What a public bank can do for real people
The little city of Hazen, North Dakota, population 2,300, is the kind of town where farming and ranching families often have a second income from a job at a power plant or a coal mine.
As a teenager, Christie Obenauer, née Huber, frequently made the hourlong drive from Hazen to Bismarck, the state capital, to go shopping with her sister. On the way, they’d usually make a stop to run an errand for their dad, who ran Union State Bank of Hazen.
“We would back up that giant Buick to the back of the old Bank of North Dakota building, they loaded it up with money, and we’d cover it up with a blanket, close the trunk, go to the mall, and come home,” Obenauer says. “That was a different time. Everyone just knew we were the Huber girls.”
Obenauer is the fourth generation in her family to run Union State Bank. Founded in 1908, the bank today holds $130 million in deposits and has $147 million in loans, investments, and other assets. Obenauer still sends her staff on regular trips to pick up coin and currency in Bismarck—just don’t ask her what car they drive.
Though it’s a tiny institution in a tiny city, Union State is able to do many things normally beyond the reach of a bank of its size. It served as the lead local lender for a $30.5 million medical center that opened in 2016, combining state and federal loans, another federal loan guarantee, and cash from the regional health system. Obenauer describes how her bank partnered with the medical center, Basin Electric, and a few other local employers to convert a former church into a cooperatively owned child care center that now serves 88 kids. She also notes that her bank helped finance manufactured housing for new workers attracted by the shale oil boom. The Bank of North Dakota was an instrumental secondary market to buy those mortgages, taking up the long-term risk in the way Fannie Mae helps local lenders across the country.
While there is certainly a lot that’s unique about Hazen, Union State Bank, and Obenauer’s path to becoming a fourth-generation community banker, it is not unusual in North Dakota to find a little bank punching far above its weight. That’s just how banking works in this state, largely because of the century-old Bank of North Dakota, the only state-owned bank in the country.
All of North Dakota’s state tax and fee revenues get deposited by default into the Bank of North Dakota. Prohibited by law from competing with the private sector, it has no branches or ATMs, and other than student loans, the bank rarely originates or services loans directly to people or businesses. If you want to open an account and deposit your own money into the bank, you have to go in person to the main office in Bismarck, and you also have to be a North Dakota resident.
The Bank of North Dakota operates primarily as a bankers’ bank, partnering with local financial institutions to leverage the state’s deposits in ways designed to strengthen local banks and credit unions.
“To some degree, it’s a little bit mystifying to other bankers who are in other states,” Obenauer says. “It’s an extension of who we already are. I’m only a $150 million bank with just three locations in a rural space. The Bank of North Dakota allows us to be bigger than we are. We can sell overlines or participations or we can utilize some of their programs that we wouldn’t be in a position to offer on our own. They just allow us to do big things, even if we’re small.”
Participation loans are one of the most important and the most voluminous way the Bank of North Dakota works as a bankers’ bank. In a participation loan, the loan originator covers part of the principal amount borrowed, then it brings in other lenders behind the scenes to cover the rest, and everyone shares in the interest paid on the loan. Participation loans let small banks share the risk with larger institutions, while keeping the larger institutions in the background. Most borrowers don’t know that the Bank of North Dakota is involved through a participation loan unless they ask, says Gary Petersen, chairperson for Cornerstone Banks.
That’s intentional. It allows local banks to leverage a deeper pool of money while maintaining their relationships with their clients. According to its 2018 Economic Development Report, the Bank of North Dakota made 491 commercial loans totaling $971 million and 402 agricultural loans totaling $182 million. The vast majority of those were participation loans in partnership with local financial institutions across the state.
“It’s like a bankers’ bank on steroids because of all the different programs they bring to the table,” Petersen says. “You know, when I talk to my peers that are from outside North Dakota and they learn about the bank, if they haven’t heard about it already, many are fascinated by the prospect and very envious, I think in most cases, that we have this tool in our toolbox.”
Rick Clayburgh’s first introduction to the state-owned bank was more typical of North Dakotans today. It was when he first got a student loan. The Bank of North Dakota was the first bank in the nation to write a federally guaranteed student loan, back in 1967. The bank still has a student loan portfolio of around $1.1 billion.
“I think there are a lot of people here in North Dakota that the Bank of North Dakota has touched through student loans,” Clayburgh says. “But I would venture to say, unless they had some understanding of the banking system, I don’t think most people would know that it was a state-owned bank, in particular, or that it was unique. It was just an institution that was helping them with their education.”
Clayburgh went on to work in banking, and eventually came to work at the North Dakota Bankers Association in 2005, where he is now president and CEO. He long ago lost count of the number of other state bankers’ associations and other colleagues from outside of North Dakota who have asked him about working with a state-owned bank.
“It works here because it’s been allowed to operate like a bank,” says Clayburgh.
Elected officials allow the Bank of North Dakota to take some risks, he says. “But that’s all done with open eyes by our elected officials, and working in conjunction with our local institutions.”
Despite its risk-taking, the Bank of North Dakota earned a net income of $159 million in 2018, and has had positive net income every year as far back as 1966. It currently has $7 billion in assets—twice the amount in 2008—and in 2018 it paid its billionth dollar back to the state.
With that kind of ubiquity in the state’s economy, the Bank of North Dakota has touched many lives, both for good and bad. When a state agency needs to finance a militarized crackdown on Dakota Access Pipeline protesters, for example, it goes to the Bank of North Dakota. It also shouldn’t be ignored that the state-owned bank was originally created by and for a settler population that benefited from the violent theft of Sioux tribal lands.
In another respect, the bank has helped North Dakota’s economy live up to higher ideals, welcoming newcomers fleeing violence and warfare in other countries.
Fowzia Adde arrived in the United States in the late 1990s as a 19-year-old refugee from Somalia, landing alone in Washington, D.C. Her mother, father, and siblings would arrive a few months later. Like so many new Americans before and since, Adde found work as a 7-Eleven cashier and housekeeper.
But she managed to keep in touch with the friends she had made in her refugee camp prior to being resettled in the U.S., and they ended up being resettled in Fargo.
“They were calling me,” Adde says. “How much do you pay for rent? I said I pay $1,200. How much do you get paid? This much. What is going on? Get out of there, we are only paying $500 and we are getting paid the same as you. Come here, work one job and pay your rent.”
In Fargo, she found work in a wire factory, making components for motorcycles. But by 2002, she was one of a dozen people from Somalia, Latin America, Vietnam, or the Middle East who were unhappy working on the same production line in what felt like dead-end jobs. Like so many immigrants before and since, they wanted to start their own businesses.
“We were unhappy. We started wondering what’s going on, in North Dakota, that there are no resources for new American entrepreneurs,” Adde says. “There is no organization that supports them.”
After talking about it on work breaks and weekend meetings, by 2003 the group founded what is now the Immigrant Development Center, and Adde became executive director. One day in 2018, two young men came into Adde’s office, one originally from Iraq and one from Jordan. They were already running their grocery, F-M International Foods, but they were looking for assistance.
“They came to us and said we want to pay as much as we are paying right now [in rent], but we want to own everything,” Adde says.
Adde helped the pair draft a business plan and apply for a loan, which they got, for $250,000 from Cornerstone Banks—which included a participation loan from the Bank of North Dakota.
“They bought the building, bought the equipment, and they pay less now than what they were paying before,” Adde says.
It’s about once or twice a year Adde says she works with a client who ends up getting a loan from Cornerstone Banks, which often brings in the state bank. As of the fall of 2019, the bank had around $100 million in active loans with the participation of the Bank of North Dakota.
“They’re a good friend of ours,” Adde says of Cornerstone.
At a fundamental level, the most important thing that the Bank of North Dakota does is listen to local financial institutions and respond to their needs relatively quickly, often by simply building on its existing functions and programs.
Take manufactured housing. A few years ago, Obenauer’s Union State Bank in Hazen started getting more and more requests for financing to build and purchase manufactured homes for new oil industry workers.
“You cannot just live in your car or live in a camper and think you’re going to survive our winters. It just doesn’t work that way,” Obenauer says. “These are homes that can get put up much more quickly, which is what we did, but I didn’t have a secondary market that loved manufactured homes.”
Even though the mortgages for manufactured homes were individually small, a sudden high volume of them in a relatively brief period of time can become a major cash drain on a little bank, especially since those mortgages can last as long as 30 years. That’s a long time to wait for somebody to pay you back.
“So I called the BND and said, I need your help, will you buy these from me if I’m originating them?” Obenauer says.
During the Great Depression, Fannie Mae, the Federal National Mortgage Association, was the federal government’s solution to incentivize small community lenders to make 30-year, fixed-rate home mortgages to millions of families, and between 1934 and 1962, it worked for around 11 million families. Fannie Mae still serves as a secondary buyer of mortgages from banks, credit unions, and, increasingly, non-bank lenders—essentially giving lenders back the loan principal and most of the interest for which they otherwise would have waited up to 30 years to be repaid.
The Bank of North Dakota was already serving as a secondary purchaser of conventional single-family home mortgages for North Dakota. It was a natural extension of their business to become the secondary market for manufactured home mortgages from Obenauer’s bank and any other local North Dakota lender.
The Bank of North Dakota helped subsidize the child care co-op in Hazen through its Partnerships in Assisting Community Expansion, or PACE program, which allows local economic development agencies to leverage matching dollars from the bank for key projects: equipment, working capital, manufacturing facilities, office space, child care facilities, medical facilities, and also affordable multi-family housing. The Greater Fargo-Moorhead Economic Development Corporation, for example, did 18 PACE deals in 2019, up from 15 in 2018, according to chief innovation officer John Machacek.
The PACE program started out in the mid-1990s as a job creation tool because the state couldn’t create enough jobs to keep people from moving away. Once the shale oil boom picked up, however, job creation wasn’t so much the problem as was helping every other part of the economy keep pace. So the Bank of North Dakota worked with state legislators to expand the program to include deals without a job creation requirement (called “FlexPACE”), so long as the local economic development agency provided matching dollars and the recipients submitted yearly data on its impact to the North Dakota Department of Commerce.
Every so often, when its local partners make clear it’s necessary, the Bank of North Dakota asks state legislators for authorization to expand its annual allocation of PACE program dollars, which come out of the bank’s annual profits.
Every PACE program loan is a participation loan. In 2017, the state legislature increased the subsidy cap on the matching dollar amount for each loan, and made some other tweaks to the law. As a result, there were 129 subsidized loans for a total of $55 million made under the PACE program in 2018, up from 90 loans totaling $29 million in 2017.
The PACE program’s growth and evolution is a microcosm of how the Bank of North Dakota “evolves with our own evolution [as lenders] and with the state’s own evolution,” Obenauer says. “What the BND does so well is to be responsive to the concerns that they hear and develop programs that are specifically responsive to the needs that we have as lenders out here taking care of our producers, or our customers and our communities.”
Across the country, campaigns to create more state-, city- or county-owned banks—also known as “public banks”—have emerged over the past few years in places that could not be more different than North Dakota, in terms of geography, demographics, or politics. Organizers in San Francisco, Los Angeles, San Diego, and other cities in California made key strides in 2019, banding together to overcome opposition from mainstream banks and pass a bill to make it easier for cities and counties in California to charter their own banks.
“What we’re really looking for is a tool to help us have that just transition that is moving the whole community, the whole society from an extractive economy to a regenerative economy,” says Sylvia Chi, a lawyer in the East Bay Area who co-chaired the legislative committee of the California Public Banking Alliance. “I see public banks as a way to do that because of the public nature of it and the accountability to the people that’s built into the structure; it should have the values that are missing in the status quo.”
Those California organizers are now back at their local level working with local legislators and agencies to press forward with chartering municipal and county-owned banks.
“The end goal we see locally is more direct and accelerated investment in these things like affordable housing, renewable energy, small business,” says Kurtis Wu, who co-founded the San Francisco Public Banking Coalition.
New York state legislators have a public banking bill in the works for the 2020 session that would make it easier in that state for local governments to charter public banks, and a local public banking campaign is gaining steam in New York City. Elected officials in New Jersey and Michigan are pushing for state-owned banks, and a gubernatorial candidate in West Virginia has a public bank in his campaign platform.
Public banking campaigns have looked to the Bank of North Dakota for inspiration, particularly given its origins in a brief period of electoral control by North Dakota socialists a hundred years ago, which resulted in the state creating its own bank and its own grain elevator. Some activists are looking to the Bank of North Dakota explicitly as a model to emulate or build upon.
“Our coalition definitely envisions [a San Francisco public bank] being a bankers’ bank so it can work with local community banks and expand lending capacity and help out the little banks,” Wu says. “It’s a vision here, but it exists in North Dakota.”
It’s not the first time outsiders have expressed such an interest in the Bank of North Dakota as well as other public banking models abroad. Some public bank campaign organizers first started pushing the idea a decade ago, in the days of Occupy Wall Street.
However, there also are some things that the Bank of North Dakota has done or supported that those organizers oppose. The bank has played a crucial role in the state’s fossil fuel booms over the last century, most recently the shale oil boom from 2006-2015.
Through its participation loans, the Bank of North Dakota supported local financial institutions to provide financing not only for the drilling and fracking in the western end of the state, but also for the machinery, manufacturing, logistics and other ancillary industries across the state. Hazen’s new medical center, as well as the child care co-op and the manufactured housing that Union State Bank started financing a few years ago, were all part of responding to the waves of out-of-state transplants seeking shale oil jobs in western North Dakota.
In other states, many public bank campaigners see public banking specifically as a way to divest their local tax dollars out of banks that helped finance oil and gas pipelines. But as the primary banker for its fellow state agencies, the Bank of North Dakota also provided a line of credit for the North Dakota Emergency Commission to ramp up its law enforcement militarization against those protesting the Dakota Access Pipeline at the Standing Rock Sioux Reservation.
“We’re not making a social statement on environmental issues or societal issues,” says Eric Hardmeyer, CEO of the Bank of North Dakota since 2001. “Our job is to finance economic development and state agencies. Our economic development efforts right now are concentrated on agriculture and energy, and energy is all sorts. It’s fossil fuels, wind, solar, the whole gamut. We don’t pick winners or losers.”
What public bank campaigners elsewhere want most of all is bigger and deeper than just divesting from fossil fuels, and they see in the example set by Bank of North Dakota a powerful means to that end. They want a world with a more decentralized financial sector, with more local lenders they can more easily hold accountable for meeting real human needs, like affordable housing and living wage jobs, thriving small business, affordable child care and accessible health care. They’re tired of big banks running the show and cherry-picking which of these needs they’ll meet just enough to fulfill their obligations under the 1977 Community Reinvestment Act—which current federal bank regulators want to gut even further.
“There’s just not a lot of homegrown banks anymore,” Chi says. “We haven’t had great success in persuading local community banks that this could really help them, but we’re still trying to make that argument and persuade them that public banks could really help them stick around and to provide services to their customers and keep local economies strong.”
At their peak in the mid 1980s, there were more than 14,000 banks in the United States. The fall of interstate banking walls in the 1980s, technological progress, and other economic forces have left the U.S. economy with only about 5,200 banks today, according to the FDIC, even as bank deposits continue growing every year. With a population of 330 million, that’s one bank for every 63,000 people. North Dakota has one bank for every 10,000 people, the lowest ratio of any state.
“One of the most-heard talking points against a public bank is it will hurt local banks,” Wu says. “But it’s the exact opposite—we’ve seen it in action.” Indeed, the state with the nation’s only public bank has the highest number of banks per person in the U.S. “Our coalition believes it’s a direct result of the Bank of North Dakota acting like a bankers’ bank, being able to expand lending capacity, essentially expanding the local banking sector,” Wu says.