Colorado small businesses are less likely to change health insurers for the upcoming year, even as they anticipate continued price increases, according to the second-annual Delta Dental of Colorado Small Business Survey.
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In areas where oil and gas development is booming, the new policy could mean millions of dollars for the agency’s beleaguered bank insurance fund, and mean that banks will see lower insurance premiums.
However, the program also could complicate land deals, reduce some property values and mean lower tax revenue for local governments, experts said.
The FDIC declined interview requests on the new policy. But FDIC spokesman Greg Hernandez said via email that the FDIC “continually looks at the value of the assets it acquires from failed banks to determine if it is maximizing the return on the disposition of those assets.”
The FDIC has nearly 300 acres of land listed for sale in Colorado, worth an estimated $6.7 million, excluding the value of underlying minerals. The properties are scattered throughout the state, but the largest piece, a 215-acre commercial parcel, is located in Weld County, near the intersection of 65th Avenue and 49th Street in Evans.
Royalties derived from minerals that the FDIC retains could help bolster the FDIC’s deposit insurance fund, which took a nearly $70 billion hit during the recession.
The FDIC guarantees customer deposits at the nation’s banks and primarily is funded through premiums paid by banks. At the beginning of 2008, the fund held $52.8 billion, but by the fourth quarter of 2009 it was $20.9 billion in the red as the FDIC paid depositors billions of dollars when their banks failed.
The fund has since recovered, and held $33 billion at the end of 2012. But new federal legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires that the FDIC add more to the deposit fund. The act requires the fund to reach a minimum reserve ratio of 1.35 percent by 2020, up from its current level of 0.45 percent. Before Dodd-Frank, the FDIC was required to maintain a reserve ratio of 1.15 percent.
This means that for every $100 in insured deposits in the nation’s banks, the FDIC must hold $1.35 in reserves.
Despite the economic recovery, the agency continues to struggle to rebuild its balance sheet. In a memo dated March 28, the FDIC projects that the insurance fund will reach 1.15 percent in 2018, leaving only two years to increase the fund’s balance to the mandated amount.
“The FDIC has a statutory duty to preserve the insurance fund,” said Don Childears, president of the Colorado Bankers Association. The agency also enjoys special rights that allow it to make policies such as this one, Childears said.
The impact on banks will be “minuscule,” Childears said, but the policy means banks may eventually be able to pay smaller premiums into the deposit insurance fund because of the new oil and gas revenue.
An FDIC white paper obtained by the Business Report outlines how the FDIC plans to make money by developing its own mineral rights portfolio. Before the new policy, which took affect April 1, the FDIC retained mineral rights on a case-by-case basis, Hernandez said. Now it plans to retain them on all transactions. The only properties exempted from the program are those that are worth less than $50,000 or are occupied by a condominium.
As a result of the most recent oil boom, the FDIC has received income from discovered mineral interests reserved from banks that failed nationwide as many as 75 years ago, according to the white paper.
Since 2010, the FDIC has received mineral interests in several states, including Colorado. Two Colorado deals in particular were noted in the white paper, including one in Larimer County.
Mineral rights are measured in units known as net mineral acres, which are equal to the full mineral interest in one acre of land, according to the Colorado Oil and Gas Association. In 2012, the FDIC was paid $130,000 for 141 net mineral acres from a mineral interest reservation it acquired when FirstTier Bank, formerly based in Louisville, failed in early 2011.
Money paid to the FDIC from those interests range from $150 to $2,600 per net mineral acre. In the first six months of 2012, the FDIC received more than $1.5 million in oil and gas income.
For those mineral rights it already holds, the FDIC negotiates a 20 percent to 25 percent royalty interest on the production of wells after they are drilled and completed, according to the white paper.
A royalty interest means that the mineral interest owner is entitled to a portion of the proceeds of the production, and generally is not required to pay any portion of the production costs.
Richard Adams, district manager for northern Colorado at Stewart Title and former counsel and section chief for the Division of Liquidation at the FDIC said he was “not surprised the FDIC has woken up” and decided to more aggressively reserve mineral rights.
With today’s new technologies, Adams said, finding and accessing oil is easier than ever, so the FDIC may be able to capitalize on the reservation sooner than those reservations made decades ago.
In rural areas, the FDIC will retain the rights to access the surface for the purposes of searching and drilling for oil and gas, but for properties within city limits the agency will waive those rights and instead attempt to drill any oil found there using techniques such as hydraulic fracturing or slant drilling.
The agency’s white paper also states that any damages resulting from the use of fracking will fall on whatever company drills the oil, rather than on the FDIC as the holder of the mineral rights.
But the program is not without potential pitfalls. Even with today’s technologies, it could still take generations to discover oil in a given area, according to G. Brent Coan of Otis, Coan & Peters.
Given the amount of time it sometimes takes to find oil, it could take decades for the FDIC to see a return on the reserved mineral rights.
Beyond that, mineral owners should be paying taxes on the minerals they drill, Coan said.