Breaching the "Buckskin Curtain"

Funny how money changes things. Long seen as a nonmarket for banks, Native American reservations are rife with anecdotes about 30-mile drives to the nearest town to do any banking or to use seemingly ubiquitous ATM machines. First Nations, a Native American advocacy group, called the banking gap between border towns and reservations the "buckskin curtain."

Very little formal research exists regarding the penetration of banking services on reservations, or the use of these services by Native Americans. One informal study by the Federal Reserve Bank of Minneapolis in the early 1990s found numerous reservations without banks in upper Plains states despite populations reaching into the thousands and often the presence of small, incorporated cities within reservations.

The city of Pine Ridge, with a population of about 3,000, is the largest city in Shannon County, S.D., and the largest on the Pine Ridge Reservation. Neither the city nor reservation has any bank. In contrast, there are seven cities in the state starting with the letter "A" with a population of less than 1,000 served by at least one bank (Alcester, Alexandria, Alpena, Arlington, Armour, Artesian and Avon, according to the McFadden Upper Midwest Financial Directory).

Given the general geographic isolation of many reservations and historically low incomes and high unemployment rates of its residents, there is often little in the way of a viable banking market on many reservations. With a reservation population estimated by various sources at between 15,000 and 30,000, the Pine Ridge Reservation spans roughly 2 million acres—more than 3,000 square miles. Median income on the reservation is just one-fifth the national average, more than eight of 10 are unemployed, and 70 percent live below the poverty line.

The Crow Reservation in south-central Montana is home to roughly 7,000 tribal members, spread over several thousand square miles. The reservation is dotted with only a few very small cities and has an unemployment rate of 44 percent and average per capita income of just $4,200, according to information from the Montana-Wyoming Tribal Leaders Council. The nearest banks are off the reservation in the border cities of Hardin and Billings.

But economic conditions on some reservations are improving, and the buckskin curtain appears to be falling—albeit slowly—because banks are beginning to see reservations as untapped markets. More intriguing, some tribes are taking banking matters into their own hands by owning or controlling their own bank.

Currently, there are seven U.S. banks either wholly owned or controlled by Native American tribes. (According to the Federal Reserve's Regulation Y, control exists when a party holds a 25 percent stake in a bank or bank holding company, although it can exist at lower thresholds, depending on other criteria.) An eighth bank is 3 percent owned by a tribe.

The Blackfeet Tribe of northwestern Montana was the first of this group to own a bank, when it took over a failed bank in the city of Browning in 1987. Today, Blackfeet National Bank continues to be the only bank on the entire Blackfeet Reservation.

Interest in tribal banking came to a head in 1997, when four tribes opened banks, according to J.D. Colbert, president of the North American Native Bankers Association (NANBA). That year, the Office of the Comptroller of the Currency (OCC, which regulates nationally chartered banks) also sponsored a conference on tribal banks that attracted 300 to 400 people, including many tribal members, Colbert said.

"It really opened my eyes to the level of interest in banking in Indian Country," Colbert said. Follow-up discussions with other conference attendees ultimately led Colbert to organize NANBA. "The more we talked, the more we came to [understand the] need for an association" to support tribal attempts to own a bank, Colbert said. Since NANBA's creation in 1998, Colbert estimated that the organization has been contacted by 50 to 75 tribes looking for advice and assistance on banking.

Growing middle class fueling demand

Much of the interest in banking on reservations—by both tribes and mainstream banks—is the result of rising standards of living for tribes over the last decade.

"Twenty-five years ago, there was no middle class" on reservations, Colbert pointed out. Thanks largely to gaming, the middle class is starting to take root on some reservations. Since 1988, when Congress formally recognized the limited rights of tribes to conduct gaming operations, tribal gaming has grown almost 40-fold to more than $8 billion last year. A 1997 General Accounting Office report on 127 gaming tribes found that one-third of their gross receipts that year (or a total of $1.6 billion) were transferred to tribal coffers. This money was then either distributed to individual members or, more commonly, used by the tribes for community investments like recreational centers, housing, roads and member services.

Equally important for potential banking markets, jobs on or near reservations have become more plentiful for tribal members. Although Native Americans typically make up less than one-fourth of a casino's workforce, such places nonetheless also offer badly needed employment opportunities to tribal members. The National Indian Gaming Association (NIGA) estimates that 50,000 Native Americans are employed in tribal gaming operations.

Tribal business enterprises and tribal governments "have created some good-paying jobs" as well for members, Colbert said. For example, the Mille Lacs Band of Ojibwe in Onamia, Minn., reportedly employs almost 500 people in its tribal government alone. Along with two large casinos, the tribe's business investments also include three hotels, two convention centers, an amphitheater, golf course, bakery, gas station and several restaurants. In 1996, the tribe bought a local Onamia bank, renamed it Woodlands National Bank and added two branch offices in the last year.

Economic opportunities for some tribes have expanded to the point where members are even moving back to the reservation, Colbert said, and demand for financial services on reservations has followed in step. "They want, need and expect a broad range of [financial] services in Indian Country."

Mainstream banks have taken notice. For example, when Norwest Mortgage (now Wells Fargo Home Mortgage) closed a mortgage loan on Crow Creek Reservation in south-central South Dakota last year, it culminated a three-year effort to close at least one loan on all nine reservations in the state. Meeting this growing demand on reservations, however, brings with it unique legal challenges for mainstream banks. For example, real estate is typically used as collateral on residential loans. But for Native Americans, their land is likely held in trust, which requires banks to look for new approaches to securing appropriate collateral. An OCC survey found that banks "would like to increase the volume of mortgage and other lending to Native Americans," but added that securing collateral and having access to that collateral "in the event of default can prove difficult."

Tribal sovereignty also means that tribal courts—not state courts—have authority over legal efforts to collect payments on a delinquent loan on a reservation. As such, banks have "a fear of not getting a fair shake in tribal courts" should loans on the reservation go bad, which "creates reluctance on the part of banks to reach out and make loans on reservations," according to Kevin Costley, an attorney with the Minneapolis law firm Lindquist and Vennum and general counsel for NANBA.

At the very least, it can make lending on reservations an arduous task, especially when combined with other compounding factors, like poor or nonexistent credit histories of many tribal members and reputed bureaucratic tendencies of tribal governments. This summer, a ceremony was held to celebrate the first closing of a privately financed home mortgage on Navajo trust lands in Arizona. It was six years in the making.

In the competition for business on reservations, some believe that tribal banks have certain competitive advantages over nontribal banks. Costley acknowledged that despite "more effort than ever by [mainstream] banks to reach out" to Native Americans, "there is still reluctance among members to use" bank services.

One reason for this reluctance appears to be trust and familiarity. A survey of banks by the OCC found that "many banks are unfamiliar with tribal cultures and may not know how best to meet tribal financial product and service needs."

Costley said bank usage among Native Americans is typically low because reservations tend to be cash-and-carry economies. Introducing financial services like checking accounts can be difficult because "tribal members tend to be very wary of outside vendors" who might be unfamiliar with tribal culture. The familiarity of a tribal bank "breaks down the vendor-vendee relationship" that keeps some Native Americans from using banks, he said.

Tribal sovereignty "a hot potato"

While tribal banks might have a few comparative advantages in bringing banking services to Indian Country, tribes face their own unique issues in owning or controlling a bank. Foremost among them is tribal sovereignty and bank chartering.

Given a tribe's authority as a sovereign nation, there are legal issues regarding a tribal bank's membership in the U.S. banking system and its regulation by various state and federal agencies. Officially, the OCC and other federal banking regulators "have taken a position that tribes proposing to establish or acquire a bank must agree not to raise a claim of tribal sovereign immunity as a defense to any regulatory or administrative action," according to an OCC report. Lewis Anderson, president of Woodlands National Bank, said, "To my knowledge, most [tribes owning banks] don't object" to these ground rules.

But for many tribes, sovereignty is "a major political and emotional and cultural issue," said Keith Holmes, a banking lawyer with King, Purtich, Holmes, Paterno & Berliner in Los Angeles, who counts several tribes as current clients. From tribes' perspective, dealing with federal and state governments "has been a mixed history at best," he said, which has led tribes to be very protective of their sovereignty. "They're very leery of ceding jurisdiction over things to the federal government," Holmes said.

However, the theory and practicality of tribal sovereignty can play out very differently, according to several sources. In general, sovereignty is held onto tightly by some tribes, and "any compromises of that sovereignty are to be avoided at all costs," Costley said. But he added that most tribes interested in owning a bank "are more pragmatic" about the sovereignty issue. They understand the nature of the compromise, "but they don't want to compromise any more than they have to, to get the benefit" of a charter. He likened the trade-offs to those made in any international trade pact, where countries swap certain things for items deemed of greater value.

In this case, bank charters bring with them the advantages of deposit insurance and access to the payments systems. Without these, tribes would have difficulty getting off the ground. "Tribes that want to do it are going to have to face [sovereignty] as a threshold issue," Holmes said. "It's hard to serve customers if you can't cash checks."

Formal sovereignty waivers are not mandatory, and only two bank-owning tribes have them, according to Jan Kalmus, a national bank examiner and licensing expert specializing in charters for the OCC. In other cases, tribes that have a controlling interest in a bank must merely submit to those regulations and disclosures that apply to any other controlling party. For those tribal banks without formal sovereignty agreements, getting access to necessary information for examinations and oversight has been "no problem," Kalmus said. "When you look at it, it's sort of an abundance of caution."

Until a few years ago, there was no official policy regarding tribal sovereignty and banking. When the Eastern Shawnee Tribe of Oklahoma's share of People's National Bank (Seneca, Mo.) went from a minority share to controlling interest, the issue of the tribe's sovereignty had to be addressed with regulators, who at first "were scared to death," said Dale Washburn, bank president. "They didn't know how to deal with it."

At a conference on tribal issues last year in Onamia, Minn., Colbert told attendees, "Nobody ever thought [banking and tribes] would cross. ... Regulators didn't have a pigeonhole to put it in. It was a hot potato."

With six of eight tribal banks having national charters, the OCC has played the lead government role in working through policy and administrative issues regarding chartering of tribal banks. Two years ago, it published a 77-page guide to help tribes through the organization and application process. The Federal Reserve is responsible for regulating state-chartered member banks (of which there are two) and bank holding companies (currently only one, owned by the Mille Lacs Band). In the mid-1990s, the Minneapolis Fed held a series of seminars about lending in Indian Country and it continues to provide banks with technical assistance.

There have, however, been three cases where a tribe has chosen to forego regulator approval and self-chartered its own financial institution. The most recent was the creation of Glacier International Depository this year by the Blackfeet Tribe, which followed two others in Oklahoma about three years ago. In each case, however, the financial entity was set up as an offshore depository (like those found in Switzerland and the Cayman Islands that provide safe haven for foreign depositors) and not as a traditional bank.

Given this unique distinction and tribal sovereignty, such financial institutions are—at least currently—considered outside the enforcement of state and federal banking regulators. But in the two Oklahoma cases, the OCC put these tribal depositories on its "unauthorized bank" list, and joined the state of Oklahoma in warning banks and the banking public "to exercise extreme caution when engaging in any transaction involving this entity." (Although the states of Montana and Colorado have passed legislation permitting offshore depositories, there are currently no such nontribal entities in the United States.)

Itching a niche

For those tribes taking the more traditional path of banking, there is a twofold strategy: to provide what tribes believe is improved and customized bank service to tribal members on the reservation, and to help tribes diversify their investments and promote more broad-based economic development beyond gaming.

The Borrego Springs Bank, N.A., is 70 percent owned by the Viejas Band of Kumeyaay Indians, whose 1,600-acre reservation lies about 35 miles east of San Diego. The bank is headquartered in Borrego Springs, Calif., a community of about 3,500 people. With five locations, including one on the reservation, the bank is filling needs for the "community around the reservation as well as the reservation," said Frank Riolo, the bank's president and chief executive officer.

After the tribe gained control of the bank five years ago, the bank spent considerable time developing a new portfolio of financial products, Riolo said. This focus "suppressed earnings" early on, but the bank is starting to see the payoff. Earnings, though small at just under $300,000 for the first half of this year, are up more than 430 percent over the same period last year.

Executives are quick to point out that tribal banks are not grant-making organizations. Asked why the Mille Lacs Band was interested in owning a bank, Anderson of Woodlands National Bank said, "Obviously, the reason is to make money."

And just because banks are owned by tribes doesn't mean their customer base is exclusively Native Americans. "We're still a community bank," Washburn said. "We serve the community's needs, not just Indian needs."

Washburn acknowledged that serving the banking needs of the Native American community "is not that easy" because many "don't understand the importance of credit" or credit histories. Nonetheless, the bank confers no preferential lending to tribal members. "We haven't made any exceptions on loaning on Indian-owned lands," Washburn said.

The bank has, however, found new ways to lend to tribal members without exposing the bank to unnecessary risk. In one case, the tribe purchased several certificates of deposit (CDs), which the bank uses as collateral for loans to individual tribal members. "It's a way to help those that would not normally qualify under normal circumstances," Washburn said.

Loan applications for this program are reviewed by a three-person tribal committee for traditional lending criteria, like repayment ability. Tribal loan applicants also are expected to put up whatever assets they might own for collateral, like a car. Such assets do not necessarily have to equal the value of the loan, Washburn said, but the intent is to create some accountability for the loan recipient.

"What's neat about it is that we've had success with it [lending in Indian Country]," Washburn said. He admitted they weren't printing money with the program; in two years, the bank has made about 30 loans worth about $150,000. But there are intangible successes to build on, he said, like the fact that several loans have already been repaid and these tribal members now qualify for loans on traditional terms.

Asked about perceived fairness issues, he pointed out, "If the community at large had someone to put up a CD [as collateral], we'll make that loan [to non-Indians], too. But the community at large doesn't have that person."

Owner's manual still in draft form

Like mainstream banks, tribes also face a litany of obstacles in bringing financial services to Indian Country. Owning or controlling a bank "is an intimidating concept to some of the tribes because of the resources involved and [a tribe's] lack of banking expertise," Costley said.

To get started, a tribe needs millions in up-front capital. For some tribes, this might not be a difficult a hurdle to clear. Capital, according to Holmes, the Los Angeles attorney, "usually is not an issue. The money is usually there."

Most of it comes from gaming. At least six of the eight tribes involved in banking having significant gaming revenue. In the not-too-distant past, Washburn said, "a lot of tribes didn't have a lot of money. Principally through gaming, tribes are coming into some money."

But only about 200 of the roughly 560 federally recognized tribes in the United States—about 35 percent—have gaming compacts with their respective states, and Costley estimated that only three of four earned "significant" gaming revenue. In fact, just 22 tribes earn more than half of all tribal gaming revenue, according to NIGA.

Even for those with ample capital, few tribes have much experience in banking. Given the complexity of starting a de novo bank, which includes market feasibility studies, and a lack of banking experience, tribes have instead chosen to acquire their bank or take over as major shareholder. Many start with a minority position in the bank "to get their foot in the door" and get industry experience, Colbert said. As they get comfortable, "we see them stair-step their way up in ownership."

People's National Bank was not specifically intended for tribal ownership when Washburn and a partner first started looking for investors in a new bank in 1994. When it received its charter in 1996, the Eastern Shawnee Tribe was just one of more than 100 investors, owning a 14 percent stake. Shortly thereafter, however, the tribe increased its stake to 33 percent and now owns 56 percent of the bank, Washburn said.

Attracting good management has been another critical obstacle for tribes and, given its banking inexperience, has meant hiring from outside the tribe. Along with the normal challenges of running a bank, executives face additional tasks in taking the helm of a tribally owned bank. For instance, as tribes pursue control of a bank, tension with non-Indian communities appears to be fairly common. When the Viejas tribe in California first became interested in owning a bank in 1995, there were virtually no examples of how to go about getting a charter for an Indian-owned bank.

The tribe first attempted to get a state charter, but "had a miserable time with the state" of California because of lingering hostility over gaming in the state at the time, Holmes said. Riolo acknowledged that the rancorous debate over Viejas gaming "created a lot of publicity" for the tribe, much of it negative. The tribe ultimately abandoned efforts for a state charter, and later received a national charter for Borrego Springs Bank, Riolo said.

Washburn admitted there were some concerns in the Seneca community about People's National Bank being tribally owned. Earlier, the tribe wanted to start new casinos in Missouri and "tried to ram down" the initiative past strong local objections. "That didn't go over very well," Washburn said. "The community got real down on them."

As a result, the bank and the tribe "had some repair issues" to deal with, Washburn said. "We've bridged those reputation-type risks ... [and] are now well-received in the community." In fact, the tribe hosted the town's July 4 celebration, complete with a program that jointly celebrated the mutual struggle for freedom by both naturalized Americans and Native Americans.

"It was awesome. I get goosebumps talking about it," Washburn said. The bank and tribe now are such an ingrained part of the community, Washburn said, "I'm not a member [of the tribe], but I feel like it sometimes."

The larger, diversified picture

Ultimately, tribal ownership of banks gives tribes a tool to leverage gaming and other revenue into new enterprise on or near the reservation, providing—and sometimes customizing—capital for both consumer needs and commercial endeavors of tribal members.

Washburn said People's National Bank doesn't have "nearly the profit margin" of the Eastern Shawnee's bingo operations, "but it provides for other needs in becoming self-sufficient."

"A bank has a way of magnifying the resources available to tribes" and their members, Costley said. For instance, a bank with $10 million in reserves enables them to lend as much as $90 million, Costley said, "So you have the magic of leverage."

Most are optimistic about the potential market for tribal banks, though predictions varied. Colbert said he expected four tribes to file charter applications in the next year. Washburn believed there might be market enough for 50 tribal banks in the future as gaming tribes look for new economic development outlets for this revenue. Costley estimated there might be 15 tribal banks in three years. "I see it as the beginning of a significant development," he said, but added, "It's going to be slower, not overnight."

Given that a majority of tribes do not have gaming operations, many tribes cannot afford to jump directly on the banking bandwagon, at least not in the immediate future. Most tribes have long had some industry on the reservation—mining, timber, light manufacturing, tourism—but few generate the net income of gaming operations.

To existing tribal banks, however, nongaming tribes represent a potential market. Earlier this year, for example, California bands signed a compact with the state to share revenue with nongaming tribes, something the Viejas tribe had been doing "well before the compact," Riolo said. With revenue sharing, Borrego Springs Bank is looking to position itself as an intermediary between gaming and nongaming tribes purchasing services from one another. "I want to be able to connect those dots," Riolo said.

People's National Bank lies on the Missouri side of the border with Oklahoma—"cross the speed bump and you're in Oklahoma," according to Washburn, and just 30 miles away from eight different tribes. "It's become a niche market to work with Native American tribes."

Along the way, tribal banks might even impact how mainstreet community banks do business on or near reservations. Neither the American Bankers Association (ABA) nor the Independent Community Bankers Association has an official position on tribally owned banks. A spokesperson for the ABA said there has been increased dialogue between banks and tribes to deliver better access to services and capital to Native Americans living on reservations.

But if tribes believe they receive poor service, "they have every right set up their own institutions," said Judith Knight, director of the ABA's Center for Community Development. While tribal banks could impact other nearby community banks, their presence should enhance local banking competition to the benefit all customers, tribal and nontribal. "I would think it would be considered a good thing," Knight said.

Me-tooism: Show me the money

Despite the enthusiasm and market opportunities seen by some, however, the tribal banking movement is still trying to find its legs. "Banking isn't quite yet real high on the radar screen" of tribes, Colbert said. "Their focus is what they can do with their gaming opportunities."

Even among interested tribes, the decision-making process can be very prolonged. For one, tribal councils typically require consensus in their decision-making, several sources said, which can be time consuming. Equally important, banking "is foreign to the Indian culture," Costley said. "So it takes them a little while to be comfortable with it. They're very deliberate."

Riolo said there was one clear way to get more tribes interested in banking, and for non-Indian banks to provide better service in Indian Country. "If we can show we can make money, that will provide much more of an impetus," Riolo said, adding that such an opportunity appears to be on the horizon "as tribes create more and more wealth."

Costley agreed. "There's a little me-tooism among the tribes. If an idea gets hot, people want to do it."