Banking on Community

by Patrick Flanagan

Local bankers say they won’t run from oil and gas because it will bounce back; they also believe the area economy is strong enough to see the industry through this down cycle.

Local bankers say they won’t run from oil and gas because it will bounce back; they also believe the area economy is strong enough to see the industry through this down cycle.

Last year was a difficult one for the giants of the nation’s banking industry, as they were bled of billions of dollars in litigation fees and settlements stemming from the sale of flawed home loans that ultimately gave way to the 2008 financial crisis. Seven out of 10 of the banking industry’s biggest institutions finished the year posting lower profits than in 2013.

But for the banking industry as a whole, 2014 ended on a positive note, with an overwhelming majority of the nation’s 6,509 banks finishing the year with increased profits. For the most part, the banking industry in 2014 was carried on the backs of the nation’s more than 6,000 community banks — those like MidSouth, Home Bank, JD Bank and Business First Bank, and even the much bigger regional banks like IberiaBank and Whitney.

Despite recent claims by JPMorgan Chase CEO and Chairman Jamie Dimon that the 2008 financial collapse showed the strength of the industry’s big players and weakness on the part of community banks, the FDIC notes in its most recent quarterly report that in 2014, community banks outperformed their bigger counterparts in nearly all categories. In just the fourth quarter alone, community banks in the U.S. posted a 28 percent earnings increase from the same quarter a year before. Loan growth and loan balances also grew for community banks over the year — making 2014 the best year for growth since the financial meltdown of 2008.

There’s no arguing that 2014 was a great year for the financial performance of community banking — some local banking officials have even called it an “outstanding” year. But the end of 2014 left local bankers wondering how long it would last, as they watched the price per barrel of oil drop by nearly 50 percent over its mid-year high of about $100 a barrel.

And that’s where the banking industry stands today, waiting for oil’s rebound while tightening belts for what’s shaping up to be a conservative year, especially for community banks like MidSouth where a large portion of commercial loans — about $256 million — are tied to nesses in the oil and gas industry.

“It was an outstanding year, we were clicking on all cylinders, our move to Texas two years ago finally started paying out in big digits; everything we hoped to go right went right in 2014,” explains Rusty Cloutier, president and CEO of the Lafayette-based MidSouth Bank, which got its start by catering to oil and gas business during the 1980s. “Nobody in the world expected the price of oil to drop 50 percent overnight. But it did. And yes, we’re very big in the oilfield market, from here to Morgan City, New Iberia, Houma, up to North Louisiana and all the way west to College Station in Texas.”

MidSouth Bank President and CEO Rusty Cloutier

MidSouth entered the Texas market just two years ago, but the effects of this westward expansion weren’t truly realized until the close of 2014; Texas now makes up about 30 percent of the bank’s total business.

It’s unlikely this will be a good year for many local banks as oil prices remain bottomed-out as they head into the second quarter. Yet, Cloutier’s quick to point out that he’s been through this before, when his bank successfully weathered the storm from the last big oil crisis of the mid-1980s, which saw a number of small banks fall like dominos, largely over bad real estate loans.

We’re nowhere near the crisis-level of the ’80s fallout, but Cloutier also knows times are tough and belts will require serious tightening: Since oil prices started dropping in mid-November, the effects are already being felt (especially in oil-centric communities like Lafayette), rig counts are now down by 50 percent, layoff announcements from oil and gas companies (both big and small) have become the new normal in 2015, and the global economy still has many struggles to overcome.

Cloutier, however, says he isn’t frightened by all these negative factors. The same can’t be said for some of his colleagues at the giants of the banking industry, who immediately began distancing themselves from the businesses tied to oil and gas at the first sign of losses. That’s not the community banking approach.

“Some of the major players are already making those moves, but we’re prepared to stay the course,” Cloutier tells ABiz. “That was the reason we survived in the ’80s. I think a lot of banks will leave the oil and gas business, We’re not. We know what we need to do to survive, and we’re sticking with our customers and sticking with the people who made MidSouth what it is. If they suffer a little pain, we’ll suffer a little pain. And that’s what I’ve been preaching in every interview, every article — Wall Street Journal, Dallas Morning News, CNN: We’re in it for the long haul.”

The reasoning behind Cloutier’s optimism? Americans won’t stop driving and consuming fossil fuels in other ways, for one, and second, with drilling at a standstill, supply levels will be impacted. When that happens, prices will start moving upward.

And there are other factors at play as well.

“Will oil improve in the near future?

Well, that means asking will the world’s economy improve,” says Cloutier, pointing to a recent announcement from Walgreens that it would soon close 200 stores as one in a growing number of examples.

“I mean, we have negative interest rates all over the world, so if that bounces back, oil bounces back,” Cloutier continues. “We also have to take into account the possibility that we’ll see a new disturbance in the Middle East or a devastating hurricane or some other natural disaster, and again, oil prices bounce back.”

JD Bank President Boyd Boudreaux

But until that happens, Cloutier says aside from a small expansion into Abbeville, MidSouth’s strategy for 2015 will mostly take a conservative approach, buckling down along with the bread and butter of its commercial business and this storm of low prices. Yet, he’s also optimistic we’ll see the tide turn before year’s end.

“Someone who I have a lot of respect for told me just recently that he thought we’d be back up to about $70 a barrel by October, and I think he’s right, that just with all the everyday occurrences that can affect the market, we should be back at $70 by the time we’re playing football,” says Cloutier. “I think you’ll see a lot of banks leaving the oil and gas business this year, but we’re setting aside the necessary reserves we need to be sure everything goes well. We’re going to work with our customers, not run and hide and give up on that business.”

And despite the struggles impacting oil and gas, just west of here, in Lake Charles, a much different scenario is playing out for the local banking industry.

The economic boom to take hold of the Lake Charles area in recent years has, for the most part, continued chugging away in ways not seen elsewhere along the Gulf Coast thanks to the injection of billions of dollars for projects tied to another aspect of the energy industry. While Acadiana’s business community is overwhelmingly tied to the service and fabrication aspects of oil and gas, that’s not the case in Lake Charles, says Boyd Boudreaux, president and CEO of the Jenningsbased JD Bank, which just recently made inroads into the Acadiana market with the opening of full-service branches in Lafayette, New Iberia and Opelousas.

“In 2014, we reached all our target goals, and our growth goals exceeded expectations; last year was a tremendous year for JD Bank,” notes Boudreaux.

Like MidSouth, JD Bank is also a community-styled bank. The big difference between the two is where the bulk of their business lies: “Our oil and gas loans make up less than 10 percent of our business,” says Boudreaux.

“In Lake Charles, the majority of our commercial clients are tied to the petro plants, which is different than what you have over there in Acadiana where the industry is mostly tied to drilling,” explains Boudreaux. “The reason we haven’t been impacted by oil prices in the Lake Charles market is because we’re being driven by the expansion of natural gas and all the gas export facilities and conversion plants currently being built here. When people say oil and gas they immediately think drilling, but that’s only part of the market. Lake Charles represents the end product, the refining and exporting, taking natural gas and converting it from fuel to liquids. All these projects are moving forward here, and they’re still hiring people.”

While those projects may not be as affected by the price of a barrel of oil, there is definitely a connection, evidenced by South Africa-based Sasol’s announcement that one of its two multi-billion dollar projects planned for Lake Charles — a gas-to-liquids plant touted as the biggest industrial expansion in the state’s history — would be delayed indefinitely because of the collapse in oil prices.

“Sasol’s other project [an $8.1 billion ethane cracker] is still proceeding,” Boudreaux is quick to note. “Since they announced the delay of the [gas-toliquids] project, we’ve received word of another new natural gas export project in Cameron, as well as Cheniere [Energy’s Sabine Pass LNG Terminal] in Hackberry, which just announced an expansion of their current facility for export. There’s definitely been some focus on [Sasol’s delayed project], but right now, banking in Southwest Louisiana is good. A lot of our businesses are growing, adding employees, expanding, so we’re pretty optimistic about the future.”

The Lafayette metropolitan statistical area encompasses the parishes of Lafayette, St. Martin, Iberia, Vermilion and Acadia.

1 Institutions not listed have less than 1% market share in Lafayette MSA (includes Acadia, Iberia, St. Martin and Vermilion parishes); FDIC deposit data as of June 30, 2014.

The Lake Charles metropolitan statistical area encompasses Cameron and Calcasieu parishes.

1 Institutions not listed have less than 1% market share in Lake Charles MSA (includes Cameron and Calcasieu parishes); FDIC deposit data as of June 30, 2014.


2 Return on Assets source: (as of Dec. 31, 2014 and Dec. 31, 2013).
3 Return on Equity source: (as of Dec. 31, 2014 and Dec. 31, 2013).
4 Equity capital to assets ratios provide readers with an idea of each bank’s capital strength.


2 Return on Assets source: (as of Dec. 31, 2014 and Dec. 31, 2013).
Return on Equity source: (as of Dec. 31, 2014 and Dec. 31, 2013).
Equity capital to assets ratios provide readers with an idea of each bank’s capital strength.

5 The financial ratios are reflective of the pre-tax income from operations because Subchapter-S banks do not pay corporate income tax at the corporate level; for this reason, they are charted separately.