Federal Deposit Insurance Corporation 

FDIC 

Bankin; 

Review Winter 1990 

Vol. 3, No. 2 

A Letter from the Editor 

In 1980 the phrase "the Texas economy" evoked images of surging oil prices and 

boundless possibilities; by 1990 those images had been replaced by the reality of va 

cant office buildings and bankruptcy court. In the interim, nine of the ten largest Texas 

banking organizations were recapitalized with FDIC or other outside assistance, 425 

Texas banks failed or were assisted by the FDIC, and the FDIG incurred insurance 

losses of nearly #11 billion in Texas. 

How did this calamity occur? Certainly, much of the blame can be ascribed to 

economic events, but what was the role of the supervisory and examination process 

and the deposit insurance system itself? In an effort to answer these questions, 

Chairman L. William Seidman directed the FDIC's Division of Research and Statistics 

to conduct a study of the causes of the Texas banking crisis. 

The study, entitled "The Texas Banking Crisis: Causes and Consequences," appears 

in this issue of the FDIC Banking Review. In light of the length and importance of 

the study, the Editorial Committee decided to publish it in a special issue. This study 

contains much new and interesting information on the Texas banking crisis and, in 

my view, will come to be regarded as an extremely valuable contribution to the historical 

record on the anatomy of that crisis. 

George E. French 

Editor 

FDIC Banking Review 
Federal Deposit Insurance Corporation 

FDIG 

Chairman 

L William Seidman 

Division of Research 

and Statistic**, 

Director 

Win. Hoger Wjitson 

Editor 

George E. French 

Editorial Committee 

Frederick S. Cams 

Gary S, Fissel 

Arthur .1. Murion 

list rail vc 

Manager 

Delta Voesar 

Editorial Secretary 

Gathy Wright 

Design and Production 

Design and Priming 

Unit 

The views expressed are 

[hose of the authors and do 

not necessarily refled of

ficial positions of [he Federal 

Deposit Insurance Corporalion. Articles may be 

reprinted or abstracted if the 

Review and author are 

credited. Ptease provide [he 

PDIG's Division of Research 

and Statistics with a copy of 

any publications contain ing 

reprinted material 

Single-eopy subscriptions 

are available to the public 

free of charge. Requests for 

subscriptions, back issues or 

address changes should be 

mailed \.o: FDlC tianking 

Review, Office of Corporate 

Communications, Federal 

Deposic Insurance Corpora 

tion, 550 17th Street, NW, 

Washington, DC 20429. 

Review Winter 1990 

Vol. 3, No. 2 

Table of Contents 

Page 

Executive Summary 1 

Introduction 2 

Growth Rates among Commercial Banks: Texas versus the U.S 4 

Condition and Performance Trends: 

Texas versus the U.S 6 

Major Metropolitan Areas 7 

Texas Bank Holding Companies 9 

Bank Supervision: Bank Examination and Oversight 9 

Funding Bank Activities: The Rote of Deposit Insurance 13 

.Appendices 

A. Trends in Lending Activity: Texas versus the U.S 15 

B. Failed-Bank Lending Activity: Major Metropolitan Areas 24 

C. Case Histories 27 
The Texas Banking Crisis: 

Causes And Consequences 

1980 1989 

by John O'Keefe* 

Executive Summary 

The purpose of this analysis is to 

sxplain die recent high failure 

rates among Texas commercial 

banks. Specifically, financial and 

nortfinancial market data, as well as 

information regarding regulatory ac 

tivity in Texas over the past decade, 

were examined in order to deter 

mine those factors contributing to 

the recent problems of the state's 

commercial banks. 

Background 

Over the past decade, 349 Texas 

commercial banks failed, and an ad 

ditional 76 required FDIC financial 

assistance. The number of failed and 

assisted Texas banks rose from three 

in 1983 to 134 in 1989. In 1988 and 

1989, failed and assisted banks 

(hereafter denoted as failed banks) 

in Texas comprised over 80 percent 

of total U.S. failed-bank assets, and 

over 80 percent of total FDIC 

reserves for losses on failed banks. 

In addition, both the domestic 

energy and local commercial realestate markets, in which Texas banks 

invested heavily, experienced 

dramatic declines after 1985. 

Principal Findings 

— Most Texas commercial banks 

that failed over the past decade 

reacted quickly to oil-price 

movements. Loan concentrations in 

commercial and industrial loans, 

which include loans to oil and gas 

producers, increased as oil prices 

rose from 1978 to 1981. Commer 

cial loan concentrations generally 

peaked in 1982, shortly after oil 

prices began to drop. These concen 

trations subsequently declined along 

with oil prices. 

— Texas commercial real-estate 

growth outpaced increases in office 

employment from 1982 to 1987, 

resulting in a 30 percent office 

vacancy rate by 1987 for the com 

bined Austin, Dallas, Houston and 

San Antonio areas. Failed commer 

cial banks generally increased con 

centrations in construction and land 

development loans long after the 

decline in local real-estate markets. 

— As commercial real-estate 

vacancy rates grew, failing commer 

cial banks continued to fund com 

pleted construction projects, as 

evidenced by the growth in loans 

secured by nonresidential properties, 

Traditionally, long-term financing of 

completed commercial properties 

would have been taken over by nonbank financiers. 

— Asset growth and increased 

investment in risky commercial realestate development projects by fail 

ed Texas banks were funded by both 

insured and uninsured deposits. 

— The frequency of examinations 

of failed banks in the Southwest has 

been the lowest for failed banks in 

the nation for most of the past 

decade. In addition, the number of 

bank examinations declined 

significantly in 1984 and 1985 for 

the nation, and for Texas, in par 

ticular. 

— Once problems became apparent 

to regulators and the market, re 

trenchment began at most failing 

institutions, followed by resolution. 

— Over the past decade, nine of 

the ten largest Texas bank holding 

companies were recapitalized with 

FDIC or other outside assistance. 

Equity capital ratios for the nine 

organizations were, on average, over 

25 percent higher than those of their 

peers between 1980 and 1982. 

However, by 1987 this capita! 

cushion had eroded, with these nine 

organizations holding a third less 

capital than their peers. 

* John O'Keefe is a Financial Economist 

in the FDlC's Division of Research and 

Statistics. 

The author would like to thank Arthur 

Murton, Maureen Muldoon, Jane Co burn, 

Michael Graves and Donald Inscoc of the 

Division of Research and Statistics for their 

suggestions and assistance. In addition, in 

formation and comments received from 

Division of Supervision staff, Robert 

Miailovich, Robert Walsh, and the staff of 

the FDIG's Dallas Regional Office were very 

helpful. 

As in all such endeavors, any remaining 

faults are the responsibility of the author. 
The Texas Banking Crisis 

Introduction 

Over the past decade, 349 Texas 

commercial banks failed and an ad 

ditional 76 required FDIC financial 

assistance. As shown in Figure 1A, 

the number of failed and assisted 

banks (hereafter denoted as failed 

banks) in Texas approximately doubl 

ed each year between 1983 and 

1988, increasing from three failures 

in 1983 to 175 in 1988 (and 134 in 

1989). These figures may be 

somewhat misleading because of the 

branch banking restrictions in Texas, 

which were not removed until 1987. 

However, with the failure of most of 

Texas' largest bank holding com 

panies in 1988 and 1989, the data 

show a disproportionate amount of 

failed banks' assets among Texas 

banks (see Figure IB). 

The increase in failures among 

Texas commercial banks has increas 

ed resolution costs for the FDIC. 

Figure 1C shows FDIC loss reserves 

for banks that failed between 1985 

and 1989. As expected, the cost of 

resolving failures in Texas has 

become a large portion of total 

resolution costs in recent years. FDIC 

loss reserves for Texas banks that fail 

ed in 1985 were #80.9 million, or 9.2 

percent of total reserves. The situa 

tion changed dramatically by 1988, 

with FDIC loss reserves on Texas fail 

ed banks reaching $4.7 billion, or 88 

percent of total FDIC loss reserves on 

failed banks that year. In 1989, FDIC 

loss reserves for Texas failed banks 

remained high at $4.6 billion, or 81 

percent of total loss reserves for the 

year's failures. 

Historically, the proportional cost 

of resolving bank failures decreases 

as bank asset size increases. Among 

banks that failed between 1985 and 

1989, we find that for banks with 

assets of $30 million or less, FDIC 

loss reserves averaged 27.3 percent 

of bank assets, while for banks with 

assets of $1 billion or more, loss 

reserves averaged 10.8 percent of 

bank assets. 

Figure ID shows FDIC loss reserves 

as a percentage of failed-bank assets 

for Texas and the rest of the nation. 

Figure 1A 

Number of Failed and Assisted Banks 

FDIC-Insured Banks (1980-1989) 

No. of Failed and Assisted Banks 

320 

280 

240 

200 

160 

120 

80 

40 

0 

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 

Year 

The proportional cost figures for The high failure rates among Texas 

Texas failed banks have declined in commercial banks are attributable to 

recent years, primarily because re a combination of several develop 

cent failures in the state have involv ments. The first was the trend in 

ed large bank holding companies. In crude-oil prices (and related prod 

1988, the failure of First Republic- ucts). The OPEC oil embargo of 1973 

Bank and the assistance of First City contributed to large increases in 

Bancorporation comprised most of domestic crude-oil prices between 

the total failed-bank assets in Texas January 1973 and June 1981. Crudethat year. Similarly, the failures of oil prices subsequently declined 

MCorp and Texas American Bank moderately from midyear 1981 to 

comprised most of the failed-bank December 1985, then fell a dramatic 

assets in Texas in 1989. 45 percent in 1986. Crude-oil prices 

Figure IB 

Assets of Failed and Assisted Banks 

FDIC-Insured Banks (1980-1989) 

Billions of Dollars 

50 

40 

30 

20 

10 

1980 19B1 1982 19B3 1984 1985 1986 1987 1988 1989 

Year 
FDIC Banking Review 

have fluctuated less in recent years, 

and as of July 1990 remained below 

1980 price levels. 

The second important development 

was the boom and bust in Texas real 

estate; especially, office and land 

development projects. Following the 

late 1970s boom in the energy 

markets, Texas office real estate grew 

rapidly, as did office employment 

However, after the drop in oil prices 

in 1982, the expansion in office space 

outpaced the growth in office employ 

ment until 1987. Overbuilding in 

Texas eventually led to 25 percent to 

30 percent office vacancy rates in the 

major metropolitan areas in Texas 

between 1986 and 1989. 

Changes in the composition of the 

loan portfolios of Texas commercial 

banks constituted the third factor con 

tributing to the high failure rates of 

the late 1980s. Concentrations in con 

struction and land development pro 

jects among Texas banks grew from 

3.5 percent of bank assets in 1978 to 

8.3 percent of assets in 1984, and re 

mained at high levels through 1986. 

Over this same period, nonperform

ing assets, comprised largely of 

nonperforming real-estate loans, grew 

steadily among Texas banks.1 

Concentrations in commercial and in 

dustrial loans (which include energy 

loans) followed oil-price movements, 

rising from 20.7 percent of Texas 

bank assets in 1978 to 27.8 percent 

in 1982. However, as oil prices declin 

ed, so too did related loan concentra 

tions. As of 1989, commercial and 

industrial loans comprised 16.5 per 

cent of Texas bank assets. 

The final significant trend relates to 

bank examinations. The frequency of 

examinations of Texas commercial 

1 Nonperforming assets are defined as the 

sum of all loans and leases (hereafter 

denoted as loans) past due 90 days or more 

[excluding past due restructered loans), 

nonacoural loans, and other real-estate own 

ed minus investments in real-estate ventures. 

Nonperforming real-estate loans are defin 

ed as the sum of real-estate loans past due 

90 days or more plus nonaccural real estate 

loans. 

Figure 1C 

FDIC Loss Reserves 

Failed and Assisted Banks 

Billions of Dollars 

6 

1985 1986 1987 1988 1969 

Failure Year 

banks was among the lowest in the banks is analyzed, as it relates to in 

nation for the last decade. Bank ex creased bank-failure rates in the state. 

aminations were least frequent in To begin, data are presented on the 

1984 and 1985 across the country, as growth of the commercial banking in 

well as in Texas. The lengthening of dustry in Texas over the last two 

the exam interval was due, in part, to decades. Next, financial and nonfinan

hiring freezes and increased examiner uial market events relevant to Texas 

workloads. These trends also apply to commercial banking problems are 

Texas commercial banks that failed summarized. Subsequent sections ad 

during the past decade. dress the following topics: the ac 

In the remainder of this study, the tivities of failed banks in four major 

recent history of Texas commercial metropolitan areas in Texas; the 

Figure ID 

FDIC Loss Reserves 

Failed and Assisted Banks 

Percent of Failed-Bank Assets 

28 

24 

20 

16 

12 

8 

4 

1985 1986 1987 1988 1989, 

Failure Year 
The Texas Banking Crisis 

Figure 2A banks within a holding company 

Asset Growth Rates of FDIC-Insured Commercial Banks would be used to gather deposits, 

Annual Growth Rate (Percent) 

experiences of the large bank holding 

companies in Texas that have failed 

in the past decade; and the super 

visory activities of federal bank 

regulators. Finally, the role that the 

deposit insurance system may have 

played in the Texas banking crisis is 

discussed. 

Growth Rates among 

Commercial Banks: 

Texas versus the U.S. 

Banking activity in Texas increas 

ed greatly during the late 1970s and 

early 1980s. Although this paper 

focuses on FDIC-insured commercial 

bank activity, similar growth occur 

red among Texas thrifts. Texas com 

mercial bank asset growth outpaced 

the national average from 1977 

through 1984 (see Figure 2A). In 

1981, Texas banks' asset growth 

reached a high of 20.5 percent, com 

pared to 8.6 percent for all other U.S. 

banks. 

Asset growth of Texas banks be 

tween 1977 and 1980 occurred 

primarily through expansion by ex 

isting banks. Subsequent asset growth 

was aided by a large increase in new 

bank charters (see Table ] and 

expansion of bank holding companies 

as a means to achieve an effective 

branch banking network in a unit 

banking state. Consequently, some of 

the increase in chartering in Texas 

prior to 1987 facilitated the funding 

of additional growth by bank holding 

companies. The newly chartered 

which would be channeled to other 

banks through sales of federal funds 

or interbank deposits to finance ad 

ditional lending. Much of the new 

chartering, however, involved small 

banks not affiliated with the large 

bank holding companies. Between 

1980 and 1989, 673 banks were 

chartered in Texas, comprising 24 

percent of all U.S. bank charters 

issued over this period. Of these 673 

banks, 511 were national banks; 71 

were state-chartered, Federal 

Reserve member banks; and 91 were 

state-chartered, nonmember banks, 

The major factor contributing to 

the growth of Texas commercial 

banks since 1974 has been the con 

dition of domestic energy markets, 

gas and crude oil in particular. The 

importance of oil prices for the Texas 

economy has, however, changed over 

the past decade. A recent study by 

the Federal Reserve Bank of Dallas 

states that Texas nonagricultural 

employment follows oil-price 

Figures 2B and 2G). * Financial statistics on banks failing/assisted within a given year were measured 

Prior to 1987, Texas law prohibited as of the prior year-end. For example, for the 62 failed and assisted banks in Texas 

branch banking. This resulted in the in 1987, financial data were measured as of year-end 1986. This table includes 

Texas failed/assisted banks from 1985 to 1989. 
FDIC Banking Review 

Figure 2B 

New Commercial Bank Charters 

1970-1989 

No. of Charters Issued 

320 

280 

240 

200 

160 

120 

80 

40 

1971 1973 1975 1977 1979 1981 1983 1985 1S87 1939 

Year 

movements with a short lag.2 In ad 

dition, the study concludes that in 

flation in oil prices after the OPEC 

oil embargo of 1973 led to increas 

ed dependency of the Texas 

economy on crude-oil prices until 

1983. The study also finds that this 

dependency has mirrored the decline 

in oil prices since 1983. 

Texas bank asset growth also 

followed oil prices, but with a lag. As 

oil prices rose between 1973 and 

1981, so too, did Texas bank assets, 

The rapid inflation in oil prices in 

1980 and 1981 led to accelerated 

growth in Texas bank assets. Mild 

deflation in oil prices between 1982 

and 1985 brought Texas bank asset 

growth rates closer to those for other 

U.S. banks. The sharp decline in oil 

prices in 1986, and the subsequent 

failures of most of the state's largest 

banking organizations, led to a 

shrinkage of the Texas banking 

industry until 1989. 

; T. Fomby and J. Hirschberg, "Texas in 

Transition: Dependence on Oil and the Na 

tional Economy," Federal Reserve Bank of 

Dallas, Economic Review (January 1989). 

3 An exception to this statement is the case 

of completely inelastic supply. 

One question that is raised by these 

growth trends is whether Texas bank 

ing markets suffered from "overbank

ing." The term "overbanking'! 

connotes an overall expansion of 

bank activities that was imprudent or 

unwarranted. verb an king might 

therefore be characterized by ex 

cessive asset growth rates, rather than 

an increase in any specific type of 

lending (e.g., growth in commercial 

real-estate loans). By definition, im 

prudent asset growth results from a 

lowering of credit standards by 

bankers searching for new business. 

Unfortunately, a concise measure of 

overbanking does not exist. Rapid in 

creases in asset levels or new bank 

charters do not in themselves imply 

overbanking. Economic theory 

predicts that regardless of the degree 

of competitiveness in a market, an 

increase in demand for products 

results in increased output levels, 

other things being equal.3 The rele 

vant question in this context is 

whether the increase in commercial 

bank activity was imprudent, or 

merely an appropriate reaction to 

changes in market conditions. If 

Texas financial markets did suffer 

from overbanking, the result of in 

creased competition and relaxed 

credit standards would be increased 

failure rates, including both new and 

established banks. However, since 

new institutions typically have 

greater difficulty facing economic 

stress, one would expect a higher 

failure rate among newer banks. This 

was indeed the case. Approximate 

ly, 142 institutions, or 21 percent of 

the Texas banks chartered since 

1980, failed. This estimate excludes 

some of the newly chartered banks 

that merged or were acquired by 

another institution that subsequent 

ly failed. 

[No. of Charters 

Figure 2C 

Texas Commercial Banks 

1970-1989 

S Billions 

200 

160 

120 

80 

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 

Year 

40 
Given the changing structure of the 

Texas economy over the past decade, 

it would be difficult, if not impossible, 

to state how much the growth in the 

commercial banking industry was 

necessary. A simpler task, addressed 

below, is to examine specific lending 

practices and to relate them to events 

affecting the region's economy. 

Condition and Performance 

Trends: Texas versus 

the U.S. 

The high failure rates among Texas 

banks in the late 1980s have their 

roots in the OPEC oil embargo of 

1973. The OPEC oil embargo of 1973 

initiated a shortage of crude oil in the 

U.S. in the winter of 1974. As a result, 

the price of Texas crude oil more than 

doubled in January 1974. West Texas 

Intermediate crude-oil prices jumped 

from $4.31 per barrel in December 

1973 to $10.11 per barrel in January 

1974, an increase of 135 percent.4 

The influence of OPEC was, of course, 

reflected in all domestic crude-oil 

prices. Figure 3A shows the trend in 

the average annual domestic crudeoil refiner acquisition cost from 1972 

through 1988. After the OPEC oil em 

bargo, domestic crude-oil prices rose 

dramatically, with a 58 percent in 

crease in the average cost of domestic 

crude oil between 1973 and 1974. 

Domestic crude-oil prices grew at a 

moderate rate until 1979, when 

another round of sharp price in 

creases began. Average annual 

domestic crude-oil acquisition costs 

rose 23.5 percent in 1979, 55.7 per 

cent in 1980, and 29.2 percent in 

1981. Average crude-oil prices declin 

ed at a moderate rate between 1982 

and 1985, followed by a 45.9 percent 

decline in 1986. Since 1986, oil prices 

have continued to fluctuate; however, 

they have remained below 1980 

average prices. (Also see Table 5, 

Appendix A.) 

4 Source: Oil and Gas Journal Energy 

Database. 

The Texas Banking Crisis 

Figure 3A 

Crude-Oil Refiner Acquisition Cost 

Current Dollars, Domestic 

Dollars per Barrel [Yearly Average) 

36 

32 

28 

24 

20 

16 

12 

8 

4 

1972 1974 1976 1978 1980 1982 1984 1986 1988 

Year 

The increase in oil prices had an ob weakening of the OPEC oil cartel, in 

vious impact on Texas real-estate addition to domestic energy conser 

markets. Figure 3B shows trends in vation, led to reductions in oil prices. 

Texas office real-estate markets from The building trend in Texas, however, 

1978 to 1989. In 1981, office starts continued into 1986. The over 

were more than double the level in building in Texas commercial real 

1980 for the combined Austin, Dallas, estate resulted in rising office vacan 

Houston and San Antonio areas. Ob cy rates between 1981 and 1989, 

viously, 50 percent annual increases (Also see Table 6, Appendix A.) 

in crude-oil prices provided strong in Additional downward pressure on 

centives for business expansion. real-estate markets resulted from the 

However, such inflation in oil prices Tax Reform Act of 1986 which great 

did not persist. Ultimately, the ly reduced the tax benefits of owning 

Figure 3B 

Average Office Vacancy Rate 

Austin, Dallas, Houston and San Antonio 

Percent of Square Fest 

32 

28 

24 

20 

16 

12 

8 

4 

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 

Year 
PD1G Banking Review 

real estate, particular] y properties 

generating losses. As a result, the 

values of such properties declined for 

both original owners and banks 

(thrifts) holding repossessed proper 

ties. The impact of the tax law 

changes was greatest in overbuilt 

areas where such properties were 

more prevalent. 

The impact of the volatile energy 

and real-estate development markets 

on Texas banks can be seen in two 

reported bank loan categories. The 

first category, construction and land 

development loans, is comprised of 

short-term (60 months or less) credits 

secured by real estate. These include 

loans to commercial real-estate 

developers, as well as loans to oil and 

gas producers. The second relevant 

loan category, commercial and in 

dustrial loans, includes loans to min 

ing, gas and oil producers (as well as 

to all other commercial firms) that 

are not secured by real estate. 

Among Texas commercial banks, 

construction and land development 

loans rose steadily from 2.1 percent 

of Texas bank assets in 1976 to 4.1 

percent in 1980, peaking at 8.3 per 

cent in 1984 (see Figure 9B, Appen 

dix A). These loan concentrations are 

distinct in two respects. First, Texas 

development loan concentrations 

were well above the national average 

between 1978 and 1987. Second, 

these loan concentrations remained 

high among Texas banks through 

1987, despite increasing office vacan 

cy rates and declining crude-oil prices. 

This trend was particularly apparent 

among failed Texas commercial 

banks, as construction and land 

development loan concentrations 

were unusually high between 1984 

and 1988 (see Table 12, Appendix A). 

Trends in commercial and in 

dustrial loan concentrations among 

Texas banks closely followed oil-price 

movements. Commercial and in 

dustrial loans rose from 20.7 percent 

of Texas bank assets in 1978 to 27.8 

percent in 1982. However, as oil 

prices dropped after 1981, commer 

cial and industrial loans also 

declined, falling to 21.4 percent of 

Texas bank assets in 1986 and 16.5 

percent in 1989 (see Figure 10A, 

Appendix A). 

The result of high loan exposures 

to risky economic sectors can be seen 

in the trend in Texas banks' nonper

forming assets (see Figure 10B, Ap 

pendix A). Nonperforming asset data 

are not available prior to 1982. 

Nonperforming assets increased from 

1.75 percent of Texas bank assets in 

1982 to 6.6 percent in 1987. Among 

failed Texas banks, nonperforming 

assets remained extremely high be 

tween 1984 and 1988, averaging 

10.4 percent of failed-bank assets. As 

a result of these trends, Texas com 

mercial banks have experienced 

losses since 1986. The return on 

assets for the Texas banking industry 

reached a low of -1.40 percent in 

1987 and remained poor at -0.31 per 

cent in 1989. The reduction in losses 

in 1989 was due to increases in 

noninterest income and reduced loanloss provisioning. 

Major Metropolitan Areas 

To gain more insight into the 

behavior of failed Texas commercial 

banks, trends in the portfolio com 

position of banks within four major 

metropolitan areas in Texas (i.e., the 

Austin, Dallas, Houston, and San An 

tonio metropolitan areas) were 

reviewed. Specifically, changes in the 

portfolio composition of banks that 

failed between 1980 and 1989 were 

examined. The discussion focuses on 

the two types of loans most closely 

related to events in oil and real-estate 

markets: commercial and industrial 

loans, and loans for construction and 

land development. Although each of 

the four metropolitan areas studied 

had unique features, the overall 

behavior of banks was very similar. 

Therefore, findings across metro 

politan areas may be summarized. 

The first general finding was that 

[he majority of banks in the sample 

reacted quickly to movements in oil 

prices. The increase in crude-oil prices 

between 1973 and 1981 was accom 

panied by increased concentrations in 

commercial and industrial loans 

among failed banks in each of the four 

areas considered. Commercial and in 

dustrial loan concentrations peaked in 

1982 in the Dallas, Houston, and San 

Antonio areas, shortly after the initial 

decline in oil prices. The Austin area 

was unique in that commercial and in 

dustrial loan concentrations increased 

until 1984. In the Dallas, Houston, and 

San Antonio areas, commercial and in 

dustrial loan concentrations declined 

between 1982 and 1984, as oil prices 

continued to fall. Failed banks in all 

four areas had marked declines in 

commercial loan concentrations, after 

the sharp decline in oil prices in 1986. 

In sum, it appears that with the ex 

ception of Austin, this group of banks 

adjusted concentrations in energy 

loans to oil-price movements, albeit 

with a short lag. Possible reasons for 

the atypical behavior of the Austin 

market will be offered below. 

The second general finding was that 

the majority of banks in the sample 

reacted slowly to changes in commer 

cial real-estate markets. Over the past 

decade all four metropolitan areas ex 

perienced large increases in office 

vacancy rates. Concentrations of con 

struction and land development loans 

grew among failed banks in the four 

areas long after the decline in com 

mercial real-estate markets. This last 

result is due, in part, to the inertia 

created by banks fulfilling loan com 

mitments in earlier periods, as 

development projects moved toward 

completion. Recent declines in con 

struction loans among this group of 

banks appear to be due, in part, to a 

shifting (within the banks) of these 

loans from short-term development 

loans to long-term commercial proper 

ty financing. In recent years, the com 

bined 30 percent office vacancy rate 

in these four metropolitan areas helps 

to explain why banks have been 

unable to shift the financing of com 

pleted commercial properties to nonbank financiers. 
The Texas Banking Crisis 

For convenience, trends on loan of real-estate loans past due 90 days 

concentrations for failed banks in the or more plus nonaccrual real-estate 

Dallas metropolitan area are loans. Similarly, nonperforming com 

presented in Figures 4A and 4B; mercial and industrial loans or "bad 

trends for the three remaining areas commercial loans" include commer 

are presented in Appendix B. Data on cial and industrial loans past due 90 

individual categories of nonperform days or more plus nonaccrual com 

ing loans shown in Figures 4A and 4B mercial and industrial loans. 

are not available prior to 1985. The preceding discussion raises 

Nonperforming real-estate loans or questions regarding the comparative 

"bad real estate" is defined as the sum portfolio choices of Texas' healthy 

Dallas-Area Failed and Assisted Commercial Banks 

Figure 4A 

Oil Prices and Commercial Lending 

Percent of Assets Dollars 

40 40 

35 35 

30 30

25 25 

20 20 

15 15 

10 10 

5 5 

0 0 

1978 1979 19B0 1981 1982 1983 1984 1985 1986 1987 1988 

Year-end 

Figure 4B 

Office Vacancies and Real-Estate Lending 

Percent of Assets Percent of Office Space 

32 -bs^f 32 

28 28; 

24 24 

20 20 

16 16 

12 12 

8 8 

4 4 

0 0 

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 

Year-end 

versus failed commercial banks (i.e., 

banks which were still operating as 

of year-end 1989). A review of the 

loan concentrations of healthy banks 

within the four metropolitan regions 

discussed above indicated that, with 

the exception of the Austin area, 

healthy banks had, on average, lower 

concentrations of construction and 

land development loans over the en 

tire 1978 to 1988 period. The healthy 

banks followed similar trends in con 

struction loan concentrations as those 

of failed banks; however, construction 

loan concentrations were significant 

ly lower for the healthy banks. As ex 

pected, the healthy banks also had 

much fewer nonperforming realestate assets, again with the exception 

of Austin. The differences in commer 

cial real-estate lending concentrations 

between these two groups of banks 

clearly became a crucial factor, as the 

real-estate boom turned into an over 

building crisis. 

The atypical behavior of the Austin 

market may be partially attributable 

to the fact that it is the state capital. 

The state and federal government, 

and related agencies, appear to have 

been important, stabilizing influences 

upon the area's economy. In Austin, 

government accounts for almost 30 

percent of the city's jobs, an even 

greater proportion than in the 

Washington D.C. area.s In addition to 

the government, the State University 

and recently growing high-technology 

industries offer additional stability. 

However, despite the diversity of 

the Austin economy, the area is 

presently experiencing difficulties. In 

deed, the "healthy" bank group within 

the Austin area had high proportions 

of nonperforming real-estate assets as 

of year-end 1989. 

6 See National Real Estate Index, "2nd 

Quarter 1989 Trends," published by Liquidi 

ty Funds. 
FD1C Banking Review 

Texcts Bank Holding 

Companies 

Seven of Texas' largest bank 

holding companies as of year-end 

1985 failed between 1987 and 1990. 

The failed holding companies are 

Interfirst Corporation, RepublicBank 

(with their unassisted merger in 1987, 

these two holding compianies became 

First Republic Ban corporation, which 

failed in 1988), Texas American Baneshares, National Bancshares of Texas, 

MCorp, BancTexas, and First City Bancorporation. These holding companies 

comprised a large portion of the state's 

commercial bank assets. Thus, the 

preceding discussion provides a 

general background regarding the ex 

periences of these bank holding com 

panies. However, it is still beneficial 

to examine their operations on a caseby-case basis. The financial histories 

of these seven Texas bank holding 

companies are remarkably similar 

(Appendix C). Therefore, it is easy to 

construct a common history that sum 

marizes the experiences of these seven 

holding companies. 

The growth and profitability of all 

seven holding companies relied heavi 

ly upon the condition of domestic 

energy markets, particularly domestic 

oil. The dependency of these holding 

companies, and indeed all Texas 

banks and thrifts, on crude-oil 

markets was twofold. First, as direct 

lenders to oil producers and refiners, 

energy loan demand rose and fell with 

oil prices. Second, as discussed earlier, 

the entire Texas economy was large 

ly dependent upon oil prices. The 

boom in oil markets fueled the state's 

economic growth, as evidenced by 

the buildup of commercial real estate 

in the mid-1980s. Consequently, these 

holding companies expanded quick 

ly during the early 1980s. The most 

rapid growth occurred between 1976 

and 1983, with five of the seven 

holding companies continuing their 

expansion until 1985. 

Profits at these holding companies 

reached their highest rates between 

1980 and 1982, as inflation in oil 

prices peaked. Profits subsequently 

declined between 1983 and 1985 

with the mild deflation in oil prices. 

Soon after the decline in energy 

markets, these holding companies 

began to decrease concentrations in 

commercial and industrial loans. To 

replace the demand for energy loans, 

they rapidly increased lending to 

commercial real-estate developers. 

The growth in commercial real estate 

turned into overbuilding and rising 

vacancy rates between 1983 and 

1985, when oil prices failed to re 

bound. After a sharp reduction in oil 

prices in 1986, these holding com 

panies experienced heavy losses, 

which continued until their failure. 

Lending into declining commercial 

real-estate markets resulted in 

deteriorating asset quality. The severi 

ty of the situation was apparent by 

year-end 1986, when bank equity plus 

loss reserves barely exceeded nonper

forming assets for all seven holding 

companies. Although some of the 

lead banks of these holding com 

panies had been identified as problem 

banks as early as 1984, the remain 

ing lead banks were not identified as 

problem banks until 1986 (First 

Republic Bancorporation was an ex 

ception, with a 3 rating in 1986, and 

a 5 rating in March 1988). 

Bank holding company share 

holders appear to have supported the 

shift toward commercial real-estate 

lending. Indeed, shareholders did not 

anticipate the consequences of in 

creased lending to commercial real 

estate, as vacancy rates grew. Bank 

stock prices, however, quickly reacted 

to reductions in profits. In addition, 

uninsured depositors reacted more 

slowly than shareholders to the 

deteriorating condition of these banks. 

The slow reaction of uninsured 

depositors may have been due, in part, 

to their expectation that any failureresolution transaction would have 

resulted in their full protection, as had 

been the case in the handling of Con 

tinental Illinois, the largest bank 

rescued to that point. 

After 1986, the viability of these 

bank holding companies was ques 

tionable, given their capital levels and 

examiner ratings. As real-estate 

markets deteriorated further after 

1986, the condition of these holding 

companies weakened further. 

Generally, after an examination 

resulting in a composite CAMEL 

rating of 5, the resolution process 

began. By that point, the financial 

condition of the holding company 

was well-known by the market, and 

most uninsured depositors had 

withdrawn their funds. This condition 

often resulted in liquidity problems, 

and as a result many of these holding 

companies were forced to replace lost 

deposit funding with borrowings from 

the Federal Reserve discount window 

as failure approached. 

Bank Supervision: 

Bank Examination 

and Oversight 

The exam records reviewed for this 

analysis indicate that bank examiners 

normally raised concerns over failed 

banks' safety-and-soundness prior to 

failure. In nearly 90 percent of the 

cases reviewed, examiners indicated 

a need for increased oversight as a 

result of their examinations. The fre 

quency of examinations among banks 

in the troubled Southwest has been 

the lowest in the nation. Examination 

frequency in Texas has closely 

paralleled the pattern for the entire 

Southwest, declining sharply in the 

mid-1980s. A lapse in regulatory over 

sight, coincident with a recession in 

the Texas economy, may explain a 

portion of the increase in the failure 

rate among the state's commercial 

banks. 

Exam Frequency 

The exam files reviewed contain in 

formation from each of the three 

federal bank regulatory agencies, as 

well as state banking authorities. The 

frequency of bank examinations is 

dependent upon the policies of a 

bank's principal regulator. All na 

tionally chartered banks are supervis 

ed and examined by the Office of the 

Comptroller of the Currency (OCC). 
The Texas Banking Crisis 

All state-chartered banks that are Figure 5 

members of the Federal Reserve U.S. Commercial Banks 

System are examined by both the 

Federal Reserve and state bank 

regulator. Finally, state-chartered 

banks that are not members of the 

Federal Reserve System are examin 

ed by both the FDIG and state 

authorities. Although banks are 

required to file periodic, detailed 

financial reports (monthly as well as 

quarterly reports are required), onsite examinations are the primary 

means of policing banking activity 

and providing regulatory guidance. 

At present, there are four basic 

areas of focus for bank examinations. 

The first focuses on the bank's trust 

department, to determine whether it 

is being operated in accordance with 

established regulations and standards. 

Secondly, compliance examinations 

are designed to investigate whether 

the bank is abiding by a variety of 

measures designed to protect con 

sumers, such as truth-in-lending re 

quirements, civil rights laws, and 

community reinvestment regulations. 

A third area subject to review by ex 

aminers is the integrity of the bank's 

electronic data processing systems, 

denoted as EDP exams. Finally, safety

and-soundness examinations focus on 

five key areas affecting the health of 

the institution: capital adequacy, asset 

quality, management, earnings, and li 

quidity. A bank is rated from 1 to 5 

in each area (1 representing the 

highest rating, 5 the lowest rating). 

After an overall evaluation of the con 

dition of the bank is completed, a 

composite safety-and-soundness 

rating is also assigned, known as a 

CAMEL rating (an acronym derived 

from the five areas of review). com 

posite CAMEL rating of 1 is given to 

banks performing well-above-average. 

A rating of 2 is given to banks 

operating adequately within safety

and-soundness standards. A CAMEL 

rating of 3 indicates below-average 

performance and some supervisory 

concerns. Performance well-below

average yields a CAMEL rating of 4, 

indicating that serious problems 

exist at the bank which need to be 

Average Number of Exams 

No. of Exams (Thousands) 

corrected. Finally, a CAMEL rating of 

5 indicates severely deficient perfor 

mance and the need for quick correc 

tive actions.6 A serious deficiency in 

any of the areas covered by trust 

compliance, EDP, and safety-and

soundness exams could lead to failure. 

However, because of its broad 

coverage, the focus of this study is the 

safety-and-soundness exam. 

The FDIC has established policies 

on exam frequency, which general 

ly call for more frequent on-site ex 

aminations the worse the bank's last 

composite CAMEL rating. Bank 

safety-and-soundness examinations 

are usually carried out at the same 

time as trust, EDP, and compliance 

exams. In addition, agencies also use 

on-site visits to investigate specific 

areas, such as compliance with 

previous corrective actions requested 

by bank regulators, or investigation 

per Quarter (1980—1989) 

of suspected problems detected in 

offsite monitoring. 

Specific policies on examination 

frequency have varied over time. For 

example, the 1986 Manual of 

Examination Policies calls for banks 

rated 4 or 5 to be examined at least 

every 12 months, with on-site visits 

every three months. Banks rated 3 

should be examined at least every 12 

months, while those rated 1 or 2 

should be examined at least every 36 

months. These examination intervals 

may be lengthened if the FDIC 

regional director determines an ex 

tension is acceptable. At present, the 

FDIC has established a goal of 

6 See Manual of Examination Policies 

(1986), Federal Deposit Insurance Corpora 

tion, Division of Supervision. 

10 
FDIC Banking Review 

Figure 6 

Texas Commercial Banks 

Average Number of Exams per Quarter (1980-1989) 

No. of Exams 

350 

300 

250 

200 

150 

100 

50 

1960 1981 1982 1983 1984 1985 1986 1987 1988 1989 

Year 

increasing the frequency of on-site 

examinations to at least once every 

two years for 1- or 2-rated institu 

tions, and at least once a year for 

banks rated 3, 4, or 5.7 

The frequency of bank safety-and

soundness examinations by all three 

federal bank regulators was review 

ed. Because on-site visits are also us 

ed in detecting problems, these were 

included in the analysis, as well as 

full on-site examinations. Among the 

institutions that failed between 1980 

and 1989, the median frequency of 

examinations was 365 days, com 

pared to 403 days among banks that 

did not fail. Since failing banks are 

usually rated as supervisory concerns 

prior to their actual failure, examina 

tion frequency can be expected to be 

higher among these institutions than 

among healthier banks. 

Exam frequency has varied 

significantly over time. Infrequent ex 

aminations pose less risk to the 

deposit insurer during periods of 

economic prosperity, when even 

poorly run firms may prosper. Table 

2 shows the median examination 

interval, i.e., the number of days 

since the last exam for banks examin 

ed within a given year. Exam fre 

quency has, in general, been 

relatively stable since 1981, with 

1985 and 1986 noted as exceptions. 

(Because of the sparseness of the 

data, information regarding 1980 ex 

ams is not presented.) The long in 

terval in 1986 indicates an extended 

period between the exam that year, 

and the prior exam in 1984 or 1985. 

Figures 5 and 6 provide additional 

information on bank examination 

frequency over time, showing the an 

nual average number of exams per 

quarter for all banks (failed and 

healthy). The major result shown in 

Figures 5 and 6 is that fewer exams 

were conducted, on average, in 1984 

and 1985 for both the nation and for 

Texas. Quarterly exam frequency data 

(not shown here) also indicate that 

there is seasonally in bank examina 

tions, with fewer exams held in the 

fourth quarter than any other period. 

This latter result is primarily due to 

the decrease in the number of work 

days during the holiday season. 

Regional economic trends are as 

significant as broader macro

economic business cycles in influenc 

ing the health of a given region's 

businesses. It is therefore useful to 

know how the frequency of exams in 

specific regions has varied over time. 

An analysis of six geographic regions 

indicated that in all but one year, 

exam frequency was lowest in the 

Southwest, with exam frequency in 

Texas closely paralleling that trend. 

In addition, the lower frequency of 

exams in 1986 seems particularly 

acute among failed banks in Texas. 

Figure 7 shows the median number 

of days since a prior exam for banks 

examined in a given year. 

Figure 7 

Median Exam Period (Days) 

Failed and Assisted Banks 

No. of Days Since Prior Exam 

1 See Deposit Insurance for the Nineties: 

Meeting the Challenge, an unpublished 

1989 study by the staff of the Federal 1981 1S82 1983 1984 1985 1986 1987 1988 Deposit Insurance Corporal ion. Exam-Yeaf 

11 
The Texas Banking Crisis 

Reasons for the Decline 

in Exam Frequency 

There are several reasons for the 

reduction in bank examinations be 

tween 1981 and 1987. First and most 

important was a reduction in ex 

amination staff during this period 

resulting from a hiring freeze. Table 

3 shows the number of bank ex 

aminers for each agency, and 

associated turnover rates in examina 

tion staff. 

Combined regulatory examiner 

staff levels declined 14.4 percent be 

tween 1980 and 1984, reaching their 

lowest levels in 1984. The staff reduc 

tion occurred almost entirely among 

FDIC and OCG examiners. These 

reductions were ill-timed because ex 

aminer workloads were increasing 

(particularly in the Southwest). Be 

tween 1983 and 1985, examiners 

were in the process of identifying 

those institutions adversely affected 

by the declining energy markets. 

This identification process is more 

difficult and time-consuming than 

subsequent monitoring of a known 

problem bank. In addition, FDIG ex 

am staff were responsible for gather 

ing information on potential 

acquirers of failed banks, as well as 

for preparing information for bidders 

on failed-bank assets. To compensate 

for the staff cutbacks, regulators con

centrated their efforts on the larger 

banks, as well as those on the prob 

lem list. An analysis of the relation 

ship between exam frequency and 

bank size and composite CAMEL 

ratings indicated that, nationally, 

there was a statistically significant in 

crease in exam frequency associated 

with greater bank size and poorer 

safety-and-soundness ratings. 

However, this policy was not 

adhered to strictly in Texas, where 

neither CAMEL ratings nor bank size 

was statistically significant in explain 

ing examination intervals. 

Despite the apparent national 

policy of concentrating examination 

resources on the largest banking in 

stitutions, there was still a substan 

tial reduction in the assets of banks 

examined between 1981 and 1987, 

particularly in Texas. It also should 

be noted that the processing of exam 

data received by the FDIC from the 

OCC and state banking authorities is 

believed to have been incomplete 

between 1984 and 1985. This may 

be attributable to a manpower short 

age at the FDIC, as well as changes 

in the type of reporting performed by 

the OCC. As a result, some of the 

reduction in the number of record 

ed exams between 1984 and 1985 is 

attributed to a lack of data entry. 

However, other data not subject to 

this bias, are in substantial agree 

ment with the above findings. 

Exam Results 

The reason for concern over the 

frequency of bank examinations is 

the potential for deterioration in the 

condition of banks to persist 

unrecognized by bank supervisors. It 

is reasonable to expect that longer 

delays between exams will increase 

the chances of changes in composite 

CAMEL ratings, and perhaps in 

crease the potential magnitude of 

these changes. Available data on fail 

ed and healthy banks are in agree 

ment with these expectations. The 

correlation between absolute 

changes in composite CAMEL 

ratings and frequency of exams was 

0.34 among failed banks, and 0.16 

among healthy banks. Since the vast 

majority of failed banks had their 

composite CAMEL rating lowered 

prior to failure, these findings sup 

port the premise that infrequent ex 

aminations increase the potential for 

serious deterioration in the condition 

of banks to persist unrecognized by 

bank supervisors. 

Unrecognized deterioration in the 

condition of a bank may occur even 

with timely exams, if bank ex 

aminers are not properly trained or 

sufficiently thorough in their audits. 

Judging the thoroughness of a bank 

exam is clearly a difficult task. With 

the benefit of hindsight it is easy to 

say that examiners should have been 

more diligent in their examination 

of a bank that subsequently failed. 

For a bank examination to be useful, 

however, it must search out poten 

tial sources of difficulty for a bank. 

For example, high concentrations of 

loans in traditionally risky areas such 

as construction and land develop 

ment, poor liquidity, and inadequate 

capitalization are factors that can 

lead to failure. Yet these conditions 

appear before the actual failure. 

More specifically, the factors leading 

to bank failure do not usually arise 

overnight. Therefore, it is not 

unusual for failed banks to receive 

12 
FDIC Banking Review 

low composite CAMEL ratings prior 

to failure. The CAMEL ratings shown 

in Table 4 are the most recent for 

banks as of January 1989 (i.e., the 

last CAMEL rating for failed banks 

between 1980 and 1988, and the 

most recent CAMEL rating as of 

discriminate among banks based 

upon perceived levels of risk in the 

institution. In the event a bank fails, 

insured depositors would only face 

the risk of possibly redepositing 

funds at lower interest rates at a suc 

cessor/another institution. Second, if 

Table 4 

Last Composite CAMEL Rating for Failed /Assisted Banks 

Composite CAMEL Rating Percent 

1 1.9 

2 9.3 

3 8.5 

4 27.1 

5 53.1 

January 1989 for banks that failed in 

1989). 

Table 4 shows that 88.7 percent of 

the sample of failed banks were rated 

supervisory concerns prior to failure 

{i.e., they had composite CAMEL 

ratings of either 3, 4 or 5). For com 

parison, using the most recent exam 

among healthy banks in the sample 

(as of January 1989), only 21.) per 

cent of the healthy banks were rated 

supervisory concerns. These 

statistics, although general in nature, 

indicate that difficulties in bank 

operations were usually recognized 

prior to failure. However, the data on 

exam frequency indicate that in 

some cases these difficulties might 

have been recognized sooner had 

bank examinations been more 

frequent. 

Funding Bank Activities: The 

Role of Deposit Insurance 

As discussed earlier, Texas bank 

ing activity increased dramatically 

over the last decade. The role that 

deposit insurance may have played 

in funding this growth, as well as the 

types of risks assumed by Texas 

banks, are examined next. 

Some observers have argued that 

the availability of flat-rate deposit in 

surance permits bankers to fund 

greater levels of "risky" loans than 

would be otherwise possible. There 

are two reasons for this. First, insured 

depositors have little reason to 

Cumulative Percent 

1.9% 

11.2 

19.8 

46.9 

100.0 

deposit insurance premiums do not 

rise with the riskiness of the bank, 

bankers will have incentives to ex 

ploit this flaw in the premium struc 

ture and to accept greater risks. This 

would be especially true of poorly 

capitalized or nearly insolvent banks, 

where shareholders have little to 

lose, but a great deal to gain, from 

risky decisions. 

In order to relate the composition 

of bank financing to bank activity, 

the histories of nine Texas bank 

holding companies were reviewed. 

Seven of the nine holding companies 

failed; two were involved in 

unassisted mergers, but did not fail. 

The failed holding companies are 

Interfirst Corporation, RepublicBank, 

Texas American Bancshares, Na 

tional Bancshares of Texas, MCorp. 

BancTexas, and First City Bancor

poration. Interfirst and RepublicBank 

merged in 1987 to form First 

Republic Ban corporation, which fail 

ed in 1988. The holding companies 

involved in unassisted mergers are 

Texas Commerce Bank and Allied 

Bancshares. 

The combined bank assets of these 

holding companies grew from 830.6 

billion in 1976 to a peak of #134.6 

billion in 1985. The average annual 

asset growth rate for this group was 

over 18 percent from 1976 to 1985, 

with a peak of 28 percent in 1981. 

Combined assets declined from 1986 

to 1989. Figure 8 shows that growth 

was funded by both insured and unin 

sured deposits. Deposit accounts of 

8100,000 or more increased from 

19.8 percent of liabilities in 1976 to 

28.5 percent in 1981, and remained 

at high leveis through 1988. 

Deposit insurance coverage chang 

ed over this period as well. The 

deposit insurance limit in 1974 was 

$40,000 for most individual accounts 

and $100,000 for time and savings 

Figure 8 

The Nine Texas Bank Holding Companies 

Member Banks' Deposit Funding 

Billions of Dollars 

100 

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985^ 

Year-end 
The Texas Banking Crisis 

accounts of municipalities. The 

$100,000 limit was applied to in 

dividual retirement accounts in 

1978, and was expanded to cover all 

accounts in 1980.8 

The data show clearly that bank 

ing activity in Texas continued to ex 

pand after the initial decline in 

energy markets in 1982; however, ex 

pansion was halted with the sharp 

reduction in oil prices in 1986. Only 

two institutions, First City and BaneTexas, stopped growing in total asset 

size after 1983. 

The histories of the seven failed 

bank holding companies (see Appen 

dix C) also show that both insured 

and uninsured deposits were used to 

fund increased investment in risky 

construction and land development 

projects between 1982 and 1989. As 

vacancy rates increased in the ma 

jor metropolitan areas of Texas be 

tween 1982 and 1986, all seven 

holding companies increased con 

struction and land development 

loans significantly (both in dollar 

terms and as a percent of bank 

assets). Uninsured depositors reacted 

very slowly to the deteriorating con 

ditions of these holding companies. 

The collapsing commercial realestate market led to severe asset 

quality problems for all seven 

holding companies by year-end 

1986. The severity of the situation 

was evident in that capital plus loss 

reserves barely exceeded nonperform

ing assets for all seven holding com 

panies at year-end 1986. In most in 

stances, however, they were able to 

maintain the proportion of liabilities 

funded by deposit accounts of 

#100,000 or more through 1986. 

The findings indicate that these 

holding companies did not have to 

rely solely upon insured depositors 

to fund risky investments in commer 

cial real estate. Indeed, they were 

able to maintain relatively high pro 

portions of uninsured liabilities 

through 1986. However, as failure 

became imminent, there was some 

loss of uninsured deposits, which was 

usually offset by borrowings from the 

Federal Reserve. 

Given that uninsured depositors 

reacted slowly to the deteriorating 

conditions of these institutions, it 

would be interesting to be able to 

discover more about this group. Un 

fortunately, available financial data 

do not identify depositors in a detail 

ed fashion. However, the data in 

dicate that brokered deposits were 

not a significant source of funds for 

the seven holding companies as in 

solvency approached. The measure 

of brokered deposits used for this 

analysis does not, however, include 

funds obtained through a bank's 

money desk operations. However, it 

could be expected that some portion 

of these uninsured deposits were in 

terbank deposits among members of 

a holding company. Further, cor 

respondent bank balances associated 

with check clearing may have been 

another important source of funds. 

8 See The First Fifty Years: A History of 

the FDiC 1933-1983 (Washington, D.G.: 

Federal Deposit Insurance Corporation, 

1984). 
Appendix A 

Trends in Lending Activity: 

Texas versus the U.S. 

Figure SA 

Construction Loans 

FDIC-Insured Commercial Banks 

Percent of Assets 

9 

8 

7 

6 

5 

4 

3 

2 

1 

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 

Year-end 

Figure 9B 

Construction and Nonresidential Property 

FDIC-Insured Commercial Banks 

Percent of Assets 

16 

15 

14 

13 

12 

11 

10 

9 

8 

7 

6 

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 

Year-end 

15 
The Texas Banking Crisis 

Figure 10A 

Commercial and Industrial Loans 

FDIC-Insured Commercial Banks 

Percent of Assets 

28 

26 

24 

22 

20 

IB 

16 

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 

Year-end 

Figure 10B 

Nonperforming Assets 

FDIC-Insured Commercial Banks 

Percent of Assets 

7 

1962 19B3 1984 1985 1986 1987 1988 1989 

Year-end 

16 
17 
18 
19 
20 
■ 

Table 10 

Portfolio Composition of Failed and 

Assisted Texas Commercial Banks* 

(As of the Year-end Prior to Failure or Assistance) 

Assets (% of assets) 12/64 12/85 12/Bb" 12/87 ] 2/88 

Noninterest-bearing balances due 

Interest-bearing balances 

7.19% 7.57% 6.85% 8.60% 7.39% 

due 

Investment securities 

Federal funds sold and 

3.12 

14.21 

1.37 

10.18 

3.26 

14.24 

3.84 

8.57 

3.68 

12.92 

repurchase agreements 

Gross loans and leases 

2.72 

67.54 

7.62 

66.98 

4.26 

66.87 

16.58 

59.46 

7.98 

62.64 Less loan- and 

lease-loss reserve (2.02) (3.16) (4.65) (3.63) (4.58) 

Less transfer risk reserve (0.00) (0.00) (0.00) (0.00) (0.00) Net loans and leases 65.51 63.82 62.22 55.82 58.06 

Assets held in 

trading accounts 0.00 0.00 0.08 0.49 0.08 Premises and fixed assets 2.92 3.69 2.82 1.69 2.17 Other real-estate owned 1.26 1.42 3.49 1.90 4.89 Investments in unconsolidated subsidiaries 0.00 0.00 0.10 0.02 0.24 

Customers'liability to bank 0.00 0.00 0.01 0.08 0.16 

Intangible assets 0.00 0.00 0.00 0.42 0.30 

Other assets g.06 4.33 2.66 1.99 2.13 

Liabilities (% of liabilities) 

Deposits 94.51 96.55 92.02 71.18 80.87 

Federal funds purchased and 

repurchase agreements 2.31 0.38 2.47 21.05 8.34 

Demand notes of 

the U.S. Treasury 0.00 0.07 0.29 2.97 3.83 

Other borrowed money 1.34 0.42 3.63 2.62 4.94 

Mortgage debt 0,09 0.68 0.13 0.14 0.15 

Banks' liability on 

acceptances 0.00 0.00 0.01 0.08 0.15 

Notes and subordinated 

debt 0.19 0.14 0.04 0.63 0.42 

Other liabilities 1,56 1.74 1.42 1.33 1.30 

Core deposits 65.68 69.04 56.91 45.06 51.61 

Brokered deposits 1.61 1.44 3.14 0,52 0.83 

Capital Accounts** 

Equity capital 5.44 3.18 (0.91) 2.41 (1.58) 

Tangible capital 5,44 3.13 (0.91) 2.00 (1.89) Primary + secondary 

capital 7.39 3.43 5.97 2.88 

Financial statistics on banks failing/assisted within given year were measured 

?8 fQTMf ^^y^'^d. For example, for the 62 failed and assisted banks in Texas 

m I' .TMa/lclaI data were measured as of year-end 1986. This table includes Texas failed/assisted banks from 1985 to 1989. 

" * As percentage of appropriately adjusted assets. 

21 
Table 11 

Income and Expenses of Failed and 

Assisted Texas Commercial Banks' 

(As of the Year-end Prior to Failure or Assistance) 

^,of assets) 12/84 12/85 12/88 12/87 12/88 

Interest Income: 

Interest and fees on loans 

Income from leases 

9.15% 

0.00 

8.43% 

0.04 

7.75% 

0.01 

5.01% 

0.02 

6.39% 

0.00 

Income from balances due 

at banks 

Income from securities 

0.33 

1.42 

0.19 

1.73 

0.21 

1.28 

0.35 

0.55 

0.42 

1.05 

Income from assets held in 

trading accounts 

Income from federal funds sold 

0.00 

0.39 

0.00 

0.29 

0.02 

0.28 

0.01 

1.17 

0.01 

0.66 

TOTAL INTEREST INCOME 11.29 10.67 9.56 7.10 8.52 

Interest Expense: 

(7.07) (6.83) (6.09) (3.61) (5.25) Expense on deposits 

(0.10) (0.06) (0.26) (1.23) (0.69) Expense on federal funds purchased 

Expense on notes issued to (0.13) (0.01) (0.31) (0.25) (0.44) U.S. Treasury 

(0.01) (0.05) (0.01) (0.01) (0.02) Expense on mortgage debt 

Expense on notes and (0.02) (0.03) (0.00) (0.06) (0.04) subordinated debt 

(7.32) (6.98) (6.67) (5.16) (6.44) TOTAL INTEREST EXPENSE 

3.96 3.69 2.89 1.94 2.08 NET INTEREST INCOME 

(2.12) (4.69) (6.80) (3.04) (4.77)

(0.00) (0.00) 

Provisions for loan losses 

(0.00) (0.00) (0.00) Provisions for transfer risk 

1.04 1.48 1.16 0.88 1.01 Noninterest Income: 

Gains (losses) on securities not held 

(0.03) 0.68 0.77 0.03 0.08 in trading accounts 

Noninterest Expense: 

Salaries and employee benefits (1.79) (1.96) (1.99) (1.06) (1.16)

(0.84) (0.81) (1.08) (0.45) (0.56) Expenses on premises 

(1.66) (2.33) (3.02) (1.68) (2.80) Other noninterest expense 

NET INCOME BEFORE TAXES 

AND EXTRAORDINARY ITEMS (1.43) (3.94) (8.08) (3.38) (6.13)

(0.06) 0.33 0.22 0.20 0.01 Taxes 

NET INCOME BEFORE 

EXTRAORDINARY ITEMS (1.37) (3.61) (7.86) (3.18) (6.12) 

0.00 0.05 0.00 0.00 (0.00) Extraordinary items 

NET INCOME (LOSS) (1.37) (&55) (7.86) (3.18) (6.12)

• Financial statistics on banks ailing/assisted within a given year were measured 

as of the prior year-end. For example, for the 62 failed and assisted banks in Texas 

in 1987, financial data were measured as of year-end 1986. This table includes 

Texas failed/assisted banks from 1985 to 1989. 

22 
FD1C Banking fteviev 

Table 12 

Selected Loan Concentrations of Failed and 

Assisted Texas Banks as Percentage of Bank Assets* 

(Ab of the Year-end Prior to Failure or Assistance) 

Loan Concentrations 12/84 12/85 12/86 12/87 12/88 

Loans secured by real estate: 

Construction and land development 5.37% 2.34% 6.54% 8.71% 6.16% 

Secured by farmland 1.76 1.11 0.34 0.31 0.33 

Secured by 1-4 family 

residential properties 9.30 6.65 

Secured by 5 or more family 

residential properties 2.82 0.83 

Secured by nonfarm 

nonresidential properties 5.26 10.06 

Loans for agricultural production 4.01 5.04 

Commercial and industrial 21.50 27.73 23.25 21.50 20.52 

Loans for personal expenditures: 

Credit cards and related plans plus 

other personal loans 14.32 12.01 10.95 5.98 6.29 

Asset Quality (% of assets) 

' Financial statistics on banks failing/assisted within given year were measured 

as ofthe prior year-end. For example, for the 62 failed and assisted banks in Texas 

in 1987, financial data were measured as of year-end 1986. This table includes 

Texas failed/assisted banks from 1985 to 1989. 

• 'Note: Small commercial banks also include past due and nonaccrual farm loans 

in the prior three loan categories above; therefore, for the groups of failed 

banks considered here, nonperfbrmrag farm loans overlap partially with 

other components of nonperforming assets. 
The Texas Banking Crisis 

Appendix B 

Failed-Bunk Lending Activity: Major Metropolitan Areas 

Austin-Area Failed and Assisted Commercial Banks 

Figure 11A 

Oil Prices and Commercial Lending 

Percent of Assets Dollars per Barrel 

40 40 

35 35

3D 3D

25 25

20 20

15 15

10 10

5 

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 

Year-end 

Figure 11B 

Office Vacancies and Real-Estate Lending 

Percent of Assets Percent of Office Space 

40 40

35 35 

30 30

25 25 

20 20 

15 15 

10 10 

5 

tale 

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 

Year-Bnd 

24 
32 

PDIC Banking Review 

Houston-Area Failed and Assisted Commercial Banks 

Figure 12A 

Oil Prices and Commercial Lending 

Percent of Assets Dollars per Barrel 

40 

35 

30 

25 

20 

15 

10 

5 

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 

Year-end 

Figure 12B 

Office Vacancies and Real-Estate Lending Percei Percent of Office Space 

Construction Loans, 

r —r I.*-

Nonresidentiat 

Ldans— ! J 

1978 1979 1980 1981 1982 1983 1984 

Year-end 

1985 1986 1987 1988 

25 
The Texas Banking Crisis 

San Antonio-Area Failed and Assisted Commercial Banks 

Figure 13A 

Oil Prices and Commercial Lending 

Percent of Assets Dollars per Barrel 

40 

/ ••. Real Cost of Crude Oil ( 

Commercial Loans (% 

Bad Commercial Loans (%) 

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 

Year-end 

Figure 13B 

Office Vacancies and Real-Estate Lending 

2424 

Percent of Assets Percent of Office Space 

-- 20 20 

16 16 

12 12 

8 

4 —V 

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 

Year-end 

26 
FDIC Ranking Review 

Appendix C Fiffure 14A 

BancTexas 

Case Histories 

BancTexas Group, Inc. 

(Headquartered in Dallas) 

BancTexas, a jSl.2 billion institution 

with 11 bank subsidiaries, received 

$150 million in FDIC open-bank 

assistance in 1987. The open-bank ac 

quisition of BancTexas by the 

Hallwood Group Inc. was announced 

on February 2, 1987 and completed 

on. July 17, 1987. The assistance, 

however, proved to be insufficient On 

January 26, 1990, the lead bank of 

BancTexas Group, Inc. (BancTexas, 

Dallas) was closed by the OCC. Banc 

Texas, Dallas was acquired by Hiber

nia National Bank on January 26, 

1990, requiring g69 million in FDIC 

assistance. The total FDIC assistance 

to BancTexas was #219 million, or 

23.27 percent of the 1987 Texas 

failed-bank resolution costs of $941 

million.9 

BancTexas' rapid growth between 

1980 and 1983 was funded by both 

insured and uninsured deposits, with 

deposits comprising 93.5 percent of 

liabilities in December 1980 and 92.2 

percent of liabilities in December 

1983. Deposits of glOO.OOO or more 

remained high, comprising 35 per 

cent to 40 percent of liabilities over 

this period. Brokered deposits were 

not a significant source of funds, com 

prising approximately 1.7 percent of 

liabilities in 1983. Loan portfolio com 

position moved toward increased con 

centrations in commercial real estate 

during this growth period, while com 

mercial and industrial loan concentra 

tions declined. Bank capital and 

earnings were strong through 1982. 

In 1983, however, increased loan-loss 

provisioning and loan charge-offs 

reduced profitability. 

> The 1990 FDIC assistance to BancTexas 

is added here to the prior 1987 assistance 

cost since one can reasonably argue that had 

the 1987 assistance been greater, subsequent 

assistance may not have been needed. 

Percent of Assets 

16 

12 

8 

4 

8412 8512 8603 6606 

After 1983, BancTexas' assets 

decreased. During this period of con 

traction, which lasted until failure in 

1987, commercial real-estate loan 

concentrations increased. Commer 

cial real-estate loans increased from 

10.8 percent of assets in December 

1983 to 16.6 percent of assets in June 

1987. Nonperforming real-estate 

loans increased from 1.1 percent to 

8.5 percent of assets between 

December 1985 and June 1987. 

Nonperforniing Assets 

8609 8612 8703 8706 

Date 

Nonperforming commercial and in 

dustrial loans also rose from 1.9 per 

cent to 3.3 percent of assets over this 

same period. The deterioration in 

asset quality resulted in increases in 

loan-loss provisions and charge-offs 

from 1983 until the open-bank 

assistance in July 1987. 

One way to measure the potential 

capital impairment of a bank is to 

compare total nonperforming asset 

levels to the sum of equity capital and 

Figure 14B 

BancTexas 

Market Value of Common Stock 

Market Value ($ Millions) 

7912 8012 8112 8212 8312 8412 8512 8612 8712 8812 8912 

Date 

27 
I reserves for loan and lease losses. 

Although nonperforming asset levels 

do not equal the potential losses on 

assets, some portion of nonperform

ing assets will ultimately be charged 

off. Therefore, an "adjusted" capital 

ratio was computed by deducting 

nonperforming assets (most of which 

were real-estate and commercial and 

industrial loans) from the sum of 

equity capital and reserves for loan 

losses. BancTexas' adjusted capital 

ratio (equity plus loss reserves minus 

nonperforming assets) became 

negative in December 1986, falling 

to -5.3 percent. 

BancTexas' funding changed during 

the post-1983 period of decline. 

Deposits decreased from 92.2 percent 

to 76.9 percent of liabilities between 

December 1983 and June 1987. This 

decline was due, in part, to increases 

in other borrowings, which include 

discount window borrowings from the 

Federal Reserve. Other borrowings in 

creased from 0.08 percent to 19.2 per 

cent of liabilities between December 

1983 and June 1987. Deposits of 

$100,000 or more remained high dur 

ing this period, but did fall from 37 

percent to 27.6 percent of liabilities 

between March and June 1987. The 

late reaction of depositors to BaneTexas' financial condition indicates 

that they were not seriously concern 

ed prior to the assistance agreement. 

Figure 14B indicates the trend in 

BancTexas' market value from 1979 

to 1989. The total market value of 

BancTexas' common stock peaked in 

June 1982, with shares trading at 

$337.50. Lower earnings, due to asset 

quality problems, decreased share 

prices to #1.63 as of July 1987. The 

trend in BancTexas' market value in 

dicates that shareholders had dis 

counted shares greatly prior to the 

announcement of open-bank 

assistance in February 1987. 

First City Baneorpo ration 

(Headquartered in Houston.) 

First City Bancorporation was an 

Sll.2 billion institution with 59 bank 

subsidiaries when it received FD1G 

The Texas Banking Crisis 

Figure 15A 

First City Bancorporation 

Percent of Assets 

12 

8412 8512 8603 8606 8609 

13(c) open-bank assistance in 1988. 

On September 9,1987 the FDIC an 

nounced an assistance agreement 

with a group of private investors; this 

agreement was finalized and approv 

ed on March 20,1988. The estimated 

cost to the FDIG of resolving this 

failure is presently #926 million, or 

19.63 percent of the total 1988 Texas 

bank-failure costs of #4,717 million. 

First City's pattern of growth and 

eventual failure is typical of most of 

the late 1980s Texas bank failures. 

Nonperforming Assets 

8612 8703 8706 8709 8712 8B03 

Date 

First City grew rapidly during the 

pre-1981 boom in oil markets and con 

tinued its rapid growth through 1983. 

During this growth period, First 

City maintained capital ratios at or 

above five percent due to strong 

profitability and good asset quality. 

Profitability increased from 1976 

through 1981, with return on assets 

rising from 0.66 percent to 1.07 per 

cent. Growth was funded by both in 

sured and uninsured deposits. Deposits 

of #100,000 or more comprised 25 

Figure 15B 

First City Bancorporation 

Market Value of Common Stock 

/larket Value ($ Billions) 

1.2 

0.8 

0.6 

0.4 

0.2 

7912 8012 8112 8212 8312 8412 8512 8612 8712 

Date 

28 
FDIC Banking Review 

to 30 percent of liabilities during the 

1976 to 1983 period. Brokered 

deposits were also a significant 

source of funds, representing 7.3 per 

cent of liabilities at year-end 1983. 

During this growth period, First 

City increased its concentrations in 

both real-estate loans (construction 

loans in particular) and commercial 

and industrial loans. Between 

December 1976 and December 1983, 

commercial real-estate loans increas 

ed from 3.1 percent to 10.7 percent 

of bank assets, while commercial and 

industrial loans rose from 21.9 percent 

to 30.3 percent of assets. Although the 

decline in energy markets led direct 

ly to asset quality problems for First 

City, most of the increase in nonper

forming assets was associated with 

commercial real-estate lending. As 

Texas commercial real-estate markets 

declined after 1983, so too did First 

City's earnings and assets. However, 

concentrations of loans in commercial 

real estate continued to rise, from 10.7 

percent of bank assets in December 

1983 to 15.8 percent of assets in 

March 1988. The concentration of lend 

ing to commercial real estate was illtimed, however, as witnessed by the 

growth in nonperforming real-estate 

assets from 0.6 percent of assets in 

December 1985 to 4.04 percent of 

assets just prior to First City's failure 

in March 1988. 

The decline in oil markets led to 

asset quality problems for First City 

in two ways. First, as oil prices declin 

ed there was a direct impact through 

increased nonperforming energy 

loans. Second, the dependency of the 

Texas economy upon oil markets link 

ed the fates of the energy and com 

mercial real-estate markets. The 

combined effects of declining energy 

and real-estate markets upon First 

City's capital adequacy were apparent 

in 1986. First City's adjusted capital 

ratio was only 0.17 percent of assets 

as of December 1986 and -0.91 per 

cent as of March 1987 (see Figure 

15A). Increased provisioning for loan 

losses and charge-offs resulted in 

heavy losses and declining capital for 

First City in 1986 and 1987. The con 

tinued decline in equity, in addition 

to increasing nonperforming assets, 

lowered this adjusted capital ratio to 

-8.48 percent by March 1988. 

As First City's assets declined after 

1983, the composition of its funding 

changed. Deposit funding, which was 

85.4 percent of liabilities in December 

1983, declined to 74.49 percent in 

March 1988. This decline in deposit 

funding was offset, in part, by in 

creases in other borrowed money, 

which includes borrowings from the 

Federal Reserve. Deposit balances of 

$100,000 or more declined from 31.8 

percent of liabilities in December 

1983 to 25.6 percent in March 1988. 

Brokered deposits declined steadily 

from 7.3 percent to 0.49 percent of 

liabilities between December 1983 

and September 1987. This decline in 

brokered deposits may be due, in 

part, to public perception of First 

City's problems, as well as manage 

ment decisions to seek less-costly 

sources of funds. 

First City's stock prices closely 

followed the growth cycle described 

above. Figure 15B shows the trend in 

the market value of First City's com 

mon stock between 1979 and 1988. 

Share prices rose from §19.38 in 

Figure 16A 

First Republic 

Percent of Assets 

15 

Nonperforming Assets 

12 

I: 

December 1979 to a high of 838.50 

in November 1981. As earnings declin 

ed from a peak in 1981, so too did 

First City's market value. Share prices 

were $3.38 at year-end 1986 and at 

the time of the announcement of the 

open-bank assistance in September 

1988, shares were trading at #1.13. 

The data indicate that shareholders 

were aware of First City's credit quali 

ty problems well in advance of the an 

nouncement of open-bank assistance 

in September 1987. Further, the 

decline in deposit levels after 1983 

may be due to some concern among 

depositors, as well as voluntary deci 

sions by management. However, the 

fact that deposit balances of $100,000 

or more were nearly 30 percent of 

liabilities in June 1987, indicates that 

uninsured depositors were not grave 

ly concerned that they would surfer 

losses. 

First Republic Bancorporatkm 

(Headquartered in Dallas) 

First Republic was formed in the 

second quarter of 1987 with the 

merger of Interfirst and RepublicBank. 

In February 1988, First Republic ex 

perienced a deposit run. On July 29, 

1988, First Republic was closed and 

merged into NCNB Texas National, a 

*•<»»..! Capital ^**»^ 

8706 8709 8712 8803 6806 

Date 

29 
1 

The Texas Banking Crisis 

Figure 16B 

First Republic 

Market Value of Common Stock 

Market Value ($ Billions) 

7912 8012 8112 8212 8312 8412 8512 8612 8712 8812 

Date 

bridge bank. The estimated failureresolution cost for First Republic is 

82,941 million, or 62.35 percent of 

the total 1988 Texas failed-bank 

resolution costs of $4,717 million. 

The fate of First Republic can be 

traced to the impact that the declin 

ing oil and commercial real-estate 

markets had upon Interfirst and 

RepublicBank prior to merger. Interfirst Corporation grew rapidly with the 

boom in oil prices. Although it ex 

perienced peak growth prior to 1983, 

Interfirst continued to expand until 

1985. Growth was funded by both in 

sured and uninsured deposits, with 

balances of $100,000 or more com 

prising 25 percent of liabilities at the 

time of merger. Interfirst's financial 

performance was closely tied to 

energy prices. Interfirst experienced a 

loss in 1983 due to high loan-loss pro 

visioning. Losses recurred in 1986 as 

oil prices feU sharply and continued 

until merger in 1987. Interfirst in 

vested heavily in commercial real 

estate, yet, at the time of merger in 

June 1987, nonperforming commer 

cial and industrial loans comprised 

over half of the nonperforming assets. 

The major difference between Interfirst and RepublicBank is that Inter 

first's asset quality problems appeared 

or were recognized sooner than those 

of RepublicBank. Indeed, Republic 

Bank's history appears to be very 

similar to that of Interfirst, except that 

reported asset quality was better. 

Subsequent to merger in midyear 

1987, First Republic experienced 

declining assets, rising nonperforming 

assets, and near insolvency based on 

adjusted capital ratios. Nonperforming 

commercial real-estate loans 

dominated asset quality problems by 

the time of failure in July 1988. In ad 

dition, First Republic relied upon 

Federal Reserve discount window 

borrowings, as indicated by the in 

crease in other borrowed money 

from 0.94 percent of liabilities in 

December 1987 to 9.19 percent in 

June 1988. Further, there is some 

evidence of flight of uninsured 

deposits as accounts of $100,000 or 

more fell from 42.4 percent of 

liabilities in December 1987 to 18.98 

percent in June 1988. 

MCorp 

(Headquartered in Dallas) 

On March 28, 1989, 20 of the 25 

MCorp banking subsidiaries, with 

assets of gl5.4 billion, were declared 

insolvent by the OCC. bridge bank, 

wholly owned by the FDIC, was form 

ed. Bane One of Ohio subsequently 

acquired the bridge bank in July 

1989. The estimated resolution cost 

for the MCorp failure is §2,644 

million, or 57.07 percent of the total 

1989 Texas bank-failure costs of 

g4,633 million. 

As with most other Texas banks, 

MCorp grew rapidly between 1976 

and 1983. However, unlike First City 

and BancTexas, MCorp's growth con 

tinued until 1986. During the 1976 to 

1986 period, growth was funded with 

both insured and uninsured deposits. 

Deposits comprised over 80 percent 

of liabilities throughout this period. 

Figure 17A 

MCorp 

Percent of Assets 

8412 B512 8606 8612 8706 8712 8806 8812 

Date 

30 
1 

FDIC Banking Review 

Figure 17B market crash, MCorp's common 

MCorp stock fell to $2.38 per share at yearMarket Value of Common Stock end 1987. 

Market Value ($ Billions) 

0.8 

10.6 

0.4 

0.2 

7912 8012 8112 8212 8312 

Further, deposits of gl00,000 or 

more increased from 23.36 percent 

of liabilities in December 1976 to 

38.46 percent in December 1986. 

Brokered deposits were 7.88 percent 

of liabilities in December 1983, yet 

fell soon afterward to 1.05 percent 

at year-end 1984, and remained low 

thereafter. During this growth period, 

commercial real-estate loan concen 

trations increased from 6.1 percent 

of assets in December 1976 to 24.6 

percent in December 1986. Com 

mercial and industrial loan concen 

trations remained at about 20 

percent of assets over the entire 

growth period. Profitability rose 

steadily from 1976 to 1981, then 

declined somewhat from 1982 to 

1985. Losses were reported from 

1986 through 1988. Loan-loss provi 

sions and loan charge-offs rose in 

1982 and remained high until 

MCorp's failure in 1989. Despite 

asset quality problems, MCorp was 

able to maintain equity capital levels 

in excess of five percent until 1986. 

MCorp's asset quality problems 

became obvious in 1986. Its adjusted 

capital ratio, as defined above, was 

0.82 percent in December 1986 and 

-0.97 percent in June 1987. As 

MCorp declined in size after 1986, 

loan concentrations in commercial 

real estate remained at about 18 per 

8412 8512 8612 8712 8812 8912 

Date 

cent of assets. The declining commer 

cial real-estate markets in Texas led 

to increased nonperforming realestate loans, additional loan chargeoffs, losses, and insolvency. Deposit 

funding remained nearly 80 percent 

of liabilities during the post-1986 con 

tractionary period and interestingly, 

deposits of $100,000 or more reach 

ed 46.48 percent of liabilities in 

December 1988. Other borrowed 

money, which includes discount win 

dow borrowings from the Federal 

Reserve, rose to 6.65 percent of 

liabilities just prior to MCorp's failure. 

These trends show clearly that 

MCorp rose with the boom in oil 

prices in the late 1970s and early 

1980s. However, MCorp increased its 

lending to commercial real estate, 

both in dollar terms and as a percent 

of assets, until 1986. Asset quality prob 

lems resulted from the declining oil 

and real-estate markets and led to in 

solvency in 1988. 

The trend in total market value of 

MCorp's common stock indicates that 

shareholders supported MCorp's 

growth through 1986 (see Figure 

17B). Indeed, peak market value oc 

curred in February 1985, when shares 

were trading at S23.25 per share. 

Losses in 1986 helped drive share 

prices down to $10.13 in December 

1986. After the October 1987 stock 

As MCorp's asset quality problems 

became apparent in 1986, share 

holders discounted earnings more 

heavily. Despite growth in market 

value over the 1981 to 1985 period, 

investors reacted to the high losses 

and loan charge-offs from 1986 to 

1988. Deposit levels also fell prior to 

failure; however, deposits of 

$100,000 or more comprised 47.4 

percent of liabilities in December 

1988. 

Texas American Bancshares 

(Headquartered in Fort Worth) 

The 24 bank subsidiaries of Texas 

American Bancshares (TAB) were 

merged into Texas American Bridge 

Bank, NA in July 1989. The bridge 

bank was acquired by Deposit 

Guarantee Bank of Dallas on July 20, 

1989 (renamed Team Bank), after an 

earlier agreement for an open-bank 

acquisition by Carl Pohlad, announc 

ed in May 1988, fell through. The 

estimated failure-resolution cost for 

TAB is $898 million, or 19.38 per 

cent of total 1989 Texas failed-bank 

resolution costs of $4,633 million. 

TAB grew with the boom in oil 

prices in the late 1970s and early 

1980s, and subsequently fell with the 

oil-price collapse. TAB'S growth, 

which was greatest during the 1976 

to 1983 period, continued until ear 

ly 1986. During its growth period, 

TAB relied upon both insured and 

uninsured deposits for funding, 

Deposits comprised between 80 per 

cent and 90 percent of liabilities from 

1976 until June 1989. During the 

1976 to 1986 period, deposits of 

8100,000 or more increased from 20 

percent to 30 percent of liabilities. 

Further, brokered deposits increased 

from 2.3 percent of liabilities in 1983 

to 6.1 percent in 1985. 

Portfolio composition during the 

1976 to 1985 period shifted heavily 

toward commercial real-estate lend 

ing. Commercial real-estate loans in 

creased from 6.5 percent to 24.1 

percent of assets, while commercial 

31 
The Texas Banking Crisis 

Figure ISA 

Texas American Bancshares 

Percent of Assets 

20 

16 

12 

8 

4 

0 

A 

-8 

8412 8512 8606 8612 8706 8712 8806 8812 8906 

Date 

and industrial loans rose from 21.6 tween 1976 and 1982, began to 

percent to 25.9 percent of assets. Pro decline. 

fitability was high between 1978 and Beginning in 1986, TAB's assets 

1982, with peak profitability in 1981 began to decrease. During this con 

and 1982 (return on assets was 1.04 tractionary period, deposits ac 

percent in 1981 and 1.05 percent in counted for about 80 percent of 

1982). In 1983, however, both loan- liabilities, with accounts of $100,000 

loss provisions and loan charge-offs or more and brokered deposits declin 

more than doubled, thus signaling the ing as TAB approached failure. 

beginning of asset quality problems Federal Reserve discount window bor 

that only worsened in subsequent rowings were not relied upon at the 

years. As a result, bank capital, which time of failure. During its contrac 

had been well over six percent be tionary period, TAB decreased its conFigure 18B 

Texas American Bancshares 

Market Value of Common Stock 

Market Value ($ Millions) 

400 

centrations of commercial re'al-estate 

loans and commercial and industrial 

loans somewhat. Commercial realestate loans fell from 24.1 percent to 

20.6 percent of assets between 1985 

and 1988, while commercial and in 

dustrial loans fell from 25.9 percent 

to 19.7 percent of assets. Asset quali 

ty continued to decline, however, with 

problem commercial real-estate loans 

comprising most of TAB's non

performing assets. In 1986, TAB again 

sharply increased annual loan-loss 

provisions and charge-offs, resulting in 

losses that would continue until TAB's 

failure. 

As with the other failed Texas bank 

holding companies, the extent of 

TAB's asset quality problems could be 

seen in 1986. TAB's adjusted capital 

ratio fell to 0.92 percent in December 

1986 and -0.32 percent in June 1987. 

Although TAB's failure appears to 

have been ultimately due to the 

decline in Texas commercial realestate markets, its problems began 

with the decline in oil markets after 

1981. 

TAB's market value closely follow 

ed its profitability. TAB's common 

stock increased from $18.73 per 

share at year-end 1979 to §40.88 per 

share at year-end 1984. An earnings 

drop in 1985, and subsequent losses 

in 1986 through 1988, lowered TAB's 

market value. At the time of the an 

nounced (attempted) open-bank 

assistance in May 1988, shares were 

trading at #1.88 per share. 

TAB's market value declined quick 

ly with the heavy losses from 1986 

through June 1989 (last financial 

report filed). Depositors, however, 

reacted much more slowly to TAB's 

deteriorating financial condition. 

Deposits of 8100,000 or more remain 

ed at 30 percent of liabilities in June 

1988, despite the fact that TAB's con 

dition warranted open-bank 

assistance at that time. In an openbank assistance transaction, unin 

sured depositors would have been 

protected from losses. As the an 

nounced assistance failed to work, 

uninsured depositors reacted. Deposit 
FDIC Banking Review 

balances of glOO.OOO or more fell to 

24.4 percent of liabilities in March 

1989 and 21.47 percent in June 

1989, just prior to the closure of the 

banks in July. 

National Bancshares of Texas 

(Headquartered in San Antonio) 

Nine of the 12 banking subsidiaries 

of National Bancshares of Texas 

(NBC) were closed on June 1, 1990. 

The nine banks, with assets of Si.6 

billion, were acquired by NCNB of 

Dallas. NBC had sought government 

assistance in April 1988. Two prior 

attempts at open-bank assistance ac 

quisitions, one in 1988 and a second 

in 1989, had been unsuccessful. 

Although NBC is not part of the 1980 

to 1989 failed-bank sample con 

sidered in this study, the fact that the 

resolution process for NBC began in 

1988 warrants its inclusion here. The 

resolution cost for NBC is estimated 

to be $263 million, or 5.68 percent 

of total 1989 Texas failure-resolution 

costs of 84,633 million, 

NBC experienced a period of rapid 

growth between 1976 and 1983, with 

expansion continuing through 1986. 

Asset growth was funded by both in 

sured and uninsured deposits. 

Deposits comprised about 90 percent 

of liabilities through June 1989. 

Deposits of SlOO.OOO or more com 

prised 25 percent to 30 percent of 

liabilities during this growth period 

but declined thereafter. Brokered 

deposits were at or near zero through 

1986. 

During NBC's expansion, portfolio 

composition shifted toward greater 

commercial real-estate lending, in 

creasing from 5.8 percent of assets in 

December 1976 to 16.3 percent in 

December 1986. Commercial and in 

dustrial loans increased from 12.2 per 

cent to 22.2 percent of assets between 

1976 and 1981, and remained at 

about 22 percent through 1986. Bank 

profits were high during this period, 

with return on assets reaching 1.22 

percent in 1981. Despite increased 

loan-loss provisions and charge-offs in 

1982, NBC maintained healthy proFigure 19A 

National Bancshares of Texas 

Percent of Assets 

12 

10 

8 

6 

4 

2 

0 

-2 

-4 

8412 8512 8606 8612 8706 8712 8806 8812 8906 

Date 

fits (return on assets of 1.07 percent). 

Profitability remained strong through 

1985, even though loss provisions re 

mained high. As a result, bank capital 

was over seven percent of assets for 

most of the growth period. However, 

in 1986 asset quality declined sharp 

ly. Nonperforming assets increased 

from 2.37 percent to 5.83 percent of 

assets between 1985 and 1986. Fur 

ther, loan-loss provisions and loan 

charge-offs tripled in 1986 to 2.05 per 

cent and 1.57 percent of assets, 

respectively. The decline in asset 

quality resulted in large losses in 

1986, which only worsened in subse 

quent periods. In addition, NBC's ad 

justed capital ratio was only 0.94 

percent in December 1986, falling to 

-0.08 percent in June 1987. 

AfteT 1986, NBC declined in size. 

During this contractionary period 

NBC maintained deposit liabilities of 

about 90 percent. Because of early in 

tervention by the FDIC in 1988, there 

was no increase in Federal Reserve 

Bank borrowings prior to attempted 

resolutions. Deposits of 8100,000 or 

Figure 19B 

National Bancshares of Texas 

Market Value of Common Stock 

Market Value ($ Millions) 

8012 8112 6212 8312 8412 B512 8612 8712 8812 89121 

Date 
The Texas Banking Crisis 

more declined from 29.5 percent of 

liabilities in December 1986 to 17.5 

percent in June 1989. NBC increased 

its concentration of brokered deposits 

during this period to 3.95 percent of 

liabilities as of June 1989. Commercial 

real-estate loan concentrations con 

tinued to rise, while commercial and 

industrial loan concentrations fell. 

NBC reached peak market value in 

December 1985. Growth in equity 

value was supported by strong earn 

ings through 1985 and relatively low 

nonperforming assets (2.37 percent of 

assets in December 1985). However, 

as seen in Figure 19B, its market 

value fell rapidly in 1986. Common 

stock fell from $23.75 per share in 

December 1985 to #12.25 per share 

in December 1986. Severe losses 

from 1986 through 1988 reduced 

share price to $2.25 in December 

1987. At the time of the attempted 

open-bank assistance in May 1988, 

shares were trading at #1.38. 

However, open-bank assistance failed 

to work, and NBC was trading at 3 

cents per share at year-end 1988. 

NBC's shareholders reacted quick 

ly to the decline in earnings in 1986, 

Further, it appears that depositors 

also reacted to NBC's problems. 

Deposit balances of $100,000 or more 

were approximately 30 percent of 

liabilities through 1986, but fell to 

22.91 percent in December 1987 and 

to 17.54 percent in June 1989. 

34