Banking on a Boom: North Dakota’s Banking Industry

Banks move in cycles just like any other business, flexing and changing with the boom and bust cycles of regional economies. North Dakota’s current boom economy with oil, natural gas, housing and construction is presenting banks with challenges – some of them quite welcome, some of them frustrating.

The Banking Environment: “Hello, My Name Is”

For a community bank, with bankers on the ground in their home state who are used to creating and maintaining relationships with their customers, the influx of people into the state is challenging. In part, it’s the sheer volume of deposits and accounts, but it’s also new businesses coming in from out of area, looking for local financing when there may not be active in the area. When bankers are used to working with long-term customers they’ve built relationships with, getting to that comfort level in a boom economy with an influx of new customers can be challenging.

North Dakota banks are moving cautiously. “We’ve been through a cycle like this twice in the history of North Dakota, most recently in the ‘80s and that didn’t end well; it ended abruptly and with a lot of pain; over-building, over-extending. Memories are long and bankers are true to themselves,” said Eric Hardmeyer, president and CEO, Bank of North Dakota. Bankers trying to minimize risk were hesitant at first to jump into the booming economy, and they’re continuing to finance cautiously.

Now that lenders are gaining confidence and discovering the boom is not only continuing but may be bigger than what they’re comfortable handling in terms of financial resources, what they’re seeing is outside investments coming into the state. National homebuilders, pension funds, hedge funds and Wall Street investors are assisting with financing, big development and large tracks of land.

“When the boom first started there were a lot of people who came in with a great idea on how to do something and make lots of money and they really didn’t have a financial background that would support them obtaining a loan,” said Dave Hanson, president and CEO, American State Bank and Trust, a community bank located in Williston.

That’s changed somewhat as the economic boom has continued and businesses are finding their footing in North Dakota and learning the market. More businesses now are finding success as they relocate or expand in the state and others are arriving that have the financial wherewithal to obtain financing for more clearly thought out businesses.

Finding qualified borrowers has become easier for banks in North Dakota. Statewide, borrowers are pretty strong and tend to understand what’s going on in the economy, said Brent Mattson, president, Bremer Bank, Minot. “We have a steady stream of requests coming in and many are very well qualified.”

“It’s still a challenge,” said Hanson. “We have the businesses that come in and have a great idea, but not necessarily the financial wherewithal to support the idea, but they’re fewer than they used to be. It used to be just about everyone of them was that way. However, now more people are doing the due diligence and their homework and studying the projects and processes, because they’re more skilled in [the market] or more educated in the whole development process.”

“That’s how you develop a relationship with a community bank – you come in and kick the tires and ask questions and start building a rapport and a relationship,” said Hanson. Over time if things come together and if the request is reasonable, the down payment and terms come together and the idea is solid, then a credit relationship develops.”

Relationships with banks take time and North Dakota moves forward conservatively. The state really hasn’t seen the super lows of the U.S. economic fluctuations, and it hasn’t really ridden the super highs or balloon economies, either, Hanson said, though it seems to be seeing one now. And that’s something bankers in the area are closely watching.

Of Balloons and Bubbles

When the housing bubble broke and the recession was declared official, construction in most parts of the country took a nose dive.

In North Dakota, construction is booming. Housing is a major challenge and one that’s presenting banks with significant challenges.

“We have local builders visiting with us about trying to increase the housing here, whether it’s going to be single family dwelling, multi-family or even hotels. You have to be careful not to over-saturate your portfolio in one category, because you really need a diversified portfolio,” said Mattson.

One way to avoid over saturation is to require borrowers to put more equity into the deal to lessen the bank’s exposure. “Basically we want the client to have a little more skin in the game, and reduce some of the bank’s risk, if you will, in a more uncertain situation,” adds Teresa Morrow, senior vice president, Bremer Bank, Minot.

It’s a practice that’s becoming more common, (having the client inject more cash into a deal), because the sheer volume of loans creates risk and while the boom shows signs of continuing, a bust is always a possibility. Banks everywhere are moving carefully in the post-recession economy, and despite the present boom, North Dakota banks are no exception.

For the qualified home buyer and the banks looking to provide home loans, the challenges continue. Banks are having a hard time keeping up in the rapidly expanding housing market.

“With low interest rates and huge volume, it’s not just banks that are struggling but the whole process from getting the house appraised to getting closing companies and everything all together for the closing, every step is impacted right now,” said Mattson. “It’s kind of slowing down the process. Right now purchases are more of a priority than refinances, but we’re trying to avoid any negative impact to the customer. Still, purchases are definitely a priority and for those people refinancing if the rate lock is expiring, generally we’ve been able to honor that rate lock due to the rate environment.”

What it really boils down to, Mattson says, is that demand is high and there are a lot of transactions in the process. It’s a challenge to get everything done in a timely manner.

For some people moving to North Dakota, the challenge is being able to get a home at all. Fifteen to 20 percent of people moving in are coming from depressed areas where they’ve already had difficulty with past credit experiences, and there’s not much banks can do beyond providing guidance for fixing credit. “Banks on the whole are trying to do what they can, but they’re also dealing with the challenges of a booming real estate market and prices that are going up quickly,” said Hardmeyer.

For those who qualify for home loans, it’s still a challenge – there’s simply not enough housing to go around. Construction laborers are working night and day to put up single family dwellings in Williston and Minot, the latter of which is also rebuilding after floods in 2011 destroyed some 4,100 homes. Multi-family dwellings are going up, hotels are being built and the ancillary services – mortgages, appraisals, recording services and home loans – are being stressed and stretched.

In Williston the demand is so high and prices are rising so fast, Hanson said, you just kind of shake your head at the prices. “Sometimes it leaves you wondering if that can really be a reasonable price for some of these homes. It feels a bit like prices are inflated because of the rampant demand and that gives you pause to stop and think about. Are we inflating a bubble here that’s going to pop at some time? We’re keeping an eye on that. After all, we’ve been through that before.”

Federal Rules & Regulations: Changes as Challenges

It was the last housing bubble, and the economic collapse that followed the bursting of that bubble, that caused many of the changes in regulatory and reporting procedures that banks are now dealing with during the boom economy. Mortgage rules and regulations have changed and from the perspective of additional compliance requirements, mortgage lending is a completely different ball game, according to Hanson.

Throughout the banking industry, new regulatory requirements make business as usual, a challenge. For community banks, which are used to building relationships, the challenge comes in suddenly being required to gather information from long-time customers.

“Some of them see it almost as an insult, but a lot of the time it’s federally required information we have to gather that, in the past, because we may have had a relationship with a customer for 50 years, we never had to ask for. Now we are,” said Hanson.

Business judgement and common sense aren’t the rule of the day for community banking anymore – it’s compliance with checklists, processes and procedures that have to be delineated and followed exactly in order to stay in compliance with the new regulations.

“It’s not as easy as it was 20 years ago when you could call your banker up and say ‘Hey, I’m going to go buy a car, can you float me a loan for the thing?’ and you could say, ‘Yeah, write the check and on Monday we’ll take care of it’. That doesn’t work anymore, you have to do loan planning and put the application in and there are a bunch of steps and it’s a lot more challenging in that regard. Even for your best customers,” said Hanson.

That doesn’t mean that every new regulation is a bad thing, Hanson added. Some have created much needed changes and added protections for bank customers. Mortgage lending has changed enough to drive out the anything-for-a-buck brokers who sold regardless of whether that buyer would end up in foreclosure inside a year.

Too Much of a Good Thing

Another challenge North Dakota banks are facing is the influx of money into the state. While it’s a very nice problem to have, it still presents enough challenges that some banks are asking for a 72-hour head’s up before customers bring in sizeable deposits and others are flatly saying “No” to deposits.

Which sounds crazy for a bank, but has a basis in both regulatory requirements and reality. In an environment where banks are facing significant and fast growth with deposits, it’s not possible for them to deploy the incoming deposit monies in a loan portfolio as fast as they’re growing. Banks end up putting those funds into investment portfolios that don’t make the banks as much money. Plus, when those assets are growing, banks have to maintain capital ratios in appropriate relation to total assets and the rapid growth in deposits can stress the capital ratio without banks having the ability to earn the appropriate return on the deposits to enhance their capital.

The federal funds rate and prime rates are so low right now that when you factor in the costs of net interest margins for banks it’s getting harder for them to make money, said Bob Entringer, commissioner, North Dakota Department of Financial Institutions. “Because, especially when they have a large amount of money coming in, they don’t know how quickly it’s going to leave or if it’s going to leave and so banks don’t want to go too far out on investments.”

While that doesn’t necessarily affect the bank’s ability to lend, in the sense that they can set the rate they’re willing to lend to the borrower, the concern, says Entringer, is how stable is that money? “Is the depositor going to want the large deposit they brought in, are they going to take it out? If so you don’t want to have to get into the situation where you’re lending potentially volatile funds in a long term loan.”

And the funds are considered volatile, if only because in the boom economy the funds are sitting in non-interest bearing accounts rather than CDs – it’s available on demand and the banks can’t know when that demand will come. “Typically in an interest bearing account or certificate of deposit, say a two or three year CD, you know that money’s not going anywhere for that time period. At the end of that time period it’s potentially volatile. People change rates. If you’re not paying the highest rate, that money could leave. But it’s certainly more potentially volatile because you don’t have any fixed maturity when it’s simply deposited into the demand deposit account.”

“There have been some institutions in the area that have had some challenges with that,” said Hanson. “One bank we’ve heard of is refusing to take deposits. We have not been in that situation, we try to work with our customers and we do ask for a head’s up on large deposits and if we have the opportunity to work with them for our mutually beneficial options, then we’ll take a look at that.”

Bremer Bank has a different very nice challenge – finding places to give money away. The for-profit, taxes-paying bank is owned by a non-profit foundation that funnels 40 percent of profits on an annual basis into charitable community grants. This year, the bank has donated $30 million into the community. Their non-profit foundation is working doubly hard to keep up with the giving. That’s a nice challenge to face.

Looking Ahead: North Dakota’s Banking Future

“I’d say our market for the future looks really, really good,” said Mattson. “We need to be smart and diversified and we can’t get greedy. Banks need to find the sweet spot and stay with that and stay true to what their lending model is.”
The state is going through a fairly rapid transformation, complete with demands on existing infrastructure as well as activity around the oil and gas industry and changes happening there that will likely require financing, such as new natural gas gathering systems and several refineries that may be coming into the state. Western North Dakota is seeing transformation.

“North Dakota has worked hard to diversify its economy and get where it is today and now the state has the opportunity to change its landscape and economic fortunes,” said Hardmeyer. “I think for most, it’s a very interesting, exciting time to be here and look forward to the future.”

With the economic boom and conservative processes, the state is expected to be a leader in the nation in terms of its position in economic standards, according to Hanson. While before North Dakota didn’t necessarily experience the super highs and lows the rest of the nation experienced, “This time it’s kind of getting into that realm. But I think the state government is recognizing the infrastructure needs and kinds of investments they need to make to support western North Dakota and this engine that produces so much for the state. I think, from the banking perspective as we generate that infrastructure which generates opportunities for additional housing, which generates the opportunities for additional retail and other stores and jobs and it all kind of comes together – The future is very bright for community banking in North Dakota.”

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