It's not much fun being a banker in Texas these days. The 50 percent-plus drop in oil prices has taken its toll with lightning speed. Socked with bad loans from companies that can't meet their payments and expecting more of the same, the top seven banks in Texas are scrambling to limit the damage.
Their financial statements from the first quarter of 1986 look like a war zone: earnings leveled to almost nothing for three of the banks, losses piled up to $374 million for three others, and loan loss reserves -- the amount banks set aside for future bad loans -- tower at nearly $1.5 billion.
But the situation here, although it is bleak, does not portend a major financial crisis, either in the state or in the rest of the country, bankers and economists say.
True, Texas banks have great effect on the rest of the banking community, accounting for about 14 percent of the banking in the United States. True, the failure of a major bank would shake up big banks in New York, Chicago, and San Francisco, which have banking relationships with Texas banks and hold their debt securities.
But ``the situation is containable,'' says Mark Booth, an economist at Data Resources Inc., a Lexington, Mass., consulting firm.
``We always assume the Federal Reserve will come to the rescue,'' he says, citing the bailout of Continental Illinois in 1984. Even if a big failure were to occur, which he and other economists doubt, ``the banking industry overall is fairly healthy, which is why the Fed could afford to come in.''
Which is not to say that Texas banks are home free.
They are anxious about loans to their neighbor Mexico, a major oil producer which has seen its major export plummet in value.
Loans to the state's troubled farmers, who have not only been hit by falling commodity prices but are getting smaller royalty payments from oil companies that lease their land, are in jeopardy.
And loans for real estate development may prove another black hole for banks, as the value of property drops with the price of oil and developers continue to build, despite a glut in office space. Even Texas banks are guilty of one-upmanship with high-rise office space. The skylines of Dallas and Houston are largely made up of towering bank buildings.
Nonetheless, economists credit Texas banks with moving quickly, cutting costs, reducing staff, and rearranging their portfolios toward lower-risk and middle-market companies.
``If oil prices stay where they are or go lower, absolutely, we're not out of the woods,'' says Alan Coleman, president of the Southwestern Graduate School of Banking at Southern Methodist University. ``If oil prices bounce back up and settle in at $15 to $18 [a barrel], then probably the banks have taken some pretty aggressive reserves and we've seen the worst of it.''
Moreover, he and others say, low oil prices lower costs in other industries, both in Texas and the rest of the US, and the beneficial effects of that will ultimately help Texas banks.
In the meantime, banks are leafing back through recent history to see how they got in such a mess. It doesn't take much sophisticated analysis.
Back in the days of booming oil prices, in the late 1970s and early '80s, many forecasters expected oil prices to have reached between $65 and $90 a barrel by now.
Business people jumped into the oil business and began operating high-cost, low-producing wells; at $30 a barrel, even marginal wells could make a profit -- and the price could only go up, right?
The surge in production meant that oil rigs and equipment couldn't be made quickly enough, bidding up the price of such equipment. Banks used the value of that equipment as collateral and made big loans to such companies based on the inflated value.
Then, when oil prices began to soften in 1982, some marginal drillers stopped operating, and bigger oil companies cut back their production. The demand for oil equipment fell, and the value of that equipment -- and the collateral for banks -- tumbled to 10 cents on the dollar in some cases.
Conservatism during that time is one reason RepublicBank, the state's largest bank holding company, is weathering the storm better than others, says Edward McClelland, vice-president and economist.
He recalls that several years ago when RepublicBank was losing market share to its competitors, chairman James Berry went down to the energy group and ``chewed them out.''
They told him if he wanted to change the bank's lending criteria, they would start going after oil equipment companies in a big way. He went back up to his office and decided to stay the course, a move that has spared the bank much money since, Dr. McClelland says.
RepublicBank, which as of the end of last year had lent only $33 million to service and supply companies -- by far the smallest amount of the top five -- saw its earnings drop 35 percent from a year earlier, to $23 million.
In contrast, First City Bancorporation had the most loans to such companies -- $375 million -- and scored the largest loss of any Texas bank in the first quarter, $232 million.
Now banks are making big allowances for those loans to go bad. In fact, all three banks that declared quarterly losses -- First City, MCorp (with a $120 million loss), and Texas American ($22 million) -- would not have suffered losses had they not boosted their reserves so much.
``We consider this a one-time event, barring any significant deterioration of the economy,'' says George McCane, a vice-president of MCorp, which added $220 million to its loan-loss reserves this quarter.
The future is uncertain, however. Real estate is a much bigger part of these banks' loan portfolio -- generally near 40 percent. Here, the horizon is ominous.
In Dallas County, which is doing far better than, say, Houston or more oil-dependent regions, foreclosures are way up. A record 1,007 properties were declared in default of mortgage commitments and scheduled for foreclosure in April, up from 405 a year ago.
Most were residential properties. But Dallas, which has one of the highest vacancy rates for office space in the country, is still building as if there's no tomorrow.
Developers ``figure interest rates will be going up, and they want to get a hole in the ground before they do,'' one observer says. He says real estate could be the next oil-crisis fiasco.
There are already tremors of this: Texas Commerce, for example, charged off more in bad real estate loans in the first quarter ($8 million) than in energy loans ($6 million).
Still, says Dennis Shea, a bank analyst at Morgan Stanley, ``there is not the potential in real estate for loss that there is in drilling and services. You see drilling rigs fall in value from 100 cents on the dollar to 8 to 10 cents on the dollar; that wouldn't happen for a group of real estate projects.''
McClelland at RepublicBank contends that ``supply creates its own demand,'' and that cheap available housing and office space will draw people and businesses to Texas. Dr. Coleman at SMU says that lower interest rates will make it easier for developers to carry their payments, which reduces the risk to banks.
Aside from losses, Texas banks worry about money-center banks moving onto their turf. ``It's a prime time for a Citicorp or a Chase to come in here and start cleaning up,'' says one banker at MCorp. ``It's bad enough that our depositors use their credit cards.''
At this point, an out-of-state bank cannot acquire a failed Texas bank unless other Texas banks are unwilling to save it. Regulators have proposed easing those conditions; moreover, Texas bank executives worry that interstate banking rules will be relaxed before they have a chance to recover.
Even without regulators' changes, out-of-state banks could cut into the Texans' traditional customer base by offering more attractive loans and services than could Texas banks, in their weakened position.
In some ways, the wild expansion that turned MCorp from a $1.3 billion (assets) bank a decade ago into a $22.2 billion bank today lends stability to the system, says Coleman. Like other large holding companies, MCorp grew by snapping up smaller banks (Texas doesn't have branch banking; but to have a presence statewide, holding companies acquire other banks).
Coleman acknowledges that the 15 Texas banks that have failed in the last 15 months were mainly small energy- and agriculture-related banks. But, he says, small and medium-size banks as a whole did better than their larger brethren last year.
``The big exposures were in the large units of the big banks,'' he says. ``If anything the earnings contributions from those smaller to medium-sized banks have probably helped to steady the ship a little bit.''
For now Texas bankers, once so wildly optimistic about the oil industry and the economic growth of their state, are learning a new concept: caution.