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Native American Bank at the crossroads

WASHINGTON - Native American Bank officers have confirmed a round of heavy layoffs at the bank, but denied any connection between the layoffs and a federal regulatory enforcement action from April.

The layoffs have forced closure of the bank's trust department in Denver and a branch office in Scottsdale, Ariz. "We have every intention of remaining in Denver," said John Beirise, the bank's president and chief executive officer.

Beirise said a spike in bank deposits from the financial quarter ending March 31 is due to lending opportunities the bank expects to act on in the near future. (A question as to the sharp increase in deposits arose because deposits are an asset to banks, but a curious kind of asset. If deposits are not converted into performing loans or some other vehicle that returns a favorable interest rate to the bank, they become liabilities because the bank must pay interest on what is, essentially, a loan from its depositors.)

Beirise also minimized the scope of the April enforcement action and said the bank remains well-capitalized, despite a regulatory clause to the contrary. Bank treasurer Tracie Davis characterized the clause as a technicality whose main function is to exclude the bank from certain expedited federal approval processes in the event, say, that it wanted to acquire another bank.

Beirise said the enforcement action was a "carry over" document the bank inherited from a predecessor bank, Blackfeet National in Browning, Mont. (Native American Bancorporation formed as a holding company in Denver in 2001, and then acquired Blackfeet National as Native American Bank with executive offices in Browning and Denver.)

The only new amendment in the "carry over" document is a demand that Native American Bank maintain minimum capital levels, Beirise said. Not altogether unusual for a start-up bank, Native American Bank has logged six consecutive financial quarters of losses. "Losses reduce your capital," Beirise said, leading to the regulatory prescription of minimum capital levels. (In briefest terms, bank capital is the cash value invested in the bank by shareholders - established levels must be maintained because it is the bank's disposable cash, cash it can draw on quickly if it must, in contrast to cash that may be obligated, such as cash on loan to it from depositors and so on call for withdrawal on demand.)

"All of these other things have been dealt with," Beirise said, referring to a host of provisions in the April enforcement action. " ? We inherited that bank. ? We had to work through those issues. ? On the one hand we were a start-up bank" - on the other hand it couldn't start with a clean slate but will remain "subject to that same operating agreement" as the one imposed on Blackfeet National on July 24, 2001. The bank's ability to navigate these issues is a credit to its strong management team and loyal staff, he said.

He added that the so-called enforcement actions of bank regulatory agencies would be better termed "operating agreements," because the bank in question is agreeing to operate in accordance with the enforcement authority of its federal regulator, and the regulator is agreeing to let it, presumably because the agency sees no need for stronger action.

In the April 15 enforcement action, the Office of the Comptroller of the Currency does cite the July 24, 2001 action against Blackfeet National. It describes the April 15 document as an amendment to that agreement. The language between the two documents is strikingly similar. But the April 15 action cites two previous agreements imposed on the bank long after the agreement "inherited" from Blackfeet National on July 24, 2001: one a bank strategic plan of Sept. 30, 2002, the other an OCC "Report of Examination" from March 31, 2002. The former is set forth as guidelines the bank must not stray from without notifying the OCC; the latter cites violations for the bank to correct.

It was unclear whether Beirise meant these post-July 24, 2001, provisions were among the issues the bank has had to work through. It was quite clear though that he considers the enforcement action to contain only one live issue - minimum capital levels.

"If it was not in the amended agreement [as new information] ? it was not of concern to the OCC."

Beirise emphasized that he cannot speak for the OCC. The OCC does not speak for itself publicly on enforcement actions, declining all comment as a matter of policy.

Beirise agreed that the April 15 enforcement action's reference to "violation of law, rule and regulation" is guaranteed to get a response from just about anyone who reads it. But he insisted that it is actually intended as "kitchen sink language," something to cover all the complexities of compliance with federal banking regulations. As an example, he said a staff member might miscalculate a percentage that could effect return on investment for clients. That is considered a violation of law, but one occurrence would not lead to charges or a bank closure. Rather, the OCC would be concerned that one occurrence not become a recurrent pattern. To ensure that it doesn't, Beirise said, the OCC might include it in an enforcement action.

The OCC regulates all U.S. national banks, more than 9,000 of them at present. Its primary focus is on the safety and soundness of bank operations. Its primary regulatory tool is the bank examination. They are meant to protect the public and the financial system by reviewing the safety and soundness of bank operations; they are to be understood not as "investigations" of specific issues, but rather as an ongoing oversight function that may or may not turn up specific issues for corrective action. The findings of the exam generate a Report of Examination.

The bank exams in no way single out Native American Bank. Regulatory agencies examine all U.S. banks, bank holding companies and financial institutions on a regular basis.

Nor do Native American Bank's heavy financial losses necessarily single it out. Many banks lose money in their initial years. Many business plans that pass muster before they meet the real numbers must be altered afterward.

But for a bank with total assets that hover between the high $20 millions and the low $30 millions (adequate but modest sums for a small national bank), an aggressively growth-oriented business plan would have to rely on high capitalization, preferably with a bit of profit in the early going.

Native American Bank is just such a bank. Given an oft-stated goal of $500 million in assets over five years, it operates from just such a business plan. As Beirise notes, its capitalization rate is relatively high by any conventional standard, high enough to absorb the heavy losses of the past six quarters and still have enough left to meet mandatory capitalization levels.

That profits have been hard to come by is, again, not unusual for any start-up bank, or for that matter many a start-up business. A multitude of factors may affect profit and loss figures.

Public records suggest that three factors have hindered Native American Bank in its attempts to turn a profit. One is the national economic climate, another is relatively high salary cost, and the third is a business plan Beirise terms unique.

From even before the founding of Native American Bank in fall 2001, the stock market has fluctuated and government bonds have tended to pay a smaller-than-anticipated return. Most banks invest in stocks or bonds as a way of generating revenue. As interest margins are squeezed the associated revenue loss may effect whatever purpose the revenue was meant to pay for - in the bank's case, the jobs needed to fulfill its aggressive plans for getting loans into Indian communities and setting up bank branches on reservations.

The relatively high salary cost of Native American Bank in previous financial quarters reflects the slow patient work of making loans to creditworthy applicants in Indian country, where historical isolation from mainstream financial channels and banking relationships dictates financial literacy training, credit repair, tutelage in the loan application and maintenance processes, and other activities that, however vital, tend to reduce profits. In short, as Beirise noted, making and servicing loans in Indian communities is more expensive than elsewhere because more working hours are needed for the purpose.

Following the recent layoffs, Native American Bank's salary cost is sure to decline. But the question arises of whether or not it will also have to curtail its stated objectives of getting loans into Indian communities and setting up bank branches there (a stated goal of $500 million in assets over five years seems to have fallen by the wayside for the time being).

This brings us to Native American Bank's business plan. Beirise considers it unique because it seeks to build a banking presence, and provide access to credit, in communities that have never known well-developed financial institutions. Native American Bank may be the first private sector financial institution to take up this challenge head-on, at least on a national scale.

Native-owned start-up banks do not have to lose money in their initial years. Beirise mentioned the Chickasaw Nation's thriving Bank2 in Oklahoma City. Bank2 is comparable with Native American Bank in terms of asset-size, start-up date, and plans to establish a community development financial institution for direct service to primarily Indian clients who are not immediately prepared for mainstream banking relationships. Bank2 predicted losses in its first year, but turned a modest profit instead and looks forward to an even stronger showing in 2003.

Beirise took note of Bank2 as a way of pointing out other contrasts, however - contrasts of location and business plans. Bank2 is located in Oklahoma City, a well-developed market for financial services, with branches in non-Indian communities of rural Oklahoma. Bank2's business plan did not call for serving Indian clients directly, but for returning a profit to Chickasaw Enterprises, the nation's business arm. That profit can be expected to benefit Chickasaw citizens in indirect ways, while the CDFI comes on line to provide them with more direct banking services.

Native American Bank took a different approach on both counts. By design, it acquired Blackfeet National Bank in the reservation border town of Browning, Mont., with its large Native population. And while planning to turn a profit, it has been willing to absorb losses for the sake of providing direct bank services, particularly loans, in Indian communities. Among other planned-for services is the setting up of bank branches in Indian communities, as in Browning.

Six consecutive financial quarters of heavy losses have forced retrenchment. But according to Beirise, the overall business plan has not changed.

"These communities need an institution that is willing to focus on the community. ? Getting transactions completed in Indian country takes more time [and money] ? That's a price we are willing to pay. Because if we're not willing to pay it, things are not going to change ? We have the full support of our boards of directors."

Planning for what became the actual Native American Bank began in the summer of 1997 and overcame many obstacles before the bank opened its doors. At its founding in fall 2001, Native American Bancorporation was a holding company owned by 21 tribes and Alaska Native corporations. Ten founding tribes and tribal organizations, including an Alaska Native corporation, invested $1 million apiece to capitalize what became Native American Bank, with executive offices in Browning, Mont., and Denver. Private sector banks also invested through non-voting stock.

The concept of a national bank emerged from the process of reforming the Indian trust fund accounts. (Beirise said the trust funds have played no role in Native American Bank's planning or financial projections.)

A trust funds entity or bank formed the centerpiece of a trust funds reform plan offered by the Interior Department's first special trustee on trust funds, Paul Homan. A congressional appropriations committee eventually forbade any effort to establish that entity, finding the overall plan "unanimously opposed" by tribes.

Sen. Daniel K. Inouye, D-Hawaii, had been working behind the scenes on behalf of a national Native bank. He eventually hosted a meeting of tribes that had been interested in the Indian Investment Bank and Trust that never got off the ground. In its public statements ever since, bank officers and board members have credited Inouye as an inspiration behind Native American Bank as it ultimately took shape.