The Bank in the Background

By Evan Sparks

Here we are, three adults, sitting in toddler-sized chairs in a former church basement. High-pitched laughter and kid chatter wafts in from the next room, where snacks are about to be served. I’m in the pre-K classroom of Energy Capital Cooperative Child Care, a new daycare center in Mercer County, N.D., and I’m chatting with Dana Santini, who manages the center, and local bank leader Christie Obenauer.

“We were getting to the point where we had people who were saying, ‘I just can’t work, I have no place to take my kids,’” says Obenauer, who is president and CEO of Union State Bank in Hazen. “Employers like us already have a shortage of people to fill positions. We can’t have them not able to use their talents because they can’t find someone to watch their children.”

Obenauer and other local leaders were responding to both local market pressures and broader economic trends. With more two-income households generally, and with a need for round-the-clock shift work in Mercer County’s energy economy and too few daycare seats, many residents were feeling the pinch.

Two years ago, the daycare coop opened to meet that need. The story of how it came together is a classic small town and community banking story, but with a twist. A local church was closing its doors and selling its building but wanted to bless the town as it did so. The coop was able to buy it for a significantly below-market price, explains Obenauer. Meanwhile, “we came in to put the financial package together.”

The total cost of the project was $250,000—which may not sound like much for a commercial facility, but it can be a big hurdle for a nonprofit cooperative in a town of 2,400. Local volunteer labor retrofitted the building, keeping the cost down, but a program from the Bank of North Dakota in Bismarck was what made the whole project come together.

Through BND’s Flex PACE program for local economic development projects, Union State Bank was able to buy down the interest rate on the loan by 25 percent, then sell half of the loan back to BND. The effective interest rate on the project, according to Obenauer? One percent. “The amount of interest expense saved through the Flex PACE program at the Bank of North Dakota, it can make or break a deal,” she explains.

The result: child care for up to 60 kids, employing 19 people at the coop and facilitating 100 additional Mercer County jobs. Santini adds that having a center—as opposed to a home-based daycare—meets the needs of parents with shift work who need child care at, say, 5:30 in the morning. It also provides flexibility for parents dealing with economic turbulence like layoffs and job switches. “We were here” when a family suddenly needed different hours, says Santini.

A unique institution

A child care center is a small project, but there are stories like it in towns across North Dakota. The common denominator is the Bank of North Dakota, which is a unique American financial institution. Part Federal Reserve, part economic development agency and part bankers’ bank, the 100-year-old BND is the only state-owned and state-run bank in America.

Why is it so unique? To answer that question, let’s take a look back 100 years, to the environment that spawned BND.

Energy Capital Cooperative Child Care provides daycare for 60 kids in a former church building in Hazen, N.D.

By 1919, tension had been building for decades in North Dakota. As the Northern Pacific and Great Northern railroads crossed the state, connecting the shipping hubs of Minneapolis and Duluth with Pacific portals, farmers—a great many of them immigrants—settled along the railroad routes and cultivated grain with easy shipping to domestic and overseas markets. In the tight-money environment of the late 19th and early 20th centuries, many of them felt pinched on two sides, paying high interest for loans from out-of-state banks and high costs to ship grain using powerful out-of-state railroad and mill interests.

In 1914, the people of North Dakota approved state-owned terminal elevators. But the legislature refused to build them, and the elevators—along with a state-owned bank and mill—were spearheaded by a populist political movement called the Non-Partisan League. These public institutions were intended to provide more choices to North Dakota businesses in a very different economic, social and political milieu than our own, but they remained controversial for decades.

Just two years after the bank was created, for example, the voters recalled Gov. Lynn Frazier, who had signed the bill authorizing BND’s creation. It was the first of only two instances in U.S. history that a governor has been recalled before the end of his term. BND itself survived public votes, legislative repeal attempts and a lawsuit challenging its constitutionality—but in so doing, it changed.

Over the next several decades, BND would become a political football, with its program shifting dramatically based on the priorities of the three elected officials—governor, attorney general and agriculture commissioner—who comprised the Industrial Commission, BND’s official board.

“Because the bank is a creature of the political system, it responds to those swings,” says former Grand Forks Herald editor Mike Jacobs, who authored a history of BND. “It has to respond to those swings.”

These included big swings in credit policy. Under some administrations, BND lent freely, getting “loans that other banks didn’t want to make,” a former attorney general told Jacobs. In the 1980s, the bank was embarrassed by “Potatogate”; it issued $1.85 million in promissory notes to help a North Dakota firm ship seed potatoes to Honduras. The Honduran buyers were a chimera, and the money disappeared into the hands of a Canadian con man.

At other times, the bank was thought to be too tight with credit. Steve Stenejhem, chairman and CEO of First International Bank and Trust in Watford City, recalls wanting to make a loan to a rancher in the 1980s to develop RFID technology for tracking cattle. “I was willing to lend him $500,000 to help with his project, and I could not convince BND to lend $150,000,” he says. “They were almost 20 times bigger than our bank was at the time, and they were unwilling to take a $150,000 risk.”

That began to change under Gov. Ed Schafer, elected in 1992, and John Hoeven, who became president of BND in 1993. BND takes the state’s deposits and puts them to work across the state primarily through participating in loans originated by a local bank. “When I came there in ’93, they were not taking enough risk,” says Hoeven, whose background was as a commercial banker in Minot and who today serves as a U.S. senator. “Their loan portfolio was only a couple hundred million.”

Explore the story of community banking in North Dakota with a special documentary episode of the ABA Banking Journal Podcast. Listen here.
To Hoeven, the bank was “really an economic development agency for the state of North Dakota . . . designed to better manage risk and help the commercial banking network provide funding to entrepreneurs, businesses, farmers and students. Its role is to complement and work with private financial institutions to support, expand and grow the private sector—and not to compete with private financial institutions.”

Operating as a bank, staffed by professional bankers, helps BND succeed at its economic development mission, says Eric Hardmeyer, who succeeded Hoeven as president of BND in 2001. “Economic developers have never seen a deal they don’t like,” he says. “When you’re a banker, you have look at it objectively and independently and make a decision.”

In all but a handful of instances, BND makes loans as a secondary partner by working through local banks and credit unions and does not originate them directly. That also helps BND prioritize the most creditworthy and effective projects, Hoeven adds. “We did need to take more risk, but that’s tempered by the professionalism of all these financial institutions that understand risk. They’re community banks that know their people, that know their communities.”

Booming in the Bakken

In recent years, BND’s economic development mission has been to complement the rapid growth in the state with the nation’s lowest unemployment rate. In the heart of the Bakken formation, which sits under the northwest corner of the state, technological innovations like fracking and horizontal drilling have made North Dakota the second-largest oil producer among states. It also helped fuel America’s rise to be the number-one oil-producing country worldwide, with U.S. oil production more than tripling over the past decade.

BND’s lending capability has grown as state tax revenue—and thus BND’s deposits—has exploded over the course of the oil boom. “We were growing at a rate of about a billion dollars per year,” says Hardmeyer. And the oil patch is one place where BND proves its value to local lenders.

“In the 1980s, when the boom ended, we had more people than we had jobs, and we had more housing than we had people,” says Stenehjem from his office on Main Street in Watford City. “Today, with the economy as strong as it is, we have more jobs than we have people, and we have more people than we have housing. It’s a nice problem to have.”

As oil jobs proliferated—and then showed some staying power, attracting other new businesses—newcomers have thronged to Watford City and other Bakken hubs like Williston. Watford City’s population has more than quadrupled over the past decade. The average age in the town has fallen from about 60 to more like 30, says Keith Olson, regional director of the Small Business Development Center. New development sprawled across the plains, but the added population put its toll on public infrastructure like roads, schools and medical facilities.

Due to a lag in property tax assessments, “the city’s schools were growing much faster than their bonding ability was keeping up,” says Stenejhem. “We needed a new school, and the school didn’t have the money or the bonding ability to build it.” He worked with BND to design a solution.

“I gave my willingness to lend up to our legal lending limit, but I needed BND to be a partner, and they did,” Stenejhem explains. “They came up with a program where we could use the gross production tax money to repay the loan over a period of time. We got the school the money they needed and got the buildings built in time for all the kids coming up to use it.”

The partnership is apparent on the east end of town, where a new public recreation and event facility called the Rough Rider Center stands next to Watford City’s new high school and athletic fields. The Stenejhem family donated 53 acres and moved 4.5 million cubic yards of dirt to prepare the site. Nearby is a hotel complex, new apartments and a First International bank branch with a built-in brewpub.

A public option?

Good economic times in North Dakota—combined with struggles to grow elsewhere—have made the BND model attractive. But up close, BND today isn’t the populist institution that its origin story suggests it might have been. BND’s success today—and what makes it so beloved by bankers like Obenauer and citizens across North Dakota—are that it has learned by hard experience to eschew politics for pragmatism and partnership.

In fact, those close to the bank are wary about efforts to replicate it elsewhere, as activists in several states and cities have proposed. (As feasibility studies across the country have demonstrated, any benefits from the BND model of public-private cooperation can take decades to develop, while posing significant financial risk to taxpayers from inception.) First, there’s the matter of the tone. BND leaders never disparage private-sector banking institutions or speak about competing with them. “It is unique to North Dakota . . . and it is used in a way that is not a threat to any of the private-sector financial institutions and is viewed really as a partner in a very benevolent way,” says Hardmeyer. “We are really here complementing what they do.”

Hoeven agrees: “To the people who came in and said, ‘We’re going to set this up as a competing enterprise,’ I said, ‘No. I don’t believe in that.’”

BND has moved away from any semblance of competition. In the 1980s, Stenehjem recalls, “the bank was a tough competitor for municipal, school board, park board-type deposits, taking those deposits from me as a community bank, and they weren’t lending any money back.” That changed under Hoeven and Hardmeyer. While BND does accept deposits from North Dakotans, “we don’t make it convenient by design,” Hardmeyer explains—no debit cards, and no branches except for the main office in Bismarck.

Another key to the bank’s success in recent years has been North Dakota’s high-trust, low-corruption culture. “North Dakota has among the nation’s most transparent governments,” says Mike Jacobs. It’s hard to hide the ball in a state with fewer than 800,000 residents. “Transparency is one way we keep politics out of it,” says Hardmeyer. “This is still a small state. There’s two degrees of separation. We all know each other.”

And the North Dakota legislature understands that the bank needs to be managed with discipline and not raided as a piggy bank for government projects. BND has paid differing levels of dividends back to the state’s general fund over the years—and no dividend at all in some boom years, leaving more funds to loan out. BND builds its capital through retained earnings, so Hardmeyer and Jacobs both remark that legislators understand the need to let the bank manage itself appropriately.

BND’s status as a political football came to an end when its management became consistent and disciplined, but the controversy, uncertainty, scandals and mission drift of the bank’s first decades provide a word of caution to anyone attempting the same today. Moreover, the banking environment is drastically different than they were a century ago. “I think it would be very hard to replicate today,” says Stenehjem.

Hardmeyer emphasizes that any public bank like his needs to be able to fill a niche that the private sector can’t. “Just to broadly compete against private-sector banks is a recipe for problems,” he says. “The headwinds of a public bank competing against private-sector banks to do the exact same thing that they are flies in the face of what we have come to expect in the United States. . . . There has to be a specific purpose for what you’re trying to accomplish.”

Back in Hazen, we’ve left the daycare coop and we’re tagging along with North Dakota’s other senator, Kevin Cramer, for a tour of the Sakakawea Medical Center, a brand-new $30.5 million critical access hospital that opened in 2017. Christie Obenauer is president of the hospital board, and Union State Bank was the lead local lender. Through BND programs, she explains, her bank booked $12 million and shared the risk on all but $1 million of that.

The cutting-edge facility—which includes intensive care, primary care, specialist services and even a senior home—is impressive, but more importantly, it helps meet the growing healthcare needs in Mercer County. Medical center CEO Darrold Bertsch points out that the facility wouldn’t exist if it weren’t for the partnerships of local banks, BND and federal agencies.

Cramer agrees. “With a participation program like this, the collaboration makes something work that otherwise in the free market competitive system couldn’t work,” says the senator. “North Dakota does that sort of thing really well.”

To listen to the podcast episode on BND, click here.

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About Author

Evan Sparks

Evan Sparks is editor-in-chief of the ABA Banking Journal and vice president for publications at the American Bankers Association.