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.