The first signs of what was to come emerged in 2006 with news from neighboring Montana of a successful oil project. A short while later, the land men began showing up at local county courthouses. They’d dig up the identities of mineral rights owners in the area, and strike lease deals with them for the exploration companies.
The numbers were small at first, and the drilling activity was slow. No one got too excited. Most of the folks in North Dakota’s Bakken oil region had seen spikes in activity and predictions of life-changing production levels before. Booms in the 1950s and 1980s had gone bust, causing quite a bit of pain and teaching them to temper their enthusiasm.
As things began to pick up, however, bankers started paying more attention. They invited a group of oil experts to give a briefing. Gary Petersen, chairman of $400-million asset Lakeside Bank Holding Co., which owns banks in Watford City and New Town, about 150 miles northwest of Bismarck, recalls the urgency of one presenter. “He was saying, ‘Look out, guys. Hold on. This is going to be big.’
“Looking back, I don’t think anyone in that room really grasped what he was telling us,” Petersen adds. “Most of us thought we’d see some ramp up in activity, but this is totally different. … It’s beyond belief for us. It’s hard to comprehend.”
Over the past six years, as much of the country has struggled with collapsing housing prices and recession, northwestern North Dakota has been swamped by a gusher of oil-based economic activity unlike anything ever seen in these parts—or most anywhere else.
Decades after oil was first discovered here, new drilling techniques and higher global oil prices have finally made it cost-effective to tap some of the billions of barrels of the stuff trapped in shale deep beneath the surface.
The boom has brought a flood of jobs, money and people—an overwhelming amount, really—to a corner of the country known more for its isolation and staid Scandinavian demeanor than its economic vitality.
About 7,500 wells have been drilled so far, and officials say they’re only 20 percent done. Nearly 200 rigs are drilling at any one time, a breathtaking number, given that just one well can cost up to $10 million to tap. State officials predict that as much as $19 billion will eventually be spent here over the next several years by exploration and production companies.
The reward? Exemplary production. In December, North Dakota shipped a record 768,853 barrels of its light, sweet crude per day, which at a recent price of about $90 per barrel amounts to roughly $2 billion per month in revenue.
While similar technology-driven production spikes are playing out in Ohio, Texas and other states, the Bakken is now America’s largest domestic oil play. Some industry experts predict it could generate one million barrels per day, a feat achieved by only six oil fields in the world, ever.
For bankers in the region, the boom represents equal parts salvation and challenge. The economic jolt has been transformational to communities and institutions that not long ago were worried about survival.
Some towns have seen their populations triple or more in just a few years. Williston, a town of 12,000, today hosts somewhere around 35,000 to 40,000 people, though the situation is so fluid no one knows for sure.
David Hanson, chief executive officer of $500-million asset American State Bank & Trust Co. in Williston, marvels at the development underway in his town, including the hospital’s new state-of-the art birthing center and a 200,000-square-foot recreation center on the edge of town. Airlines have been adding flights to the region from Denver and Minneapolis.
As the financial linchpins of the local economy, most banks have grown bigger, stronger and more profitable today than they were just a few years ago.
“Ten years ago, every banker was looking at their deposit base and saying, ‘What does the future here hold? The population is aging, the customer base is leaving earlier and at a more rapid rate, and they’re taking their deposits with them.’ It didn’t look good,” Petersen says. “It’s obviously quite different now.”
At $1.3-billion asset First International Bank & Trust Co. in Watford City, deposits jumped 42 percent in the past two years, while assets increased by 33 percent. Returns on assets and equity—in 2012, 1.70 percent and 26.13 percent, respectively—have spiked more than 60 percent over the same span.
“It’s good to be a businessman in western North Dakota, whether you own a hardware store, a grocery store or a bank,” says Steve Stenehjem, First International’s chairman and CEO.
There’s plenty of good in the boom, to be sure, but also more than a few daunting challenges. Local communities are seeing more traffic, higher crime rates, longer lines at restaurants and stores. There’s not enough of anything—schools, water, doctors, postal workers and, especially, affordable housing—to go around.
“It’s economic growth run wild,” says David Flynn, director of the Bureau of Business and Economic Research at the University of North Dakota. “You’re seeing all of the good things that come with an economic boom, and also many of the bad things, happening in a very, very narrow time window.”
Wages in the area have risen sharply—by 20 percent in 2012 alone, according to the Federal Reserve Bank of Minneapolis—making it tougher to hold on to good employees. The Williston Wal-Mart recently was hiring entry-level cashiers at $17 per hour.
Folks have flocked to the Bakken from other Midwestern states, and from as far away as California and Florida, lured by the prospects of big money.
Since 2009, total employment in the Bakken area has jumped by 60 percent, to more than 85,000, and it’s not nearly enough. In December, the region’s unemployment rate was just 1.7 percent, with 35,000 job openings unfilled.
Stories abound of fast food restaurants and other lower end services curtailing hours for lack of employees. One nursing home in Williston closed because it couldn’t find workers. Some companies, including Menards, a Midwestern home-improvement store, have taken to flying people in from out-of-state.
As employers, banks are feeling the pressures. They’re investing in more ATMs and other labor-saving technologies, but on paydays the lines at once-quiet banking offices stretch outside the front doors.
“Ten years ago, if we opened 10 accounts a month, we were doing pretty well. Nowadays, we open 15 to 20 accounts per day,” Hanson says. “If a teller gets offered a receptionist position with a 50 percent raise and they don’t have to deal with so many people every day, they might take it.”
No bank has been immune to turnover. Many mid-level banking executives have been lured away by oil-related companies looking for financial expertise, posing potential long-term leadership issues for those institutions.
One credit union chief financial officer recently left his job to work the oil fields. “He had an accounting background, but if you can make $90,000 working for the credit union or $180,000 in the oil fields, the decision isn’t that hard to make,” says Robert Entringer, commissioner of the North Dakota Department of Financial Institutions.
The employment issues pale against the challenges of striking the right balance sheet mix. Simply put, banks are collecting far more deposits than they are able to prudently lend.
In the 13 Bakken counties, including three in Montana, overall deposits jumped 27 percent in 2011 and another 15 percent last year, according to Ronald Feldman, senior vice president for supervision at the Minneapolis Fed.
“There’s been a huge increase in deposits,” Feldman says. “Is that a good thing? On the surface, yes. But if you don’t have anywhere to put that money, it’s not so good. You feel compelled to grow your assets and you can start running into capital and credit quality issues.”
At Petersen’s Lakeside State Bank in New Town, deposits have jumped more than fivefold since the end of 2007, from $50 million to $254.5 million. That’s the good news. The bad: Loans over the same period have increased from $30 million to $89.1 million, leaving a loan-to-deposit ratio of just 35 percent.
“It’s not where we want to be,” Petersen says of the bank’s ratio. “The old standard is 70 percent, but finding a way to get there prudently when deposits are growing at more than 20 percent a year is difficult, especially when there isn’t enough demand to effectively deploy it.”
Everywhere you go in the Bakken, the boom’s pros and cons are evident. People are richer now than they used to be (pro). That means they don’t need to borrow money (con), but it also has fueled a rapid expansion in the fee-generating trust and wealth management arena (pro).
As agricultural banks, institutions here have long taken care of farmers’ trust needs. The money being paid out in oil-related leasing bonuses and royalties has brought the numbers to another level.
Early in the boom, a typical lease paid mineral-rights owners an upfront bonus of about $100 per acre for five years’ worth of drilling rights, plus royalty payments of 15 percent of production revenue from the site.
Today, Hanson says it’s not uncommon to see lease bonuses of up to $1,500 per acre for three years of drilling rights and royalties of 20 percent.
The payoffs can be huge. “There are families taking in an additional $100,000 a year, and other families that are taking in an extra $1 million a year,” says John Giese, a Bismarck-based area business banking manager for Wells Fargo & Co.
Another source of wealth: Local oil-services businesses that have sold to the oil companies for nine figure sums. Wells Fargo, North Dakota’s largest bank with about $2 billion in deposits, has beefed up its wealth management staff to handhold clients through the “unintended consequences” of their newfound riches.
“We’ll say, ‘You suddenly have a lot of money here. What do you want your legacy to be? What values do you want to pass on to your children?’” Giese explains. “When people get big windfalls due to mineral acres or selling a service business, someone needs to help them stay true to their values.”
The Bakken’s banking landscape is dominated by agricultural-oriented, family-owned community banks—the kind that have been a cornerstone of towns across rural America for a century. (Only two large, out-of-state banks, Wells Fargo and U.S. Bancorp, have on-the-ground operations here.)
Bank managements and boards here know all about the volatility of another global commodity-based industry, agriculture. But that doesn’t count for much in gauging risk in oil and most bankers will readily admit they’re being pushed out of their comfort zones by the boom’s dynamics.
“The gamble with agriculture is whether it’s going to rain enough to produce a good crop,” Stenehjem says. “In oil, it’s the commodity price worldwide and everything that affects it. Is a war going to break out? Will something else impact the price?”
Many recall the last oil boom here, which ended in collapse during the early 1980s, and regard it as a cautionary tale. Oil firms descended when global prices jumped in the wake of trouble with the Middle East.
The industry raged for three years before oil prices dropped sharply and everyone left. “It was almost like they turned a switch and it was over,” says Hanson, who was a teenager in Williston at the time.
The collapse left empty houses, boarded-up apartment buildings and loads of civic debt in its wake. One bank failed, and most of the others were stuck with fistfuls of bad debt that took a decade to clear.
“It was hard on banks and hard on communities and the people living in them,” says Eric Hardmeyer, president of the Bank of North Dakota, a one-of-a-kind state-owned development bank that also works as a sort of banker’s bank for the state’s industry.
“You hear all the time that this time is different. The oil companies have success with virtually every well they drill,” Hardmeyer adds. “But there’s still reluctance among bankers to jump in with both feet.”
Petersen says memories of the last boom-gone-bust “factor into every decision we make.” While the dynamics this time around look more solid, “we’ve all been down that road before, and know it all could be gone tomorrow.”
Bankers here are the first to admit they’re not terribly sophisticated. First International’s nine-member board, for instance, includes six family members—but they must employ the same risk-management practices as any other bank.
Today’s worst-case scenarios include a sudden drop in oil prices or government-imposed limitations on the technologies used to extract oil from shale, which could bring this boom to an end.
These aren’t far-fetched propositions. Oil prices are volatile. If they dropped below $60 per barrel, the breakeven point for Bakken crude, it could spark a replay of the 1980s exodus. An equally serious threat to the boom would be a crackdown by the U.S. Environmental Protection Agency (EPA) on the primary drilling technique behind the production surge, hydraulic fracturing.
Fracking, as it is known, involves blasting water and sand into layers of shale deep beneath the surface to release the oil. Many worry that it can lead to groundwater contamination or leave toxic chemicals on the surface. “The worst case scenario is that the EPA decides to severely limit the ability of these companies to drill for oil,” Petersen says.
Even assuming the worst doesn’t happen, Feldman advises bank boards in the Bakken area to underwrite their loans with an eye for a slowing of the market. “If they assume a level of growth that doesn’t come to pass, then it could result in trouble” for those banks, he says.
Such counsel, combined with capital limitations, has kept the banks here from jumping headlong into lending. While almost every bank has been able to retain earnings in recent years, it hasn’t been enough to support significantly higher levels of lending.
Lakeside State has increased the capital on its balance sheet by more than 50 percent since 2009, but its tangible equity-to-tangible asset ratio has declined, due to an 85 percent jump in assets—much of it low-rate government bonds.
Even so, more lending needs are being met. While the oil companies generally come with their own outside credit lines, commercial loan demand from local businesses is increasing. One of Petersen’s biggest deals is a $4 million loan to a local trucking firm. “They’re very busy and need a larger facility for parking and working on their trucks,” he says. “That’s not something we would have seen five years ago.”
The biggest need—and biggest apparent opportunity—lies in housing. Rick Clayburgh, president of the North Dakota Bankers Association, says that with jobs still in short supply elsewhere, more people would be willing to move to the region. “The problem is, there’s no place for them to live, or even stay,” he says. “Lack of affordable housing is a huge issue.”
In Watford City, official population 1,500, rows of improvised “crew camps”—long, white metal containers used to house oil workers—charge thousands of workers nearly $100 per night for a bed and shower. Officials estimate the town actually hosts closer to 10,000 people.
“Seven years ago, you could get a decent two bedroom apartment in Williston for $300,” Hanson says. “Today, the same place is getting $2,000 and a new place will fetch $3,000. It’s a big challenge for people on fixed incomes, and for our employees.”
(Things are so tight, a handful of banks have taken the unusual step of buying townhouses or other properties for employees to live in—moves that required special approval from state regulators.)
Bankers say they’re intent on avoiding the overbuilding of the 1980s. Everyone is aware that once the drilling phase of the boom ends, things will even out, leaving a healthy, but less-meteoric, economy in its place.
“Every banker and board member I run into out there is pretty guarded,” the Fed’s Feldman says. “They’ve been through this kind of thing before, and they’re a little nervous.”
Even so, bankers are becoming convinced that the boom is for real. Mortgage lending is on the rise, and construction and land development loans jumped 69 percent in the fourth quarter of 2012 from a year earlier, to $190 million, according to the Minneapolis Fed. In Williston, officials estimate that 2,300 new housing units will be built this year, compared to 166 in 2009.
Most boards are spending more time reviewing loans. At Hanson’s American State, the board includes an outside accountant, a title attorney and a contractor. Directors come to meetings prepared, and ask hard questions, such as: What kind of occupancy rates are required to achieve the projected cash flows?
“Have we stress tested what happens if the price of oil drops and rents here return to what they might be in Fargo?” Hanson asks. “There’s a fair amount of skepticism when they’re looking at a loan.”
To cover themselves, banks often are seeking more builder equity in housing projects, and shorter amortization periods to structurally minimize some of the risk.
Some are bringing in more specialized expertise, as well. Petersen says Lakeside State was fielding multiple loan inquiries from contractors with larger commercial projects, such as trucking facilities or apartment buildings, which were outside its comfort zone.
“We finally had to acknowledge that from a personnel standpoint, we didn’t have the horsepower internally to address those requests,” he says. In response, the bank hired a search firm to help find a couple of commercial lenders from outside the area.
Some banks have pursued growth more aggressively than others. First International boosted its lending by 22 percent in 2012, and had a loan-to-deposit ratio of 74 percent at the end of the year.
Stenehjem says the board has been getting deluged with loan applications for speculative housing, and has been biting more often.
The company owns two branches in Arizona and felt the pain of troubled land development and construction loans during the financial crisis. Even so, the board has been approving housing loans in the Bakken, cautiously optimistic about the region’s long-term prospects.
“In most of the country, speculative home lending is considered bad. But we know the demand for housing is there,” Stenehjem says. The key, he adds, is to make loans to developers with good reputations who are willing to finance at least one-third of the project’s cost with their own equity.
“We feel better about this boom,” he adds. “We don’t think this is a speculative play. This is about the long term. The oil companies know where the oil is, and they know how to get it.”