Credit problems lurk beneath the surface in North Dakota, and bad energy loans aren't the only threat.

Unlike lenders along the Gulf Coast, local banks in northern shale states kept energy loan concentrations low during the recent oil boom — a move that has softened the initial blow of the recent market crash. Still, a lingering malaise in oil prices could present some banks with problems, particularly in their commercial real estate books.

Real estate worries are a key issue in the Bakken Shale region, located along the border of Montana and North Dakota, industry experts said.

Most banks in the Bakken region are privately held and too small to finance large-scale drilling operations. But a number of those institutions bulked up on loans for new hotels, apartment buildings and retail centers as production ramped and transformed the once-sleepy region into a booming commercial center.

Ultimately, the degree of exposure is tied to what the underwriting is like, said Ron Feldman, an economist with the Federal Reserve Bank of Minneapolis. "You're not going to see losses show up yet."

Bakken-area banks, which expanded construction lending by nearly 80% between 2010 and 2012, continued to increase lending until oil prices began to plunge, according to data from the Minneapolis Fed.

There are signs of trouble as big energy companies scale back operations in the region. Hotel occupancy rates have been declining sharply, according to local media reports. Rents have also plunged, after a housing shortage pushed up prices to levels that rivaled New York City.

The slowdown will test the quality of underwriting at banks throughout the region, Feldman said. A key test will involve borrowers' ability to repay their loans in the absence of a boom market, he added.

Bankers in the region insist that economic activity remains strong despite a cutback in drilling. The number of active rigs in the Bakken has fallen to 45 in January from about 200 just over a year ago, according to the Minneapolis Fed.

Problem credits are on the rise.

"We're seeing an increase in delinquencies," particularly in commercial real estate and personal lines of credit, said Steve Stenehjem, chief executive at First International Bank in Watford City, N.D. The $2.1 billion-asset bank has more than doubled the size of its loan book over the last five years, according to the Federal Deposit Insurance Corp.

Uncertainty over real estate illustrates the different ways that oil is weighing on banks.

Several energy lenders in Texas and Oklahoma, for instance, were recently downgraded by credit rating agencies because of strong concentrations in oil and the possibility of future losses.

Big banks have also taken hits. JPMorgan Chase, Comerica and Wells Fargo have discussed plans to boost oil reserves in the first quarter as more energy borrowers struggle to stay afloat. Still, a number of big Midwestern banks — fearful of an eventual bust — avoided lending in the Bakken when the energy boom was in full swing.

The $417 billion-asset U.S. Bancorp "chose not to" build significant energy exposure in the Bakken, Andrew Cecere, the company's chief operating officer, said during a January interview. While the Minneapolis company has branches across North Dakota, most of its energy exposure involves credits in Texas and Southern states, he said.

The $8 billion-asset First Interstate Bancorp also kept its distance from the Bakken.

"Management stayed away from North Dakota," said Kevin Riley, the Billings, Mont., company's newly minted chief executive. "Good for them, because we'd be in a much different issue now."

First Interstate's proximity could still expose it to issues in other ways, including a "deceleration in economic growth" in the region, Matthew Forgotson, an analyst at Sandler O'Neill, wrote in a recent note to clients. About 2% of First Interstate's loans involve energy, Forgotson said.

Most financing for oil production in the Bakken came from outside the state, said Rick Clayburgh, president and chief executive of the North Dakota Bankers Association.

Companies with major drilling operations in the region, including Whiting Petroleum in Denver and Continental Resources in Oklahoma City, have syndicated lines of credit from Chase, MUFG Union Bank and other big banks, according to securities filings. As those companies scale back, the Bakken region is returning to a slower — and more normal — pace of activity, Clayburgh said.

"There's still development, still growth," Clayburgh said. "Things were just happening so quickly here; we're getting more of a chance to catch our breath."

Banks in the Marcellus Shale region, which runs from West Virginia through western New York, have also taken steps to limit their exposure to low energy prices.

When drilling in the region began to ramp up, Frist Commonwealth Financial in Indiana, Pa., largely focused on gathering commercial deposits, said Mike Price, the $6.5 billion-asset company's chief executive. First Commonwealth also provided loans to servicing firms that generated more than half of their revenue from nonenergy sources, he said.

"We kept our concentration limits low, and we lent to companies that had stronger balance sheets and could endorse cycles," Price said, noting that just over 1% of the company's loan book is focused on energy.

The region surrounding the Marcellus Shale didn't see the boom-and-bust pace of real estate development, which has made it easier to weather the market crash and a slowdown in drilling.

"You never saw the ramp-up in real estate prices," Todd Clossin, chief executive of the $8.4 billion-asset WesBanco in Wheeling, W.Va., said during a Jan. 27 conference call to discuss quarterly results. While an influx of new residents increased rental prices in some areas, Clossin said the overall pace of development grew at a manageable pace.

"You didn't see a lift in the real estate values that … in some markets that you might have seen," Clossin said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.