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Fed Finds Mixed Concerns Among Banks About Oil/Gas Industry Loans

Bankers across the country expect that some loans made to the oil and natural gas industry could deteriorate this year and lead to more charge-offs, which has prompted increased monitoring of impacted borrowers, particularly in regions that rely more heavily on energy-related lending.

The concern, however, has been tempered, according to the Federal Reserve Bank of Cleveland, where officials believe the industry can weather the current commodities downturn as it has in the past.

"This is part of the normal credit cycle," said Jenni Frazer, assistant vice president and deputy regional officer of the Cleveland Fed. "At any given time, there are pockets of bankers' portfolios that are under heightened risk. It's not unusual for loan portfolios, as they become seasoned, to experience some kind of loss. What would be worrisome is if loans made 90 days ago were being charged off. But through the credit cycle, we expect bankers to incur some losses."

It isn't clear what regions in the Federal Reserve system are more exposed than others to industry lending. No data has been collected for such a comparison. But the Cleveland Fed, which serves the fourth district of Ohio, western Pennsylvania, West Virginia's northern panhandle and eastern Kentucky, has watched for years as banks in the area have grown with oil and gas industry loans.

"Some banks in the fourth district have been growing these portfolios over the past four or five years," Frazer said. "Over the past year, with oil prices being low for a longer period of time than people anticipated, that gave us cause for concern for the viability of borrowers in that group. Bankers share that concern and have been closely monitoring their borrowers' vulnerabilities.”

But in April, the Federal Reserve Board's Senior Loan Officer Opinion Survey found that more than 80% of those polled said oil and gas industry loans make up only about 10% of their total outstanding commercial and industrial loans, a fairly small portion for any bank's portfolio.

The Cleveland Fed said bankers in Appalachia are not yet alarmed by spending cuts and industry layoffs. In the Marcellus Shale, the rig count has declined from 83 to 63, or 23%, in the last year. That's the smallest decline of any major producing basin. In the Utica Shale, rigs have declined from 40 to 25 (see Shale Daily, May 29).

"There's no sense of alarm with their oil and gas portfolios," Frazer said of the region's banks. "Yes, they're monitoring more carefully, and they're having more frequent discussions with their borrowers, but the oil and gas industry is somewhat prepared for these lower oil prices and has hedges in place to protect its financial performance."

In a first quarter filing with the U.S. Securities and Exchange Commission, one of the region's largest banks, Cleveland-based KeyCorp, said the credit quality of its oil and gas loan portfolio "remains solid," adding that it accounted for just 2% of all lending at the end of the quarter. It also said charge-offs for impaired industry loans were lower than those of its overall portfolio.

The Federal Reserve Board's April survey found that in response to the commodity crunch, banks were taking a variety of actions to mitigate losses. These include restructuring outstanding loans, reducing the size of existing credit lines, requiring additional collateral and tightening underwriting policies on new loans or lines of credit, among other things.

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