In our May 1 issue of NorthWestern Financial Review we cover three banks among many in the Midwest that have climbed to the top of the industry in terms of profitability and other metrics.
Looking at just return on assets for banks with under $10 billion in assets, across all 50 states in the union, nearly half (785 of 1,642) of the banks with more than 1.5 percent ROA are based in NorthWestern Financial Review’s 14-state region. (If you selected the hyperlink it will take you to a list of these top banks, the institutions which are based in the Midwest are marked with a “1″.)
A bank which performed among these but did not make it into our feature story is McKenzie County Bank in Watford City, N.D. Earning 1.81 percent return on assets last year; the $113 million bank sits in the top third for ROA among banks with less than $10 billion in assets.
How has the bank done so well? “Well, we started a bank in a Bakken oilfield 30 years ago,” said Dale Patten, president of the bank.
The Bakken formation, a 200,000 square-mile stretch of land covering western North Dakota and eastern Montana and containing an estimated three to four billion barrels of oil, has provided a number of banks in the state unprecedented local economic growth in recent years.
For McKenzie County Bank, agricultural lending has been the mainstay of the bank for decades. Now, loans for farm land are dropping off. But that doesn’t mean the bank isn’t seeing requests for loans on the same land, “The land prices are so high that little of it is sold for ag,” Patten said. Most of the banks growth is due to oil industry service companies, customers also are borrowing against land for housing development or for other purposes connected with the oil industry, he said.
In 2008, the banks had $4.6 million in farmland loans. At the end of 2012, the bank had $4.3 million. On the other hand, construction and land development loans have increased to $4.4 million from $1.9 million over the same period. And, overall, real estate loans have grown to $43 million from $31 million, according to the FDIC.
The risk facing McKenzie County Bank is a decline in the local oil industry and the effect it could have on the oil service businesses and on real estate values. Fortunately, having opened amid the previous oil boom in 1982, the bank’s management has the experience to manage the risk. “When you look at the western side of the state, we have experienced staff because we have been in an energy boom before,” said Patten, who was with McKenzie County Bank since the bank opened. “We believe we are conservative and we have seen lots of capital from outside the local area.”
And the bank doesn’t see the boom slowing soon, Patten said. Barring some climactic change for the local oil industry, oil will bring income to the area for years to come. “A well that produces 1,000 barrels a day may drop to 250 a day after two years, but it will produce 250 a day for the next 25 years to 50 years,” Patten said. Out of the 180 oil rigs in North Dakota, the average well produces about 2,000 barrels a day. At yesterdays price for a single barrel of oil at $86, you can do the math for the revenue flowing into the region.