America's new energy boom has created an opportunity for select banks to generate more fee revenue through their trust departments.
The opening comes from managing royalty rights held by the owners of oil- and gas-producing properties. Recent technological advances in hydraulic fracturing, or fracking, and horizontal drilling have led to a dramatic surge in the U.S. production of oil and natural gas.
Banks in North Dakota, Oklahoma and Pennsylvania have either expanded the royalty rights divisions of their trust departments, or formed new units. Cullen/Frost Bankers (CFR), one of the nation's biggest managers of royalty rights, recently agreed to buy WNB Bancshares (WNB) in Odessa, Texas, partly because of the chance to gain new royalty clients.
"There's so much money right now in domestic oil and gas; billions of dollars are being spent to drill wells," says Jerry Simmons, executive director of the National Association of Royalty Owners in Tulsa, Okla., which represents families and foundations that own oil and gas real estate.
"It's creating owners who don't know anything about royalties," Simmons says. "This is all so new to them. They've never had anyone approach them with a lease."
It is easy to see why banks would be interested in getting into the royalties business, says Bud Shuffstall, senior oil, gas and mineral officer at Northwest Bancshares (NWBI) in Warren, Pa. The industry standard is to charge a fee 6% of gross royalties. Monthly royalties range from several hundred dollars to "hundreds of thousands of dollars," he says.
"You can move the decimal pretty easily," Shuffstall says. "The scope of development in the Marcellus Shale [formation of Pennsylvania and New York] is frankly unprecedented."
The $8 billion-asset Northwest added a royalty rights division in August to pursue owners of royalties in the Marcellus Shale area and the Utica Shale area in Ohio and Pennsylvania. Northwest is based about 40 miles from Titusville, where the Pennsylvania oil rush began in 1859. The company also has branches in Ohio and New York.
The business of managing a property owner's royalty rights is somewhat arcane, so few banks have traditionally offered the service, says Joseph Heringer, personal trust manager for the central region at American Bank Center in Dickinson, N.D.
The $975 million-asset American Bank Center expanded the royalty rights-management offerings of its in-house trust department when the oil boom associated with the Bakken formation in western North Dakota began, between 2006 and 2007.
"We were not nearly the scale we are now," Heringer says. "We've added personnel and gotten them education and training on how to deal with mineral rights and trusts."
American Bank Center has gotten most of its clients through referrals from professionals like lawyers and accountants outside the bank, Heringer says. The number of referrals from the bank's loan department has been minimal, he says, because the clients are "getting a good amount of revenue from their mineral rights and they don't need loans."
The $23 billion-asset Cullen/Frost has been in the royalty-rights management business for years; it manages royalties associated with about 8 million acres nationwide, which generate about $170 million in annual revenue.
The fracking and horizontal well boom has changed the energy landscape in Texas, says Baker Duncan, senior vice president at unit Frost Bank. A large portion of Frost's royalty rights clients hold properties that produce natural gas. The price of oil has surged past the price of gas, which has hurt Frost's bottom line.
"That's one thing people don't appreciate," Duncan says. "The oil and gas business is great, but gas prices have fallen and that has hurt a lot of individuals."
One trust that Frost Bank manages on behalf of royalty-rights owners generated $25 million of revenue in 2008. The same trust has produced just $7 million of revenue this year because it is based only on properties that produce natural gas Duncan says. "If our clients don't do well, our fees don't do well," he says.
Cullen/Frost's agreement to buy WNB, the parent of the $1.4 billion-asset Western National Bank, could help it diversify its exposure to royalty rights, Duncan says. WNB has seven offices in a major oil-producing area the Permian Basin of western Texas.
"Times are good if you're in the Permian Basin and you're oil-based," Duncan says.
"We're looking for introductions" to people who own royalty rights in the basin, Duncan says. "There are a lot of people who own land there and they're hungry for advice on what to do."
Frost Bank does not provide detailed figures on the revenue and profit from its from royalty-rights management unit; those figures are reported within its noninterest income.
Still, Cullen/Frost occasionally gives some detail into the division's performance. In the second quarter, noninterest income in the company's nonbanks segment, which includes oil and gas royalties fees, rose by $407,000, from a year earlier.
The company said in its quarterly regulatory filing that the increase was "primarily related to an increase in mineral interest income related to bonus, rental and shut-in payments and oil and gas royalties" from properties that a Cullen/Front unit owns.
It is not always necessary to open a physical office in an area of energy production, says Chris Rooker, fiduciary executive at BOK Financial (BOKF) in Tulsa. Many oil and gas wells are owned by absentee landowners who can be serviced from elsewhere, he says.
"A lot of people ask me, 'Why don't you open an office in south Texas?'" Rooker says. "But you may have a lot of minerals in one place owned by people who don't live anywhere near the property."
The $28 billion-asset BOK is deriving most its shale-related growth by offering agent services to banks in states like Kentucky and West Virginia, where oil and gas production is a new concept and banks there lack royalty specialists, Rooker says.
BOK manages about 1,200 royalty accounts, representing about $150 million in annual client revenue. It's an area that BOK's management deems of supreme importance, Rooker says. "This is a core business for us," he says.