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
txt
           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.                                                                      

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