Energizing Local Economies

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Community banks in areas with strong ties to the oil and gas industries usually benefit.

Although large investment banks have profited enormously from commodities trading over the years and deal volume, community banks in areas with strong ties to the oil and gas industries usually benefit from robust local economies.

Exposure to the oil and gas industries traditionally has provided a bit of a cushion during economic downturns while fueling loan growth during boom times. That said, geography is only part of the equation; sound management and a credit culture that balances loan growth with solid underwriting are essential.

Texas is the classic example of this phenomenon. Researchers at the Federal Reserve Bank of Dallas have noted that since the 1970s, Texas' economy has avoided three of the six US recessions thanks to elevated or rising oil prices.

And Texas banks have benefited from this strength, though eight have failed since 2008. Only 15% of banks in the state were unprofitable in 2009, compared to 30% at the national level. Credit metrics at Texas banks were also far superior to those at the national level.

The market has recognized these advantages; shares of many high-quality banks trade at elevated valuations.

Investors seeking long-term growth should consider community banks in southeastern and northeastern Pennsylvania poised to benefit from the development of the Marcellus Shale.

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