Texas, its economy standing less tall, bows to outside banking. Merger with New York stalwart symbolizes trend

When Ben Love, chairman of Texas Commerce Bank, and Mark Shipley, chairman of New York's Chemical Bank, stood together to announce the merger of their two companies, it may have been the first time ever the 6-foot, 4-inch Mr. Love had to look up to another banker. Mr. Shipley stands 6 feet 8 in his stocking feet.

Love even jested about it, but he could not have missed the symbolism. At one time, Love's bank company led the 25 largest banking institutions in the United States in return on assets and return on equity.

That was in 1983. By 1986, the Texas company was struggling with a loan portfolio riddled with the results of declining prices in energy and agriculture as well as a glut of real estate.

The December merger announcement was the first of an expected gush of such unions made possible when the Texas Legislature passed an interstate banking law last fall. With the exception of an intrastate merger between two longtime Dallas rivals, InterFirst and RepublicBank, the flurry of activity with Texas banks has not materialized - yet.

``Nobody knows if the bottom is here,'' theorizes George Hempel, associate director of the Southwestern Graduate School of Banking at Southern Methodist University in Dallas. ``There is a risk to purchasing Texas banks, because you are not quite sure what you're getting.''

That interlopers have been allowed to breach the Texas borders at all is a sign of the times. The banking industry in Texas has long been based on the populist notion of diffusing power, an idea that dates back to Reconstruction, when Texans felt Yankees got a little highhanded with the state's assets and government. Banks go from boom to bust

Such concepts did not allow interstate banking, or even branch banking. As a result, a phenomenal number of banks reside in the state - more than 1,900 - or about 8 percent of the world's total.

But, as Federal Reserve economist Bob Clair notes of the pivotal last three years, ``Texas banks went from being the peak performers by many measures to fighting a real turnaround situation.''

Year-end figures for 1986 are sobering. While Texas Commerce made a profit of $20 million, compared with $53 million in 1985, the bank's nonperforming loans increased from $654 million to $986 million, or 7.3 percent of total loans.

InterFirst, which hopes to complete its merger with RepublicBank in the second quarter of this year, lost $326.5 million in 1986, exceeding its 1985 losses of $282 million. Nonperforming loans for the bank topped $1.09 billion in 1986, compared with $742 million in 1985.

Rumors of a possible overseas investor's coming in created a surge in interest in First City Bankcorporation earlier this month; prices rose from $4 a share to $6.50. In 1981, the stock had traded at 41.

In addition, BankTexas Group Inc., a holding company of 11 banks, was officially notified last week that it was in default on $24 million to four creditors, including Continental Illinois and Bankers Trust. Late last year, the FDIC turned down proposed purchase agreements that would have required ``substantial'' help from the Federal Deposit Insurance Corporation (FDIC). At the end of the third quarter, the latest period with figures available, the group had $1.3 billion in assets and $82.1 million in nonperforming assets, or 9.7 percent of loans.

A few months can make a big difference, as Texas bankers learned in 1986. After hoping that the downturn in energy which began in 1982 had abated, oil prices hit the skids, falling more than 50 percent by last fall. In fact, in the first half of 1986, Texas banks lost $247.4 million, compared with a profit of $652.2 million for the same period in '85.

Nonperforming loans hit 4.51 percent of total, against a national average of 2.87 percent. During that time, nonperforming loans were up almost 28 percent in three of the largest counties, an indication that more charge-offs could be in the works.

The largest number of Texas banks failed in 1986 since the depression, with 26 going down, more than in any other state. The number of FDIC employees in the bank supervision division has increased from 189 in 1983 to 302 for the four-state Dallas region: Texas, Oklahoma, New Mexico, and Colorado.

``I think we're at a status quo,'' says Sid Carroll, assistant regional director of the FDIC. ``The number of problems are not increasing as rapidly as they were.'' Poor diversification was a problem

Texas banks (as the Texas saying goes) have danced with those who brought them to the party - namely energy, agriculture, and real estate. When one of these segments hit a rough spot, another was likely to be in an upturn. Agriculture has been a troubling but sometimes profitable segment, depending largely on land inflation.

``It was awfully easy to put your marbles in those few baskets with little diversification,'' recalls Frank Anderson, senior vice-president with Ferguson & Co., a Dallas-based consulting firm for financial institutions. ``It wasn't unusual to see a 20 percent annual growth in loans.''

The boom set the stage, however, for more than just a financial bust. It has been psychological as well.

Alex Sheshunoff, president of Sheshunoff Rating Services, an Austin-based banking information firm, says Texas' long streak of uninterrupted growth made businesses and banks poorly prepared to deal with adversity.

``In Michigan,'' he says, ``they are used to dealing with cycles. Now, everyone in Texas is doing graduate work in humility.''

Most banks have whittled their energy portfolios from highs of more than 30 percent to about 9 percent of total. If oil stabilizes in the $18-a-barrel range, most of the energy charge-offs should be history, Mr. Anderson says.

Energy's softening, however, had led many of the big banks to funnel money into real estate. A glut of office space - Houston's vacancy rate is at 28.8 percent - and new tax laws make real estate investments less attractive, and Fed economist Clair predicts that many of those loans will be difficult to work out.

While Houston took a lot of chiding for its ``see through'' buildings, the vacancy rates in Dallas now amount to a troubling 28.4 percent, and Austin has hit 31.2 percent.

Few are expecting a resurgence of the boom in oil, banking, real estate, or anything else. Such euphoric good times were fun, but they weren't for real. Most prognosticators believe Texas is near the bottom and, as consultant Anderson predicts: ``The recovery will be slow at best.''

Anderson believes the out-of-state banks will bring a much-needed infusion of capital into the banks, but they, too, will be wary of recovery. ``They will provide capital that doesn't exist today, even though lending will be awfully careful.''

That more outsiders haven't jumped into the Texas banking market has surprised Sheshunoff. ``My guess is that everyone is still trying to evaluate what it is they have when they buy a Texas bank right now. Buying a bank in Texas is still more of a bet and less of an investment right now.''

There are still holdouts who wish the outsiders would stay out.

``I really feel a concentration of banking powers is not good for the individual or small businesses,'' says Gary Tongate, president of the 18-month-old City National Bank, Whitehouse, a community of 5,000 in north central Texas. ``The big banking companies are going to look at bottom lines and not people.''

Since his bank has been swallowed up twice now, James B. Bexley, president of Texas Commerce Bank in McAllen, says such fears are largely unfounded.

Purchased by Texas Commerce in 1978, his bank was part of the Chemical transaction. He believes the New York bank may be well equipped to handle the problems of a border economy. After all, he notes, ``They operate in 38 foreign countries. They understand worldwide implications of Mexico, the problems with devaluation, and agricultural problems.''

This new era in Texas banking is unsettling for those in the industry, which employs about 100,000. A Dec. 30 transition newsletter for RepublicBank-InterFirst's 17,400 employees hastened to calm concerns about layoffs but confirmed reports of a 12 percent reduction of the combined work force of the two banks.

A study by economist Clair indicates that the number of banks in Texas may be reduced by as much as 50 percent. But because of branch banking, approved by voters in November, the number of banking offices may increase by as much as 90 percent, a boon for consumer convenience. In the long run, however, through improved efficiency in banking, employment may fall by 7,000.

Individual consumers will benefit from an expected surge in service competition. Texas banks have been long on ``wholesale'' activities, buying money and making business loans, and less enthusiastic about individual consumers.