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Community Developments Investments (August 2013)
First National Bank AlaskaCrews work on the underwater fiber-optic cable that connects Alaska’s Kodiak Island to telecommunications infrastructure on the mainland. FNBA financed the project with the help of a loan guarantee from the U.S. Office of Indian Energy and Economic Development.
Prospering Together on Top of the World
How First National Bank Alaska Became a Leading Financial Partner of Alaska Native Corporations
Jay Page, Vice President, First National Bank Alaska
First National Bank Alaska boasts a rich history of helping provide opportunity to all Alaskans. Alaskan-owned and operated since 1922, First National today proudly meets the financial needs of its customers with 30 branches and ATMs in 18 communities throughout the state. The bank lends money to grow businesses, build homes, and send students to college. It also supports its local communities through donations, grants, and volunteerism.
The Alaska Native community is an important segment of the bank’s customer base. One way the bank lends to and invests in Alaska Native-owned businesses and enterprises is through its work with the U.S. Office of Indian Energy and Economic Development (IEED) loan guarantee program. First National is the state’s top IEED lender.
To better appreciate the nature of banking in our region, let’s take a look at Alaska’s economy, the unique aspects of doing business with Alaska Native corporations, and the bank’s relationship with the IEED program and how this relationship benefits the local economy.
Alaska’s Economy: A Three-Legged Stool
Oil production and federal spending make up about two-thirds of Alaska’s economy. The remaining third is made up of all other economic activity.
Liken the economy to a three-legged stool: It takes all three to support businesses and households.
People from all walks of life have long called for the diversification of the Alaskan economy, but that has proved to be easier said than done, largely because of the state’s remoteness. The high cost of transportation caused by the long distances is so prohibitive that it is difficult to add value to raw material and remain competitive in national or global markets. It makes more economic sense to export the raw material for processing elsewhere. The result is that the state serves as the center of the import-export cycle—the arrival point for imported goods and the departure point for exported raw materials.
Despite the lack of economic diversity, Alaska is still prosperous, and its growing economy has enabled successful operation of private businesses for decades. It has remained essential that everyone in the state understands and actively supports the “three-legged stool” in order to keep the economy strong.
Whatever job an Alaskan has—in a grocery store or bank or state agency—it depends in some way on the three legs of the Alaskan economy.
Alaska Native Corporations: Major Economic Players
The Alaska Native Claims Settlement Act (ANCSA) was signed into law by President Richard Nixon in December 1971. Disputed aboriginal land claims were extinguished and, in turn, titles were transferred to 12 newly formed Alaska Native regional corporations and more than 200 village corporations in the regions.
Native corporations were deeded 44 million acres of land and were paid $963 million. ANCSA also allowed for creation of the Trans-Alaska Pipeline, which has shipped to market 16 billion barrels of oil as of 2010. For Alaska Natives as well as the oil industry, the state’s economic engine was primed.
In the early 1970s, the world of business was mostly foreign to Natives from far-flung, undeveloped villages like Barrow. ANCSA was passed before there was oil development on the nearby North Slope. Natives of Alaska’s interior were experts in subsistence hunting and fishing but most had no business experience. So, early on, many Native corporations and individuals from rural Alaska had difficulty starting and sustaining businesses. A few corporate bankruptcies were filed and problems arose while trying to develop profitable business enterprises from scratch. The good capital needed to leverage deals wasn’t easy to find.
But as Alaska Native corporations gained experience and matured, business-savvy shareholders appeared to take the leadership positions and, as they gained more experience, the corporations transformed themselves into solid businesses and assumed an integral role in the overall Alaskan economy. Just recently, Alaska Business Monthly recognized the 49 largest Alaskan-owned companies by gross revenue as of year-end 2011. The 20 Alaska Native-owned companies on the list accounted for 73.7 percent of the combined gross revenue for all 49 companies and 62.4 percent of all Alaska-based jobs. The success since the early 1970s is due to many factors, not the least of which is the IEED loan guarantee program.
Lending to Alaska Native Enterprises
Lending to Alaska Native for-profit companies is similar to lending to any other business.
Pledged collateral, whether it is buildings, equipment, or tenant improvements, is typically privately owned property. The majority of First National’s IEED lending is secured by property and equipment residing on private property. Making loans becomes more challenging when the collateral is on tribal land.
Native villages are recognized by the federal government as sovereign nations, so foreclosure or repossession on tribal land requires the consent of the Native village. For practical purposes, lenders often require the village to execute a waiver of sovereignty specific to the asset or assets being pledged.
It has been our experience that villages understand why the waivers are required, and in most situations borrower and lender can work together to keep a loan in place.
Not Unlike Any Other Commercial Loan
The IEED loan guarantee program helps First National meet the needs of many Alaskans. To qualify for an IEED guarantee, the borrowing entity must be at least 51 percent Native owned, but as mentioned earlier, jobs are created for both Native and non-Native employees to the benefit of the local economy.
A Native corporation is 100 percent Native owned, but a limited liability company can be classified as Native owned if it is at least 51 percent Native owned. An IEED guarantee lapses if the borrowing entity becomes less than 51 percent Native owned during the course of the loan. First National has not had that happen.
Currently, we have 46 IEED-guaranteed loans with an aggregate balance of more than $118 million, making us the top IEED lender in the state.
Processing a loan with an IEED guarantee is similar to processing other commercial loans, with minor additional steps.
Typically, the bank provides the borrower with a checklist of items needed to consider the loan request. When First National reviews a complete application, we consider the effect an IEED guarantee would have. If we think the application is a sound proposition that is enhanced by IEED involvement, the loan is approved. IEED has a checklist of items it wants to see when the bank applies for the guarantee. That checklist is the same as our initial checklist to the borrower, so there is no redundancy or delay in the process. IEED communicates with the loan officer on points of clarification, and IEED makes its decision.
The Alaska state IEED currently has authority to approve loan guarantees up to $3 million. Turnaround time for loan guarantee approval is very good. Loans greater than $3 million are submitted locally and sent to Washington, D.C., for approval. Depending on government funding cycles and IEED processes, loan guarantee approval can take two weeks to two months.
First National does not submit applications to IEED unless it thinks the applicant has a sound credit. There may be a lack of business history or we may be dealing with specialized collateral, but if we have a strong belief in the applicant’s credit we will submit it for IEED consideration.
An IEED Assist
How does a bank collateralize itself while providing construction and term financing for a submerged fiber-optic cable hundreds of miles long? In our case, Kodiak-Kenai Cable Company’s unconventional project came to life when First National helped secure a 90 percent IEED loan guarantee.
Kodiak Island, once served by bouncing signals off satellites, now has subsea cable service that is also relayed to surrounding villages such as Ouzinkie and Old Harbor. Now diagnoses of medical conditions in remote Kodiak can be done by doctors in Anchorage through telemedicine. Communications are more reliable and better quality, at a more reasonable cost.
Native nonprofit groups benefit from the IEED guarantee program as well. The Native Village of Tyonek is recognized by the U.S. Department of Interior as the Indian tribal government for the village of Tyonek. The village administers contracts and grants for the benefit of Native inhabitants of Tyonek pursuant to the Indian Tribal Governmental Tax Status Act of 1982, as amended.
Village Chief Frank Standifer recognized a need to renovate and remove asbestos from the 47-year-old village headquarters. At the time, the building housed village offices, Tyonek Native Corporation, Tyonek Contractors LLC, a university program, and government and nonprofit organizations that benefit the community. The bank secured an IEED guarantee on a term loan to fund construction work to keep the building in service for decades.
The IEED loan guarantee program can also be used for smaller deals. One example is the Aurora Lodge loan. Many rural Alaskans have never traveled out of their village or region, and a first trip to Anchorage can be a culture shock. An IEED-guaranteed loan from First National Bank Alaska let 15th Terrace LLC finance Aurora Lodge, a small boardinghouse in a quiet part of town enjoyed by visitors from rural Alaska.
IEED does not have maximum or minimum loan amount restrictions. If a deal makes sense it will be considered, but very small deals don’t go to IEED. First National has individual loans guaranteed in excess of $10 million, but when a villager needs a new kicker (outboard boat motor) to pull in his fishnets from the Kuskokwim River, or needs $2,000 for fuel oil to heat the house in winter, we make those loans at the branch and get paid when seasonally made money comes to the borrower.
Working hand in hand with IEED allows Alaska-owned First National to help Alaska Native enterprises grow and prosper. In turn, this work makes it possible for the bank and Alaskans to succeed.
First National Bank Alaska Vice President Jay Page can be reached at firstname.lastname@example.org.
Community Developments Investments is produced by the OCC’s Community Affairs Department. Articles by non-OCC authors represent their own views and not necessarily the OCC’s.