Credit problems lurk beneath the surface in North Dakota, and bad energy loans aren't the only threat.
Unlike lenders
Real estate worries are a key issue in the Bakken Shale region, located along the border of Montana and North Dakota, industry experts said.
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While the energy sector and regions that rely heavily on oil and gas production have been hit hard by the glut in the global oil supply and the closure of drilling rigs across the country, the probability of widespread bank failures as a result appears to be remote.
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Texas has had a fair share of M&A since the financial crisis, but deal volume has declined since oil prices began to plummet in late 2014. Uncertainty over sellers' exposure and depressed stock prices for aspiring buyers are largely to blame.
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Kelly King, BB&T's CEO, said his company is keen on eventually buying banks between Alabama and Texas, though his team would need to have frank discussions with any targets before pursuing a deal.
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Most banks in the Bakken region are privately held and too small to finance large-scale drilling operations. But a number of those institutions bulked up on loans for new hotels, apartment buildings and retail centers as production ramped and transformed the once-sleepy region into a booming commercial center.
Ultimately, the degree of exposure is tied to what the underwriting is like, said Ron Feldman, an economist with the Federal Reserve Bank of Minneapolis. "You're not going to see losses show up yet."
Bakken-area banks, which expanded construction lending by nearly 80% between 2010 and 2012, continued to increase lending until oil prices began to plunge, according to
There are signs of trouble as
The slowdown will test the quality of underwriting at banks throughout the region, Feldman said. A key test will involve borrowers' ability to repay their loans in the absence of a boom market, he added.
Bankers in the region insist that economic activity remains strong despite a cutback in drilling. The number of active rigs in the Bakken has fallen to 45 in January from about 200 just over a year ago, according to the
Problem credits are on the rise.
"We're seeing an increase in delinquencies," particularly in commercial real estate and personal lines of credit, said Steve Stenehjem, chief executive at First International Bank in Watford City, N.D. The $2.1 billion-asset bank has more than doubled the size of its loan book over the last five years, according to the Federal Deposit Insurance Corp.
Uncertainty over real estate illustrates the different ways that oil is weighing on banks.
Several energy lenders in Texas and Oklahoma, for instance, were recently
Big banks have also taken hits.
The $417 billion-asset U.S. Bancorp "chose not to" build significant energy exposure in the Bakken, Andrew Cecere, the company's chief operating officer, said during a January interview. While the Minneapolis company has branches across North Dakota, most of its energy exposure involves credits in Texas and Southern states, he said.
The $8 billion-asset First Interstate Bancorp also kept its distance from the Bakken.
"Management stayed away from North Dakota," said Kevin Riley, the Billings, Mont., company's
First Interstate's proximity could still expose it to issues in other ways, including a "deceleration in economic growth" in the region, Matthew Forgotson, an analyst at Sandler O'Neill, wrote in a recent note to clients. About 2% of First Interstate's loans involve energy, Forgotson said.
Most financing for oil production in the Bakken came from outside the state, said Rick Clayburgh, president and chief executive of the North Dakota Bankers Association.
Companies with major drilling operations in the region, including
"There's still development, still growth," Clayburgh said. "Things were just happening so quickly here; we're getting more of a chance to catch our breath."
Banks in the Marcellus Shale region, which runs from West Virginia through western New York, have also taken steps to limit their exposure to low energy prices.
When drilling in the region began to ramp up, Frist Commonwealth Financial in Indiana, Pa., largely focused on gathering commercial deposits, said Mike Price, the $6.5 billion-asset company's chief executive. First Commonwealth also provided loans to servicing firms that generated more than half of their revenue from nonenergy sources, he said.
"We kept our concentration limits low, and we lent to companies that had stronger balance sheets and could endorse cycles," Price said, noting that just over 1% of the company's loan book is focused on energy.
The region surrounding the Marcellus Shale didn't see the boom-and-bust pace of real estate development, which has made it easier to weather the market crash and a slowdown in drilling.
"You never saw the ramp-up in real estate prices," Todd Clossin, chief executive of the $8.4 billion-asset WesBanco in Wheeling, W.Va., said during a Jan. 27 conference call to discuss quarterly results. While an influx of new residents increased rental prices in some areas, Clossin said the overall pace of development grew at a manageable pace.
"You didn't see a lift in the real estate values that … in some markets that you might have seen," Clossin said.