Excerpt from an Executive Message to Members...
THE COMMITMENT AND DETERMINATION OF THE EARLY BOARDS OF DIRECTORS. Beginning in the mid-1980's, there were many reasons to believe CFAB was doomed. Early misdirection; a naïveté about the challenges of resource financing; unprecedented inflation rapidly driving up interest (and all other costs for both borrowers and lenders); a botulism scare in the salmon industry; a precipitous crash in the King Crab fishery; inappropriate application of cooperative principles; and more, had resulted in a bleak financial outlook. CFAB's lender was openly contemplating foreclosure, public and private auditors had raised concerns, and there was often hostility among legislators and other State officials. Newspaper headlines had inspired public derision, and it appeared that outright failure was at hand. It would have been easy for CFAB's Directors to "throw in the towel," and rid themselves of the burdens associated with managing CFAB.
While the Directors received modest compensation for attending meetings, individually they had little at stake but their pride and personal reputation. But after carefully considering detailed analyses and evaluations, they concluded there was a "fighting chance" for CFAB's survival. After reaffirming their beliefs in CFAB's potential value to Alaska's fishing and agriculture communities, there was a nearly universal and exhausting effort to "do what it takes" to save the institution.
THE COMPETENCE AND DEDICATION OF CFAB'S EMPLOYEES. At the time of the crisis, CFAB was clearly overstaffed, and had "too many" office locations as well. Between mid-1985 and the end of 1986, all offices located outside of Anchorage were closed and staff was reduced from over 40 employees to fewer than 30 (this process has continued, gradually resulting in today's relative handful.) Many good people were affected by this staff reduction, and the morale of "survivors" certainly suffered.
Nevertheless throughout its 30 years of doing business, CFAB has been blessed by a staff of focused individuals, largely driven by entrepreneurial instincts and committed to the delivery of financial services within the strictures and limitations of CFAB's statutory mandate, and oriented to the concept of "tailoring" those services - in every case - to the borrower's needs.
THE INTEGRITY OF THE DOCUMENTATION FUNCTION. A lender's assets are not "bricks-and-mortar;" in the final analysis they are pieces of paper in a file cabinet. In the case of an untroubled loan, the paper will likely never see the light of day and will ultimately turn yellow in some storage facility. When a loan becomes a problem of any kind, however, that paper will suddenly come to life - and the lender will live or die with whatever is recorded on it. There is no chance to "do it over." Every name, every comma, every description, every date, may become an issue, with aggressive adversaries searching for arguments and loopholes. Countless lenders - all kinds - have lost untold billions (trillions?) of dollars over the past 30 years as a result of defective, or inadequate, loan documentation. In CFAB's case, since it deals with relatively uncommon instruments such as Preferred Ship Mortgages, Timber Deeds of Trust, and Limited Entry Permit liens, etc. the perils are formidable. Yet from the beginning CFAB's Loan Documentation process was well-conceived, soundly structured, and in the hands of extremely competent, knowledgeable, and dedicated individuals. It has successfully endured routine collection efforts, bankruptcies and other formal legal challenges, and the predations of other creditors, etc. We have never attempted any formal or directed records search, so we cannot make any absolute claim. But we are proud to say that there is no institutional memory of any significant loan loss(es) in the past 30 years that can be attributed to poor documentation.
THE ONGOING SUPPORT OF CFAB'S LENDER. From the beginning CFAB's principal lender has been a unit of the Federal Farm Credit System. Initially it was the Spokane and Central Banks for Cooperatives - these entities later merged and assumed the name "CoBank." As the discussion above suggests, the relationship has not always been without tension, since the mid-80's events and circumstances created great anxiety for both borrower and lender. Nevertheless, communications have always been constructive and respectful. CFAB has enjoyed all the benefits - and has assumed all the responsibility of being a member of a cooperative lending structure.
The relationship has posed certain challenges for CoBank, because CFAB - and commercial fishing - differ so much from CoBank's traditional agricultural base. Geography also poses significant servicing challenges from an economic standpoint, and CFAB's needs are dramatically smaller and simpler than those of its typical borrower-members. Over the years, and for a range of reasons (none of which is necessarily negative), CFAB has explored the availability of obtaining financing from other institutions, located both within and outside of Alaska. None of these attempts have been successful, with the reason cited most often being fear of the risks associated with resource-based financing. CFAB has never grown to the size apparently envisioned by its original supporters, but through CoBank it has become an effective and economical vehicle for bringing "Outside" capital into the resident Alaska seafood community.
THE RATIONALITY OF THE HICKEL ADMINISTRATION. CFAB's initial equity capital was $32 million of non-voting, non-dividend-bearing stock purchased by the State of Alaska. There was a statutory requirement that CFAB repurchase the stock no later than July 2000. The model for this scheme was found in the Federal Farm Credit System, most of whose entities had been established many decades earlier through the purchase of similar stock by the US Government - that stock was indeed ultimately repurchased. In applying the model to CFAB, the legislature apparently failed to consider the fact that during the period in which those Farm Credit entities enjoyed Government capitalization, they were not subject to federal income tax. And, being federally-chartered, they were not subject to state income tax! No such shelters were available to CFAB, which created a near-impossible situation from a fiscal standpoint. In 1985, the State's investment in CFAB was nearly worthless on paper, and shortly after that the State's public auditors required that the investment in CFAB be written off as worthless. CFAB slowly nursed itself back to health, but even in the early 1990's it could not rationally project an ability to meet the statutory repurchase requirement. This created a range of practical and moral dilemmas. CFAB's management approached the administration of Governor Walter Hickel through Revenue Commissioner Lee Fisher and ultimately received a favorable response to a proposal to immediately begin monthly installment repurchases of the stock on a "present value" basis, discounted from July 2000 with the discount rate to be determined annually. This mechanism worked successfully, and allowed CFAB to complete the repurchase in late 1998. The State of Alaska recovered much of what it had previously written off, CFAB avoided a forced dissolution (in which the State, whose claims were of the lowest priority, would likely have recovered nothing), and CFAB members acquired a substantial augmentation to their own invested capital.
"IT IS WHAT IT IS'- A CRITICAL PHILOSOPHY. Within CFAB, we have often referred to the institution as "a platypus"; that is, there is nothing else like it (although there may be many things that possess some of the same characteristics). The combination of origin, purpose, structure, mandates, ownership, restrictions, etc. makes CFAB absolutely unique. But human nature seems to rebel at the "platypus" concept; it seeks the familiar. Human nature also seems to instinctively seek the goals that can be described by superlatives - "the biggest," "the cheapest," "the fastest," etc. Over the years, there have been occasional but intense pressures within CFAB - at all levels - to pursue these instincts. In some ways, the external pressures - and accompanying criticisms - have been even greater. But also, over the same period, there was the gradual realization that the mandates and restrictions of the "CFAB Statute", the narrow scope of CFAB's markets, and the rate of lesser but irresolvable limitations made the pursuit of those traditional goals a matter of wasteful exercise. An equally gradual, and sobering, realization is that perhaps CFAB's greatest challenge is to equitably balance the interest of three distinct "generations" of borrower-members: (1) those who loans have been paid in full but are still equity holders; (2) those who loans remain outstanding today; and (3) those whose needs to borrow will arise in the future.
Out of these realizations came the unstated but pervasive philosophy that 'the ultimate of success for CFAB is to "BE HERE,": and that "BEING HERE" means to be viable, to maintain a fiduciary posture toward past and present borrower-members, and to be fully prepared to meet the needs of each new generation of potential borrower-members. We are pleased at the extent to which this philosophy is expressed in staff efforts, at the results we are able to report on an ongoing basis, and at the level of financial services CFAB offers to those for whom they are devised and intended.
A 'PROBLEM' LOAN DOES NOT NECESSARILY SIGNAL A 'PROBLEM' BORROWER. Among the many components of the universe of financing (i.e. credit cards, residential mortgages, auto loans, retail financing, etc.) there are varied - but still basically "standard" - processes for dealing with delinquencies and other forms of loan problems. For conventional lenders, many aspects of these processes are dictated by regulation or other legal considerations, or simply by an obligation to limit losses sustained by owners. In CFAB's early days, its management and credit staff quite rationally assumed that one or more of these processes could be readily applied to a portfolio of commercial fishing loans. Once again, experience over time taught us that the unusual cash flow patterns of commercial fishing, the range of external factors that can effect success in resource-based efforts, the circumstances of rural residents in general, and other factors made "traditional" debt-collection procedures inappropriate for CFAB and its borrower-members. These procedures tended to be costly and inefficient, as well as destructive to the interest of the debtors, and often resulted in minimal recoveries.
Moreover, it was clear that even when CFAB was "successful" in recovering all or most of the money due from a seriously delinquent borrower, CFAB's narrow focus dictated that the only "next step" available was to re-lend that money to someone who looked exactly like the original borrower! Out of all this came the adoption of policies dictating that CFAB will "work with" any delinquent borrower-member who is communicative and cooperative, who will deal in obvious good faith, and who demonstrates a reasonable probability of future success.
We are immensely proud of the record CFAB has achieved in dealing with a consistent volume of "troubled" loan accounts, and of the resultant "successes" of hundred of affected borrower-members. On the other hand, we are somewhat frustrated that this incredibly valuable benefit cannot be "promoted." The borrower-members involved are certainly not inclined to have their experience highlighted, and it is not likely that typical applicants enter into loan contracts anticipating that they will ever need to take advantage of CFAB's favorable loan-servicing practices! We should also mention that an important part of CFAB's evolution was the recognition that CFAB needed to understand, and to adapt to, the circumstances in rural Alaska which in many instances vary greatly from those found among "Lower 48" - or even urban Alaskan borrower populations. In particular, we found it especially constructive for loan officers and CFAB staff in general, both formally and informally, to be understanding of - and adaptive to - the culturally based perceptions and practices of the Alaska Native community. Members of that community have always been, and are, a significant component of CFAB's membership.
A presentation of "history" usually involves a recounting of specific events, the mention of many names, and a marking of particular milestones. As we look back at CFAB's 30 years, though, we experience a sense of evolution, of maturing, and of development rather than of a series of "happenings." We indeed have fond (and some not so fond!) memories of special developments, of momentous occasions, and of notable people. But we believe the factors discussed above have been among the most meaningful and enduring elements of the foundation of today's CFAB.
Copyright © 2008-2018 by Alaska Commercial Fishing and Agriculture Bank (CFAB)