Full text of District Highlights : March 1987

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DALLAS
Federal Reserve Bank o f D allas

M arch 1987

Branching Affects Texas Banking Structure
The advent of branch banking will
significantly alter the Texas banking
industry. Banking employment, already
declining as a result of the state’s
recession, will decline further in
response to the new law. While branch
banking is likely to increase the
number of banking locations, the
number of banks will fall. Over the next
year, branching will have an important
effect on the Texas banking industry,
as will bank mergers and general
economic conditions.
Banking Employment Growth Slows

Banking employment in Texas has
gone through three stages since the
late 1970s. From 1975 through 1982,
employment growth in the industry
was strong at a 6.6-percent annual
rate. After oil prices weakened in late
1982, employment growth at banks
slowed but remained positive, averag
ing 2.2 percent annually from 1983
through 1985. During 1986, however,
banking employment in Texas declined
4.6 percent. Problems in the energy
and real estate industries lowered
bank earnings, and banks responded
partly by reducing employment in order
to cut costs (Chart 1).
Branching Legislation Takes Effect

The 1986 passage of a state con
stitutional amendment paved the way
for limited branch banking in Texas.
Beginning in 1987, a Texas bank may
have up to three branches in each
county in which it operates. Within a
county, affiliated banks of a multibank
holding company can reorganize as
one bank with a branch network.

One way of evaluating the potential
effect of this legislation is to compare
some characteristics of Texas banking
and banking in states that already per
mit limited branching. The data pre
sented in Chart 2 show that in relation
to its population, Texas has more bank
employees and more banks but fewer
banking locations than other states
that permit limited branching. If bank
ing in Texas becomes more like bank
ing in these states, estimates of the
long-term impact of the legislation
suggest that banking employment in
Texas will fall more than 7 percent, the

number of banks will decline almost 60
percent, and the number of banking
locations may rise over 90 percent.
These effects will take place over the
next several years and may be offset or
exacerbated by other factors, such as
interstate banking and the state’s
economic activity.
The number of banks will fall
because some existing banks will be
come branches, especially banks
within multibank holding companies.
When banks consolidate and stream
line operations as a result of branch(Continued on back page)

Rural Banks Fare Better Than Urban Banks
Largely because of increasing loan
losses, profitability has fallen for
banks in both rural and urban areas of
Texas. Rural banks, however, have sus
tained considerably smaller declines in
profitability than have their urban
counterparts. Most rural banks are
small, and loan losses have been more
severe at large banks. Nevertheless,
rural banks have still fared better, even
when only small banks are considered.
The smaller declines in rural bank prof
itability can be traced to a lower loanto-asset ratio and less severe loan dif
ficulties. Urban banks have experienced
greater loan difficulties because their
lending has been linked more closely
with industries hurt by lower oil prices.

economic conditions have resulted in
rising loan delinquency rates, forcing
banks to write off increasing propor
tions of their loans. Provision for loan
losses relative to assets at the state’s
small urban banks rose from 0.79 per
cent in 1984 to 1.12 percent in 1985
(Chart 3). Net income relative to assets
at these banks correspondingly fell
from 0.77 percent to 0.26 percent. Fur
ther increases in loan losses at the
small urban banks in Texas led to an
annualized return on assets of -0.24
percent over the first three quarters of
1986. In contrast, during the same
period the annualized return on assets
at small rural banks in the state was
0.75 percent.

Profitability Falls at Urban Banks

Rural Banks Suffer Less

Loan losses have been a major con
tributor to recent declines in urban
bank profitability in Texas. Adverse

As a group, rural banks in Texas
have had considerably smaller declines
(Continued on back page)

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

Chart 2
BANKING INDUSTRY CHARACTERISTICS
IN RELATION TO POPULATION

Chart 1
EMPLOYMENT IN BANKING AND
FINANCE, INSURANCE, AND REAL ESTATE

8.0 EMPLOYEES-------------------------- BANKS/LOCATIONS .40 —
PER 1,000 PEOPLE
PER 1,000 PEOPLE
■ TEXAS
6.4
655 SELECTED LIMITED-BRANCHING STATES'
.32 -

EMPLOYEES

SOURCES OF PRIMARY DATA: U.S. Bureau of Labor Statistics.
Federal Reserve Bank of Dallas.

Chart 3
INCOME AND PROVISION FOR LOAN LOSSES
RELATIVE TO ASSETS AT SMALL TEXAS BANKS

Table 1
SELECTED RATIOS FOR
SMALL TEXAS AND U.S. BANKS

2.0 PERCENT OF ASSETS---------------------------------------------------NET INCOME

LOCATIONS

1. Louisiana, Michigan, New Mexico, Ohio, Pennsylvania, and Tennessee.
SOURCES OF PRIMARY DATA: Federal Deposit Insurance Corporation.
Federal Reserve Bank ot Dallas.

1983

1984

1985

1986'

Change

-.24

.26

-.50

.75

.81

-.06

1.80

1.41

.39

1.58

1.54

.04

2.27

1.77

.50

1.88

1.76

.12

Other U.S. urban banks

Net income/
assets..............

1985

Percent

Change

Percent

Net income/
assets..............
Net write-offs/
loans ..............
Loan loss
provision/
loans ..............

19861

1985

19861
Ratio

1982

Texas rural banks

Texas urban banks

LOAN LOSS PROVISION

.77

.70

.07

Other U.S. rural banks

.78

.69

1. Figures for the year are annualized from the first three quarters.
NOTE: Calculated for insured commercial banks with total assets under
$100 million.
SOURCES: Board of Governors, Federal Reserve System.
Federal Reserve Bank of Dallas.

1. Figures for the year are annualized from the first three quarters.
NOTE: Calculated for insured commercial banks with total assets under $100 million.
SOURCE: Federal Reserve Bank of Dallas.

LOANS-LARGE WEEKLY REPORTERS

DEPOSITS— LARGE WEEKLY REPORTERS

Eleventh Federal Reserve District

"2 2 |
1. Percent change from same quarter in previous year.
SOURCE: Federal Reserve Bank of Dallas.

1984

1985

1. Percent change from same quarter in previous year.
SOURCE: Federal Reserve Bank of Dallas.

1986

.09

DISTRICT BRIEFS
The Eleventh District economy is showing some signs of a recovery. Weakness continues,
however, in the important energy and construction sectors.
• In Texas, nonagricultural employment growth
has been slow but steady since June. Gains in
service-producing industries have more than
offset the weaknesses in oil and gas extrac
tion, manufacturing, and construction. The big
gest employment gains have been accounted for
by local government hiring. Personal and busi
ness services and finance, insurance, and real
estate have also produced jobs at a steady rate.
• The employment picture is less bright in Loui
siana, owing to the high concentration of
energy industries. Although the rate of contrac
tion has slowed, total nonagricultural employ
ment in the state continues to decline. Among
the three District states, New Mexico has
proved to have the most resilient economy. The
state’s nonfarm employment grew at a robust
rate in the fourth quarter of 1986.
• Construction activity has slipped markedly,

UNEMPLOYMENT RATE
i—

HOUSING PERMITS IN TEXAS

12 PERCENT-------------------------------------------------------------------------

(QUARTERLY AVERAGES,
SEASONALLY ADJUSTED)

1984

1985

1986

1. Louisiana, New Mexico, and Texas.
SOURCES: Texas Employment Commission.
U.S. Bureau of Labor Statistics.
Federal Reserve Bank of Dallas.

8 PERCENT1-------------------------

“

i—

24 THOUSAND— ----------------------------------------------------------------(QUARTERLY AVERAGES,
SEASONALLY ADJUSTED)

1984

1986

TEXAS INDUSTRIAL PRODUCTION INDEX
(SEASONALLY ADJUSTED)

1984

1985

SOURCES: U.S. Bureau of the Census.
Federal Reserve Bank of Dallas.

CONSUMER PRICE INDEX
r-

mainly because residential building declined
sharply in the latter months of 1986. Nonresidential construction remains steady after end
ing its steep decline earlier in 1986.
• Business conditions for the District’s manufac
turers have remained sluggish. The problems in
the energy and construction sectors have
adversely affected many durable goods in
dustries.
• OPEC’s actions to cut production and raise
prices have led to marginally better conditions
in the energy industry, but further improvement
is questionable. Although the drilling rig count
has edged up since September, the count
slipped back slightly in January.
• The balance sheets of the District’s large banks
continue to reflect the weak economy. Both
total loans and total deposits have contracted
sharply.

1985

1. Percent change from same quarter in previous year.
SOURCES: U.S. Bureau of Labor Statistics.
Federal Reserve Bank of Dallas.

1986
SOURCE: Federal Reserve Bank of Dallas.

Branching (cent.)

Rural Banks (cent.)

ing, fewer employees are needed. The
number of locations will probably rise
as branching allows banks to use loca
tion as another means of competing
for customers.

in profitability over the past two years
than have urban banks. Rural banks
have held a smaller amount of loans
relative to assets, making their overall
profitability less sensitive to increas
ing loan problems. Moreover, they have
had less difficulty with their loan port
folio than have urban banks. Between
1985 and the first three quarters of
1986, smaller increases in rates of loan
write-downs and provision for loan
losses led to a smaller decrease in
profitability at small rural banks (Table
1). As a result, for the first three
quarters of 1986, the return on assets
at small rural banks in Texas was com
parable to the return on assets re
ported by small banks, both rural and
urban, in the rest of the nation. This
contrasts sharply with the large dif
ference between the negative return on
assets at small urban banks in Texas
and the return on assets at small
banks elsewhere in the nation.

Adjustment Will Take Time

Because branching is a new phe
nomenon in Texas, these adjustments
will not take place all at once. Al
though further declines in banking em
ployment are likely to result from the
earnings problems facing Texas banks
and from interstate and intrastate
bank mergers, branching legislation
will play a role as well. While other fac
tors, such as the state’s economic
health and population growth, will af
fect the number of banks and banking
locations, branching legislation will
also have an important effect on these
variables in Texas over the next year.
—Robert T. Clair and
William T. Long III

Differences Reflect Economic Trends

The large increase in loan losses at
urban banks in Texas identifies a
closer link between their loan portfolio
and industries that have been hurt by
lower oil prices. Profitability at rural
banks has been partially spared by the
regional economic downturn because a
far greater proportion of their lending
is related to the agricultural sector.
Although agriculture has suffered, it
has not experienced as dramatic a
downturn as have Texas industries
hurt directly or indirectly by lower oil
prices, such as oil and gas extraction,
energy-related manufacturing, and real
estate. The Texas economy is ex
pected to recover modestly this year,
but bank profits tend to lag economic
recoveries. Thus, profitability at urban
banks in Texas will probably remain
fairly low through most of 1987 and
then show improvement.
—Jeffery W. Gunther

The views expressed are those of the authors and do not necessarily reflect the positions of the
________________ Federal Reserve Bank of Dallas or the Federal Reserve System.________________

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Full text of District Highlights : March 1987

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