BancTexas Group Inc. can't win for interest rates.

The $370 million-asset bank, a big indirect auto lender in Dallas, was nailed last year when interest rates fell on its core product, and competition with large banks reached a feverish pitch.

Now, with rates on the rise again, BancTexas is facing its sixth straight quarterly operating loss.

"The rates on the loans we buy have gone up about 100 basis points," said Nathan Collins, chief executive at BancTexas. "But our cost of funds has gone up 150 basis points." The rate situation is also being driven by a sudden surge in competition for deposits in Texas, Mr. Collins said.

"CD business is getting competitive," he said. "S&Ls and credit unions are paying up substantially, but where they're investing it I don't know."

The BancTexas case points to the tribulations of community banks, especially if they are in the consumer lending business, when it comes to dealing with interest rate risk in the 1990s: the age of FASB 115, derivatives, and pesky rate swings.

Mr. Collins said he wouldn't be surprised to see a slew of community banks take major hits to capital this year from interest-rate-related losses on their securities portfolios.

"Those that have the capital are very likely looking at dumping their securities in the near future, even if they have them classified as held to maturity," he said.

"More and more it's become an individualized situation with every bank having a different interest rate sensitivity picture," said Frank Barkocy, managing director of the financial institutions group at Advest Inc. "It depends on their asset mix, their liability mix, what kind of business they're in. It's hard to generalize with community banks here."

Mr. Barkocy said the adage is true that community banks face less pressure to raise deposit rates than larger banks that use more borrowed funds. He added, however, that he believes that pressure on smaller banks to increase core deposit rates is more forceful now and could nullify that traditional advantage.

In fact, Hoefer & Arnett, a San Francisco investment firm that tracks about 80 community banks in the West, knows of no traditional interest rate plays in its universe right now. "The rate increase isn't going to mean that much to the bottom line," said the firm's Steve Didion.

What he is most worried about isn't a bottom line issue, but a capital issue. He's worried about the unknows lurking in banks' securities portfolios, believing that many banks will be forced to take massive hits when mortgage-backed securities tied to slowmoving cost-of-funds indexes plummet in value.

At BancTexas, Mr. Collins said he is trying to reduce the bank's reliance on indirect auto lending, which makes up 75% of its loan portfolio. While indirect auto lending was a profitable niche at brought the bank its first yearly profit in years in 1992, Mr. Collins wants to book more small business loans, mortgage warehousing lines, and single-family construction loans.

BancTexas is lucky in one aspect. In May, it sold $30 million in new equity to St. Louis-based First Banks Inc. That money will be used to restructure the balance sheet and, Mr. Collins said, increase the bank's footings through acquisitions.

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