Texas Bank Growth Needs to be Wrangled

NEW YORK ( TheStreet) -- Texas's banks and thrifts are healthier than in the rest of the nation, but that doesn't mean all is right in the Lone Star State.

While industry consolidation has been a theme on our coverage of the banking scene in four key states seeing turmoil from the real estate crisis -- Georgia, Florida, Illinois and California -- the prime catalyst for consolidation in Texas is not the need for additional capital or the threat of bank failures, it is the lackluster earnings.

During the fourth quarter, 15% of Texas banks and thrifts posted net losses, which compares well to 19% for all of the United States, according to data supplied by HighlineFI. But 36% of all Texas institutions had fourth quarter returns on average equity (ROE) of less than 5%, which is a rather lousy return, especially if you are sitting on the board of directors of a privately held three-branch community bank, considering whether or not to throw in the towel.

While banks are seeing a boost to earnings at this point in the credit cycle from improving asset quality and the release of loan loss reserves, net interest margins are squeezed in the prolonged low-rate environment, banks face repeated hits to their fee revenue. Following the reduction in fee income from the requirement that customers "opt-in" before receiving expensive overdraft protection that was implemented in August 2010, large banks were hit with the Durbin Rule's clampdown on interchange fees charged to merchants for processing debit card purchases, which of course affected smaller banks as well.

Community banks now see another threat to the "free checking" business model, with Consumer Financial Protection Bureau, last Wednesday announcing that it had "launched an inquiry into checking account overdraft programs to determine how these practices are impacting consumers," with Director Richard Cordray saying that "overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it."

KBW analyst Fred Cannon on Wednesday said that "the contraction in the mortgage securitization market and new regulations for NSF fees and debit interchange are the primary drivers of lower fee income," and that "it feels like the banks have come full circle now back to the early 1990s," and that "banks must find another avenue for fee income growth in order to expand ROEs, if no other variables change."

All four of the states we have already surveyed for the fourth quarter had banks or thrifts included on TheStreet's Bank Watch List, that were undercapitalized under ordinary regulatory guidelines. Texas had none.

Texas Banks with Weakest Asset Quality

The following list includes all banks in the state with nonperforming assets comprising more than 10% of total assets as of Dec 30:

Nonperforming assets (NPA) include nonaccrual loans, loans past due 90 days or more and repossessed assets. Government-guaranteed loan balances are excluded. The ratio of net charge-offs to average loans is annualized.

The total risk-based capital ratios needs to be at least 8% for most institutions to be considered adequately capitalized by regulators and 10% for most to be considered well-capitalized. Most of the undercapitalized banks on the above list are operating under regulatory orders to achieve and maintain total risk-based capital ratios higher than 10%.

The list also includes financial strength ratings provided by Weiss Ratings. Weiss Ratings uses a very conservative ratings model, placing the greatest weight on capital strength, credit quality and earnings stability to assign ratings ranging from A-plus (Excellent) to E-minus (Very Weak).

The Texas institution with the highest nonperforming assets ratio as of Dec. 30 was Park Cities Bank of Dallas, which had $612 in total assets as of Dec. 30 and a crippling nonperforming assets ratio of 29.23%. The bank is operating under an April 2010 consent order from the FDIC and state regulators, agreeing to raise its total risk-based capital ratio to 13%, submit a strategic plan, and improve its credit administration and interest rate risk management.

Largest Texas Banks

Deposit gathering in Texas is dominated by three of the "big four" U.S bank holding companies.

JPMorgan Chase Bank NA -- the main subsidiary of JPMorgan Chase ( JPM) -- has the leading deposit market share in Texas, with 18% of deposits in the state as of June 30, 2011, according to the most recent FDIC data. The bank's deposit market share grew from 16% a year earlier.

Bank of America NA-- held by Bank of America ( BAC) -- has a second-place market share in Texas, with 14% of deposits in the state as of June 30, with its share unchanged from a year earlier. After Tom Brown of Second Curve Capital said in December that he had suggested to Bank of America board of directors member Chad Gifford that the company consider selling part of its branch network -- with the company's Texas operations given as an example -- as a way of showing the market that the company's assets really were worth more than the fraction of book value the stock was trading for, the Wall Street Journal on Feb. 17 reported that the company might indeed consider a Texas sale if it were to come under severe stress.

According to the Journal report, Bank of America would consider selling its Texas branches, along with its U.S Trust wealth management subsidiary, it the company were forced to raise capital "in a market shock or severe economic downturn."

Wells Fargo Bank, NA -- held by Wells Fargo ( WFC) is in third place for Texas Deposits, with a 9% share as of June 30, 2011, declining slightly from a year earlier. Wells Fargo has another subsidiary -- Wells Fargo Bank South Central, NA -- with a 3% Texas deposit market share as of June 30, 2011.

The bank headquartered in Texas with the largest deposit market share is fourth-place USAA Federal Savings Bank, with an 8% share as of June 30, 2011, increasing from 7% a year earlier.

Here are the 10 largest banks headquartered in Texas, along with key metrics as of Dec. 30:

The largest Texas bank is Comerica Bank of Dallas, which is the main subsidiary of Comerica, with $61 billion in total assets as of Dec 30. The bank's fourth-quarter return on average assets (ROA) was 0.86%, and its earnings performance has been steady over the past year, with ROA ranging from 0.74% to 0.89% over the past five quarters.

The holding company relocated to Dallas from Detroit in August 2007, and as of Dec. 31 218 of the company's 494 branches were located in Michigan, while 142 were in Texas.

Comerica was in 11th place in its new home market, with a 1.2% deposit market share as of June 30, 2011. The company in July of last year acquired Sterling Bancshares of Houston, in a stock deal valued at $803 million. Sterling Bank had a 16th place market share in Texas as of June 30, 2011, with $4.2 billion in deposits, for a 0.8% share.

Comerica's shares closed at $29.45 Tuesday, returning 14% year-to-date, following a 38% decline in 2011. The shares trade for just under tangible book value, according to HighlineFI, and for 13 times the consensus 2012 earnings estimate of $2.31, among analysts polled by Thomson Reuters. The 2013 consensus EPS estimate is $2.61.

Interested in more on Comerica? See TheStreet Ratings' report card for this stock.

The second-largest Texas bank is USAA Federal Savings Bank, with $52.2 billion in total assets as of Dec. 30. The bank is part of USAA, which provides insurance banking and investment services to military personnel.

The third-largest bank headquartered in Texas is Wells Fargo Bank South Central, NA of Houston, with $33.7 billion in total assets as of June 30. This subsidiary of Wells Fargo is a mortgage lender, originating $55.6 billion in first-lien residential loans during 2011, while selling $48.9 billion.

Next is Frost National Bank of San Antonio, which had $20.4 billion in total assets as of Dec. 30. The bank is a subsidiary of Cullen/Frost Bankers ( CFR). First National Bank's fourth-quarter ROA was 1.19%, declining from 1.79% the previous quarter, but improving from 0.69% a year earlier.

The holding company reported that noninterest income declined during the fourth quarter by $5 million because of the Durbin rule, while service charges on deposit accounts also declined. The company also saw an increase in noninterest expense, with salary expense increasing by $5.4 million, or 9%, from a year earlier, "as a result of normal annual merit and market increases, and increases in stock-based compensation expense and incentive compensation."

Cullen/Frost's shares were up 7% year-to-date through Tuesday's close at $56.71, following a 10% decline last year. The shares trade for twice their tangible book value and 16 times the consensus 2012 EPS estimate of $3.65. The consensus 2013 EPS estimate is $3.82.

Deutsche Bank analyst Dave Rochester has a "Hold" rating on Cullen/Frost, based on the stock's relatively high valuation, saying on Jan. 26 that "while CFR has an attractive deposit franchise in one of the strongest economic regions of the U.S., with good longer-term growth prospects, and solid management, we await a better entry point, as we expect more limited upside potential to trading multiples/EPS/ROTCE."

Interested in more on Cullen/Frost Bankers? See TheStreet Ratings' report card for this stock.

Amegy Bank, NA of Houston had $12.2 billion in total assets as of Dec. 30. The bank is a subsidiary of Zions Bancorporation ( ZION) of Salt Lake City.

Amegy Bank performed solidly during 2011, with ROA ranging from 1.06% to 1.77%, and earning $159.4 million for the year.

Zions owes $1.4 billion in federal bailout funds received in 2008 through the Troubled Assets Relief Program, or TARP. Please click here for a discussion on the holding company's prospects for exiting TARP, as a catalyst for the shares.

Zions Bancorporation's shares closed at $19.22 Tuesday, returning 18% year-to-date, following a 33% drop in 2011. The shares trade just above tangible book value, and for 13 times he consensus 2012 EPS estimate of $1.43. The consensus 2013 EPS estimate is $1.80.

Interested in more on Zions Bancorporation? See TheStreet Ratings' report card for this stock.

Another strong performer among the largest Texas banks is Prosperity Bank of El Campo, which achieve ROA ranging from 1.47% and 1.57% during 2011. The bank is the main subsidiary of Prosperity Bancshares ( PB).

The holding company's shares closed at $42.72 Tuesday, returning 6% year-to-date, following a 5% return last year.

Prosperity Bancshares on Monday announced a deal to acquire American State Financial Corp., which is the privately held parent of American State Bank of Lubbock, which had $3.1 billion in total assets as of Dec. 30, with 37 branches spread across West Texas.

Prosperity agreed to pay $178.5 million in cash, and "up to 8,525,000 shares of Prosperity common stock" to complete the deal, which could be valued as high as $529.2 million, based on Prosperity's closing price of $41.14 last Friday.

Prosperity's continued expansion through acquisitions and strong earnings performance is reflected in relatively high valuation in the current environment, with the shares trading for 3.2 times tangible book value and 14 times the consensus 2012 EPS estimate of $3.04. The consensus 2013 EPS estimate is $3.30.

Following the deal announcement, KBW analyst Jefferson Harralson on Monday reiterated his "Market Perform" rating for Prosperity, with a $45 price target, saying he was "excited about value-enhancing use of capital, and saw the deal as low risk, but significantly accretive" to earnings.

Interested in more on Prosperity Bancshares? See TheStreet Ratings' report card for this stock.

Strongest Texas Banks and Thrifts

Based on third-quarter financial reports, 117 Texas institutions were assigned "recommended" ratings of B-plus or above by Weiss Ratings:

The list is sorted by rating, then alphabetically city, and then by institution name.

All of the Texas banks and thrifts on Weiss's recommended list were strongly capitalized as of Dec. 30, with total risk-based capital ratios exceeding 12% and 65% had total risk-based capital ratios exceeding 20% or twice the level most institutions need to be considered well-capitalized by regulators.

Among the recommended Texas institutions, 72% had fourth-quarter returns on average assets exceeding 1%.

Thorough Bank Failure Coverage

There have been no bank or thrift failures in Texas this year. Since the current wave of bank and thrift closures began in 2008, Texas has seen only 10 failures, which reflects the state's escape from the word effects of the real estate crisis, but is still a small number, considering how many banks there are in the state.

Georgia leads all states with 75 institutions closed by regulators since the beginning of 2008, followed by Florida, with 60 failures, Illinois with 48, and California, with 38 bank and thrift closures.

There were two bank failures in Georgia and Minnesota on Friday.

All 423 U.S. bank and thrift closures since the beginning of 2008 are detailed in TheStreet's interactive bank failure map:

The bank failure map is color-coded, with the states having the greatest number of failures highlighted in dark gray, and states with no failures in light green. By moving your mouse over a state you can see its combined 2008-2011 totals. Then click the state to open a detailed map pinpointing the locations and providing additional information for each bank failure.


-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.