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Two North Dakota banks tap financial bailout funding

Fargo-based State Bank & Trust has tapped a federal fund to get a $50 million injection of capital by selling stock to the U.S. treasury that obligates it to pay dividends of at least 5 percent to taxpayers.

Similarly, the parent company of BNC National Bank, with its headquarters in Bismarck, has sold equity of $20.1 million to the treasury to boost its capital.

The two banking companies were among 39 banks across the country that received government investments totaling $1.5 billion in the latest round of assistance from the U.S. Treasury Department's Troubled Asset Relief Fund, better known as the "bailout fund."

Executives at both State Bank and BNC stressed their banks are well capitalized and financially sound, and that the money must be repaid with a return to taxpayers.

"It's not a gift," said Richard Solberg, chairman and chief executive officer of State Bank & Trust. "Basically it's a loan from the government in the form of preferred stock that's going to be paid back with interest."

State Bank plans to repay the $50 million in three to five years, during which it must pay annual dividends to the government of 5 percent. After five years, the dividend rate jumps to 9 percent.

"We look at it as bridge capital," Solberg said.

The infusion of money will require State Bank to actively seek out new deposits and make new loans to generate revenues to avoid a loss from its borrowing costs under the government program, intended to help boost the faltering economy.

"We can't sit on the money, or we lose money," Solberg said. The capital injected by the government will, in turn, be loaned out to homeowners, consumers and businesses.

Timothy Franz, chief financial officer of BNCCORP, the parent company of BNC National Bank, said in normal times the banks would get their capital from the private sector.

But the loss of confidence plaguing the financial markets means private capital is scarce.

"That money's sitting on the sidelines right now," Franz said.

Through its dividends, BNCCORP will be paying the treasury $1 million a year. State Bank estimates its borrowing costs at $2.5 million a year.

Last year, State Bank's assets grew by $111.3 million, or by almost 14 percent, according to financial statements. That fell short of the bank's targeted growth rate of 18 percent, Solberg said.

BNCCORP exceeded its "well-capitalized" levels by $20 million as of its last quarterly report, and with the infusion of capital from the treasury that excess likely will rise to about $40 million, Franz said.

State Bank has experienced some losses in Minnesota, including by participating in loans made by smaller banks, but that is not what led it to seek the capital infusion from the treasury, Solberg said.

"The bank is still very profitable in spite of that," Solberg said of poorly performing loans.

BNC's North Dakota banks have performed well, where the economy has been more robust than in many areas, but its banks in Minnesota have struggled and its banks in Arizona have been beset by the collapse of real estate prices, he said.

"In Minneapolis and the Twin Cities, we've had a few hiccups, but it's been pretty manageable," Franz said. "Arizona, everybody's read about the challenges, and we've had some challenges there."

To qualify for the capital injections, both banks must agree to certain restrictions. They cannot use the federal funds to pay dividends to shareholders, and must agree to limits on executive compensation.

Both Solberg and Franz said neither bank had to alter its executive pay plans to qualify for the funds.

Timothy Karsky, commissioner of the North Dakota Department of Financial Institutions, which regulates state-chartered banks, believes 20 or more banks in the state applied for the federal capital injections.

Not all banks will elect to accept them. Those that have demand for more loans are most likely to tap the fund, he said.

"It's a bank by bank deal," he said. Banks that decide to participate in the federal capital purchase program shouldn't be viewed as troubled, Karsky said.

"Those banks are fundamentally sound," he said. "The overall condition of banks in North Dakota is extremely good."