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DiCom Software Newsletter
April, 2016  

Don't Miss Out!

2016 Annual Loan Review Industry Benchmarking Survey
Industry information is vital to being competitive and current with industry trends, salary and staffing levels.  By taking our survey you will know exactly how your bank lines up with the industry.  
There are just a few days left to take part in the fifth annual survey.  The fully analyzed results are only provided to those banks who participate. The results are broken down by peer group based on bank asset size.  

To take the 15 minute survey now, 
click here.

CQS News

CQS 9.2.5 
CQS 9.2.5 is available and ready for client download from DiCom's secure FTP site. The release includes improved comment text box functionality, the ability to use the Report Designer for Monitor and Problem Loan reporting, and several other UI improvements.  If you are a current client and are interested in this release, please contact our technical services team as soon as possible to begin your upgrade. 

CQS 9.5 
CQS 9.5 is currently being completed and will be released shortly.  This release incorporates relationship functionality in scoping as well as other enhancements to review and reporting.  To contact DiCom's Techical Support and discuss your upgrade, click here

Learn More and 


Welcome to the fifteenth edition of DiCom's e-newsletter!  We use this tool to keep you informed of the latest credit risk and loan review industry updates.  This month we focus on the efforts to address increasing risks being made by various regulatory groups.

As always, your input on topics for future newsletters, as well as suggestions for enhancements to our suite of credit risk management software solutions is heartily encouraged!
A New Twist On An Old Problem
The most vivid memories I have of an 'energy crisis' come from the 70's.  The energy crisis of that time was related to an embargo by OPEC, and the resulting impact was one of increased gasoline prices and lack of supply.  I remember lines at gas stations.  You could only fill up your tank on assigned 'even or odd' days based on the numbers on your license plate to buy gas at prices previously unheard of (55 cents a gallon, which adjusted for inflation is close to where it is today).  As a result, throughout that decade economic growth was suppressed and the country dealt with a recession.  The long term impact of that crisis was significant in the US economy and led to changes in behavior and policy that we can still see today.  Energy conservation became much more 'main stream' with legislative support in various forms, Detroit had to rethink its approach to car design, the smaller Japanese cars surged in popularity, and assuring a certain level of 'domestic' oil supply gained political support.1

Fast forward to current day, and we face a different type of 'energy crises.  The US has made great strides in control of consumption per capita, as well as having developed other energy sources (we will leave the debates about fracking for another venue).  Gas guzzling Hummers share a road that is also carrying just as many Prius' and hybrid vehicles.  The energy crisis of today has the potential to have similar far reaching and long lasting impacts to the US economy, but it essentially comes from a drastic decline in prices and an oversupply, quite the opposite of what the country faced in 1973.

The banks that are actively engaged in lending to the oil industry and its support network of related industries are reporting the financial impacts of the crisis already, but the smoke has been visible on the horizon for some time now.  Regulators have been focusing attention on these portfolios for more than a year, and internal bank management has been taking pre-emptive action in most cases, if not all.  Reserves have been increasing, but with this last round of quarterly financial reports the ante has been upped, as actual losses appear to be starting to occur.  Just last week there were at least three different banks either reporting increases to their reserves, increased concern and focus on this portfolio or financial impacts as a result of loan failures, and this ranged from a small bank in Pennsylvania to a large bank in New Orleans.This is also the season for energy lending to 'reassess' as April is the time for 'redeterminations' in the energy industry, and many loans have covenants built around those valuations.

It is likely all of these banks have had serious discussions with their regulators during their recent exams, and similar discussions have been happening at banks across the country, regardless of which regulator they were talking to.  Martin Greenberg, Chairman of the FDIC, in a speech on March 7th mentioned what they perceive as a supervisory challenge in working through exposures in US banks to energy producers, as well as indirect exposures to households and businesses in specific regions and communities that are likely to be impacted.3  While that could be considered the 'front line' for regulatory oversight, the regulators also have been hard at work behind the scenes, as they published an update to the Comptroller's Handbook Booklet on 'Oil and Gas Exploration and Production Lending' on March 16th.  This booklet had previously been updated in April 2014, so not all that dated as compared to some other booklets.  This new version provides additional clarification to what constitutes prudent risk management for this portfolio, identifies factors that examiners should consider when evaluating these loans, and discusses the ALLL procedures to be applied here.4  This is all valuable information for banks involved in this industry to consider as they focus on this volatile portfolio segment. 

What happens next will be the most interesting stage.  The management of this 'crisis' will be a true test of the heightened risk management structure that has been in place since the real estate lending collapse brought into being the DFA era.  An elevated level of engagement of senior management at banks as well as Board level participation should be in place to successfully navigate the wind-down of a portfolio of this type, without incurring losses of such a size that they might call into question the survival of the institution.  Will this be the 'case study' to prove that the strict oversight envisioned in this Dodd Frank era is working?

If you have questions about any of the information in this newsletter or about DiCom's suite of Credit Risk Management products, please do not hesitate to contact us at 407-246-8060.
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