Falling oil prices may be welcomed by most U.S. consumers, but some credit unions in North Dakota are feeling the pinch of a softening energy market.
That's because the western part of this Midwestern state around the Bakken formation has become one of the most important sources of new oil production in the United States. Most Bakken drilling and production has been in North Dakota, though the formation extends into Montana and Canada.
Two years ago, Bakken oil production exceeded one million barrels a day making North Dakota the second largest oil-producing state in the US, behind only Texas in volume of oil produced.
And though oil prices have recently rebounded from 13-year lows in February of about $28 a barrel to the $40 range, they still remain dramatically lower than two years ago when the price of a barrel reached almost $110.
Dakota West Credit Union, a $250 million institution based in Watford City, N.D., is right in the heart of the Bakken region where several energy companies have sprung up in the last few years.
"We are primarily an agriculture-based credit union with nine branches spread across western North Dakota," said Dakota West Chief Executive Jeff Meyer. A "fair percentage" of the credit union's 8,600-plus members have oil field-related jobs, he added.
Collapsing oil prices have led crude production in the state to fall over the past three months — sinking to an 18-month low; while rig counts have slipped, and related jobs have disappeared.
Meyer noted that falling oil prices have hurt the regional economy — causing a large exodus of oilfield workers who were primarily in Bakken to develop and drill new wells, while adding that his CU has remained financially stable.
"Shares have started trending downward — the days of cash flowing liberally have gone — for now," he noted. "Members who receive oil royalties have seen fairly significant reductions. [But] our bottom line has stayed very steady."
Meyer explained that between 2010 and 2014 (when oil prices were high), Dakota West's asset size grew from $125 million to $265 million. The credit union had an average return on assets of 1.56% during these years and ended up 2014 with an 8% capital level.
"Over the last five quarters we've been able to grow capital to in excess of 10%,"he noted.
Jeff Olson, president and CEO of the Credit Union Association of the Dakotas (CUAD), noted that technically the Bakken fields "oil boom" is currently on a hiatus, "and when the market and demand is back on an upswing, so will the production and output."
"With only about a quarter of the oil rigs currently in production, there have been a number of producers and suppliers laying off workers," Olson conceded. "However, as the state and impacted municipalities invested in infrastructure expansion and repairs, there have been plenty of construction jobs available, especially skilled labor opportunities such as carpenters, constructions workers, plumbers, electricians and welders."
Melanie Stillwell, president and CEO of $334 million Western Cooperative Credit Union in Williston, N.D., located in the center of the Bakken region, also counts "many" members who work in oilfield-related jobs.
"We have had members that have lost their jobs, had pay cuts, had their overtime reduced, and had housing subsidies discontinued," Stillwell said. "There is much uncertainty in the economy — so many members are more conservative in their borrowing. This does affect our loan income — we have worked with a number of members to restructure their existing loans for more affordable payments."
She noted that when oil workers lose their jobs a spillover effect leads to job cuts in many other industries in the state.
"The restaurants, retailers, hotels, and service companies also begin to cut back on hiring or wages when they begin to see reduced sales and services from the consumers and businesses," Stillwell said.
During boom times, many North Dakota CUs had to entice employees to the cold, remote area with by offering high salaries. But Meyer points out that now, "that situation has definitely started to reverse."
Still, over the last 18 months, employment at Dakota West has stabilized, according to Meyer. "We've lost a couple of employees whose spouses or significant others have moved in search of new employment opportunities," he noted.
Stillwell noted that during the days of sky high oil prices, it was "extremely difficult" to find qualified and experienced employees for her credit union.
"We were competing with companies that could offer very high wages, good benefits, and many times some type of housing assistance," she recalled. "As a credit union, we struggled to find and keep good employees."
While Western Cooperative does not suffer from high turnover now, it did witness that phenomenon in entry-level positions during the height of the oil activity in the area, according to Stillwell.
"We have had employees comment that they are now very glad they did not leave our employment when they had opportunities in oil related jobs — and many of them did have those opportunities," she added.
Those cash-flush days also led to a mushrooming in deposits at Western Cooperative. "We took measures to limit funds because of the fast growth in deposits," she said. "We wanted to be sure that our equity ratios remained strong and the fast share growth was starting to reduce our ratios."
In addition, Stillwell explained that her credit union had members that received large oil leases and/or large oil royalties.
"Along with that, a number of members were able to sell their businesses for a premium," she stated. "And some members chose to sell their houses at a gain and retire to another community. When these things happened, many times the member wanted to deposit that money in their account at the credit union. Some of these checks were extremely large (as high as $1 million to $3 million) or there were multiple checks that added up."
These were the types of funds that Western Cooperative needed to limit because its growth was pushing 25 to 30% annually and that was affecting their reserve ratios.
Now, amidst a bleaker economic backdrop, Dakota West has had to tighten its underwriting standards with respect to the issuance of loans to members.
But Stillwell said Western Cooperative will not likely change its underwriting standards. "We have good policies and procedures in place that we follow," she said. "We are fairly diversified in our loan portfolio. We were chartered as an agricultural credit union and about one-third of our loans are in agriculture. We underwrite a fair amount of mortgage loans, but do sell almost all of those loans to the secondary market. We also have about one-third of loans in consumer lending — mainly vehicles."
Job losses have also created problems in the local housing picture. "There's currently an excess of new rental housing [apartments] available," Meyer said, but "affordable single family homes are still at a premium." Dakota West, he added, has "limited exposure" to this segment of the economy — primarily in commercial residential [rental] properties.
Stillwell concurs that housing costs were very high in her area — both in renting and in purchasing — during the oil boom. "The prices for both purchasing a home or renting are much more reasonable at this time," she noted. "We did not offer housing assistance during the oil boom."
On a positive note, she cited, with housing costs coming down, many members are now purchasing homes that were not available to them previously or were too highly priced. "This is especially true for those [workers in] industries that are so necessary [to the local economy] but do not earn oil-field-type wages — law enforcement, teachers, nurses, etc.," she explained.
Looking out over the longer-term, Meyer notes that there's been a significant (and much needed) investment in the local infrastructure. "[But] if [oil] prices drop further or even remain the same it will be difficult for the local residents and business who remain to support and maintain it," he warned.
Similarly, Stillwell cautioned that if oil prices keep declining the local economy will suffer because there are many new restaurants, hotels, retail shops, and other businesses that came to western North Dakota for the strong economy and opportunity. "They rely on the consumers and businesses for their livelihood," she said.
Stillwell further said that her credit union "could see an increase in loan delinquency. We could also see that consumer loan demand is reduced. Because we are an agricultural credit union, that area will still be a big part of our lending. With housing prices falling, we could see our mortgage lending activity stay busy. The credit union will also see more stability in our employees and less turnover. Our salary scale should level off."
Stillwell added that her institution is a community credit union that has been in western North Dakota for 78 years. "We have been through these swings in the economy over the years."
