AUSTIN — Texas banks are starting to feel the ripple effects of the nation's economic downturn.
Though banks here generally outperform their counterparts in other states, second-quarter results have shown loan growth slowing, credit quality deteriorating somewhat, and profit falling or flat compared with the year earlier.
Texas Capital Bancshares Inc. in Dallas, for example, reported that its earnings declined by about 30%, to $5.8 million, primarily as a result of a 650% increase in its provision for loan losses, to $8 million. Loans still grew at a healthy clip, 23% year-over-year, but the pace was slower than in past years, and chief financial officer Peter Batholow said last month that he does not expect much of a pickup the remainder of the year.
"We are imposing much tighter credit standards than in previous years," he said in a conference call with investors and analysts.
Bankers and other industry observers stressed that Texas' economy remains strong, thanks to its robust energy sector, and they pointed out that, though credit quality may be weakening, chargeoff and delinquency levels at Texas banks are minuscule when compared to those in many other states.
Bain Slack, a senior vice president at KBW Inc.'s Keefe Bruyette & Woods Inc., said that delinquencies have been at historically low levels so that "it makes sense to see these numbers start to come up because [banking] is a cyclical business."
Even Texas banking companies with severe asset-quality problems, such as Guaranty Financial Group Inc. in Austin and Franklin Bank Corp. in Houston, said that most of their problem loans are in other states. The $16 billion-asset Guaranty, which reported an $85 million second-quarter loss, is an active lender to home builders in California, and the $5.9 billion-asset Franklin makes residential construction and single-family mortgage loans nationwide. (Franklin has yet to report second-quarter results, but a call report filed with the Federal Deposit Insurance Corp. said its thrift subsidiary had a $101 million loss.)
Still, Texas is not immune to the economic woes triggered by the mortgage meltdown a year ago.
The number of housing starts has dropped statewide largely because mortgages are more difficult to obtain, and bankers say many business owners are skittish about borrowing for expansion until they have a better handle on where the economy is headed.
Data from Resident Strategies Inc. in Dallas shows home building in the second quarter fell from the year earlier in all four markets the company covers — San Antonio, Dallas, Austin, and El Paso. The largest decline was in San Antonio, where housing starts fell 35%, to 2,468.
Scott Dueser, the chairman, chief executive officer, and president of the $3.1 billion-asset First Financial Bankshares Inc. in Abilene, said that from what he has seen developers are building fewer homes because they have seen demand soften, not because banks won't lend.
"In this slowdown what I see different from the last slowdown is the builders are really making those decisions on their own," Mr. Dueser said. "Instead of letting the bank make the decision, they just aren't asking for the loan."
Dennis E. Nixon, the chairman and president of International Bank of Commerce in Laredo, said he does not believe the slowdown in home building will last as long in Texas as in other parts of the country because continued population and job growth will create demand for houses.
"In Texas, we are going to see that recover sooner than the rest of the country," he said. "People are going to have to have a place to live."
Unlike in regions where construction credits account for most of banks' nonperforming loans, bankers in Texas cannot attribute the slight uptick in chargeoffs and delinquencies to any one business sector.
The $4.9 billion-asset Sterling Bancshares Inc. in Houston said its earnings suffered when an energy company that had a large loan with the company filed for bankruptcy without warning. Its nonperforming assets at June 30 nearly quadrupled from the year earlier, to $53 million, and as a result its earnings fell 20%, to $10.3 million.
The $1.6 billion-asset MetroCorp Bancshares Inc. in Houston said its quarterly earnings declined 25%, to $2.3 million, as its chargeoffs rose 29%, to $10.7 million.
Prosperity Bancshares Inc. in Houston earned $23.4 million, up about 1.8% from the year earlier. The $6.8 billion-asset company provisioned $1 million for loan losses, almost double its year-earlier reserve, but its credit quality is considered stellar compared with banks its size nationally, analysts said. At June 30, just 0.22% of its assets were nonperforming.
KBW's Mr. Slack said the Texas economy "is slowing in a more orderly fashion" than in other states, "giving management time to react before it gets too serious.
"We are seeing it with a number of banks where provisions were ahead of significant net chargeoffs. Banks are taking the opportunity to build up reserves ahead of a deteriorating economy. They won't get caught by surprise," he said.
Even if overall commercial loan demand is slowing, bankers say, they should be able to expand their loan portfolios because they have less competition. Prosperity president and chief operating officer Dan Rollins said that several out-of-state banks doing business in Texas have scaled back lending as they tend to their problem credits.
"A year ago, it would be real easy [for a borrower] to take a loan to 10 or 15 lending sources and get offers from all of them," Mr. Rollins said. "Today, five of those are completely gone, and five more aren't going to make an offer. We are down to less competition than we had a year ago."
