In a dismal fourth quarter for the banking industry, Texas was a bright spot.
Banks there accounted for 10% of the industry's net income in the quarter, versus less than 2% in the fourth quarter of 2006, according to data from the Federal Deposit Insurance Corp.
Other states that had been hot banking markets posted losses or lower earnings in the fourth quarter.
Florida banks lost $30 million, after a $380 million profit in the year-earlier period, and California banks lost $122 million, compared with a $1.6 billion profit a year earlier. Earnings by Georgia banks dropped 40%, to $456 million.
Texas' still-robust economy helped keep credit quality stronger than the nation's overall, allowing banks there to outperform the industry significantly in return on assets and return on equity.
Though many industry insiders expect the Texas economy to cool off this year, they say it is unlikely to slow down as much as the national economy.
That's why Downey Bridgwater, the chairman and chief executive officer of the $4.5 billion-asset Sterling Bancshares Inc. in Houston, said he believes Texas banks "absolutely" have an advantage.
He said a Houston barbecue restaurant's slogan urging customers to "thank their lucky stars they're in Texas" is "very appropriate to banking in Texas, especially in 2008. Being a banker in this market is an absolute blessing."
Texas banks hold 2.6% of the industry's assets and contributed a disproportionate share of its fourth-quarter earnings, according to the FDIC's Quarterly Banking Profile, released last week. One reason is that large banks' losses caused overall earnings to plunge 83%, to $5.8 billion. In Texas, which has few large banks, earnings fell 16.5%, to $551 million.
The calculations for Texas exclude the $62.6 billion-asset Comerica Inc., which moved from Detroit to Dallas last year. (Comerica's net income of $119 million would boost the state's quarterly profit to 11.5% of the industry total and allow Texas banks to boast a 1.5% year-over-year increase in their fourth-quarter net income.)
Some states considered to have slower growth posted higher fourth-quarter earnings than a year earlier, including Iowa, Idaho, and Wyoming. But they started from a low base. In Iowa bank net income rose 4%, to $136 million; in Idaho it also rose 4%, to $22 million. In Wyoming it rose 10%, to $31 million.
High energy prices and a growing population helped the Texas economy, several bankers and other industry insiders said.
Texas also escaped the housing bubble that caused problems for many banks in other states, they said.
Texas banks' return on assets averaged 0.79% in the fourth quarter, versus 0.18% for the industry overall, and their return on equity averaged 7.33%, versus 1.74% overall, the FDIC data shows.
"Like other parts of the country, we are slowing down, but on a performance or economic basis Texas continues to shine very well," said Alan Bush, the regional manager of the FDIC's Dallas division of research and insurance. But, he added, "well" is relative.
For the year, U.S. banks' earnings fell 27%, to $105 billion. In Texas, 2007 earnings were flat at $2.9 billion (excluding Comerica).
George Jones, the president and CEO of the $4.3 billion-asset Texas Capital Bank in Dallas, said he is "optimistically cautious" about 2008.
"I think we would be foolish to think we are totally isolated from the rest of the country," Mr. Jones said. "We are going to see some peripheral effects, but it is going to be less than on the East or West coasts."
Though Texas has diversified significantly since the oil bust of the 1980s, high energy prices — oil hit $100 a barrel in January — has helped its economy. Last year the state added the most new oil wells (nearly 750) in more than 20 years, according to data from Baker Hughes Rig Counts.
But Texas banks have not gone completely unscathed. In the fourth quarter 13.2% of them were unprofitable, versus 9.7% in 2006's fourth quarter.
While that is not as high as the 17.7% for banks nationwide, it is high enough to be worrisome, Mr. Bush said. "That is something that we will continue to focus on."
Texas' noncurrent loans also rose, but not as much as for the country overall.
Texas banks' fourth-quarter ratio of noncurrent loans to total loans rose 40 basis points from a year earlier, to 0.93%. The industry's ratio rose 60 basis points, to 1.39%.
"In general, it still seems like things are holding up a little better in Texas than what we are seeing around the rest of the country," said Brent Christ, an analyst at Fox-Pitt Kelton Cochran Coronia Waller. "Many banks did show an increase in nonperformers, but it was coming off a relatively low base."
He said that Sterling and Texas Capital are among several Texas companies with "a decent-size uptick" in nonperforming loans but that their chargeoffs remain relatively low.
Sterling's fourth-quarter ratio of nonperforming assets to total assets rose 21 basis points, to 0.53%. Its ratio of chargeoffs to average loans fell 11 basis points, to 0.16%. Texas Capital's nonperforming assets ratio jumped 29 basis points, to 0.56%, and its chargeoff ratio fell 1 basis point, to 0.07%.
Texas banks also did better than the industry overall as measured by chargeoff rates. They charged off an average of 0.28% of their loans in 2007, up from 0.23% in 2006 but still well below the national rate of 0.59%, the FDIC data shows.
Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Inc., agreed that Texas was holding up better than other parts of the country. But he said the state's banking industry would not completely evade the pressure the rest of the industry is feeling — and he said the biggest hurdle for Texas banks will probably be each other.
"I worry that competition levels there are still very stiff and margins are going to be coming down," Mr. Rabatin said.
The state's net interest margin averaged 3.75% for the fourth quarter, up 34 basis points from a year earlier and 20 basis points higher than the national average, FDIC data shows.
But, Mr. Rabatin said, "I don't think that will be the case going forward."
