It may seem like a story straight out of "The Beverly Hillbillies," but it's very real.

Previously struggling dairy farmers in rural western Pennsylvania are cashing in on a windfall of natural gas reserves located under their land. And with local community banks supplying the wealth management expertise for many of these overnight successes, nobody has to move to California.

"You can't go to any restaurant or tavern where people aren't talking about this," says Scott Rickard, an investment representative for Honesdale-based Wayne Bank, a community bank that now is serving a suddenly vibrant investment client base that makes up 20 percent of Rickard's business. Land that was used primarily to feed cattle or raise corn 10 years ago is now being bundled into development packages to energy firms, according to Rickard. The Marcellus Shale natural gas field that stretches underneath a four-state region has been known for years, but had not been tapped until the development of a new drilling technique that uses ultra-compressed fluids (hydro-fracing).

With the spigot open, farmers are now able to sell the rights to the land, and are capitalizing on substantial funds because of partnerships used to negotiate for better land deals. In one example, the Northern Wayne Property Alliance representing 700 farmers holding 80,000 acres of land could be worth $300 million in leases and profit-sharing plans, or an average of $428,571 per farmer. The royalties depend on gas production, but large farms can make a bundle-one of Mr. Rickard's clients is earning $40,000 to $60,000 a month.

Some of the money is used to cover expenses, "but at some point all of that money will go into long-term investments to generate ongoing income," he says.

Rickard is counting on his long-term community ties-his father served on the $500 million-asset bank's board for 30 years, and his family has been involved in dairy farming for generations-to keep the farmers in the century-old bank's fold, and to do that the bank offers wealth and trust services, including portfolio management, to stave off the competition of carpet-bagging financial planners who have "come out of the woodwork" in this small town of 8,000, he says. "It comes down to relationships, not slick brochures," notes Rickard.

Attracting the farmers as clients remains a challenge, since they have no experience with retirement plans or investments. And traditionally, they have worked with banks' business lending officers, not investment advisers. But in Rickard, they not only have a local tie, they also share the experience of the natural gas windfall. Richard's family is among the coterie of landowners who've entered gas leases.

"The up-front money is nice, but the percentage of royalties is the more important number," he says. Eight- or 10-year leases are typical, with royalties ranging from 12 percent to 20 percent, depending on how the land is appraised. "We're beginning to see deposits from the first or second wave, and there's a lot more money out there now that farmers know what their land is worth."

Rickard reaches out to farmers through radio commercials on his own dime (about $500 a month) and in conjunction with his bank, which devotes 20 percent of its advertising budget to investment services. He says he likes to run a different one-minute ad every six weeks and starts working on a new spot as soon as the previous one hits the airwaves, so the bank's compliance department has plenty of time to clear it.

The first thing Rickard advises is for the farmers to put 35-to-45 percent of their windfall in a separate deposit vehicle to cover taxes, and up to half the returns from the gas leases for expenses. "Once you get past taxes and what they want to spend immediately, then you're talking about income in a tax-efficient manner and building a retirement nest egg," says Rickard.


This article originally appeared in Bank Investment Consultant.

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