Texas: Banks Finally Back on Track

DALLAS -- Texas is back.

There are signs everywhere that the state - and its banks -- are on the mend: In San Antonio, Cullen/Frost Bankers is recruiting for the first time in years. In Dallas, the thrift bailout agency is shuttering its offices. And in Houston, home builders are pouring foundation slabs, pushing crews, and landing sales.

Sweetest of all, from the standpoint of Texas bankers, are their first-quarter results, which for the first time in years bested the national average.

"The resurgence is real," says Ronald Steinhart, chairman and chief executive of Team Bancshares Inc.

The turnaround was a long time coming. From 1986 to 1990, 425 Texas banks failed, causing roughly $6.6 billion in shareholder losses and $12.8 billion of losses for the Federal Deposit Insurance Corp. Nine of the state's 10 largest banks were forced into buyouts or bailouts.

The sense of returning prosperity in Texas has touched off an 11th-hour shopping flurry by out-of-state predators.

Looking for More

Fresh from buying the $4 billion-asset Sunbelt Savings, San Francisco-based BankAmerica Corp. is eyeing the $11 billion-asset First Gibraltar Bank. And Ohio-based Banc One Corp. recently broadened its Texas empire by snapping up Team Bancshares and its $5.5 billion in assets.

Moreover, Los Angeles-based First Interstate Bancorp, already a big player in the state, is mulling a bid for the teetering $11 billion-asset First City Bancorporation of Texas, as is North Carolina-based First Union Corp. (First City's problems largely stem from a flawed 1988 rescue and problem loans made overseas and outside the state.)

"As the excesses in this economy have been wrung out, the players have been staking their positions," says Charles McMahon, chairman and chief executive of Houston-based Compass Bancshares, a subsidiary of Central Bancshares of the South in Birmingham, Ala.

Giants Stepped In

Indeed, the latest wave of buyouts is but the tail end of a massive shakeout:

* Banc One's franchise encompasses the 20 failed MBanks and the failed Bright Banc Savings Association, as well as Team Bancshares;

* New York's Chemical Banking Corp. owns Texas Commerce Bancshares in Houston;

* First Interstate bought the former Allied Bancshares franchises;

* And NationsBank Corp. now operates the largest banking company in Texas, which comprises the banks formerly owned by First RepublicBank Corp., Dallas; National Bancshares Corp. of Texas, San Antonio; and University Savings Association, Houston.

Not All Roses

Despite the turnaround, Texas as bankers remain guarded in their outlook - and for good reason.

It's true that Texas banks racked up an annualized 1.1% return on assets in the first quarter, compared with 0.88% for banks nationwide. But strip away tax-loss carryforwards, securities gains, and net interest income gains attributable to falling short-term interest rates, and you see an industry hurting for business.

From December 1986 to December 1991, Texas banks recorded a $44.5 billion, or 3.7%, decline in total loans. The slide persisted in the first quarter of this year, the Federal Reserve Bank of Dallas reported, as loans declined by an additional $500 million.

What's more, economists don't foresee a rekindling of loan demand anytime soon, given the sluggish national economy and the public's growing aversion to debt. "I don't know where the loan demand is going to come from, quite frankly," says Jeffery Gunther, senior economist at the Dallas Fed.

Fight for Declining Market

At ground level, that reality is translating into an inch-by-inch Texas turf battle.

On the commercial lending front, the name of the game is wresting a bigger share out of a shrinking market. NationsBank Texas is the only company showing meaningful gains. The unit reported a 7.5% increase in commercial loans during 1991, a year in which Texas banks together reported a 2% decrease.

"We are banging heads and getting loan growth," says Timothy Hartman, chairman and chief executive.

Obstacles to Loan Growth

Two factors are braking commercial lending: post-crisis caution and declines in the Texas realty and energy sectors.

"Many of the people in Texas who liked to borrow went broke," says Marc Shapiro, chairman and chief executive of Texas Commerce Bancshares. "Those who didn't borrow and survived the crash sure don't want to borrow now."

The Texas oil and gas industries, mangled by a decade of low energy prices, now account for only 15% of gross state product, compared with 27% of Texas economic output in 1981.

Moreover, the energy sector remains weak. During the last 12 months, the number of oil rigs dropped to 236 from 320, and 11,000 energy industry workers lost their jobs.

And so severe was the overbuilding of commercial real estate during the 1980s that Harvey Mitchell, chairman and chief executive of Bank One Texas, believes the lending market won't be fully revived "in our careers."

The net result, Mr. Mitchell says, is that Texas bankers "are having to work harder for earnings."

Boosting nonlending revenues is atop many an agenda, and that has entailed fierce battles for corporate and trust accounts. "We are going after that business with a vengeance," says Linnet Deily, chief executive of First Interstate Texas.

Another important trust is selling financial services such as cash management and trade finance to corporations. In the past five years, for example, Texas Commerce landed roughly 4,500 new corporate accounts. "We've gone from lending officers to relationship managers," says Mr. Shapiro of Texas Commerce.

Pushing into Retail Market

Most Texas bankers also are working hard to get close to consumers.

Banks are carving out major portions of the residential lending market formerly dominated by thrifts. Since predecessor NCNB Corp. took over the failed First Republic franchise in November 1988, for example, NationsBank has originated more than $3 billion of mortgages in Texas.

At March 31, the top six banking franchises in Texas operated more than 800 branches -- at least double the outlets of a few years back.

However, with the big buildup of branch and computer facilities, some of the networks aren't yet operating at full speed.

At yearend, only Bank One Texas had shown much progress. The unit's $1.9 billion consumer portfolio year. And some of from the prior year. And some of that growth came through purchase of loan from outside Texas.

A Harmful Law

A serious impediment to consumer lending in Texas is the century-old state law prohibiting individuals from borrowing against the equity in their homes. Texas bankers have failed in their previous efforts to get the law changed. But Mr. Mitchell of Bank One Texas says the industry is gearing up for another try.

Meanwhile, bankers are out beating the bushes with a vigor never before seen in Texas.

For example, Texas Commerce officers made 1,103 calls on a single day in May, passing out baseballs emblazoned with the bank's logo and telling businesses the bank stood ready to "make a pitch" on loans and services.

Last December, NationsBank Texas announced formation of a small-business unit whose officers would meet with more than 10,000 companies during 1992.

The grass-roots campaigns are a decided comedown from Texas banking of a decade ago, when the energy industry was roaring, people were streaming in from all points of the globe, and the construction crane was known as the state bird.

Back then, "you didn't need a market strategy," recalls Cullen/Frost Bankers chairman and chief executive T.C. Frost. "You just figured how much you wanted to grow and then unlocked the front doors."

But bankers in this state learned the hard way that focusing on "home-run" loans for glamorous realty and energy projects can be a prescription for disaster. "We have a history to show how deep the troubles can go," says Ms. Deily of First Interstate. The unit lost $1 billion from 1987 to 1989.

The happy compromise unfolding in Texas now, Ms. Deily says is that while the go-go days are gone, "the industry's results will be much more stable and sustainable."

Finally, a Good Year

That in itself has brought deep sighs of relief from Texas bankers, especially those who came through the crisis without help from the government or a deep-pocketed out-of-state owner.

The 1991 rebound at Victoria Bancshares, for example, was the South Texas banking company's first good year since 1983. "I wish you could see the color of our hair, and you'd know how difficult it has been," says Charles Hrdlicka, chairman and chief executive.

The question is whether Texas banking can go beyond stability to garner the growth on which so many market entrants are counting.

Encouragingly, employment has been rising steadily in the state since 1987. By the middle of the decade, some experts predict, Texas will surpass New York in total population. And a free trade agreement between the United States and Mexico could translate into an economic bonanza for Texas.

Weak Side of Job Data

On the other hand, most of the recent percentage gains in employment - as touted by the more marketing-oriented bankers and economists - look good only because they are compared against crisis years. The roughly 1.3% compound annual average employment growth in Texas since the previous peak in 1985 is exactly what some big banking companies say they are trying to escape in their home markets.

Per-capita income has lagged, moreover, as workers lost higher-paying energy and construction jobs and went to work in service industries. On an inflation-adjusted basis, Texans have managed an almost invisible 1% gain in per-capita income since 1985, according to Thomas Plaut, an economist working in the Texas Comptroller's office.

The slowdown of the U.S. defense industry is beginning to hit home in Texas, where big contractors such as LTV Corp. and Texas Instruments are headquartered. And Texas banks aren't immune to constrictions in the national economy and the growing maze of federal regulation.

Rewards for All Entrants?

So despite the clear and excellent progress made in recovering from a regional economic depression, it remains too early to say that all the major banking companies that have crowded into this will be amply rewarded.

After all, the $474 million in profits booked by the largest Texas banks in 1991 was roughly half the record $943 million of profits booked in 1982. And the simplest explanation statewide was the roughly $70 billion of Texas bank deposits that at yearend had no place to go but into securities investments.

Texas banks probably can remain profitable even if loan demand stays soft, says Mr. Gunther of the Dallas Fed. But unless the economy cooperates, "the growth potential will suffer."

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