Banking on the Government
At 75, the nation's only socialist bank is still striving to achieve its mission
Published March 1, 1994 | March 1994 issue
For many years the joke in North Dakota was that the nation's only state-owned bank was known as the Bank of No Decision, for its lengthy loan process and its generally ponderous, bureaucratic ways.
John Hoeven, the bank's president, smiles knowingly when reminded of that version of the Bank of North Dakota's acronym, and he deftly replies that under his tenure he hopes BND will be known as the Bank of No Delay. For many in the state, an even better name would be the Bank of New Developmentas in economic developmentan area where the bank has made its greatest strides in recent years.
If the Bank of North Dakota hasn't always met with people's expectations over the years, there is good reasonit's effectively owned by North Dakotans, run by people they've elected and charged with the mission of improving people's lives through economic growth. That's a tall order for any state agency, but when that agency holds over $1 billion in assets and is one of the largest banks in the state, disagreements over bank operations are expected.
The essential dilemma for the Bank of North Dakota hasn't changed over its 75 years: As an agent of the state it can make subsidized loans to try to spur development; however, its profits and losses affect state tax burdens. How much subsidization are those taxpayers willing to afford? How risky should those loans be? Do the returns from new development offset those subsidies and risks?
The whims of the state Legislature, the goals of a particular gubernatorial administration, the hopes of the populace, and the need for safe and sound banking practices can sometimes form a volatile mix, concedes Hoeven, who has led BND for about a year. But the former community banker from Minot, N.D., doesn't necessarily view that mix as a hindrance. He prefers to focus on the combined power of those sometimes disparate forces.
"There are different parties and different approaches, but I think we can work together," Hoeven says. Everyone desires economic development, he says, and the bank needs the active participation of all the state's players. "That's our strength. That's how we'll be successful."
What is a state bank?
In many ways the Bank of North Dakota, located in Bismarck, is like a private bankit accepts deposits and makes loans, for example. But unlike a private bank, most of its deposits come from the state and its lending programs are limitedno auto loans, for example. Other features of the Bank of North Dakota:
- The bank's deposits are guaranteed by the state of North Dakota, not by the federal government.
- All funds of the state and state institutions must be deposited with the bank.
- The bank is governed by an Industrial Commission, consisting of the governor, attorney general and the commissioner of agriculture, all elected officials. The commission, in effect, serves as the bank's board of directors; it was formed with three members so voters could more easily monitor and influence bank policy.
Recently, a political sideshow, of sorts, has embroiled the Industrial Commission as Ed Schafer, North Dakota's governor, has seen his company's financial woes played out on the front pages of the state's newspapers. As chairman of the Industrial Commission, Schafer abstained on a December 1993 charge-off vote of $326,204 against Fish 'N Dakota, a fish farm of which he is president. The charge-off is part of a $1.45 million loan arranged by Norwest Bank, of which $500,000 is held by the Bank of North Dakota; the loan originated before Schafer was elected governor.
While Schafer says his company will pay its debts and his counterparts on the Industrial Commission insist the governor has received no special treatment, the BND charge-off has become a political thorn in Schafer's side and has focused attention on the otherwise more mundane affairs of the BND's board of directors. Charge-offs at BND are made on loans that are more than 120 days overdue and are considered potentially uncollectible; BND charged off 21 loans totaling $534,243 in December 1993.
- Use of the bank's earnings, which totaled over $22 million in 1992, is at the discretion of the state Legislature. The 1993 Legislature transferred $52 million from BND to the General Fund, of which about $24 million will be transferred from the bank's capital and $28 million from earnings. The Legislature also guaranteed that BND's capital would not be drawn below $100 million.
- Except for its beginning farmer and established farmer loans, all of the bank's agricultural and commercial lending programs are in participation with another lender or lenders.
- While the bank does accept savings and checking accounts from private sourceswhich generally account for between 10 percent and 20 percent of the bank's deposit baseit does not market those services.
- Consumer lending is restricted to farm real estate loans and fully guaranteed loan programs, like student lending. BND made the country's first federally insured student loan in 1967, and since then student loans have grown to form a large portion of the bank's loan portfolio.
- The bank also provides services to its private counterparts in the state, like check clearing and a secondary market for single-family mortgages.
The giant is awake, but what should it do?
Although BND turns 75 this year, it is still very much a work-in-progress. It was formed with the goal of "encouraging and promoting agriculture, commerce and industry," a goal that has been more idealized than realized during much of the bank's history.
The framers of the Bank of North Dakota Act in 1919 envisioned a state that would flourish under BND's benevolent financial guidance. But from the start the bank met with difficulty, not only from political opponents but also from economic slumps that beset other banks as well, such as the Great Depression and the occasional downturn in the agricultural sector. Additionally, through its first half-century, the bank was largely operated as a passive depository for public funds, with little or no emphasis on its founding mission. Bank funds were deposited in low-interest, or even non- interest, producing accounts. For much of that time the bank did not have one farm loan on its books; bank managers concentrated on buying and selling municipal bonds, a portfolio that grew from $2 million in 1935 to $27 million in 1960.
Only during the last 25 years has the bank become a more active lender and addressed its founding mission. Today, just as other states have become more sophisticated in their use of special funds to encourage economic development, state officials say the BND has a more important role in North Dakota's economy.
In her history of the bank, political scientist Rozanne Enerson Junker calls the bank's gradual movement into economic development throughout the 1970s as the awakening of a sleeping giant. The metaphor is apt, not only to describe the languorous nature of the big bank, but also to reflect the caution needed when rousing such a powerful force. On one hand, with loans representing just 24 percent of BND's assets, a case can be made to use the bank's resources more aggressively. On the other hand, public funds are at stake and risk must be balanced by prudence.
Hoeven, the bank's president, believes the bank can be more aggressive and still uphold the public's trust. Eleven years at First Western Bank and Trust in Minot, where he was actively involved in local economic development efforts, have helped shape Hoeven's vision for the Bank of North Dakota. He says the bank must first become a "customer service oriented organization," in part by streamlining the lending process and by charging each division in the bank to market its own services.
As for BND's lending programs, which are meant to spur local development, the bank must encourage communities to take the lead in economic development, according to Hoeven. He cites the bank's PACE program (Partnership in Assisting Community Expansion)as do many others in the stateas an effective private/public development effort. Under PACE, which includes commercial and agricultural lending, a local bank originates a loan, the Bank of North Dakota participates at a rate determined by the community's economic strength (between 50 percent and 80 percent), and the local economic development group and BND "buy down" the interest rate to 3 points below prime.
Since its inception in June 1991, BND has participated in about $44 million in PACE loans to businesses that have added over 2,000 jobs, according to Hoeven. But almost half of that money, and 751 of those new jobs, occurred in 1993, he says, reflecting BND's more active stance in recent months. Beyond PACE, BND has about a dozen other participatory programs for commercial and agricultural loans.
Local banks have noticed BND's increased lending activity and they are pleased with BND's efforts in participating in loans that might otherwise be too large for them to handle, according to Arlene Melarvie, executive director of the Independent Community Banks of North Dakota. "We feel John is looking to the community banking industry," she says. BND's aggressive lending has created a positive attitude for the banking industry, she says.
A recent poll by the North Dakota Bankers Association would seem to confirm that assessment. In the poll, which surveyed bankers' opinions on topics relating to the economy, bankers found the state's economic development programs to be six times more favorable than less favorable, with those programs administered by BND and the Department of Economic Development and Finance the most beneficial. "State programs are becoming more favorable with the Bank of North Dakota's new willingness to participate in loans," said poll respondent Steve Stenehjem of First International Bank and Trust, Watford City.
Gov. Ed Schafer says when he considered Hoeven for the BND position, the former banker's experience in local economic development efforts was perhaps more important than his years in the banking industryalthough the two are obviously linked. "A development mentality is often different from a banking mentality," Schafer says, adding that the success of an institution like BND often has a lot to do with the attitude of its leaders. The governor says the bank is trying to shift that mentality of development to local communities. "We say cities should drive that effort."
Special bank, special responsibility
In recent years, when calls were made for more risky use of the bank's resources to engender economic growth, the defendant on the side of caution was, most often, Joseph S. Lamb, who served as president of the bank from August 1986 to December 1992, under then-Gov. George Sinner. While agreeing that BND is an important economic development tool for the state, Lamb stresses that BND is a public institution with a special responsibility. "This is the public's money, they are the stockholders."
Lamb, who has returned to his position as chairman and president of Lamb's Bank in Michigan City, ND, doesn't accept the conventional wisdom that North Dakota is deficient in capital; rather, he says the state lacks an adequate supply of managerial expertise to create good ideas and successfully operate a fledgling business. "Everybody says throw money at it, throw money at it," Lamb says about economic development. "That isn't going to be the answer," he says, warning that more risk leads to more failures, and the false hopes from a failed business enterprise is the worst thing for a town. "How do you recover from a plant sitting empty?" he asks, especially when that plant may have included tax dollars.
"My economic development friends might disagree," Lamb concedes about his views, adding that perhaps some of BND's earnings should go toward training business managers and owners in the state. "The buzzword is entrepreneurs," he says of the current economic development climate, "and there's a bunch of them backing up to the bankruptcy court, too."
George Sinner, North Dakota's governor from 1984 to 1992 and now an executive at American Crystal Sugar Co. in Moorhead, Minn., who takes pride in the formation of the PACE fund during his second term in office, shares Lamb's cautious tone about the proper use of BND as an economic development tool. Risky development efforts jeopardize the safety and soundness of BND, he says, and failed enterprises may create disillusionand ultimately distrustfor the institution.
A banking birthright
While the proper method for BND to uphold its mission of promoting economic development has been debated for most of the bank's 75 yearsand will likely be argued during the next 75members of opposing political parties and differing development philosophies usually agree that BND is good for the state. Arguments to abolish the bank have been raised in the past, but no serious attempt to disband BND has occurred in many years, according to Allen Olson, North Dakota governor from 1980 to 1984, and the state's attorney general from 1972 to 1980.
"In its essence the Bank of North Dakota is a socialist institution," says Olson, who was interested in the attorney general's office, in part, because of its role in the Industrial Commission. "I considered [BND] an asset then and I still consider it an asset," he says.
Even so, Olson, now the president of the Independent Community Bankers of Minnesota, admits that he might not vote for the formation of such an institution today. How does he explain such a seeming contradiction? To understand, "You have to be born and raised in the state of North Dakota," he says.
Sara Vogel, North Dakota's commissioner of agriculture and a member of the Industrial Commission, would understand Olson's views of the bank as a birthright of North Dakotans, because that's especially true for her. Vogel has strong feelings about the bank that stem from the days when her grandfather was manager of BND. Like Olson's desire for the attorney general's post, the bank is one of the reasons she sought the commissioner's office. "I grew up with its mission firmly ingrained in my genetic memory."
And that mission, 75 years in the making, is perhaps best paraphrased by Vogel: "I see the Bank of North Dakota as an opportunity to solve problems. It's a proactive bank. It's special."
The Region asked the following North Dakotans what aspect of the Bank of North Dakota they would change if they had the power: Ed Schafer, North Dakota governor: Reduce the amount of capitalization needed for a company to qualify for a Bank of North Dakota loan. John Hoeven, president, Bank of North Dakota: To fund economic development as effectively as possible, risk capital must be provided in addition to low-interest financing; prudent use of the bank's earnings for such investments would expand the state's economic base and increase returns on such investments exponentially. Heidi Heitkamp, North Dakota attorney general: Keep bank moving in same direction to increase participatory loans that are originated by local communities. Dale O. Anderson, president, Greater North Dakota Association: Follow the recommendation of Vision 2000, a state economic development plan, and replace the Industrial Commission with an appointed boardrather than elected officialsto foster more risk-taking. Chuck Stroup, director, Department of Economic Development and Finance: To enhance economic development opportunities, allow the bank to retain earnings to use at discretion of Industrial Commission. Cole Gustafson, associate professor, Department of Agricultural Economics, North Dakota State University: Decrease emphasis on large agricultural loans with big interest subsidies and increase efforts to make smaller loans with smaller subsidies, thereby impacting more farmers; also, pay more attention to agricultural businesses and not just to farmers and ranchers.
Political Prairie Fire:
The agrarian movement that sparked a state bank
North Dakota's state senators triumphantly filed into the House chambers for a remarkable joint session of the legislature.
Banners lined the walls, movie cameras whirred and everyone raised a small flag as they stood to sing patriotic anthems. It was 1919, and North Dakota politics was on parade; the rest of the country would witness on film how democracy was done on the Northern Plains.
While it may have lacked fast-paced cinematic thrills, North Dakota's 1919 legislative session had its share of political action. At 10 a.m. one day, for example, the full House began work on two bills meant to revolutionize North Dakota finance and politics. By 4:30 p.m. that same day the debate was closed and the votes cast: North Dakota would create a state-owned bank and establish an Industrial Commission to control it.
With the swiftness and intensity of a prairie fire, an agrarian reform movement that began in 1915 had swept through North Dakota. Known as the Nonpartisan League (NPL), the party followed in the footsteps of other movements meant to shift power from the Big Money interests of finance and agriculture (in this case, located mainly in Minneapolis and St. Paul) to the people (which, in North Dakota, largely meant the farmers). Existing political parties were considered subservient to the banks and grain companies of Minnesota. North Dakota's economy was even more dependent on farming at the time of the NPL's rise than it is today (see accompanying table); nine of 10 North Dakotans depended on farming for their livelihood in 1919.
The NPL was different from other reform movements in that it was the first party in North Dakota to call for state control of capital; such control was viewed as essential for its proposed reforms. Other states had formed banks in the previous century, but all attempts at total state ownership had endedeither by design or by failure.
Galvanized by its founder, Arthur Charles Townley, (a former Socialist Party organizer) and driven by its single-minded purpose, the NPL won the governor's seat and a majority in the state House in 1916. Two years later, with the addition of the state Supreme Court and a majority in the state Senate, the NPL was unstoppable.
The NPL acted quickly to implement its Industrial Program: It attached emergency status to its laws and squashed any attempts to amend or otherwise delay passage. In addition to the state-owned bank, the 1919 legislative session also produced the North Dakota Mill and Elevator Association to manufacture and market farm products, and the Home Building Association to build and finance homes.
Regardless of its supposed merits, debate on the proposed Bank of North Dakota often concerned the likelihood that such a venture would even succeed, with opponents frequently citing the failed attempts of other states. State House Representative Paul Johnson said that "The bill looks to me to be Socialistic in the main points. I do not believe in state-owned and operated utilities: at least I do not believe in experimenting on a large scale like this."
But supporters of the proposed bank tried to assuage such fears by referring to the existing state bank and rural credit programs in Europe and Australia as successful examples. One NPL backer, Walter Liggett, argued in the state's dominant NPL newspaper, the North Dakota Leader, that concern over a state bank was unwarranted:
"There is nothing experimental about the proposed Bank of North Dakota. Neither is it in any way 'revolutionary.' It simply is a carefully considered measure which combines the best features of the Federal Reserve Bank and the farm loan act and adds to this several constructive features patterned after the Australian land banks and cooperative farm loan associations of Europe."
Capitalized with $2 million through the sale of bonds, the Bank of North Dakota opened for business on June 20, 1919. While the bank and the state mill exist today as the last vestiges of the NPL, the building association eventually failed.
As for the NPL, its rise to powerlike that of a prairie firehad a sudden and major impact in North Dakota and then it quickly burned out. Over time, the party divided into radical and moderate factions, with party members running as Democrats or Republicans; by 1956, the NPL formally merged with the Democratic Party, although many party members joined the Republicans.