Here's a problem you would think banks would love to have: more deposit money than ever before, coming in from people reaping the rewards of the oil boom in western North Dakota. Lease payments, royalties, and money from property sales are pouring in to the small independent banks of the many small towns in the region.
Why is that a problem? Because banks make money from loans, not from deposits.
Gary Peterson, along with his family, owns the Lakeside Bank in New Town. “The amount of liquidity in the system is amazing,” Peterson reported with a smile one year ago. “We’re growing at 20% a year in deposit growth, which for rural North Dakota is unheard of. Before this happened, I think a lot of bankers would have told you that one of their concerns is how we are going to sustain the deposit side of our balance sheet. As the elderly would leave or die, those deposits would go to their kids who are usually elsewhere. Totally different story these days: we’re wondering what to do with it, frankly.”
The imbalance between money in the vault – so to speak – and money out on loan is now commonplace across the region. David Grubb is President of the Bank of Tioga, an unassuming, single story building on the town’s main drag. “We’ve seen a tremendous rise in deposits. The last couple of years we’ve grown at about a 26% clip. The growth rate has been very robust, and it also causes some concern.”
Grubb adds that the fed has kept interest rates so low that that treasury yields are practically zero, so there’s no haven for new deposits there.
“Causes some concern” and “we’re wondering what to do with it” seem like odd sentiments in the booming economy of the oil patch. But until a few years ago, these banks were making mostly agricultural loans to farmers and ranchers, people with whom they had personal relationships.
Gary Nelson recently sold the Stanley bank – that had been in his family for a hundred years – to American Bank Center, a regional consortium. He is still the marketing consultant in the Stanley branch. Western paintings and memorabilia hang on his office walls, and he greets customers and visitors with an open shirt collar and sleeves rolled up.
“We spend an awful lot of time with our farmers in their cash flow analysis,” Nelson says. “It’s a relationship. Independent banking is a relationship business with customers, and it’s important for the banker to understand what the farmer is going through.” Nelson says at one point he knew everyone in town, as well as the surrounding farmers and ranchers.
Gary Peterson at Lakeside State Bank in New Town says agricultural loans remain a mainstay of his bank, but he adds, “There’s only so many farmers and ranchers out there; they’re not really growing, in fact they are contracting, so as much as we want to do that business, there’s just a limited supply there. So with our tremendous deposit growth, we’re trying to find ways to put that to work.”
There are three reasons these small banks are having a hard time finding ways to put their new deposits to work: most of the people seeking loans are strangers from out of state; these customers are seeking commercial loans, with which the banks have little experience; and finally, the shadow of an earlier oil boom that went bust still haunts the region.
David Hansen is the President of American State Bank and Trust in Williston, the epicenter of today’s boom. He remembers what happened during the oil embargo of the 1970s. Williston funded an infrastructure expansion with bonds. “Then the oil embargo was over, the price of oil plummeted, and all exploration pretty much stopped in a very short time frame. People exited the area very quickly,” Hansen recounts. The town “was strapped with about $27 million of special bonds based on property tax, and they weren’t worth anything.” Williston levied a sales tax to pay off the bonds, “and it took about 25-30 years to pay them off,” Hansen says. “That’s still fresh on people’s minds.” He adds that it wasn’t only the city that was hurt; many banks had many bad loans on their hands as well.
Bankers here are also aware of what’s happened in other western towns that have experienced energy busts. Bill Klevin was president of Rocky Mountain Bank in Pinedale, Wyoming, following the natural gas boom there. “Hyperactivity brings lots of loan requests very fast,” he says. “We didn’t have the depth of experience on the team to do the due diligence on the loan requests that were being made. The result was that we had a higher number of problem loans during the downturn than you would find in a typical banking environment. It caused severe pain, and our bank almost went out of business.”
So the small town banks are proceeding slowly and cautiously as the deposits pile up. Gary Nelson in at the Stanley Skandia Bank says the big oil companies don’t come to him for loans. They bring their own money. “The smaller guys like water truckers, those type of loans we do get applications for, but you understand that we don’t know these people. Sometimes we don’t really understand their industry, their job, how they make money, so yes, it is a learning curve.”
Gary Peterson at Lakeside State Bank in New Town didn’t think his bank could turn that learning curve fast enough, so he had another solution. “We went out and brought in some people that have some years of experience in commercial ventures and have some experience in the oil industry to help us. But we’re very cautious in that regard. It’s been difficult,” he admits. “At times we need to tell the customer, 'Look I either don’t have the time or the expertise to address your needs, so thank you, but no thanks. Can’t do it.' I’ve said that too many times, probably.”
Peterson says one of the most difficult terrains to navigate is the uncertain real estate market. “I had a customer ask about a piece of property recently, so I called a real estate broker I know who’s been in the business 30-40 years and said, ‘What do you think about this?’ and he said, ‘Gary I don’t know what anything is worth anymore.’ About every other day there’s a head-shaker in terms of property values.”
Making loans on houses, apartment buildings, hotels and motels is even more difficult, says Gary Nelson in Stanley. “We don’t know how many homes are going to be needed to support the people who are going to be living around here. No more than we know how big a school to construct for the anticipated number of kids.”
Many in the new oil patch population may remain transient, as they have homes back in Texas or Oklahoma or Wyoming. Bankers in the area have a hard time figuring out a sustainable building rate.
One solution, says Gary Peterson, is to up the ante on down payments and shorten the amortization. “Where you might have financed 75% of a project before, now you might finance 65 or 45%. You might have looked at 15-year payout; now not only the lenders but the borrowers are looking at a three-to-five year deal. And they are able to achieve that because they can lock in a two-to-three year deal with a large oil company to rent out housing.”
Of course, a major downturn in the global price of oil could put a serious crimp on things, even projects that are hedged as well as the ones Peterson describes. That’s why these once remote rural bankers keep a close eye on the economies of Asia and Europe. A serious collapse in those places could drive the price of oil down to a point where the complex fracking process required to tap the Bakken’s riches becomes uneconomical.
Some say there’s nothing to worry about for the moment, however. Everyone in the industry is projecting 20 to 30 years of development on the Bakken, and Oil-prices.net is forecasting $110 dollars a barrel over the next year.