By Patrick Danner
San Antonio Express-News
South Texas landowners getting fat checks from oil companies for drilling on their land have been a boon to banks based in the Eagle Ford Shale.
Deposits at most of those banks have surged. The Karnes County National Bank’s deposits rocketed 110 percent to almost $168 million from the end of 2009 through the first quarter of this year.
Eleven other institutions registered jumps in deposits that ranged from 46.8 percent to 82.7 percent. By comparison, domestic deposits at U.S. banks increased 14.7 percent during the same period.
But the influx of deposits has left the Eagle Ford-area banks with something of a challenge: how to deploy that money at a time when loan demand isn’t nearly as strong.
“It’s a problem, but it’s a good problem,” said H.B. “Trip” Ruckman III, president and chairman of The Karnes County National Bank in Karnes City. Its deposits rose by $88 million from the end of 2009 to March 31, while its loans rose by $19 million.
“We have had depositors come in with more than a million dollars at a whack,” he added. “So it is a challenge to keep the money invested.”
The San Antonio Express-News tracked deposits and loans from the end of 2009, when activity started picking up in the Eagle Ford Shale, through the first quarter of this year at 20 banks based in the 14 counties directly affected by the oil and gas activity. Most of the banks tracked are small community banks with assets of less than $220 million.
Eighteen of the 20 banks had deposit growth above the national average of 14.7 percent over the 27 months ending March 31.
Deposits at Security State Bank in Pearsall, for example, climbed by $150 million from 2009 through March 31, mostly as a result of the oil and gas activity, said Mike Wilson, president and CEO.
“Where we used to hunt for money, we don’t have to hunt anymore,” he said.
Curtis Carpenter, who follows banks as managing director of Sheshunoff & Co. Investment Banking in Austin, likened the situation to having “more than you can say grace over.”
Still, the deposit windfall has yet to translate to the same growth in loans.
“You can only loan money where it makes sense,” Carpenter said. “And the fact that all of these deposits are coming in doesn’t necessarily translate into lending opportunities.”
Those lending opportunities will pick up as the Eagle Ford area prospers from all the oil and gas activity, Carpenter said. Bankers agreed, saying they are eager to loan on both multifamily and single-family residential projects. There is some reticence to loan on RV parks and motels because of concerns that they’ve saturated the area.
Bankers offered other reasons why loan growth hasn’t corresponded with deposit growth. Banks have to comply with lending standards — set by banking regulators — that are designed to prevent bank failures. Many existing bank customers are paying off loans with their newfound wealth rather than borrowing money. In addition, many of the oil services companies operating in the Eagle Ford Shale have pre-existing relationships with banks outside the area, so they are not turning to South Texas banks for loans.
Lagging loan growth
All but six of the 20 banks studied reported loan growth over the period. That growth ranged from as little as 6.5 percent at Texas Community Bank in Laredo to 62.2 percent at The Karnes County National Bank.
The increase for those 14 banks was well above the 1.8 percent increase for all U.S. banks combined. Nevertheless, the pace of growth significantly lagged the rise in deposit growth that Eagle Ford-area banks experienced.
“Nobody’s been able to keep up with that,” said Fred Hilscher, executive vice president of the First National Bank of Shiner. Its deposits are up $78 million, or 78.5 percent, versus $7.7 million for loans. The bank borders two counties directly affected by the Eagle Ford Shale. He attributed most of the increase in deposits to the shale.
“We would hope that we could have a larger loan growth, more investments, but … we’re very conservative in what we do,” he added.
Security State Bank’s lending is up about $46 million, or 29 percent since the end of 2009, though its deposits were up $150 million. Wilson, the bank’s president and CEO, has been assessing loans for new oil field buildings and yards in the area to ensure that the bank doesn’t concentrate too heavily on these types of investments.
“If this oil play was to quit or really slow down, there’s going to be an oversupply of that type of thing,” he said. “Just like RV parks and motels. The whole Eagle Ford Shale, every major community in it, is inundated with motels.”
Every week, the bank turns down at least one loan application for motel construction, Wilson said. He’d prefer to provide construction financing for apartments or duplexes because there is such a shortage of permanent housing in the area, but developers aren’t interested.
“Everybody wants the immediate huge payback,” he said.
At Dilley State Bank, with nearly $100 million in assets, deposits increased by $33 million, or 70 percent, to $80.4 million. Loans, meanwhile, increased $3.4 million, or 36.2 percent, to almost $12.8 million.
“Our loans are higher now,” said Jeff W. Avant, the bank’s president and CEO. “But they are still relatively low (versus assets) for most banks our size. It’s not that we’re not (looking to lend) — we’re looking. We look at all the loans and possible loans that come in.”
Like most other banks, Dilley State Bank isn’t willing to ease its lending standards to make a loan. And while oil services companies have come into the area, the bank hasn’t had a bump in lending to them.
“A lot of oil companies, they are banking wherever they come from,” Avant said.
Straining capital ratios
The flood of deposits has led to one serious issue for some of these small banks: having enough capital.
Banking regulators require that banks maintain a minimal level of capital. Deposits are listed on a bank’s balance sheet as liabilities, so as deposits swell, the institutions’ owners might have to put up more of their own money — capital — as a hedge against potential losses to satisfy regulators’ requirements.
It’s an issue banks will have to grapple with as long as landowners continue to deposit big checks from royalties and leases. The solution is either to turn away customers or to raise more capital, Sheshunoff’s Carpenter said. Selling stock or retaining earnings are ways to boost capital.
Security State Bank has chosen the latter. The bank has been retaining about half its profits — rather than paying them out to shareholders — to increase its capital so its capital ratios remain stable.
Meanwhile, The Karnes County National Bank is seeking authority from federal banking regulators to sell $5 million in stock to boost its capital, Ruckman said.
“You’ve got to be proactive in these situations, and that’s what we’re trying to do,” he said.
Picky about customers
Dilley State Bank hasn’t gone to the extreme of turning away new customers to limit new deposits, but it’s particular about who it wants banking there.
“We’re not trying to grow deposits. We’re not short on cash,” president and CEO Avant said.
One of Avant’s lieutenants refused to share the bank’s CD rates with a reporter out of fear that it they were published it would generate a slew of phone calls from prospective customers wanting to park their money there for just a short time.
“We are looking for long-term-relation-type customers,” Avant said.
All the activity in the Eagle Ford Shale has created exciting times, Security State Bank’s Wilson said. Yet he can’t quit worrying that it won’t last as long as many predict.
“Everything tells us that this is going to be a long-term play, but we’ve all been through some of these before and nobody saw the end coming until the day after it happened,” he said.