Legislature(2013 - 2014)SENATE FINANCE 532
04/16/2014 09:00 AM FINANCE
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CS FOR HOUSE BILL NO. 121(FIN) "An Act relating to the examinations, board, loans, and records of the Alaska Commercial Fishing and Agriculture Bank; and providing for an effective date." 9:45:02 AM REPRESENTATIVE ERIC FEIGE, stated that the Commercial Fishing and Agriculture Bank (CFAB) was a great example of the government starting a project and then stepping back and allowing it to succeed in the private sector. The bank was created 34 years prior by an initial investment of $32 million from the state; as required by the creating statutes, the bank had repaid the state's investment and was currently a private entity owned by its members. He explained that because CFAB was created under specific statutes, it was regulated differently than other banks and credit unions operating in Alaska. The specific statutes that created CFAB assured that it continued to fulfill its original purpose of assisting the commercial fishing and agriculture industry. The bank's board of directors desired to improve the operating ability of the bank by requesting several changes in the operating statues. HB 121 expanded the types of loans the banks could give to commercial tourism and natural resources industries and removed the maximum loan amounts provided to borrowers. HB 121 also expanded the category of borrowers to include non-resident owned businesses that were physically located within Alaska, expanded the eligibility of the banks small loan program, and gave the board the ability to set its own compensation level. Finally, to provide CFAB with additional resources to capitalize its ability to provide loans to its members, the CFAB Board requested that the Alaska Banking Commission begin auditing the bank's operations, as was done with other banks in the state. The cost of the audits were born by the bank, not the state. 9:47:16 AM MICHAEL PASCHALL, STAFF, REPRESENTATIVE ERIC FEIGE, reviewed the sectional analysis of the bill. Section 1 restricted board member requirements to state residency and to those under Alaska Statue 39.05.11 which placed restrictions on appointments to board and commissions (a provision added in the House Finance Committee). He continued with Section 2 which adjusted the lending power of the bank by eliminating the borrowing limits on certain types of loans. It also removed the residency requirement for certain types of capital loans. If the facility was located in the state it expanded the loans. It also made loans available for certain tourist operations and operations dedicated to the development of or exploration of natural resources. He reported that Section 3 required the bank to consider whether the principles of conservation and sustained yield would limit the ability to repay a loan when collateral would primarily be used in a salmon fishery, a provision added by the House Finance Committee. Section 4 added commercial agriculture to the current provisions allowing loans to non-members. Mr. Paschall continued that Sections 5 and 6 pertained to loans to non-members changing the dollar limitation on the loans to non-members from $25 thousand to $50 thousand, and increasing the debt capital ratio of loans to non-members to 25 percent of the total bank assets. Section 7 inserted conforming language pertaining to the bank examinations added in Section 9 and also corrected a change in the language by Legislative Legal Services. He reported that Section 8 allowed the bank to make a list of eligible members that could serve on the board available to the membership for election purposes. Section 9 required the Department of Commerce Community and Economic Development to examine the bank at least once every 36 months as it did with other banks in the state. Section 10 repealed a limitation on the compensation of directors currently in statute, and allowed the board to set compensation for board members. Previously there was a prohibition on lobbying by the bank. The bank requested the provision be removed in statute but the change that would have done so was removed from the bill. He furthered that Section 11 simply delayed examinations to one year after the effective date of the act so that the bank could be sure to be compliant with the requirements of the banking commission. Section 10 made the act effective immediately. 9:50:22 AM Senator Olson inquired what CFAB's current default rate was compared to what it was 5, 10, or 15 years prior. Representative Feige was unsure of the exact number, but understood that it was relatively low. He concluded that the president of CFAB would be able to answer the question. Senator Olson noted that commercial fishing was a big part of his district and stated that most of the villages that he represented were along the coast. He inquired if different organizations and fishermen were in favor of the bill and if anyone had voiced a position on it. Mr. Paschall replied that there had not been any outside groups that had expressed any direct position on the bill. He explained that the bill only affected the operation of CFAB and did not change any of the policies that pertained to loaning to the fishing industry, rather, it pertained to other industries. 9:51:49 AM Senator Olson asked about the inability to lobby on behalf of the bank. Mr. Paschall replied that when the bank was created state funds were involved in its operation. Through the statute that created the bank, one of the requirements outlined was that the bank reimburse the state. Currently, the state did not have an ownership interest in the bank. The governor currently appointed two members to CFAB's board of directors. The other members were elected to their seats. All members had to be members of the bank. The bank operated as a private for-profit corporation and had an interest in having someone in Juneau to track legislation. However, she stressed that with only 10 employees, the bank preferred to hire a representative, a lobbyist by definition. Senator Olson assumed that other banks had a lobbyist acting on their behalf. Mr. Paschall responded affirmatively. 9:53:18 AM Vice-Chair Fairclough directed the committee's attention to page 4 of the bill and expressed a concern about the familiarity of those receiving loans and those making loans. In Section 2, number 15C at least one of the primary obligors of the loan needed to be a member of the bank. She asked for clarification about membership requirements and account status in order to borrow. Mr. Paschall responded that the provisions being expanded in one section of the bill pertaining to non-members allowed a non-member to receive a limited loan up to $50 thousand. All other loans provided by the bank required that the person obtaining the loan be a member of the bank. A person was required to purchase one share of class "A" stock and pay a fee equal to 2 percent of a pre-approved loan amount ($2500 maximum) to establish membership. Once an obligee paid off their loan their membership expired. 9:55:05 AM Vice-Chair Fairclough inquired what the catalyst was for the bill's changes. Representative Feige responded that the provisions the bill attempted to change simply expanded the ability to loan larger amounts of money to the tourism and natural resources industries. It also allowed the bank to expand its ability to loan to non-residents. It was required that they have operations and facilities within the state, and were members of the bank. The bill broadened the market in which CFAB could lend. He reported that the "married couple" reference was part of the original statute language. 9:56:45 AM Vice-Chair Fairclough noted the new amended language and commented that it could also be referring to additional statute. She pointed to page 6 of the bill and recalled that there had been an increased funding ratio for the debt. She wanted clarification on the ability to extend to 25 percent of an asset base. She asked if it was standard business practice because she thought debt ratio was supposed to be significantly lower. Representative Feige pointed to page 5 of the bill in Section 4 and stated that the section of law dealt with loans made to non-members of the bank. The loans to non- members were originally restricted to commercial fishing. The bill would expand to commercial agriculture in remote areas. Section 5 expanded the maximum loan amount made to a non-member. In Section 6 the bank's overall percentage of capital that could be loaned out increased from 8 percent to 25 percent. 9:58:46 AM Vice-Chair Fairclough noted that raising the asset base from 8 to 25 percent was financially risky and was not standard business practice. The State of Alaska looked at 8 to 10 percent with its "AAA" rating. She inquired about why the large jump was being proposed. Representative Feige replied that they were referring to the capital of the bank and that the purpose of the bank was to loan out its capital. The legislation limited the amount of the total capital that could be loaned to non-members. Vice-Chair Fairclough iterated her awareness. 9:59:44 AM Senator Bishop wanted to know the definition of a state resident. Mr. Paschall responded that the definition in statute applied. Senator Bishop requested that Mr. Paschall provide the statute definition to his office. Representative Feige responded to Senator Fairclough's question regarding married couples. He referred to page 1, line 14, Section 2 of the bill stating that the language was part of the original statute and the amendments were aligned with existing statute. Co-Chair Meyer inquired if the bill had gone through significant changes as it progressed through the house. Representative Feige confirmed that there had been a number of amendments adopted during the committee process. Co- Chair Meyer asked if the amendments were amenable to the sponsor. Representative Feige signified that he had accepted them as part of the committee process. 10:01:57 AM LELA KLINGERT, PRESIDENT, COMMERCIAL FISHING AND AGRICULTURE BANK, JUNEAU, spoke in support of HB 121. She relayed that CFAB was a privately owned and operated financing cooperative that provided loans to residents involved in the commercial fishing, agricultural tourism, and resource-based industries of Alaska. The bank was a product of legislation introduced in the late 1970s. At present, it operated as the sole subject of AS.44.81, which was the focus of HB 21 before the committee. The bank was committed and structured to serve resident individuals and smaller companies in a highly focused and specialized manner. Many of its members and borrowers would not otherwise have access to loan funds in reasonable and constructive terms. Ms. Klingert continued to address the changes requested in HB 21. She pointed out that the changes sought to provide a level playing field in CFAB's lending authority for all of the industries and markets that it served as well as to allow CFAB the same discretion as other small businesses. She reported that CFAB did not oppose any of the amendments made to HB 121 with the exception of the lobbyist issue. She elaborated that CFAB was 100 percent owned by its membership allowing CFAB to engage a lobbyist to assist in, monitor, and deal with issues that would potentially impact CFAB without using any state funds or resources. She reported that it was the most cost-effective way in which to handle such matters. She reiterated that CFAB and its board of directors supported HB 121. 10:04:11 AM Vice-Chair Fairclough referred to page 6, Section 6. She asked about the board's reasoning to increase the total ratio of assets to debt from 8 percent to 25 percent. She further commented that the increase could prove to be a higher risk. Ms. Klingert responded that her concerns would be raised in a traditional banking model in which most banks dealt with depositors' money. In the case of CFAB, all of its capital was lent out. Beyond capital, CFAB borrowed money and in turn lent it out. She agreed with Senator Fairclough that the percentage increase was risky. She also reported that CFAB was created to provide financing for industries that were unable to access funding due to their volatile business nature, adding another layer of lending risk. Section 6 allowed CFAB to make loans to non-members. A requirement of membership was to make a financial investment in the cooperative. Some individuals in rural areas could not afford the mandatory outlay. The original part of the statute was included to allow CFAB to loan up to $25 thousand for fishing to assist individuals who could not afford a membership investment. She pointed out that part of CFAB's mission was to serve rural parts of Alaska. She affirmed that CFAB's efforts to mitigate risks showed in its lending record. 10:06:39 AM Vice-Chair Fairclough noted that CFAB was almost tripling its risk. She stated that the change reflected a 17 percent increase. She furthered that the increase was not being implemented with incremental steps. Klingert responded affirmatively. She indicated that it would be a maximum of $5 million based on CFAB's capital, currently which represented less than 10 percent of its total loan portfolio. She was uncertain of the loan demand and informed the committee that although the legislation would allow for the increased debt ratio, it was undetermined if management would lend to the full extent. Vice-Chair Fairclough inquired if there had been unanimous support of the board of directors in making the proposal to come forward. Ms. Klingert replied in the affirmative. Senator Olson inquired about Ms. Klingert's background and expertise in banking. Ms. Klingert relayed that she had been in banking her entire career. She started out in the operational side of banking and spent a few years working in lending for the government. She also worked for a couple of private institutions. She informed the committee that she had been with CFAB for 26 years. 10:08:28 AM Senator Olson expressed his concern about the increase in risk. He recounted the Bank of the North going under and how he was affected personally. He viewed CFAB's money as depositors' money belonging to fishing and agricultural people who had a vested interest in the actions of the bank. He asked whether CFAB was concerned about tripling the current number. Ms. Klingert responded that there were always concerns and CFAB was managing a balance of staying true to its mission of serving rural folks and staying financially sound. She reported that CFAB's early years were sketchy, particularly in the 1980s when the bank came close to failing. She expressed confidence in CFAB's mission and its staff in order to remain financially sound. The bank's history demonstrated its responsibility which it took very seriously. She agreed that the proposal was risky and also presumed that because of the types of industries it served it was also at a higher risk. She assured the committee that the bank followed a very sound credit practice. 10:10:22 AM Senator Olson noted that CFAB had voiced reservations about the lobbying aspect of the bill. He asked Ms. Klingert to elaborate and indicated it was a sensitive issue. She agreed that lobbying was a delicate issue but emphasized that CFAB was presently a private entity. She continued that the bank paid taxes. She furthered that even though the bank operated under state statute the bank was private and small in numbers. She indicated that she had a staff of less than 10 people. The commitment of time and financial resources made it very difficult to sponsor legislation in order to change the bank's business plan. She continued that Senator Coghill and Representative Feige had been very generous to take up the legislation. The other item of concern was having to travel with her director to Juneau, which took him away from his post for two or three days at a time. She wanted to better understand why there would be objection for a private company to have the same rights that every other private company had. She reiterated the time and resources that were dedicated to the process of changing the banks' business plan and its inconvenience. Senator Olson liked the concept of a lending facility that dealt with less than conventional people doing business in volatile markets. He inquired how many rural residents the bank dealt with that were not connected to the road system. Ms. Klingert provided an approximation of about 50 percent of CFAB's membership. Rural members included people from Kenai. Vice-Chair Fairclough inquired about the number of loans typically issued in a year and CFAB's default rate. Ms. Klingert responded that CFAB received an average of 120 applications annually and made approximately 60 loans per year. The default rate fluctuated from month-to-month between 2 to 4 percent. 10:14:25 AM Co-Chair Meyer noted that CFAB was still under the state's statutes and inquired about the kind of state support it received. Ms. Klingert replied that through the legislative process it received support. She mentioned that a department of the state was one of CFAB's largest competitors making things difficult at times. She appreciated the help of banking and the examiner to put forward legislation to reinstate the examination of CFAB, a provision removed from statute in 2003. She reported that CFAB worked very closely in cooperation with various agencies such as the Commercial Fisheries Entry Commission. She acknowledge the state's overall support. Vice-Chair Fairclough inquired what kind of assets CFAB was invested in. Ms. Klingert replied that of its assets CFAB's loans represented approximately 98 percent of its assets. She added that CFAB owned its office building in Anchorage. Co-Chair Meyer CLOSED public testimony. HB 121 was HEARD and HELD in committee for further consideration.