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ND's banking boom: Oil Patch banks scrambling as deposits outpace lending

FARGO -- Lakeside State Bank's origins trace back to a three-bedroom home with an attached vault in newly organized New Town on the shore of Lake Sakakawea.

The bank was founded with $35,000 in capital when it opened in 1952 to serve a new town created to replace communities flooded by Garrison Dam's reservoir.

Flash forward 55 years, to 2007, when the bank's deposits had grown, along with farming and energy in western North Dakota's Mountrail County, to $47 million.

Just five years later, as of June 30, the bank's deposits had multiplied 4.5 times, to $214.6 million, as Lakeside State Bank rode the Bakken oil boom and grew significantly by acquiring a neighboring bank.

"Obviously this is off the charts compared to what we saw pre-boom," said Gary Petersen, CEO and chairman of Lakeside State Bank, adding that deposits have grown 15 percent to 20 percent a year.

Similar growth is occurring throughout western North Dakota's Oil Patch, as energy wealth piles up in vaults.

Bank deposits in nine counties in the heart of the Bakken Formation have mushroomed from $1.4 billion in 2007 to $3.2 billion as of June 30, an increase of 128 percent, according to an analysis by The Forum.

By comparison, the growth in bank deposits in Cass County during that period rose 37.5 percent, from $3.28 billion to $4.5 billion. The comparable increase in Grand Forks County was 66 percent, from $1 billion to $1.7 billion.

The figures are drawn from reports from the Federal Deposit Insurance Corp., which collects deposit and loan data for all banks it insures.

To keep up with explosive growth in deposits, Bakken banks have added staff and automated teller machines, opened new branches, and even brought in coin-counting machines.

"It's very nice to be a businessman in western North Dakota," said Steve Stenehjem, CEO and chairman of First International Bank & Trust, with headquarters in Watford City, in the heart of the Bakken.

"All our customers that have business are seeing growth as well," he said.

"It's fun to see," Stenehjem added, noting that for many years, businesses and families struggled before the oil boom hit.

Deposits at First International Bank's locations in McKenzie County, including Watford City and Alexander, jumped 153 percent during the five-year period examined by The Forum, from $88.3 million to $223.4 million.

"It's really nothing that any of us expected," Lakeside State Bank's Petersen said. "To see this growth and activity is truly a remarkable thing."

From the office of his bank on Main Street, Petersen watches as 12,000 vehicles a day pass, more than a quarter of them semis rumbling to service oil wells or construction sites.

One challenge for Petersen and his fellow bankers is finding good ways to put those bulging deposits -- which for banks are liabilities that must be offset by assets, including loans and investments -- to productive use.

Often, the oil companies and construction companies and other businesses flocking to the Oil Patch from out of state keep borrowing from their hometown banks, Bakken bankers said.

As a result, most of the commercial loan growth for many banks comes from expanding local businesses.

"We're growing some of the larger local businesses," said Jason Hopfauf, president of Dakota Community Bank & Trust, based in Dickinson. "Their success brings success to us. That's where the bulk of our growth comes from."

A recent analysis by the Federal Reserve Bank of Minneapolis examining the nine key North Dakota counties in the Bakken Formation, as well as three in Montana, found that growth in deposits is surpassing the rise in lending.

In fact, the ratio of loans to deposits actually dipped in the Oil Patch as lending failed to keep pace with saving, the study found.

Real estate loans pose another challenge for bankers wrestling with the boom. Housing needs have jumped with oil drilling and construction, but many of those jobs are temporary.

Bankers are leery of overbuilding during the development phase of the boom, which petroleum representatives shows signs of approaching a plateau.

On the other hand, the rising housing values are good for many homeowners when it comes time to sell, Stenehjem said.

"For many, many years, people really struggled to sell real estate," he added. The upswing reminds Stenehjem of the last big boom, in the late 1970s and early 1980s.

Back then, on payday Friday afternoons, pipeline crews would line up at the teller windows all the way out the door in downtown Watford City, he said.

"It's not quite that crazy now," Stenehjem added, in part because of the advent of automated teller machines. Some banks also have expanded or added new branches.

The housing shortage, traffic jams and other challenges associated with the boom have gotten a lot of attention, but Stenehjem said the new wealth and jobs outweigh the problems.

"Ninety-five percent of what's going on is good, because it creates opportunities for people," he said, including young people who are starting families.

To better handle the new loan challenges Lakeside State Bank is facing, Petersen has hired loan officers with expertise in oil-related enterprise.

Another difficulty in putting deposits to work, familiar to anyone who has watched in dismay as their savings account has flatlined: Very low interest rates on Treasury bills make it harder for banks to find safe investments with good yields.

Stan Koppinger, president and CEO of American Bank Center, with headquarters in Dickinson, said he is not trying to hit the ball out of the park when investing or making loans.

"We're cautious," he said. "We want to do the right things for our communities. We don't want to overshoot the runway. There's a lot of money that comes and spends the night here. Banks aren't going to lend that out for 30 years."

That means loans, including mortgages, with bigger down payments and shorter payback periods, Koppinger and other bankers said.

As with all employers in the Oil Patch, bankers have found that they have to increase salaries to keep employees.

"It's not business as usual when it comes to staffing issues at banks," Koppinger said.

His American Bank Center has 10 branch locations in the Oil Patch, as well as Bismarck, and has added staff as well as increased salaries between 10 percent and 15 percent.

First International Bank, based in Watford City, has bought a duplex and is building homes and renting apartments for employees, Stenehjem said.

The oil boom began showing up in Bakken bank deposits in mid-year 2010, when deposits began accumulating at a rate notably greater than banks elsewhere in North Dakota and Montana, the Fed study found.

The study of banking in the 12 Bakken counties compared to the rest of North Dakota from 2004 to June 30 also found:

- Construction and land development loans in the Bakken increased substantially in recent months, while decreasing in the rest of North Dakota.

- Despite increases in some lending activity, loans haven't kept pace with the jump in deposits in the Bakken banks.

- Bank performance in the Bakken has kept stable, with performance similar to banks elsewhere in North Dakota, although profits have risen faster in oil country.

"Banks in North Dakota on average are really, really strong," said Ron Feldman, senior vice president of bank supervision, regulation and credit for the Federal Reserve Bank of Minneapolis.

Bankers dealing with a boom are understandably cautious about not getting overextended, said Feldman, who recently toured the Bakken.

Still, he was a bit surprised that there wasn't more lending. Then again, Feldman added, most of the banks, even those with multiple locations, are closely tied to the ups and downs of their local economies.

"These are community banks," he said.