Community Banks Stable Amid Energy Market Downturn

By Llewellyn Hinkes-Jones

April 1 — Community banks so far have weathered the downturn in oil prices far better than larger banks, although representatives from the community banking industry told Bloomberg BNA they had concerns about potential long-term risks.

Community banks—those defined by the FDIC as serving the local community based on their size, total assets, number of branches, and other aspects — as a whole were considered relatively safe from the collapsing petroleum prices because of their focus on oil and gas production investment rather than commodity speculation. But indirect consequences of the downturn, such as the effect on local economies from energy company bankruptcies, could lead to delinquent consumer and other loans in the future.

According to numbers from the Federal Deposit Insurance Corp., charge-offs—loans written off a bank’s balance sheet—and loan loss reserves have increased for all banks on average, which the FDIC previously stated was led by commercial and industrial loans affected by slumping oil prices and the large number of associated bankruptcies. Larger banks with significant energy portfolios, including CoBiz Financial Inc., Guaranty Bancorp, and Cullen/Frost Bankers, Inc.,all suffered stock price drops of over more than 30 percent in December, coinciding with the drop in oil prices and the slumping market.

But charge-offs remain substantially lower by almost half for community banks compared with those of other larger and regional banks. The trend is similar for loan loss reserves, which increased for many banks, but at a much lower rate for community banks. Community banks experienced “significantly higher net interest margins than the rest of the industry,” according to the FDIC's quarterly banking profile from February. The percent of all charge-offs represented by community banks increased throughout 2015, but still remains relatively low, at around 6 percent, compared with noncommunity banks.

(Click image to enlarge.)

Distribution of Percent Net Chargeoffs Among Community Banks 2015

Downturn and Energy-Producing States

States with much larger median charge-offs and loan loss reserves—including Alabama, South Carolina, and Utah—were not those commonly associated with energy production, although a bank's location does not necessarily indicate the location of its investments.

While Texas community banks had the largest total number of commercial and industrial charge-offs, they ranked lower on a per-bank average than those in most states.

But Texan community banks, along with those in Georgia and Illinois, also represented the bulk of larger-scale charge-offs. The numbers for those banks were substantial, although they represented fewer than 9 percent of all community banks.

Investing in Production, Not Commodity

FDIC Chairman Martin J. Gruenberg said at the insurer's Quarterly Banking Profile announcement in February that community bank charge-offs were increasing because of commercial and industrial loans, but that was “less an issue of direct exposure to the energy sector than to the community banks operating in regions of the country whose local economies may be impacted.”

Rusty Cloutier, founding president and CEO of MidSouth Bank of Louisiana and Texas, told Bloomberg BNA that, while Chase might lose a billion dollars investing in oil markets, there wouldn't be much of an impact to community banks. “Community banks lend to the equipment, not so much for the oil,” he said.

Still, that lending approach is not without risk for community banks. A report by Bloomberg News in January indicated that some oil companies going through bankruptcy were struggling to sell their assets at auction.

While Cloutier didn’t think any energy bank was losing money at the moment, he didn't think that would always be the case. “Some banks may take some losses, but there won’t be a crisis.”

Christopher Williston, president and CEO of the Independent Bankers Association of Texas, also reiterated that most community banks in Texas are less likely to speculate in the commodities market, but more likely to invest in oil and gas production.

“[Texas banks] learned a good lesson in the 80s during that oil glut,” Williston said. “Nowadays, the community banks are pretty carefully structured.”

Chris Cole, executive vice president and senior regulatory counsel for the Independent Community Bankers of America, said that, while there's no sign of collapse because of energy prices, the Texas mergers and acquisitions market has dropped off as a result of falling energy prices—even though there is no sign of overall collapse.

Jim Brown, principal of Darling Consulting Group, has seen banks curtailing their lending activities and "girding their loins" for potential fallout related to energy sector exposure, but has yet to see significant problems reflected in operating results. He told Bloomberg BNA that it's likely there are community banks with outsized exposure to the energy sector, but said it depends on what aspect of the industry they are exposed to and that “all oil and gas exposure is not created equally.”

Concerns of Long-Term Risks

Like Gruenberg, Williston said community banks could be indirectly affected by the downturn because of ancillary issues—such as a slumping housing prices—if oil prices stay low.

“Oil could affect other markets like real estate and agriculture, and we could eventually see more charge-offs in consumer loans,” he said.

Randy Dennis, president of DD&F Consulting, said there are few signs of a downturn besides increases in reserves and stock prices in Texas and Oklahoma. But, he said, "nobody is saying it's temporary."

“Energy prices will have a ripple effect on the borrowing world,” he said. “But it's possible banks have been able to contain it."

To contact the reporter on this story: Llewellyn Hinkes-Jones in Washington at

To contact the editor responsible for this story: Heather Rothman at