CUs in Boom and Bust Economies

Fracking has created the latest U.S. ‘boomtowns.’

November 11, 2013

In North Dakota, Texas, Pennsylvania, and Colorado, credit unions have seen their share of economic booms brought on by discoveries of oil, coal, and natural gas. They’ve also seen their share of busts as gas and oil fields dry up and drilling companies move on.

North Dakota is currently experiencing a modern-day Gold Rush due to fracking—a process of hydraulic fracturing to extract oil and gas from below ground. In North Dakota, landowners have become wealthy overnight by leasing their acreage to energy-exploration and drilling companies. A sudden infusion of wealth into these small communities can throw credit union operating ratios out of whack.

Unemployment is virtually nonexistent in these communities due to the drilling companies’ high demand for labor. And the drilling companies’ generous paychecks have created a ripple effect, inflating wages for all jobs—even front-line credit union staff.

Hotels, apartments, and houses spring up almost overnight to accommodate the rapidly growing population. And sales of pickup trucks to drilling companies and members have increased sharply. But for North Dakota credit unions, lending hasn’t been able to keep pace with deposits because many members have been paying off debt and financing new purchases out of their higher earnings.

At $203 million asset Dakota West Credit Union in Watford City, N.D., CEO Denton Zubke is constantly monitoring liquidity levels and implementing procedures to deal with massive deposits. He also tightened credit standards to minimize risk.

Zubke knows that the boom economy will eventually moderate, so he tries to keep members from taking on too much credit. “For some people, it’s like a bonanza,” he says. He believes in financial education and helping members set realistic goals. “Having a lot of business is a better problem than having to run around and find business,” he says. “It’s all a matter of perspective.”

Staffing is another issue Zubke is dealing with. He’s trying to retain staff by increasing wages and encouraging members to use online banking channels for routine transactions, which lightens lobby traffic and reduces burnout on front-line staff.

Big-dollar deposits

Some states’ larger populations make it easier to cope with economic booms and busts. But North Dakota’s sparse population has a tougher time dealing with such fluctuations.

“It has a big impact on a small community,” says Western Cooperative Credit Union CEO Melanie Stillwell.

All eight of Western Cooperative’s branches rest in the Bakken formation—a 200,000 square mile geological formation where most of the fracking operations are taking place.

Assets at the $305 million credit union in Williston, N.D., increased 27% in 2010 and 25% in 2011 at the height of the land-lease boom.

“Originally we didn’t want to turn massive deposits away because they were coming from long-term members,” Stillwell says. “When we finally did, they’d get upset with us. It was difficult for a while.”

Within the past two years, Stillwell had to turn down two members’ requests to deposit checks of $9 million and $14 million. She has lowered rates on savings accounts and share certificates, and regularly directs members with large sums of cash to financial planners (“Advice for instant millionaires”). Even so, it’s not uncommon for assets to increase $5 million to $10 million a month.

“I’ve been in credit unions since 1986, and I was an examiner at one point,” Stillwell says. “I never thought I’d see anything like what’s happening in Williston.”

The assets at Dakota West Credit Union grew $8 million in five days in early 2008 through these types of deposits—a 9% increase in assets at the time. The credit union eventually had to impose deposit restrictions as well.

Dakota West’s liquid assets/assets ratio stands at about 20% (compared with a 17% national average). To guard against excess liquidity, the credit union:

“I feel like we’ve managed asset growth about as well as we could,” says Dakota West’s CEO Zubke. “I check the books daily. It could quickly get out of control if we didn’t monitor it so closely.”

John Savelli inherited similar liquidity issues in 2011 when he took over as CEO of Guthrie Federal Credit Union in Sayre, Pa. The $62 million asset credit union, which is located in the Marcellus natural gas reserve, joined a federal home loan bank in Pittsburgh to get its liquidity ratios back in line.

“We rebounded, but it took a lot of work and planning to get out of that situation,” Savelli says.

NEXT: Lending opportunities

Lending opportunities

Drilling companies typically are large-scale operations backed by even larger banks. As such, credit unions’ best lending prospects are the independent contractors and ancillary businesses.

“We have specific plans for approaching the large gas companies,” says Jeff Balestrini, vice president of lending for $219 million asset Service 1st Federal Credit Union in Danville, Pa. “They don’t want to deal with a credit union themselves, but they’re OK with making a credit union available to their employees.”

Independent contractors that do light hauling or logistical support need loans for cars and trucks, says Matt Henderson, a shale gas specialist for Pennsylvania State University’s Marcellus Center for Outreach and Research. Henderson is also seeing more small business loans going to local welding companies or machine shops.

“You don’t need a large line of credit or large loan,” says Henderson, who recently spoke at a Pennsylvania Credit Union Association two-day conference on business opportunities related to the shale oil and gas industry. “Credit unions have that personal relationship with their members and can get things started pretty easily.”

Service 1st Federal capitalized on a surge in demand for pickup trucks by financing those vehicles. And the credit union recently received three small -business loan applications related to local drilling operations.

Credit unions located near drilling operations find loan growth by targeting housing, hotels, restaurants, and other service-oriented businesses because these areas tend to be less populated and ill-equipped to handle the influx of workers.


“This reaffirms what we, as an industry, have been saying for a long time: There’s a demand out there for commercial lending, and credit unions can help meet that need,” says John Worthington, executive vice president and chief communications officer for Security Service Federal Credit Union in San Antonio.

The $7.4 billion asset credit union made two hotel construction loans related to drilling near the Eagle Ford shale formation. One loan closed in 2011 and the other one closed in July. Both loans are performing well, according to Worthington.

“We’re open to opportunities that might be there, but we’re not going to change our lending criteria just to make things happen,” Worthington says.

Dakota West’s most aggressive real estate venture was a $200,000 loan to a developer who split up 15 acres into individual lots. Lending business is also brisk at Western Cooperative, which experienced 11% year-to-date loan growth through August.

Western Cooperative, also in North Dakota, recently joined forces with other credit unions to create Midwest Business Solutions—a credit union service organization (CUSO) in Rapid City, S.D. Credit unions can refer commercial loans to the CUSO and also participate in those loans with other credit unions.

Real estate valuation is particularly tricky in Pennsylvania where separate surface rights and mineral rights make property valuation very difficult, says Wayne Grinnik, CEO of Keystone Business Lending Solutions—a CUSO in western Pennsylvania. There’s little track record for assessing the value of a property— or surrounding properties—when a drilling company establishes a well.

“I’ve been in banking almost 40 years and I’m concerned that we don’t know what we don’t know,” Grinnik says. “Everything has been pretty standard until now from a lending perspective. But you can’t compare this to anything else.”

Membership barriers

Membership at credit unions in these areas has increased somewhat, although not as sharply as the sudden influx of workers might suggest.

Many Pennsylvania credit unions in areas where drilling is taking place have charters that let them serve multiple select employee groups (SEGs). Shared branching has been a popular choice for many displaced workers, according to Service 1st Federal’s Balestrini. The credit union offers shared branching at its Williamsport office, which is the gateway to the drilling fields.

Most of the workers in North Dakota’s “man camps” aren’t eligible for membership with Western Cooperative Credit Union because they don’t meet residency requirements, according to CEO Stillwell. Most of the fracking workers are there temporarily and maintain permanent addresses elsewhere.

Dakota West’s Zubke has noticed a gradual improvement in the credit quality with each new wave of new members who move into the area. If this trend continues, he’ll consider making adjustments to his credit union’s credit criteria. Currently, anyone with a credit score below 625 can’t obtain a checking account. But instead of turning those people away, Dakota West created a debit card with a minimum balance that doesn’t allow cash withdrawals.

“It’s amazing how many accounts we’ve opened,” Zubke says. “We’re providing valuable services to these new arrivals and it hasn’t created a significant increase in our loss ratios.”

NEXT: Wage competition

Wage competition

It’s a challenge for credit unions located in boomtowns to retain employees. It’s not uncommon for front-line staff to double their wages by taking jobs with drilling companies. Western Cooperative’s Stillwell says a common refrain among credit union CEOs in North Dakota is: “I can’t afford oil field wages.”

Stillwell says the bloated real estate market has hampered efforts to attract managers from other locations. The three-bedroom apartment she rented for $230 a month 15 years ago in a mostly empty building now rents for $2,700 a month, and there’s a waiting list to get in, she says.

“The wages we used to pay for front-line staff wouldn’t even cover their rent now,” she says.

As a result, one employee commutes 70 miles each way daily from her home in Montana. Another has lived in an RV with her husband and two children for more than a year. To retain front-line staff, Western Cooperative now pays new tellers $15 an hour, which is double what the credit union paid before the fracking boom. And after learning that understaffed day-care centers required parents to pick up their children by 5 p.m., the credit union adjusted its office hours so employees could get to those day-care centers by 5 p.m.

Staff turnover hit 39% at Dakota West this year, and two of its 10 branches saw turnover well above that. “Part of the rampant turnover is due to the wage differential, and part of it is due to the fact that you get desperate and sometimes hire the wrong person,” Zubke says.

A well-liked, college-educated member sales representative recently left Guthrie Federal for a dispatching job in Pennsylvania’s gas drilling industry, lured by a 40% salary increase. “I hate to lose him,” Savelli says, “but the way they throw dollars around, you can’t blame these kids for taking a risk and going for it.”

Staying optimistic

Service 1st Federal’s Balestrini is optimistic about his credit union’s future in the shale gas era. He believes the credit union is well-positioned to grow along with Pennsylvania’s gas industry.

In North Dakota, most credit unions have emerged from the leading edge of the fracking boom in solid shape, according to Robbie Thompson, president/CEO of the Credit Union Association of the Dakotas. “We face big challenges, but if I had to choose between this and a region where home values have fallen 50% and unemployment is high, I’d choose this,” he says.

Western Cooperative in the western part of North Dakota is celebrating its 75th anniversary, “and, despite some challenges, we plan to be around for another 75 years,” says Stillwell.

Zubke arrived at Dakota West in 1986, at the tail end of a previous North Dakota oil boom. The credit union was on the verge of bankruptcy at that time. But it weathered that challenge and Zubke says the credit union is in a stronger position this time around.

“You can’t stand in the way of progress,” Zubke says, “or you’ll get run over.”