultural and fishing industry loans result in an unusual level of risk exposure and vulnerabilities, the ups and downs of the industries. And we both know what ups and downs in agriculture and fishing can do. And I suspect ... that we're going to see a lot more of those in the future. And as such, it really makes this portfolio very, very vulnerable. And if we're interested in maintaining this as a viable entity and allowing it, and that's the problem we've done, Mr. Chairman, we've created this entity, we keep its arms tied behind its back and if we don't allow it to be competitive it could very well suffer extreme duress in the future. This bill recognizes those underlying concerns and resolves issues by allowing CFAB to make loans within natural resource and within the tourism industry...this is a bill that the CFAB corporation brought to me for consideration. It was voted on by their membership and, of those members who voted, 82 percent of them, I believe, voted in support of doing this. They recognize the narrow loan portfolio they have and the need for some diversification. But it surprised me, ... the amount of response that I've gotten from various entities throughout the state that recognize that this bill can provide an access to a niche that's not currently being serviced. Now, within natural resource development and also tourism there are a lot of low level loans which, frankly, don't register on the Richter scale of most banks or lending institutions because they're not large scale. They tend to be a little more speculative and, for time and level of investment, the banks aren't going to give them that much time or oversight, and it's just easier just to say no and focus a lot more on the half million, million dollar, two million dollar loans because that will get them a greater net return. Consequently, what happens with a lot of folks who are interested in doing these enterprises, they have to go to the venture capital market. And for those of us who've been there before, at most times what happens is these venture capitalists are from out of state and in exchange for taking a piece of your action, you know, 25, 50 percent, whatever it is of your business, they'll give you some operating capital to get started. The end result is we end up with a lot of these businesses that are very successful, but the money for them is going out of state. And we're not really allowing that opportunity to occur, or they just flat don't get financing at all. Number 1814 I was surprised when we visited with the AVA [Alaska Visitor's Association] group or the new ATIA [Alaska Tourism Industry Association] group. They're very interested and very supportive of the bill. We met with the, I guess it's called, the AHA [Alaska Hospitality Association] group, the beverage dispensary folks and the restaurant folks. They were very encouraged and very supportive of the bill because they saw the opportunities that were there. I think for a lot of us who don't go out into the capital markets to try and get investment dollars to try and expand or start a new business, we don't realize how hard it is to go through the process of getting conventional lending. It's a very difficult process especially for a new business. And so this will provide that opportunity. I think that CFAB has proven itself to be an efficient, effective lender by anyone's standards. If you check within the commercial lending industry, they will tell you that CFAB is a very well run lending institution. I've got the confidence that they will continue to do that, that they will make appropriate loans that have appropriate level of risk that they can stand. Ultimately, Mr. Chairman, I would hope that sometime in the future that CFAB might actually, because we've created them, that sometime they might actually help us and provide some sort of a limited dividend back to the State of Alaska. At this point in time, however, I think it's just important to get this going so that we can create and promote some additional economic opportunities and diversification. Number 1896 REPRESENTATIVE HARRIS wondered if CFAB is more of an investor- owned bank. REPRESENTATIVE MULDER replied: Exactly. It is akin to a cooperative relationship. So, as such, the profits go back in to the corporation, but, as you'll hear Ed [Ed Crane] say, last year they could do a lot more lending, but they didn't have people to [lend to] because we've so narrowed their focus or scope. CHAIRMAN ROKEBERG asked Representative Mulder to provide the committee with a citation of the supreme court case referred to earlier. REPRESENTATIVE MULDER said he believes that Ed Crane will be able to provide the details of that case. Number 1977 ED CRANE, President, Alaska Commercial Fishing and Agriculture Bank, came forward to testify on HB 339. He stated that he is unable to provide the legal cite for the supreme court case. He indicated it was called the Alaska Coast Decision and it occurred in March or April of 1986. He commented that CFAB actually is a successful effort at privatization by the state, but would not necessarily recommend it as the ideal way to go. It was a unique method set out in statute for creating a private institution to perform a public purpose. In the process of becoming a private institution and functioning as one, CFAB has developed almost $20 million in equity which is owned by past and present CFAB borrowers. This is significant since there are less than 1,000 stockholders. MR. CRANE emphasized the basic purpose for CFAB's interest in HB 339 is to protect the $20 million invested by those stockholders. He explained there are a number of corporations who have detected a need for changes to existing statute in order to make business and commerce easier for them. CFAB is the only corporation which is incorporated under AS 44.81. He is here to affirm that the Legislature was successful in the creation and maintenance of CFAB. Nevertheless, there are still some needs. MR. CRANE stressed the importance for diversification and warned against putting all of CFAB's eggs in one basket. Lack of diversification has been a problem for CFAB. He said there are increasing signs that, as time goes on, there is potential for the lack of diversification to impinge upon CFAB's ability to borrow money. He commented that CFAB does business with two types of money; equity and borrowed funds. Without the ability to borrow, CFAB would basically be out of business. Number 2212 MR. CRANE further stated: Under our present borrowing arrangement, I refer to it as an unlimited source of funds. It is not unlimited, but within the projectable and practical needs, we could triple our loan volume today, subject to the quality of the loans that we made and still be in compliance with the loan agreement that we have with the National Bank for Cooperatives. However, another side of that is, and I've discussed this with some of you, there are increasing signs that CFAB is a relatively insignificant part of the National Bank for Cooperatives existence. We're up here in Alaska. This is a huge institution focused on completely different areas than commercial seafood. CFAB is its only borrower that does the kinds of things that we do. We do represent now just something like three one hundredths of one percent of that institution's total loan volume. And I'm sure many of you may have had experience or have heard of situations where it's really easy to just dispose of those who are giving you the biggest headache and providing the smallest level of satisfaction. We're quite concerned, and I want to stress we have a good relationship, we have had a good relationship with that bank. Nevertheless, the realities of life are that being a small and strange piece of something does not provide a lot of security. We have explored the potential for alternative sources of financing over the years. Quite a number of different institutions that we've talked to and, most recently within the past 12 months, we've had separate conversations with each of the two largest commercial banks in Alaska exploring the possibility of one of them replacing the National Bank of Cooperatives as CFAB's lender. There was interest on each of those bank's part, and there was a considerable effort of each of their parts to study and analyze and reach a conclusion, but in the final analysis they each came back and said, "No, we do not want this additional exposure to the commercial seafood business." So, again, it is clear to us, has been clear to us for some time, that we need to build some diversification into CFAB's loan portfolio strictly as a defensive or protective measure and not simply because, gee, we think there's some great things out there for us to do. And, even should this bill pass, I think I could safely project that it would be a matter of several years before we were talking about a meaningful diversification, but it is a situation where we cannot get there unless we start. Number 2347 The last thing that I'd like to touch on, one of the questions that has been raised is does CFAB in fact have the competence or the capacity to move into some totally new and arguably some challenging areas of credit and I guess my response would be kind of a qualified "yes". I suspect if this bill had passed last night, we would not today be out on the streets beating the drums for applicants in some of these areas. We've not committed a lot of resources to getting ready for something that is beyond our capacity to make happen. We will ease into whatever comes of this effort and I guess I'd say, yes, we have well over a hundred years of commercial loan experience within CFAB. We are a small organization, 13 and a half employees. That is 13 full-time and one part-time. Nevertheless, another of the reasons that we're addressing this now has to do with the composition of that staff. You may not know it from looking at me, but I'm getting close to retirement. As a matter of fact, I do have an understanding with CFAB's board of directors that I will likely retire in two to three years. We have another senior person in the bank whose horizon is just a little bit lower than that and will likely be a year or two behind me. So, we know that we're going to be making some major changes. The board has already started to plan for that. I have started to plan for that and we know that we're going to be making some changes to the staff and we see some clarity as to the role the bank will play in the future as something that's important to help us to understand the type of people and the type of expertise and competence we'll need to assure is available to the bank. Under the statute, the board has complete and absolute responsibility and authority to manage the affairs of the bank, and I'm happy to say that our board is and always has been a forward-looking group of individuals. This is something that ... we have discussed at length and which we are determined to deal with.... Our core business is commercial fishing. Our stockholders are commercial fishermen and a very small handful of farmers. Our effort is to protect them and to continue to be here to serve future generations of commercial fishermen and farmers, as well as those in these other industries or areas which we may find ourselves serving. Number 2471 CHAIRMAN ROKEBERG asked who is on the CFAB Board of Directors. TAPE 00-19, SIDE B MR. CRANE explained that there are seven members on CFAB's Board of Directors. Five of the members are elected by the CFAB membership, and two are appointed by the governor. All members currently are fishermen, with the exception of one appointed member who is a farmer. CHAIRMAN ROKEBERG asked Mr. Crane if it is possible for a member who pays off his or her loan to extract the capital. MR. CRANE answered that the member generally waits. The way CFAB stock program works is that everyone is required to buy five percent. When a loan is paid off the borrower's stock stays in place, but is available in the event he/she needs to borrow again. While the equity remains in the bank, CFAB pays a dividend on the stock which no longer has an outstanding loan associated with it. CFAB has paid dividends in about eight of the last nine years. The dividends have ranged from 6 to 8 percent. MR. CRANE said there is some compensation for the use of the capital. At the end of each fiscal year on May 31, the management develops a recommendation for the Board to consider the current and projected cash needs. They have been able to do this almost every year for the last nine years. The borrower's capital is, in effect, impounded for some period after using CFAB. The basic reason for that is the most CFAB can borrow is 80 percent of the total loan volume. Theoretically, CFAB needs at least 20 percent in capital. It is not realistic to ask the borrower to buy $20,000 of stock for every $100,000 borrowed. The philosophy is that when a person becomes a member of CFAB and uses its services he/she has an obligation to provide some capital beyond what his/her own specific needs are. CHAIRMAN ROKEBERG wondered if that is because CFAB is a cooperative corporation. MR. CRANE said that is exactly why. The statute says specifically that CFAB shall operate as a cooperative corporation. Number 0166 CHAIRMAN ROKEBERG asked if cooperative banks ever convert to shareholder status. MR. CRANE said he believes there are some financial institutions in the Northeast and Midwest United States called cooperative banks, which are somewhere between a commercial bank and a credit union. As far as he knows, there is only one other institution which functions in a similar capacity to CFAB called the National Cooperative Bank. He is not aware of any that have ever changed character. CHAIRMAN ROKEBERG asked if the National Cooperative Bank is able to lend directly to Alaska Native corporations. MR. CRANE replied yes. CHAIRMAN ROKEBERG wondered about Native tribes as well. MR. CRANE said he believes their statutory definition of a cooperative is quite broad, and it would quite likely involve that. The National Cooperative Bank is one of the institutions that CFAB in the past has discussed financing from. The National Cooperative Bank was also concerned about CFAB's concentration in seafood. Number 0244 CHAIRMAN ROKEBERG asked for clarification that CFAB receives funds from the National Bank of Cooperatives. MR. CRANE said yes. CHAIRMAN ROKEBERG asked how many basis points there are between CFAB's borrowed money and lending money. MR. CRANE said CFAB does not look at it that way. He said the answer is about 3 percent. He explained that CFAB functions as a cooperative and they periodically project the anticipated loan demand, expenses and other things that effect them. CFAB seeks from the National Bank of Cooperatives estimates of what will happen with their interest rates. CFAB deals with dollars rather than rates, and projects the ability to generate some reasonable level of margins at the end of the year. They work back from those dollars to establish a base interest rate. At the end of the year, some or all of the margin will be allocated back to the borrower and the other borrowers, proportionate to the interest each has paid. CHAIRMAN ROKEBERG asked if CFAB reassess their entire weight structure and distributions annually because they are a cooperative. MR. CRANE said that is correct. CFAB sends a portion in cash, and a portion is kept in their equity accounts. On a six-year basis, they retire those retained margins. He said: Even though we tell you you're getting a $1,500 interest rate credit, ... we may send you a check for only $600 of that and a piece of paper for the other $900, which is a form of equity. And then perhaps six years from now we'll send you the check for that other $900. CHAIRMAN ROKEBERG asked: If a loan from CFAB were used to build a tourist attraction, would the borrowers be members for life until they met CFAB's requirements to extract their money? Number 0424 MR. CRANE explained that once the borrowers buy class B preferred stock, essentially there is no way they can get that money back until CFAB is in a position to retire the stock of all the people in that same year class. Number 0495 REPRESENTATIVE MURKOWSKI said she is concerned with CFAB leaving their area of expertise, which is fishing and agriculture, and taking on riskier loans. She referred to Mr. Crane's comment regarding diversification for the purposes of spreading the wealth and stated her concern is that the shareholders may not be given protection if CFAB takes on riskier loans. Her concern is compounded by the fact that there will also be some staff and management turnover in the next few years. She thinks she would have a greater level of comfort with this expansion into the great unknown of lending if it were not quite as broad as set forth in the statute. MR. CRANE said he is not sure what assurances he can give Representative Murkowski. He said her concerns are very real and that he also shares those same concerns. These concerns have been discussed. He said, "My basic response is a 'trust me' response, and I know that has limited currency down here in Juneau." He offered assurance that no matter what comes out of HB 339, CFAB will not rush into anything. He further commented: To some extent, we're looking at a chicken-and-egg situation. We have had no reason to this point to develop, for example, to hire, perhaps, a loan officer or two with broader experience than some of us have, or to develop some of the expertise we're talking about. I think I'd say again we're quite sensitive to the dangers there. Some of you have been around long enough to know that when CFAB began its operations back in 1980, there was a certain exuberance and vivre that resulted in some spectacular, some very nice loans, and some spectacular losses, and some painful headlines, and a big job of climbing out of a hole. ... Whether we were here at the time or not, there are many of us who remember that or have seen that happen with other institutions. We're not about to expose ourselves. Again, our effort is to protect the equity that CFAB has. As to the broadness of the scope of this legislation, yes, it is broad, and that's primarily to provide some flexibility to permit us to establish a process of moving into new areas, and also to avoid the necessity to come down here two years from now, or three years from now, and go through this whole process all over again with a different group of people who've never heard of CFAB before and say, "We'll need a few words changed here or we need something added there." We're not seeking the potential to commit suicide here. We've done enough dumb things. We've done enough things which turned out not to be as good as we thought they were.... I don't know of any way to address that, other than to higher and/or develop competence. Number 0802 REPRESENTATIVE MULDER directed his comment to Representative Murkowski and said he has been thinking about her concerns. He explained that it comes back to a basic fiduciary responsibility that has been entrusted with CFAB to manage their funds appropriately. Because it is a basic fiduciary responsibility, there are audits of their oversights. They have their own internal audits which they have to respond to which would show vulnerabilities or poor lending practices. CFAB is overseen by the Division of Banking, Securities and Corporations, Department of Community and Economic Development (DCED) who will point out any vulnerabilities or any poor practices that may occur. An annual report is also provided to the Legislature. There is a series of checks and balances that CFAB has to go through that a normal bank does not go through. Number 0900 TERRY ELDER, Director, Division of Banking, Securities and Corporations (DBSC), Department of Community and Economic Development, came forward to testify on HB 339. He pointed out that DBSC does examine CFAB and has examined them since 1987. They conduct they same type of examination of CFAB as they do any other banks or credit unions. If HB 339 passes and CFAB expands their loan portfolio into other areas, DBSC does not believe there would be any significant impact on the Division in terms of the cost of doing examinations. The division shares the same concerns expressed regarding the expansion into new areas of lending. The expectation is that CFAB would do this without reducing quality and in a planned way. He said: I also do want to underscore that, assuming that it's done in a responsible way and that there's concern given for maintaining credit quality, then we would certainly agree with the statements made here that diversification of a loan portfolio across a broader range of industries and the economy reduces the risk of that portfolio and so we would agree with that. We think that would improve the financial quality of CFAB. In addition, one of our missions is, of course, to promote a healthy and competitive financial industry in Alaska, again, to the extent that this broadens the number of institutions that are lending in these areas increases competition doesn't reduce the financial risk of CFAB and doesn't harm other institutions. We see that as being consistent with our mission. CHAIRMAN ROKEBERG asked, "A bank with $20 million in footing lending into the oil patch, would you consider that a safe investment?" MR. ELDER said he thinks any bank or lending institution that has to make loans bears a certain relationship to its capital. He indicated 20 percent capital is high for banks. CHAIRMAN ROKEBERG questioned, "With $20 million in footing?" MR. ELDER replied yes. CHAIRMAN ROKEBERG said that is small. MR. ELDER agreed. Number 1082 REPRESENTATIVE MURKOWSKI asked if DBSC regulates any other institutions similar to CFAB. She also wondered if anything else could be provided in terms of regulatory oversight that would allow for enhanced protection of shareholders. She is still concerned that CFAB is being allowed to act in the capacity of a bank without regulatory protections that other banks have. MR. ELDER replied that CFAB, from an examination standpoint, does have similar protections. CFAB does not have protection of depositors because there are no depositors. This makes CFAB quite different from a bank. He pointed out that regulatory oversight does not guarantee success. CFAB is relatively unique, but the businesses industrial development (BID) codes might be similar to CFAB. REPRESENTATIVE MURKOWSKI asked if it is Mr. Elder's opinion that the review process in place for CFAB now is workable and allows security with respect to the loan portfolio and how it is handled. MR. ELDER said yes. Number 1303 MARK HICKEY, Board Director, Petersburg Energy, came forward to testify on HB 339. He stated: Very briefly, let me just describe Petersburg Energy. It is an Alaska-based oil exploration production company and it is owned mostly by Alaskans. We presently have leases on the North Slope of about 12,000 acres of State land and we are in the process now of putting together an exploration program with the intent pending on the results of that to pursue production. We support HB 339. We appreciate the efforts of Representative Mulder to bring this together and the co-sponsors. Whether having this as an option is something we would ultimately take advantage of and use, we're not in a position to be able to say, we're not that far into our overall operation, whether or not it would fit in all cases in terms of what they might be able to do with us.... It does provide us, though, an option that is not there to us today. And I think Representative Mulder correctly described what would otherwise be the case in terms of going into a large- scale production situation for us where we might be only able to do that by essentially exchanging a large portion of our equity with an outside venture capital firm or other oil company, and that may be what we have to do and the way to go, but this would provide an option we think that would be helpful. Number 1424 REPRESENTATIVE MURKOWSKI wondered what the market is that is not currently being met by the traditional lenders out there. She is curious if Mr. Hickey is suggesting that within the oil industry it is difficult to get the lending needed through the more traditional institutions. MR. HICKEY responded yes. He said he is not an expert in that arena and is learning the process. He said: I can tell you our partners who have been working in this for a longer period of time, and I think we mentioned this in our letter (February 21, 2000) have had discussions with representatives of lending institutions in this state and have been led to understand that it is unlikely that this is the type of activity that the more conventional institutions would be interested in being involved with. It obviously, at some point, comes down to case-by-case circumstance and what some of the facts might be in a particular proposal, but, as a general matter, that is our expectation of what we are otherwise faced with. We would be in a circumstance of going outside either to, in terms of venture capital institutions or the more conventional, I think, is probably obtaining some type of partnership with a larger more established oil company. This is an option that, again, may not work. We're not at a point where we've worked through that in detail, but we can envision, in at least a couple of cases, where we could put something together within the limits of what CFAB, as we understand, might be able to do where we would be able to go into production. And I can just give you an example. We have one of our leases situated, and we feel we're situated strategically in all of our leases, but one situated between Milne [Point] and Kuparuk, very near production activity today. It will not be overly expensive to get into production depending on what we're able to find with our exploration program. Having the access to CFAB to put something together might make a difference in terms of us continuing on our own versus having to trade out some of the equity that we have. Number 1598 CHAIRMAN ROKEBERG wondered what a rough estimate would be of drilling the well. MR. HICKEY guesses it would cost between $1.5 million and $3 million. At the lease he referred to previously, they have existing pads they would be able to operate from through directional drilling. The infrastructure development cost is not that high. Number 1655 DAVID LAWER, President, Alaska Bankers' Association, testified via teleconference from Anchorage. He stated: I'm afraid that the Banker's Association cannot support this proposed legislation and I think primarily it's in consequence of all of the things that have been stated today in support of the bill. Quite frankly none of the reasons given in favor of the bill present a reason to expand the scope of lending of CFAB. CFAB was created at a time in need when there was limited access to commercial financing for commercial seafood harvesters, processors and farmers. Back in '78, '79, '80 that certainly was the case. Alaska was a capital-poor region of the United States. There wasn't a lot of commercial lending available. That simply is not the case today. It's also the case that CFAB has very, very well served its purpose. It's served its purpose, as you heard, to the extent that it now has excess capital to lend. It's purpose is not to get bigger. It's purpose is to provide access to financing commercial seafood harvesters, processors and farmers. If it has more money to lend, it obviously has served that purpose. By the same token, it wasn't formed to provide a better return to its stockholders or its members, if you will. If I understood the testimony before, CFAB has and is presently paying a dividend to its members of six to eight percent. In point of fact, that's a better return on equity than most commercial banks pay to their stockholders. I have heard testimony that perhaps the attractiveness of this proposed legislation is that it provides some alternative means of financing for small business at a reduced rate. Indeed, they have the opportunity to do that because, unlike banks, they are not regulated which is now become the largest portion of the expense for banks in providing financing. Certainly it's not the case that there is no alternate or substitute in other industries in besides fishing and agriculture of small loans. It is the case that we now have many banks and a considerable amount of capital in this state and all of them are under the federal law obliged by the Community Reinvestment Act [Public Law 95-128] to provide lending, loans for small businesses. That's one of the principal ways that banks satisfy the requirements of that legislation. So far, in Alaska, they're doing it very well. There is no bank presently in Alaska that has an unsatisfactory rating under the Community Reinvestment Act. We have two that have outstanding performance evaluations in that connection which certainly suggests that loans to small businesses are being provided. In point of fact, if those examination results are reviewed, it would be easy to determine that the vast majority of the loans that Alaska banks make are to small businesses. I know, in the case of the First National Bank of Anchorage, my employer, that fully 91 percent of the commercial loans we make are made to small businesses and we're not fully lent nor is any other bank in the state. There is plenty of access to capital for small business in this state. It's not available at the same rate perhaps that CFAB could provide because the commercial banks that are presently making capital available are subject to the regulations that drive up the cost. Finally, it's the case that, as we've already heard, the need that's being met perhaps is the need for loans that commercial banks presently won't make at current rates for venture capital purposes because of the risk involved. And it doesn't sound like the risk is something that advances CFAB's purposes. Number 2084 FRANK HOMAN, Executive Director, Southeast Conference, came forward to testify on HB 339. He commented: The Southeast Conference is a nonprofit membership organization that is to promote economical development opportunity in Southeastern Alaska. It's comprised of almost all of the communities of Southeastern plus a number of private businesses from all fields. It has over the years taken on a sort of a generalized role of trying to stimulate business development and to promote and support projects that do that for the community. This legislation before you provides another opportunity or another avenue for financing for business. The group is aware of the activities of CFAB and its fields of fishing and agriculture over the years and has done a good job. The appeal to the expansion into tourism and natural resource development for Southeastern comes about because of the, as you all know, the last 10 years the tremendous decline in the timber industry and people are looking to diversify and start up new businesses, particularly in the area of tourism and other natural resources. And I guess one of the most popular ones currently is the development of water sources for bottled water. There's several in place or being developed in Southeastern. I think from our membership point of view it offers another opportunity and just increases the ability to look for funding for new businesses. Number 2252 REPRESENTATIVE MURKOWSKI wondered if it is Mr. Homan's opinion that there is a need that the present lending institutions are not meeting. MR. HOMAN replied that he does not have any studies or facts to indicate that other than hearsay information. He said he has heard that many small businesses have a difficult time with the initial start up of their business. Many times they go to commercial banks and have a difficult time. They end up having to find a partner with another source of funding whether it's small business administration or a state loan program. TAPE 00-20, SIDE A Number 0016 REPRESENTATIVE MURKOWSKI commented that she feels better after having listened to Mr. Elder speak. However, she is still concerned with the laundry list of things that CFAB would be allowed to go into with respect to lending. REPRESENTATIVE HARRIS asked Mr. Crane if he has had any opposition from any other groups including commercial fishermen. He does believe CFAB does a great deal of business with the agricultural members. MR. CRANE confirmed that CFAB does very little business with them. REPRESENTATIVE HARRIS wondered if CFAB has heard any comments made by any members who are fishermen. MR. CRANE replied yes. He explained a survey of their members' views was conducted (included in the bill packet). Approximately 50 percent responded and offered comments. There were a number of both positive and negative themes in those comments. Many of the members expressed concerns similar to those of Representative Murkowski. He said, "It's like buying a kid a big car for his fourteenth birthday. You don't just hand him the keys and say, 'Go do it.'" He stressed again it is as much a concern at his level and the Board level. He stated: Another concern, and I think some of the comments today suggest some confusion, another concern that was expressed several times was, if you begin financing bed and breakfasts or other kinds of operations, you'll soak up the money that's available for commercial fishermen. That's, again, a theoretical concern. It's not a real concern from several standpoints. We do not function with a finite pool of money and I'm not certain what I may have said or what may have been said that caused the ABA [Alaska Bankers Association] representative to say we have too much capital. We have unused borrowing capacity at the moment, is what we have. But also, because of the way CFAB is capitalized and the way we borrow, assuming we maintain reasonable loan quality in our loan portfolio, we're going to be able to continue to borrow and we're not going to be running out of money. The last thing that was mentioned quite often was concerns by members who mostly are commercial fishermen for the potential for CFAB to be financing operations that are in conflict with the interests or the perceived interests of commercial fishermen. That would involve things that might result in harm to fish habitat or involve support of sport fishing operations which are seen to be in competition with commercial fishermen. Again, those are concerns that we all share at the Board and management level, and we recognize that there are certain things we'll need to avoid. Number 0443 REPRESENTATIVE HARRIS remarked that it seems to him that nothing would prohibit the board or the bank from loaning to tourism- related or sport fishing-related interests if HB 339 passed. He asked why Mr. Crane is concerned with what would happen to commercial fishing interests. MR. CRANE reiterated that the concern is to protect the structure which CFAB has built, the equity which is in place now and the equity which will be developed from future borrowers. He does not see how CFAB can escape the fact that six of their seven members on the Board are commercial fishermen and that the basic mandate of CFAB is to provide financing in that area. MR. CRANE indicated that CFAB is not looking to build any kind of empire. It is simply a matter of building in enough diversification of their assets in order for the core group of fishing related assets can be preserved. He cannot commit to anything that CFAB will or will not do. He stressed again that each of the members are paid or receives some other reward for doing a good job. MR. CRANE commented there have been discussions regarding the types of checks and balances are in place. The biggest control comes from the fact that CFAB operates on borrowed money. The National Bank of Cooperatives comes to CFAB at least once each year and goes through CFAB's loan portfolio. At the conclusion of each of those examinations, the National Bank of Cooperatives decides which loans CFAB gets credit for. This is the biggest and most significant point of control on CFAB. Number 0729 REPRESENTATIVE MURKOWSKI asked if there is a limit that the National Bank of Cooperatives allows CFAB to lend on a fishing loan or if it is subject to the board's discretion. MR. CRANE explained that there is no statutory limitation. CFAB has established their own internal limitation which is 15 percent of their capital accounts. This currently translates into $3 million, but they have not seen a loan that large in years. He is not aware of any single loan limit in their loan agreement with the National Bank of Cooperatives. He believes CFAB has to send them certain documentation before making a loan over a certain amount. He added: In essence, they can tell us they're not going to give us any credit on any loan. So, in effect, it's kind of a lender liability kind of thing. They can't tell us what we can or can't do, but they can say, "Hey, if you do that, we're not going to lend you any money for it." Number 0824 REPRESENTATIVE CISSNA wondered if it is accurate to describe CFAB's success as being based largely on exploiting a market niche to its fullest extent without broadening it. She also asked if CFAB has done any studies to determine the needs of the market. MR. CRANE replied that nothing like that has been done a formal basis. In response to Representative Cissna's initial question, he explained that CFAB has been successful in an operating sense because of the differences between CFAB and most other types of lenders. He said: Commercial fishermen tend to be relatively unsophisticated financially. They know they need X thousand dollars to buy a permit or a boat, but beyond that; they're not the best record keepers. From our standpoint, we have to do our business by mail and by telephone, what we deal with from a credit administrative standpoint, I would call messy situations,...as a generality commercial bankers cannot afford to spend the time working on and developing because they're not large enough loans to justify the expense that goes into them for the relatively small return that's going to be derived. Number 1029 CFAB, because it's mandated to do that, we have developed...the ability to deal with those kinds of; we don't have alternatives available to us. So, CFAB, in spite of what Mr. Lawer may have said, CFAB, on a per hundred dollars of loans outstanding, is a very expensive operation. Much more expensive than most commercial banks simply because of the time;...we may make a seven-year loan and, unlike most of us perhaps with our installment loans, it's not just a matter of, okay, every year for seven years a payment rolls. We can almost predict that during that seven years there's going to be at least two bad seasons and there's going to be a problem with collecting interest for a particular year and it's going to have to roll over to another year. The borrower is probably going to ask us to release or exchange collateral a couple of times. Good chance he's going to get in trouble with his wife and there'll be some documentation related to a divorce or something like that.... It's not an easy business to do, and it's the reason that, as a generality, that niche is there, ... or that other lenders have shied away from that business. REPRESENTATIVE CISSNA asked again if a market study has been done. MR. CRANE replied no. Number 1133 REPRESENTATIVE HALCRO said he believes the history of CFAB needs to be looked at. For 20 years, CFAB has been trusted and they have not been proven wrong yet. In addition, he thinks the loan portfolio was small enough that it would make CFAB more conservative in their criteria and more stringent in their requirements. He assumes CFAB would not jump both feet first into the pool. He thinks their limited loan portfolio would tend to make them more conservative and qualify their loan requests at a higher degree. He stated that size in any lending institution is never a guaranteed success. CHAIRMAN ROKEBERG said that is a very good point. He asked Mr. Crane about the amount of agriculture business CFAB is doing. MR. CRANE commented that CFAB is doing very little business in the arena of agriculture. CFAB has only one agriculture loan on the books. He does not believe there have ever been more than two or three at a time if timber is excluded. There were more agriculture loans in CFAB's early days, but he noted there is not a great market out there for agriculture credit. The state's own Agriculture Revolving Loan Fund (ARLF) appears to deal with a large percentage of what market there is out there. CHAIRMAN ROKEBERG asked if the ARLF has a lower interest [rate] or different terms. MR. CRANE said he believes the interest rate has been lower and there may be more liberal terms involved. He said, "The reality is we're talking about Alaska farmers who need credit, and they're getting credit, so it doesn't trouble us that the revolving loan fund is there and doing what it does." He indicated there also exists a Commercial Fishing Revolving Loan Fund. CHAIRMAN ROKEBERG explained that at the time CFAB was formed, there was an enormous capital shortage. He said: I am concerned that what you will want to do is expand your charge in your portfolio, and yet, and we all understand, that we actually passed a revision on the Revolving Loan Fund bill,...and the supporting documentation said there was like $53 million worth of agricultural business going on in this state. So, it is factor in this state. In a certain sense, you failed in one area. ... You and I have discussed the fact that you don't have any aquaculture loans ... and it's a major Southeastern type newer business, growing area that needs help capital.... One of the concerns that I think has been expressed, and I have, is the very broad language of the bill. For example, geothermal (indisc.). What an organization that has $31 million in footings is going to be loaning into the oil patch, I'm not so sure. Do you really want that authority to be able to do that? MR. CRANE replied: I would stress we don't (indisc.) the authority to be a mandate, but I think, if you look at the language of the bill, it raises a specter that, yeah, we might be lending BP [British Petroleum] several billions of dollars. I suspect not, but what it also does permit, by discussing and treating the oil industry as it does, is, the Fairbanks individual for example who wants to buy a truck so that he can haul all the traffic back and forth along the Dalton Highway, or some of the other support areas where there are individual or smaller needs or service needs, the person who wants to gear up for some kind of contract service on the North Slope. And, again, as I said to Representative Cissna, we've not made any great study where we're satisfied that there is something out there. We don't know how much of it we're competent to do. We don't know how much of it might be available to us, but we are satisfied that it's there. The broadness of...this bill, I should say, is simply to provide some flexibility and opportunity, not necessarily to imply that we're going to blanket Alaska with loan funds. CHAIRMAN ROKEBERG indicated HB 339 would be held over.
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