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Eagle Ford banks challenged as deposits skyrocket

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.

pdanner@express-news.net

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Eagle Ford boom means new wealth, new problems

By JOHN MACCORMACK
STAFF WRITER
April 7, 2011, 8:02PM

KARNES CITY — It was almost a half-century ago that John Braudaway had his first encounter with the hydrocarbon-soaked, deep shale formation that is turning a large swath of South Texas into one crazy boomtown.

“In 1962, I was roughnecking on a crew north of town. And when we drilled through the Eagle Ford shale, it kicked back on us with a lot of pressure. It took us three days to choke it off,” he recalled.

“I told the geologist, ‘You’ve got a good well here. Let’s run ‘er out.’ But he said, ‘Naw, it’s that old Eagle Ford shale. It will produce for four or five days and then seal off,’ ” said Braudaway, 71, who’s still in the oil business.

But about a year ago, an extraction technology called hydraulic fracturing began unlocking the mineral riches held in the deep shale vault that runs from the Mexican border northeast for hundreds of miles.

These days, the Eagle Ford is the hottest play in the country, with some South Texas oil wells producing several thousand barrels a day as well as abundant flows of natural gas.

The play is creating jobs and sudden wealth in a chronically depressed region that long survived on cattle and agriculture, between periodic oil and gas booms.

In some areas, mineral leases that a few years ago went for a few hundred dollars an acre now are commanding $10,000 and up. For a fortunate few, monthly royalty checks can run to six figures and lease bonus checks are even larger.

“This place went from desolate to booming. There are quite a few millionaires now in Karnes County. They are being made every day,” Braudaway said during a recent tour of the county.

Trip Ruckman, 66, president of the Karnes County National Bank, said deposits rose by $2 million a month last year, and now may be double what they were five years ago.

“What’s good is that a lot of mineral interest around here is owned by small landowners and farmers,” he said. “The wealth is getting spread around pretty well.”

Ruckman said that after decades of lean times, no one is throwing the money around.

Fun to be flush

“It’s fun. We’re enjoying it, but a lot of people are not used to being flush. It’s kind of unbelievable for most of them, and they are sitting on it to a large extent,” he said.

Drilling figures at the Texas Railroad Commission tell the production story.

In 2008, the state issued 33 drilling permits for the Eagle Ford shale. In 2009, it jumped to 94, and last year it exploded, to 1,229 permits.

Correspondingly, sales tax collections are climbing by double digits in areas most affected by the play.

According to a recently published economic impact study by the University of Texas at San Antonio, the long-term regional implications of the boom are staggering.

“Under modest assumptions, by 2020 the Eagle Ford shale is expected to account for close to $11.6 billion in gross state product, $21.6 billion in total economic output impact and support close to 67,971 full-time jobs in the area,” according to the executive summary.

‘No Vacancy’

At ground level, the first fruits of the boom are everywhere.

In Kenedy, the State Motel has been booked solid for two years to oil company workers, and it likely will keep the “No Vacancy” sign up awhile longer. “We’re gonna be full for the next five years,” said manager Maria Munoz.

Just down the road is the Pecan Grove RV Park, one of many cropping up around the play.

Owner David Brodsky, 48, of Kenedy, one of the new Eagle Ford millionaires, financed it with oil and gas leases and bonuses. “The bonus money built this park. I’ve got a little over 100 acres leased, and they have nine months left to drill,” he said.

With the Pecan Grove already full, Brodsky is building two more RV parks.

In Cuero, officials are planning a new 300-home subdivision to house oil field workers.

Lee’s Steakhouse in Carrizo Springs – like most restaurants in the play – is regularly jammed with free-spending newcomers.

“These people work 16 to 18 hours a day in the field, and they are hungry. They’ve got money and they pretty much order whatever they want. We’re packed every night,” said owner Lee Vallejo, who has expanded his menu and business hours.

Because hydraulic fracturing requires tremendous amounts of water, cities including Carrizo Springs are trying to figure out how to turn treatment plant effluent into cash.

“The oil industry is paying about 50 cents a barrel right now for gray water, and we generate about a half-million gallons a day,” City Manager Mario Martinez said.

The competition for mineral rights among the “lease hounds” who now are swarming over land records in county courthouses across South Texas has driven lease prices sky-high and caused some to take unusual risks.

“We’re getting a lot of ‘top-leasing,’ where one company leases on top of another, betting that the first one won’t be able to perform before the lease expires,” said David Phillip, 61, a veteran Karnes County oil and land man.

Strain on the system

And because most leases lapse if drilling doesn’t occur within three years, the landowners are hoping to cash in twice by signing a second lease with a company that’s willing to gamble.

But the sudden influx of thousands of new workers and fleets of heavy oil field equipment also is taking a toll in lightly populated rural South Texas, causing traffic jams and ruined roads.

“We have constant traffic, day and night, big trucks and oil tankers. At the H-E-B and Wal-Mart, it’s hard to find parking, and by 4 p.m., practically everything is gone from the shelves,” said Carrizo Springs Mayor Ralph Salinas, who quickly noted that he isn’t complaining.

Other problems are more serious and expensive.

“We have a lot of road damage, and while some of these oil companies are very good about working with us, others are not,” said La Salle County Judge Joel Rodriguez. “We have a lawsuit with some of these oil companies over damage for $5 (million) to $7 million.”

In Karnes County, traffic problems caused by 18-wheelers prompted county officials to call in a state police task force this year. “We weren’t prepared for this,” said County Judge Barbara Shaw, adding that the increased tax revenues needed to hire more deputies are a year or two away.

Alfred Pawelek, 81, a former Karnes County judge and businessman, said the Eagle Ford play is lifting a region that seemed on a relentless slide.

“When I went into the drive-in movie business here in 1950, we had 25,000 people in the county. When I got out in 1975, we were down to 12,000,” he said. About 16,000 now live in Karnes County.

Good times always end

Many were just getting by before the boom, and as anyone who has spent a lifetime in South Texas knows, the good times always end.

“They keep talking about this being a 20-year shot for us, but the economy could crater or we could run into environmental problems,” said Fowler, the DeWitt County judge. “Right now we’re in the glory days, and as long as we watch our budget, we’ll be safe.”

jmaccormack@express-news.net

( Original Article )

www.chron.com

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