In Texas, When Oil Sneezes Nonoil Banks Catch Cold

After a year of strong earnings, Southwest Bancorporation of Texas did not expect its stock price to plummet.

But that is exactly what happened in January when rumors surfaced on the Internet that the Houston-based banking company was mulling a $30 million chargeoff of lending to a borrower in the troubled Texas petroleum business. As it turned out, Southwest took no such chargeoff it says it did not even have $30 million of troubled Texas oil loans. And it shortly announced that earnings had improved almost 34% in 1998.

Nevertheless its stock lost more than a third of its value and then barely budged for two months.

"Our stock price dropped from more than $18 to $12," said Paul Murphy, president and chief operating officer. "It didn't start to come back around until the following quarter when investors saw another solid report."

Other Texas community banks and thrifts tell a similar story of stock prices that have been unfairly punished as investors link the fate of the fickle petroleum business with that of their banks. Though stock prices have recovered somewhat as gas and oil prices have rebounded -- Southwest was trading at $22 at midday Tuesday -- the consensus among bankers and analysts is that Texas community banks and thrifts are undervalued.

"Texas banks are relatively cheap compared with banks in the Midwest and elsewhere, and the economies are still strong down there," said Daniel Cardenas, an analyst with Howe Barnes Investments Inc. in Chicago.

Mr. Cardenas speculated that the low stock prices and strong economy, always an attractive combination for potential acquirers, could even spark a merger wave in Texas.

"Stock prices have taken a beating, and there's always the possibility they could fall again," Mr. Cardenas said. "But somebody easily could expand their presence in Texas or move into a growing market through an acquisition now."

Investors' fears that petroleum prices would hurt profits at Texas banks and thrifts have also spread to those institutions with no ties to the energy sector.

Houston-based Coastal Bancorp -- which does not even lend a dime to energy companies -- saw its stock price bottom out at just over $15 per share in March after trading at more than $19 in January.

It has recovered somewhat and was trading at $18 Tuesday.

"There's such a focus on oil and gas in Houston and Texas that the memories of the '80s -- when the industry really went through a depression -- resurface every time there's a downturn in prices," said Manuel Mehos, chairman and chief executive officer at $2.9 billion-asset Coastal. "It's more perception than reality."

The reality is that many banks and thrifts have diversified their portfolios since the 1980s crisis.

Between January 1997 and May 1999, the price of petroleum products fell by 19.8%, according to the Bureau of Labor Statistics. Yet oil-and-gas banks, defined as those that operate in petroleum-markets and have at least $1 million of loans to the sector, posted strong results. In 1998 those banks averaged return on assets of 1.29%, according to the Federal Deposit Insurance Corp.

"Like the rest of the nation, this state is riding the wave of economic prosperity," said Stephen Scurlock, executive vice president of the Independent Bankers of Texas. "If banks saw any direct impact from the oil downturn, it was hidden in all the other positive things."

Since May petroleum prices have climbed, as consumers may notice when they gas up their cars. On June 1 leading grades of Texas oil were selling on the spot market for just over $16 per barrel. By last week prices had climbed to almost $22, only slightly below January 1997 levels.

"No one anticipated that we'd go through such a long period of low oil prices," said Bill Gilmer, a senior economist at the Houston branch of the Federal Reserve Bank of Dallas. "It's a welcome event for banks that oil prices have started to turn around."

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