Business is booming for the only bank in the country owned by its state's taxpayers.
The $3.1 billion-asset Bank of North Dakota exists primarily to foster economic development, and it does this largely by helping small banks make loans that exceed their lending limits. Demand for its loans has never been higher as the state enjoys strong economic growth fueled by the thriving agricultural sector, an expanding manufacturing base, surging demand for alternative energy, and a beginning to development of what is considered to be the biggest oil find in U.S. history.
Moreover, the Bank of North Dakota — a direct lender of federally guaranteed student credits — has seen its student loan business pick up as more traditional lenders left the business due to narrowing margins and falling demand for the loans on the secondary market.
Reaping the benefits are the state's communities. All the bank's deposits come from state coffers, so much of its profits are put into the state's general fund. The more it makes — its earnings grew 19% last year, to $51 million — the more it can invest in economic development.
The higher profits have also enabled the bank to participate in more commercial loans with community banks; its commercial loan volume grew 22% last year, to $689 million.
The bank helps out community banks in other ways as well. It will pay down the interest on loans made by traditional banks to businesses that create jobs in the state and guarantee loans made by other banks to start-up businesses. It also functions similarly to a banker's bank, providing fed funds, clearing checks, and supplying other correspondent banking services.
Eric Hardmeyer, the bank's president, said, "We've never wanted to be a competitor against the private sector because we've always had a competitive edge with our captive deposit base."
It was natural that the country's only state-owned bank was formed in North Dakota, a state with a long history of progressive policies, Mr. Hardmeyer said.
Bank of North Dakota was founded in 1919 by farmers unhappy with what they considered unreasonable financing rates charged by out-of-state creditors, Mr. Hardmeyer said. Earlier the farmers had formed a political party, the Non Partisan League, which gained control of the North Dakota Legislature in 1917 and then formed both the bank and a state-owned grain elevator and mill, which still exist today.
In later years Bank of North Dakota's focus expanded to help other state agencies promote entrepreneurialism through special incentive programs, such as the bank's interest rate buy-downs on loans to businesses that create jobs, Mr. Hardmeyer said.
Companies are taking advantage of the incentive programs, as well as of North Dakota's lower labor and other costs, to open or expand manufacturing operations. As a result the state's manufacturing base is becoming more diversified, with computer and electronic firms, as well as farm equipment manufacturers and food processing plants, expanding there.
For example Microsoft Inc. bought Great Plains Software in 1999 and later relocated additional operations to its campus in Fargo, N.D. Next year, the Bellevue, Wash., software giant plans to expand the Fargo operation, adding 500 jobs, for a total of 1,500 employees.
Agriculture, of course, is the state's top industry, and rising prices for such commodities as wheat and corn has been a boon to the state's farmers and the economy is a whole, said David T. Flynn, an economist at the University of North Dakota.
Down the road, North Dakota appears poised to emerge as a major energy-producing state.
As in some other plains states, alternative energy companies are flocking in to build ethanol plants and wind farms.
Even more significantly, North Dakota sits smack on top of a major oil discovery. The U.S. Geological Survey last month released an assessment that a geologic layer called the Bakken Formation beneath western North Dakota, eastern Montana, and southern Canada could yield 3 billion to 4.3 billion barrels of oil within the U.S. portion alone.
Already, landowners are increasing their personal incomes by leasing mineral rights to oil companies, Mr. Flynn said, and drilling has begun in several areas.
"North Dakota has a fairly favorable economy right now, with good job creation coming out of those booms," Mr. Flynn said.
North Dakota's unemployment rate was 3.1% in April, compared to the 5% national rate, Mr. Flynn said.
The $61 million-asset Lakeside Bank in New Town, N.D. — the "epicenter" of the Bakken Formation in western North Dakota — is poised to benefit from expected growth in both population and jobs as oil production expands, said Gary Petersen, Lakeside's CEO. Its deposits have increased as landowners receive income from their mineral-rights leases.
However, the fast growth will be challenging for the predominantly rural area, Mr. Petersen said, because the infrastructure to support new businesses and new housing must be upgraded quickly.
"These challenges are going to come at us pretty quickly," he said, "but the expertise at the Bank of North Dakota and at other state agencies will help us better address those challenges."
The state-owned bank, working with such agencies as the division of economic development and finance, is expected to help rural communities in the Bakken Formation region by offering small-business assistance to start-ups in addition to guaranteed loans and by providing financing options to upgrade infrastructure.
The $719 million-asset Alerus Bank in Grand Forks has been working with Bank of North Dakota for more than 20 years, said Karl A. Bollingberg, a regional president. Perhaps the best way the state-owned bank has helped Alerus is by participating in commercial credits ranging from $3 million to $5 million — loans the bank could not make on its own without breaching its lending limits.
"This allows us to work with much larger companies, and lets us keep our relationships with smaller companies as they grow, because they don't have to go to a larger bank," Mr. Bollingberg said.
Alerus participates in about $100 million of loans with Bank of North Dakota. Its first-quarter net income was up 35% from the year earlier, to $2.9 million.
In addition to working with other financial institutions, Bank of North Dakota originates student loans. In 1967, it became the first institution to make federally guaranteed student loans to college students.
Now that many traditional banks are leaving the business because margins have narrowed and the secondary market for such loans has dried up, Bank of North Dakota's loan volume has picked up, Mr. Hardmeyer said. Its student loan portfolio grew 14.6% last year, to $643 million, and he expects loan volume to rise even further this year.
"We are seeing a great opportunity in the student loan business," Mr. Hardmeyer said.
The bank has historically made loans mainly for students attending colleges in North Dakota and neighboring states, but it has begun to receive a burgeoning number of requests from colleges in other Midwestern states asking for loans to their students, Mr. Hardmeyer said.
About 60% of the bank's profits are returned to the state's general fund, and that is good for all of North Dakota, said Lakeside's Mr. Petersen. "If the bank didn't put that money into the general fund, we'd have to pay more taxes, or the state would have to cut services," he said.
