What happened?
A number of banks will report earnings in the next few weeks. Many will have some explaining to do, particularly as it relates to the quality of a bank's loan portfolio. While credit metrics are generally fine from consumer lending to corporate banking, some banks have a few black sheep in their portfolio -- oil-related borrowers.

Comerica Incorporated (NYSE:CMA)First Horizon National Corp. (NYSE:FHN), and Texas Capital Bancshares (NASDAQ:TCBI) recently went out of their way to call out their oil exposures to investors in their most-recent earnings reports. I'll break it down.

Does it matter?

It's important to remember that when a bank makes a loan, the upside is baked in. In the best-case scenario, banks issue a loan that is repaid on time and in full. In the worst case, loans are written off, in whole or in part.

How much banks should reserve for oil losses has been a subject of great debate. Industry paper American Banker reported that analysts are largely expecting banks to build an allowance for energy loan losses of 5% of their total energy loans. Of course, as energy prices continue to fall, and markets forecast lower prices for longer, even 5% may prove inadequate. 

Bank Name

Oil Exposure

Allowances (If Disclosed)

Comerica Incorporated

$3.7 billion in loans, or roughly 5.2% of assets.

"Greater than 4%" of energy loans outstanding

First Horizon National Corp.

<1% of commercial portfolio, which implies energy exposure of less than 0.4% of assets.


Texas Capital Bancshares

$1.2 billion (7% of loans, and about 6.2% of assets), of which $120.4 million are on non-accrual.

$32 million, or roughly 3% of loans with direct energy exposure. No disclosure on allowances for loans with indirect energy exposure.

Source: Company investor relations.

Comerica, a bank with plenty of history in the Texas oil patch, has consistently increased its allowance for credit losses, walking its allowances up to more than 4% of its energy loans. In their prepared remarks, Comerica executives noted on the conference call that if "energy prices remain at these low levels, we would expect to see further reserve build and ultimately higher charge-offs."

Similarly, Texas Capital Bancshares has seen deterioration in its energy loan book. The company has $120.4 million of energy loans on non-accrual (loans on which it no longer accrues interest income), up from $36.9 million in the third quarter. Companies in the thick of the oil business -- exploration and production firms -- make up the bulk of its energy-related borrowers.

Texas Capital Bancshares reserved $32 million against these loans, or roughly 3% of loans to E&P firms. Helping the bank is the fact that over 50% of its borrowers have 50% or more of their expected production volume in 2016 hedged with "accretive" hedges, or hedges that allow producers to sell oil at prices above the current market price.

As the new year continues on, bank investing will seem a lot like oil investing. For many banks, it'll be the price of oil that makes or breaks their 2016 performance. Bank investors would be wise to keep a watchful eye on oil prices -- and their favorite banks' loan exposure.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.