Competitive Instincts

Photo/Michael Dinneen/AJOC

Marc Langland remembers it as the most depressing day of his life. It was in 2007, in Juneau, and Langland and fellow Alaska businessman Jim Jansen were working the capitol hallways urging legislators not to pass a draconian new oil tax being pushed by then-Gov. Sarah Palin.

A third of Alaska’s economy depends on oil, and state government depends on the industry for 90 percent of its revenues. Don’t wreck a good thing, Langland and Jansen told lawmakers.

“They told us they weren’t in favor of the tax either but that they couldn’t go against Palin because she was so popular,” with the public, Langland recalled. “Either they were lying to us or they just lacked guts.”

One legislator who did have guts was Rep. Ralph Samuels, an Anchorage Republican, who was the only legislator who voted no on Palin’s proposals.

Langland and Jansen were infuriated, but they also realized that the legislators weren’t getting many phone calls from constituents, and that few Alaskans, few Alaska businesses and few community leaders really understand the connection between the state’s prosperity and one of its major industries, particularly oil, the one that pays the bills for state government.

“Most of the public just does not understand that our state government can destroy our economy in the blink of an eye (through tax policy). The petroleum industry needs to invest tremendous capital to get the maximum production out of the ground, and their success in doing this is critical to our economy,” Langland said.

When Langland and Jansen came back to Anchorage they began talking to people in the business community, and this led to the formation of the “Make Alaska Competitive Coalition,” a grass-roots organization to educate Alaskans about the importance of petroleum industry.

It was the start of a journey. Jansen’s company, Lynden Transport, does a lot of work for oil and gas customers, so he has a stake in the issue. Langland has a stake too, but more indirect.

Northrim Bank, where Langland was then CEO, serves a broad range of small and medium-sized business customers as well as individuals. The stake for Northrim’s customers is in the health of Alaska’s economy. Palin’s tax law, which was named Alaska’s Clear and Equitable Share, or ACES, imperiled that, but the connection wasn’t well understood.

“I was particularly concerned that the business community was not connected on this, to the extent it should be. Business was certainly not as well organized as, say, the environmental community,” Langland said.

“This is important to all of us, whether we’re in the private or public sector. An economy that is dominated by government and one industry is very fragile. It doesn’t create wealth like an economy dominated by the private sector. We’re not like the Lower 48 where there can be three or four large industries.”

Informing Alaskans about their economy and urging citizens to take personal responsibility for keeping it healthy, has become a passion for Langland, now retired as Northrim’s CEO but still active as its chairman and president. Langland still lives in the state part of the year.

“Marc has a strong feeling that citizens need to understand their economy and he constantly works to get this across. People need to have a commitment to preserving the economy because it supports their communities,” said Jeanine St. John, with Lynden Transport, a longtime friend.

Laurie Fagnani, with MSI Communications, has worked with Langland and said, “Marc’s philosophy is that with education comes awareness and healthy discussion,” about the economy.

“He is a big believer in sustainability, and this comes about because he is a businessman who understands that Alaska has to be able to get its products to market profitably. He gets this.”

Forming a coalition

The Make Alaska Competitive Coalition launched in 2011 with the backing of a diverse group of supporters including labor and Alaska Native corporation leaders, former University of Alaska President Mark Hamilton and two former governors, Tony Knowles and Bill Sheffield, both Democrats.

Things had started happening when Palin resigned in 2009, midway through her first term, and Lt. Gov. Sean Parnell became governor. Parnell was elected in 2010, and began a three-year effort to reform the ACES tax and reverse a drain of industry investment from Alaska.

Langland, Jansen and others supported that through Make Alaska Competitive and the governor’s effort finally resulted in passage of Senate Bill 21 in 2013, replacing ACES with Parnell’s own tax law, the “More Alaska Petroleum Act.”

The ink was hardly dry on Parnell’s signature on the law when new industry investment began to flow back into the state. ConocoPhillips almost immediately announced it would put a new drill rig to work in the Kuparuk River field, and this was soon followed by announcements of new projects by BP for the Prudhoe Bay field.

But then critics of the tax change, having failed to stop it in the Legislature, mounted a voter referendum to repeal it, and gathered sufficient signatures to put the question on the August 2014 primary election ballot.

“We had to get back in the saddle again,” Langland said.

Make Alaska Competitive was cranked up again and new, sister organization was formed to help fight the referendum: “Keep Alaska Competitive.”

Make Alaska Competitive was never a big-money campaign and neither is Keep Alaska Competitive, which is mostly business-to-business networking aimed as helping medium and small businesses educate employees about the upcoming vote.

“We solicited contributions of any size. $500 was a lot, and $5,000 was a big deal. We had to make every dollar count,” recalls Laurie Fagnani, of MSI Communications, who worked with the MAC campaign.

There wasn’t enough money for television but there was for some radio advertisements. Most of the activity was in-person contact through presentations at chambers of commerce luncheons. Themes were developed like, “Fix ACES…unleash opportunities,” and “New oil, new jobs,” Fagnani said.

The first goal was to educate people that something had to be done.

Langland said it was tough to raise money because the organization wouldn’t solicit or accept donations from the petroleum industry. Make Alaska Competitive raised several hundred thousand dollars through two cycles of fundraising, but this was peanuts in terms of what’s spent on most political campaigns.

Langland credits the supporters of Make Alaska Competitive.

“We’ve had to go back to them twice,” once in the initial stage to make people aware of the problem with ACES, and the second when the Legislature was actively considering SB 21, he said. “They’ve been very patient. Now, with the repeal, we’re having to go back a third time.”

Origin in opportunity

The startup of Northrim Bank amid the wreckage of failed Alaska financial institutions in the depths of Alaska’s 1987 recession is now part of Alaska business history lore.

It’s a story of entrepreneurship and pluck by the bank’s founders Langland and Arnold Espe, and should be required reading in business schools.

Espe died a few years ago and Langland, having built Northrim from a startup into a successful and expanding financial institution now with more than $1.2 billion in assets and $12.3 million in income in 2013.

Northrim’s story began in the early 1970s when Langland and Espe, who were friends and working for separate banks (Langland was at National Bank of Alaska) saw an opportunity to buy First National Bank of Fairbanks. This was then sold to KeyBank, which was just coming into Alaska.

Espe and Langland stayed on to work for KeyBank but a large institution didn’t feel right, so the two kept an eye out for opportunities. It didn’t take long for those to appear, although they didn’t look like opportunities to others, which was important.

In 1986, crude oil prices crashed. State government finances went into a tailspin. Then-Gov. Bill Sheffield had to cut spending sharply to keep the state government solvent. Unlike now there were no reserve funds, and the Permanent Fund, even if it was available to be tapped, wasn’t as fat as now.

Sheffield had to slash the state capital budget virtually overnight, and by almost a billion dollars. That was big money in those days. The state’s economy, at that time still small but overheated with the spending of new state petroleum revenues, went into a sharp slump.

Thirteen banks and other financial institutions failed, mainly due to being overextended on real estate. At the time Alaska was filled with construction workers building things, and banks were in a go-go phase lending to builders and others. When the state money dried up the workers left, newly-built homes and condos went unsold, and banks were stuck holding a lot of paper.

There are opportunities in disaster. The state’s older, stronger banks, like National Bank of Alaska and First National Bank Alaska, quickly began buying up the better assets of the failed banks and doing quite well at it.

Langland and Espe, wanting to work for themselves, sensed an opportunity to serve customers who, for one reason or another, wanted another option than NBA or First National. So they started a bank, with the state’s economy still in recession and business confidence at a low ebb.

The two assembled a group of eight to 10 initial investors and $2 million in seed money and tried first to buy one of the failed banks. The U.S. Federal Insurance Deposit Corp. spurned the offer and wound up selling the assets to another bank, although for far less than Langland and Epse offered, Langland recalled.

Timing is everything

This was a critical juncture at Northrim, and in stepped Anchorage financial advisor Allan Johnston and his firm Wedbush Morgan Securities to help raise equity capital. There was some fortunate timing amid the tragic event of the Exxon Valdez hitting the rocks in Prince William Sound with the company spending big money on oil spill cleanup, stimulating the economy. This was the start of economic recovery.

But there was bad timing, too — the run-up to the first Gulf War began in 1990, and raising money nationally was difficult.

“There were just a handful of IPOs (Initial Public Offerings) in the fall of 1990, and we were one of them,” Langland recalled.

Despite that, the offering raised about $8 million.

There were challenges on the regulatory side, too.

“The FDIC was still struggling with failed Alaska banks, so we were not well received, with a new bank,” Langland said.

An innovative solution was to become chartered as a Federal Reserve Bank, a type of institution well known in the U.S. east but less so in the west.

Espe’s contacts in the Federal Reserve helped facilitate this but it ultimately didn’t sit well with the western Federal Reserve Banks who were not used to the concept. Northrim was first chartered by the Federal Reserve and subsequently switched to become a state-chartered bank, which it has been ever since.

Those were lean but also creative times. There was a period when the bank operated out of a trailer until the acquisition of Northrim’s current building on C Steet could be completed.

Langland gives credit to a loyal group of 23 core staff, mostly veterans from failed banks, who brought their experience, and contact, to the infant Northrim.

“We were able to distinguish ourselves from our competition with our people,” Langland said.

The efforts of those people plus some creative advertising and marketing — that Langland credits to advertising consultant Art Hackney — made the difference.

Two big breakthroughs came when two Alaska Native village corporations, Klukwan Inc. and Natives of Kodiak Inc., became equity investors and also deposited funds in the bank. To this day Northrim reserves two seats on its board for Alaska Native leaders, Langland said.

Irene Rowan, former chair of Klukwan, and Tony Drabeck, of Natives of Kodiak, have been board members for years.

A union pension fund from the west coast was also an early investor.

Today Northrim’s record of steady growth has attracted continued interest and Langland said large institutional investors have typically held 58 to 61 percent of the bank’s shares over the years, which is typical of most small and medium-sized community banks in the U.S.

Northrim is successful today by any standard. The bank has $1.2 billion in assets, with branches in Southcentral Alaska and Fairbanks, and since April 2014 in Southeast Alaska when Northrim closed on the purchase of Alaska Pacific Bank of Juneau, which operates branches in Southeast.

Langland has also passed the helm of the bank to CEO Joe Beedle. Under Beedle the bank has launched creative new ventures like Enroll Alaska, an initiative of Northrim Benefits Group, to help Alaskans enroll in health insurance under the new federal Affordable Care Act.

Alaska is a long way from Zearing, Iowa, population 500, where Langland grew up. Northrim is a long way, too, from Tri-County State Bank in Zearing, where Langland started his banking career. It was after graduating from the University of Iowa and a stint at a Denver bank that Langland became interested in Alaska.

He joined National Bank of Alaska in 1965 and spent 12 years working for NBA in several Alaska communities, before joining Espe and embarking on an adventure in forming Northrim.

Langland’s upbringing in a small Iowa town, where everyone knows and watches out for each other, shaped not just him but also the values he has infused in Northrim.

Not his first rodeo

Langland’s interest in connecting Alaskans to the health of their economy isn’t new. It actually started long before ACES and the current debate over SB 21. It was in the late 1990s when Langland became concerned about state government’s overdependence on petroleum and the need to diversify sources of state revenue and restrain spending.

This was something Alaskans didn’t understand, and it was dangerous because sudden dips in oil prices can wreck havoc on state finances, which was aptly demonstrated in 1986 and again in 1998.

The oil price crash of 1998, when prices plummeted to as low as $8 per barrel, created a financial crisis for state government. Prices eventually rebounded and the situation eased, but for Langland and many business leaders there were too many memories of the 1986 price crash and the sharp Alaska recession it caused.

The 1998 crash created the impetus for the Alaska Fiscal Policy Council, formed as a nonprofit to conduct forums and issue policy papers. Ultimately the council stimulated the sponsorship of research on the state’s economy by the University of Alaska Anchorage’s Institute of Social and Economic Research, or ISER, said Cheryl Frasca, a former state budget director who was active with the Fiscal Policy Council.

Northrim Bank became a major sponsor of the ISER’s work and has contributed $1 million over the years to support it, according to Dr. Scott Goldsmith, senior economist at ISER and the lead on the research program. There are six elements to the research program, and they include the state of Alaska’s economy and monitoring its health, and the importance of petroleum.

Goldsmith gives Langland credit for being far-sighted: “He has a long-term view for the future of the state, and is one of the few people who seem able to see beyond the next legislative session.”

Northrim isn’t the only business that supports ISER’s fiscal policy work, or even the only bank. First National Bank Alaska also supports the work and helps distributes Goldsmith’s reports.

Two key findings from ISER’s research are that oil and gas supports, directly and indirectly, about one-third of the state’s economy, and that had oil never been discovered here, at least in the quantities found on the North Slope, Alaska’s economy would be about half the size it is now.

“We would be about like Maine,” Goldsmith said — a great place to live but not a particularly great place to make a living. ISER’s more recent work has delved into the impending state budget gap and steps the Legislature can take to forestall a financial crisis in a few years.

That is not a pretty picture. According to ISER’s latest work on that, if present trends continue the state will run out of money and still face a huge budget deficit in 2024. The budget deficits of fiscal years 2014 and 2015 state operating and capital budgets and the diversion of $3 billion from state cash reserves into public employee pension funds will accelerate that.

Given the budget trend, Cheryl Frasca now thinks the Fiscal Policy Council’s work must be restarted. In recent years it has been picked up by Commonwealth North, an Anchorage-based business policy group that has a fiscal policy committee. Frasca thinks that work should be resumed and accelerated.

“When I was budget director in 2006 our state operating budget was $2.2 billion. It is now over $5 billion. What the heck happened?” she asks.

What happened was ACES and Sarah Palin. Palin’s ACES oil tax brought a surge of money into the treasury during an unprecedented oil price spike, but it wasn’t sustainable when oil prices fell and industry investment went south to oil fields in North Dakota and Texas.

Meanwhile, with money in the treasury there was a huge run-up of spending, all in the years Palin was governor.

That’s not a recipe for sustainability, and it is what worries Marc Langland.

All of which goes back to his Iowa upbringing and Midwestern values.

“People in Midwestern small towns live with basic values: Be straightforward, honest, and be involved,” Langland said.

As anyone who knows him can attest, Langland lives those values and while he may be semi-retired from the bank he founded, he is hardly retiring from his passion for securing Alaska’s fiscal future.

11/21/2016 - 11:49am