Declining oil prices could lead to more loan delinquencies at Gulf Coast community banks, the Federal Deposit Insurance Corp. warned in a recent report.
Though small banks do not usually lend to the large oil-producing companies, they do make loans to the restaurants and retail stores that rely on oil production to support local economies, said Adrian Rangel Sanchez, regional economist for the FDIC's Dallas region.
The concern, he said, "is that if oil is hurting, it could impact everyone's credit quality."
Bankers in the region agreed.
"I read in the local paper today that oil prices have fallen to a 12- year low," said C.R. "Rusty" Cloutier, president and chief executive officer of $240 million-asset Midsouth Bancorp, Lafayette, La. "Twelve years ago is not a time many of us down here like to remember."
In 1986, sunken oil prices devastated local economies in Texas and Louisiana and drove many businesses-and banks-under. At the height of the crisis, as many as three Texas banks were closing each week.
The price of West Texas intermediate crude oil-a standard measuring stick used by the industry-has dropped 40% since the beginning of 1997, down to $14.91 per barrel, according to the U.S. Department of Energy.
The price swoon is a simple case of rising supply and falling demand, Mr. Sanchez said. Supply is high, thanks to a November 1997 vote by the Organization of Petroleum Exporting Countries to raise production quotas by 10%. Also, Iraq has resumed exporting its oil, adding about one million barrels a day to the world inventory.
And the Asian economic crisis has caused industries there to scale back aggressive growth plans. Asia accounts for more than a quarter of the world's oil consumption, but analysts are predicting Far East demand will increase only 1% this year, Mr. Sanchez said.
It is too early to say how bad things will get, he said. In the first quarter, the FDIC did not see a run-up of nonperforming loans. However, if prices do not turn around, banks could feel the pinch by the end of the third quarter, he added.
Ralph W. Dowling, president and chief executive officer of $84 million- asset American National Bank, Gonzales, Tex., said he believes the local economy is equipped to withstand an oil price slide.
"Our communities have made an effort over the last decade to diversify, to not be as dependent on oil as they were before," Mr. Dowling said. "Tourism and other smaller industries are here now to pick up the slack."
Banks are more prepared, too. Midsouth, for example, has a capital reserve equal to 740% of its nonperforming loans.
"As long as it doesn't come down too hard, we can stand a little rain," Mr. Cloutier said.