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THE TEXAS BANKING CRISIS
CAUSES AND CONSEQUENCES

1980

John O'Keefe
Financial Economist
Division of Research ond Statistics
Feaerai Deposit Insurance Corporation
July 1990

1989

The Texas Banking Crisis: Causes and Consequences
(1980 - 1989)

John O'Keefe
Financial Economist
Federal Deposit Insurance Corporation

I would like to thank Art Murton, Maureen Muldoon, Jane
Coburn, Michael Graves and Don Inscoe of the Division of Research
and Statistics for suggestions and assistance.
In addition,
information and comments received from Division of Supervision
staff, Bob Miailovich, Bob Walsh, and the staff of the Dallas
Regional Office were very helpful.
As in all such endeavors,
responsibility of the author.

any

remaining

faults

are

the

Table Of Contents
Page
Executive Summary

Section
I.

Introduction

II.

Growth Rates among Commercial Banks:
Texas versus the U.S
III. Condition and Performance Trends:

Texas versus the U. S

IV.

Major Metropolitan Areas

Texas Bank Holding Companies

VI. Bank Supervision: Bank Examination and Oversight .• 19
VII. Funding Bank Activities: The Role of Deposit
Insurance
26
Appendices
A.

Trends in Lending Activity: Texas versus the U.S. . 29

Failed Bank Lending Activity: Major Metropolitan
Areas

Case Histories: Failed Bank Holding Companies

• i -

Executive Summary
The purpose of this analysis is to explain the recent high
failure rates among Texas commercial banks.
Specifically, we
reviewed financial and nonfinancial market data, as well as
information regarding regulatory activity in Texas over the past
decade, in order to determine 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 additional 76 required assistance from the FDIC. The number of
failed and assisted Texas banks rose from 3 in 1983 to 134 in 1989.
In 1988 and 1989 failed and assisted banks (hereafter denoted
failed banks) in the state 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 real estate markets, in which Texas banks invested
heavily, experienced dramatic declines after 1985.
Principal Findings
- Most Texas commercial banks that failed over the past decade
appear to have 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. Commercial loan concentrations generally peaked in
1982, shortly after oil prices began to drop. These concentrations
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 combined Austin, Dallas, Houston and
San Antonio areas.
Failed commercial banks generally increased
concentrations in construction and land development loans long
after the decline in local real estate markets.
- As commercial real estate vacancy rates grew, it appears that
failing
commercial
banks
continued
funding
of
completed
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 real
estate development projects by failed 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 particular.
- Once problems became apparent to regulators and the market,
retrenchment began at most failing institutions, followed by
resolution.

I. Introduction:
Over the past decade 349 Texas commercial banks failed and an
additional 76 required assistance from the FDIC. The increase in
failure rates among Texas banks coincides with the unprecedented
increase in the national rate of bank failure in 1984. As shown
in Figure 1A, the number of failed and assisted banks (hereafter
denoted failed banks) in Texas approximately doubled each year
between 1983 and 1988, increasing from 3 failures in 1983 to 175
in 1988 (and 134 in 1989) .
These figures may be somewhat
misleading because of the restrictions on branch banking in Texas,
which were not removed until 1987. However, with the failure of
most of Texas1 largest bank holding companies in 1988 and 1989, the
data show a disproportionate amount of failed banks1 assets among
Texas banks (see Figure IB)•

Nuiber of Failed & Assisted Banks
PDXC Iasvrod tamks (1980 - 1989)

Assets of Failed & Assisted Banks
FDIC Iastrtd Btaks (1980 • 1989)

I960

I96i

1962

1913

1964

IMS

tHi

1967

1966

1969

The increase in failures among Texas commercial banks has
resulted in increases in 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 failed in 1985 were $80.9
million, or 9.2 percent of total reserves. The situation changed
dramatically by 1988, with FDIC loss reserves on Texas failed 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.

FDIC Loss Reserves
railed and Assisted Banis

1965

1986

1907

Ft Hart Ytir

Figure 1C

196B

1989

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 failedbank assets for Texas and the rest of the nation. The proportional
cost figures for Texas failed banks have declined in recent years,
primarily because recent failures in the state have involved large
bank holding companies. In 1988, the failure of First RepublicBank
and the assistance of First City Bancorporation comprised most of
the total failed-bank assets in Texas that year. Similarly, the
failures of MCorp and Texas American Bank comprised most of the
failed-bank assets in Texas in 1989.

FDIC Loss Reserves
railed and Assisted Banks

1939

1905

Failure Teti
Figure ID

The high failure rates among Texas commercial banks appear to
be attributable to a combination of several developments.
The
first was the trend in crude oil prices (and related products)•
The OPEC oil embargo of 1973 contributed to large increases in
domestic crude oil prices between January 1973 and June 1981.
Crude oil prices subsequently declined at a moderate rate from
midyear 1981 to December 1985, then fell dramatically in 1986.
(Texas crude oil prices fell 45 percent in 1986.) Crude oil prices
have fluctuated less in recent years, and presently (July 1990)
remain 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 employment and continued
to do so 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.
The changes in the composition of the loan portfolios of Texas
commercial banks appears to be the third factor contributing to
the high failure rates of the late 1980s.
Concentrations in
construction and land development projects among Texas banks grew
from 3.5 percent of bank assets in 1978 to 8.3 percent of assets
in 1984, and remained at high levels through 1986. Over this same
period, nonperforming assets, comprised largely of nonperforminq
real
estate
loans,
grew
steadily
among
Texas
banks.
Concentrations in commercial and industrial 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 have declined, so too have related loan
concentrations.
As of 1989, commercial and industrial loans
comprised 16.54 percent of Texas bank assets.
The final significant trend relates to bank examinations.
The frequency of examinations of Texas commercial banks was among
the lowest in the nation for the last decade. Bank examinations
were least frequent in 1984 and 1985 across the country, as well
as in Texas. The lengthening of the exam interval was due, in
part, to hiring freezes and increased workloads for exam staff.
These trends also apply to Texas commercial banks which failed
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 restructured loans), nonaccrual loans, and
other real estate owned minus investments in real estate ventures.
Nonperforxning real estate loans are defined as the sum of real
estate loans past due 90 days or more plus nonaccrual real estate
loans.

during the past decade.
In the remainder of this study# the recent history of Texas
commercial banks is analyzed, as it relates to the increased bankfailure rate in the state. To begin. Section II presents data on
growth of the commercial banking industry in Texas over the last
two decades.
Section III contains a summary of financial and
nonfinancial market events relevant to Texas commercial banking
problems. Section IV reviews the activities of failed banks in
four major metropolitan areas in Texas.
Section V reviews the
experiences of the large bank holding companies in Texas which have
failed in the past decade. Section VI examines the supervisory
activities of federal bank regulators. Finally, Section VII looks
at the role that our present deposit insurance system may have
played in the Texas banking crisis.
II. Growth Rates among Commercial Banks:

Texas versus the U.S.

Banking activity in Texas increased greatly during the late
1970s and early 1980s.
(This paper focuses on FDIC-insured
commercial bank activity, however, similar growth occurred among
Texas thrifts.) Texas commercial 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, compared
to 8.6 percent for all other U.S. banks.

Asset Growth Rates of FDIC Insured Commercial Banks
(1970 - 1989)

ex.

o
fc-4

1971

1973

1975

1977

1979

Year

Figure 2A

1981

1983

1985

1987

198$

Asset growth by Texas banks between 1977 and 1980 occurred
primarily through expansion by existing banks. Subsequent asset
growth was aided by a large increase in new bank charters (see
Table 1 and Figures 2B and 2C).
Table 1
New Commercial Bank Charters
X£a£

Texas
Charters
Number of Banks

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989

25
25
30
34
47
34
25
20
19
28
45
58
83
134
137
100
72
22
13
9

1,182
1,207
1,231
1,259
1,306
1,336
1,357
1,377
1,395
1,422
1,467
1,523
1,598
1,727
1,852
1,934
1,969
1,765
1,492
1,313

U.S. (except Texas)
Charters
Number of Banks
155
174
213
304
320
221
143
143
138
190
173
154
261
237
257
231
189
197
218
183

12,325
12,410
12,499
12,715
12,921
13,047
14,411
13,035
12,995
12,942
12,968
12,892
12,855
12,741
12,620
12,459
12,220
11,930
11,629
11,392

New Commercial Bank Charters
(1970 -

1989)

320
300 280 260 240 -

O
«n
*\

220 -

ter!

200 ISO -

160 -

140 -

120 -

100 -

•

60 60 40 -

20 J
1970

1988

Texas Commercial BanXs
(1970 - 1989)

c
o

•
£
re
X3
CJ

o
>

210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10

•
1970

Texas Bant Assets ($)

1972

1974

1976

1978

1980

Year
Figure 2C

1982

1981

1986

1988

Prior to 1987, Texas law prohibited branch banking. This
resulted in the 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 banks within a holding
company would be used to gather deposits, which would be channeled
to other banks through sales of federal funds or interbank
deposits. The funds purchased from these affiliates would help
finance additional 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 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 condition 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 in Dallas
states that Texas nonagricultural employment follows oil price
movements with a short lag. In addition, the study concludes that
inflation in oil prices after the OPEC oil embargo of 1973 led to
increased 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, 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.
One question that is raised by these growth trends is whether
Texas banking markets suffered from "overbanking."
The term
1
1
over bank ing11 connotes an overall expansion of bank activities that
was imprudent or unwarranted. Overbanking might therefore be
characterized by excessive asset growth rates, rather than an
increase in any specific type of lending (e.g. growth in commercial
real estate loans)• By definition, imprudent asset growth results
from a lowering of credit standards by bankers searching for new
2

T. Fomby and J. Hirschberg "Texas in Transition: Dependence
on Oil and the National Economy", Federal Reserve Bank of Dallas,
Economic Review, January 1989.

business. Unfortunately, a concise measure of overbanking does not
exist. Rapid increases 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.
The relevant question in this context
is whether the increase in commercial bank activity seen in Figures
1 through 3 was imprudent, or merely an appropriate reaction to
changes in market conditions.
If Texas financial markets did
suffer from overbanking, the result of increased competition and
relaxed credit standards would be increased failure rates.
Failures would include both new and established banks, however,
since new institutions typically have greater difficulty facing
economic stress, one expects a higher failure rate among newer
banks. This was indeed the case. Approximately, 142 institutions,
or 21 percent of the Texas banks chartered since 1980 failed. (This
estimate does not include some of the newly chartered banks that
merged or were acquired by another institution which subsequently
failed.)
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 in the following section, is to examine
specific lending practices and to relate them to events affecting
the region's economy.
III. Condition and Performance Trends:

Texas versus U.S.

The high failure rates among Texas banks in the late 1980s has
its 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 in one month.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 crude oil refiner acquisition cost from 1972 through 1988.
After the OPEC oil embargo, domestic crude oil prices rose
dramatically, with a 58 percent increase 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 increases began. Average annual domestic crude oil
acquisition costs rose 23.5 percent in 1979, 55.7 percent in 1980,

An exception to this statement is the case of completely
inelastic supply.
4

Source: Oil and Gas Journal Energy Database,
11

and 29.2 percent in 1981. Average crude oil prices declined 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 ) .
Crude Oil Refiner Acquisition Cost
Current Dollar. Doiestic

93
10

iro

ITO irM ltn

it?* i?n ltrt i n

two ttti

IWJ m« i«ts t m

ltrr ttit

Year
Figure 3A

The increase in oil prices had an obvious impact on Texas real
estate markets. Figure 3B shows trends in Texas office real estate
markets from 1978 to 1989. In 1981, office starts were more than
double the level in 1980 for the combined Austin, Dallas, Houston
and San Antonio area. Obviously, 50 percent annual increases in
crude oil prices provided strong incentives for business expansion.
However, such inflation in oil prices did not persist. Ultimately,
the weakening of the OPEC oil cartel, in addition to domestic
energy conservation, led to reductions in oil prices. The building
trend in Texas, however, continued into 1986. The overbuilding in
Texas commercial real estate resulted in rising office vacancy
rates between 1981 and 1989. (Also see Table 6, Appendix A ) .
Additional downward pressure on real estate markets came with
the Tax Reform Act of 1986.
The 1986 tax law changes greatly
reduced the tax benefits of owning real estate, particularly
properties generating losses. As a result, the values of such
properties declined to both original owners and banks (thrifts)
holding repossessed properties. The impact of the tax lav change

was greatest in overbuilt areas where such properties were more
prevalent.

Average Office Vacancy Rate
Austin. Dallas. Houston, & San Antonio

c
r

1976

1979

1980

1961

1982 1983

1984

1965 1986

1987

1988 1989

Year
Figure 3B

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, construction and land development loans,
are short-term (60 months or less) credits secured by real estate.
These include loans to commercial real estate developers, as veil
as loans to oil and gas producers. The second relevant category
of loans are commercial and industrial loans. These include those
loans to mining, 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 percent in
1984 (see Figure 9B, Appendix A ) • These loan concentrations are
distinct in two respects.
First, Texas development loan
concentrations were well above the national average between 1978
to 1987. Second, these loan concentrations remained high among
Texas banks through 1987, despite increasing office vacancy 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 industrial loan concentration among
Texas banks closely followed oil price movements. Commercial and
industrial 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, commercial and industrial loans also declined, falling to
21.41 percent of Texas bank assets in 1986 and 16.54 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 banks1 nonperforming assets (see
Figure 10B, Appendix A) .
Nonperforming asset data are not
available prior to 1982. Nonperforming assets increased from 1.75
percent of Texas bank assets in 1982 to 4.2 percent in 1986 and
6.58 percent in 1987. Among failed Texas banks, nonperforming
assets remained extremely high between 1984 and 1988, averaging
10.4 percent of failed-bank assets. As a result of these trends,
Texas commercial 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 remains poor at -0.31 percent in 1989.
The reduction in losses in 1989 was due to increases in noninterest
income and reduced loan loss provisioning.
IV. Major Metropolitan Areas:
To gain more insight into the behavior of failed Texas
commercial banks, trends in the portfolio composition of banks
within four major metropolitan areas in Texas (i.e., the Austin,
Dallas, Houston, and San Antonio metropolitan areas) were reviewed.
Specifically, changes in the portfolio composition of banks that
failed between 1980 and 1989 were examined.
The discussion
presented here 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 metropolitan areas may be summarized.
The first general finding was that the majority of banks in
the sample appeared to react quickly to movements in oil prices.
The increase in crude oil prices between 1973 and 1981 was
accompanied
by
increased
concentrations
in commercial
and
industrial loans (which include loans to oil and gas producers)
among failed banks in each of the four areas considered.
Commercial and industrial loan concentrations reached peak levels
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 industrial loan concentrations
increased until 1984.
In the Dallas, Houston, and San Antonio
areas, commercial and industrial 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 exception 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 appeared to react slowly to changes in commercial real
estate markets. Over the past decade all four metropolitan areas
experienced
large
increases
in
office
vacancy
rates.
Concentrations of construction and land development loans grew
among failed banks in the four areas long after the decline in
commercial real estate markets. This last result is due, in part,
to the inertia created by banks fulfilling loan commitments in
earlier periods, as development projects moved toward completion.
Recent declines in construction 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 property financing. In recent years, the combined 30
percent office vacancy rate in these four metropolitan areas help
to explain why banks have been unable to shift the financing of
completed commercial properties to nonbank financiers.
For convenience, trends on loan concentrations for failed
banks in the Dallas metropolitan area are presented below (see
Figures 4A and 4B) ; trends for the three remaining areas are
presented in Appendix B.
Data on individual categories of
nonperforming loans shown in Figures 4A and 4B is not availableprior to 1985.
Nonperforming real estate loans or "bad real
estate19 is defined as the sum of real estate loans past due 90 days
or more plus nonaccrual real estate loans.
Similarly,
nonperforming commercial and industrial loans or "bad commercial
loans99 include commercial and industrial loans past due 90 days or
more plus nonaccrual commercial and industrial loans.

Dallas Area Failed and Assisted Commercial Banks
Oil Prices and Commercial Lending
40

Real Cost of Crude Oil ($)
35 -

Conercial Loans (X)
20 o

15
B

Bad Comercial Loans (X)
5 -

t
1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1968

Tear-end
Figure 4A

Office Vacancies and Real Estate Lending

1979

1980

1961

1982

1983

Year-enfl
Figure 4B

1984

1985

1986

1987

1988

The preceding discussion raises questions regarding the
comparative portfolio choices of Texas1 healthy 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 entire 1978 to 1988 period. The
healthy banks followed similar trends in construction loan
concentrations as those of failed banks, however, such loan
concentrations were significantly lower. As expected, the healthy
banks also had much fewer nonperforming real estate assets, again
with the exception of Austin. The differences in commercial real
estate lending concentrations between these two groups of banks
clearly became a crucial factor, as the real estate boom turned
into an overbuilding 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 of than in the Washington D.C.
area.
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. Indeed, the "healthy11 bank
group within Austin area had high proportions of nonperf orming real
estate assets as of year-end 1989.
V. Texas Bank Holding Companies:
Seven of Texas9 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 companies became FirstRepublic
Bancorporation, which failed in 1988), Texas American Bancshares,
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 experiences
of these bank holding companies. However, it is still beneficial
to examine the operations-of these seven institutions on a caseby-case basis.

See National Real Estate Index. "2nd Quarter 1989 Trends",
published by Liquidity Funds,

The financial histories of these seven Texas bank holding
companies are remarkably similar.
(Discussions of each of the
seven holding companies is contained in Appendix C). Therefore,
it is easy to construct a common history which summarizes the
experiences of these seven institutions.
To begin, the growth and profitability of all seven holding
companies relied heavily upon the condition of domestic energy
markets, particularly domestic oil.
The dependency of these
institutions, 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 (Section II), the entire Texas economy
was largely dependent upon oil prices. The boom in oil markets
fueled the state's economic growth, as evidenced by the bu ldup of
commercial real estate in the mid-1980s. Consequently, these banks
expanded quickly 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 institutions reached their highest rates
between 1980 and 1982, as inflation in oil prices reached peak
levels. Bank profitability was reduced between 1983 and 1985 with
the mild deflation in oil prices. Soon after the decline in energy
markets, these banks began to decrease concentrations in commercial
and industrial loans. To replace the demand for energy loans,
these banks 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 rebound. After a sharp reduction in oil
prices in 1986, these banks experienced heavy losses, which
continued until their failure. Lending into declining commercial
real estate markets resulted in deteriorating asset quality. The
severity of the situation was apparent by year-end 1986, when bank
equity plus loss reserves barely exceeded nonperforming assets for
all seven banks. Although some of the lead banks of these holding
companies had been identified as problem banks as early as 1984,
the remaining lead banks were not identified as problem banks until
1986 (First Republic Bancorporation was an exception, with a 3
rating in 1986, and a 5 rating in March 1988).
Bank holding company shareholders appear to have supported the
shift toward commercial real estate lending. Indeed, shareholders
did not appear to have anticipated the consequences of increased
lending to commercial real estate, as vacancy rates grew. Bank
stock prices did, however,- react quickly to reductions in profits.
In addition, uninsured depositors appear to have 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 failure resolution
transaction would have resulted in their full protection, as had
been the case in handling of Continental Illinois, the largest bank

rescued to that point.
After 1986, the viability of these bank holding companies was
questionable, given their capital levels and examiner ratings. As
real estate markets deteriorated further after 1986, the condition
of these banks was further weakened.
Generally, after an
examination resulting in a composite CAMEL rating of 5, the
resolution process began. By that point, the financial condition
of the bank 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 banks
were forced to replace lost deposit funding with borrowings from
the Federal Reserve Discount window as failure approached.

VI. Bank Supervision: Bank Examination and Oversight
The exam records reviewed for this analysis indicate that bank
examiners normally raised concerns over failed banks1 safety-andsoundness prior to failure.
In nearly 90 percent of the cases
reviewed, examiners indicated a need for increased oversight as a
result of their examinations of the bank prior to failure. The
frequency 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 regulatory oversight, 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.
1. Exam Frequency:
The exam files reviewed in this analysis contain information
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 nationally chartered banks are supervised and examined by the
Office of the Comptroller of the Currency (OCC) .
All state
chartered banks that are members of the Federal Reserve 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 examined by both the FDIC 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 types or 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 consumers,
such as truth-in-lending requirements, civil rights lavs, and
community reinvestment regulations. A third area subject to review
by examiners is the integrity of the bank's electronic data
processing systems, denoted EDP exams.
Finally, safety-andsoundness examinations focus on five key areas affecting the health
of the institution. The five areas are: capital adequacy, asset
quality, management, earnings, and liquidity. 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 condition 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) • A composite 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 corrected. Finally, a CAMEL rating of 5
indicates severely deficient performance and the need for quick
corrective 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
generally call for more frequent onsite examinations the higher 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 to these examinations,
agencies also use onsite visits to investigate specific areas, such
as compliance with previous corrective actions requested by bank
regulators, or investigation 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 onsite visits every 3 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
extension is acceptable. At present, the FDIC has established a
goal of increasing the frequency of onsite examinations to at least
once every two years for 1 or 2 rated institutions, and at least

* See Manual of Examination Policies (1986), Federal Deposit
Insurance Corporation, Division of Bank Supervision.

once a year for banks rated 3, 4, or 5.7
In this section, the frequency of bank safety-and-soundness
examinations by all three federal bank regulators is reviewed.
Since onsite visits are also used in detecting problems, these are
included in this analysis, as well as full onsite examinations.
Among the institutions that failed between 1980 and 1989, the
median frequency of examinations was 365 days, compared to 403 days
among banks that did not fail. Since failing banks are usually
rated as supervisory concerns prior to their actual failure,
examination frequency can be expect to be higher among these
institutions than among healthier banks.
Exam frequency has varied significantly over time. Infrequent
examinations pose less risk to deposit insurers during periods of
economic prosperity, when even poorly run firms may prosper, than
during periods of economic contraction. Table 2 shows the median
examination interval; i.e.. the number of days since the last exam
for banks examined within a given year. Exam frequency 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 exams is not presented.)
The long
interval in 1986 indicates an extended period between the exam that
year, and the prior exam in 1984 or 1985.
Table 2
year
1981
1982
1983
1984
1985
1986
1987
1988

Median Exam Interval (davsl
Healthv Banks
Failed & Assisted Banks
365

393
403
397
399
457
466
405
366

371
357
357
377
457
365
343

Figures 5 and 6 provide additional information on bank
examination frequency over time, showing the annual 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.
See Deposit Insurance For The Nineties: Meeting the
Challenge. (1989) an unpublished study by the staff of the Federal
Deposit Insurance Corporation.

Quarterly exam frequency data (not shown here) also indicate that
there is seasonality in bank examinations, with fever 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.

U.S. Commercial BanXs
Average Number of Exams per Quarter
US

Hals (1980 - 1989)

Yttr

figure 5

Texas Comiercial BanXs
Average Number of Exaas per Quarter
Tffias l a n k s (1980 - 1919)

1980

1961

1982

1993

1911

1«6S

1996

190?

1MB

1119

Regional economic trends are as significant as broader
macroeconomic business cycles in influencing 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 the trends in the frequency of bank examinations across
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.

Median Exam Period (days)
Tailed & Assisted Banks (1980-1989)

c
in
en

1981

1982

1983

1984

Exai-Year
Figure 7

1965

1986

1987

1988

2. Reasons for the Decline in Exam Frequency:
There are several reasons for the reduction in bank
examinations between 1981 and 1987. First and most important was
a reduction in examination staff during this period resulting from
a hiring freeze. Table 3 shows the number of bank examiners for
each agency, and associated turnover rates in examination staff.

Year
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975

Table 3
Examination Staff and Turnover Rates
Number of Staff
Turnover rates
EBB FDic
occ
FRB FDIC O C C
954
914
835
820
809
804
800
836
805
744
653
724
644

1,909
1,726
1,547
1,389
1,481
1,551
1,655
1,698
1,713
1,760
1,556
1,644
1,455

13.0%

10.6%

17.0
14.0
13.0
12.0
12.0
18.0
15.0
18.0
18.0
12.0
12.0
11.0

2,016
1,812
1,787
1,706
1,818
1,642
1,810
2,037
2,151
2,060
2,157
2,166
2,113

9 .8
10 . 7
9 .0
6 .0
7 .1
8 .0
8 .9
9 .4
8 .0
10 . 1
8 .2
7 .4

7.6%
12.4
13.6
15.1
12.0
12.7
15.3
11.7
14.9
15.1
11.7
13.9
8.6

Note: Number of staff are approximate number of field examiners for
each agency.
Source: FRB, FDIC, and OCC internal records.
Combined regulatory examiner staff levels declined 14.35
percent between 1980 and 1984, reaching their lowest levels in
1984. The staff reduction occurred almost entirely among FDIC and
OCC examiners. These reductions were ill timed, however, because
examiner workloads were increasing (particularly in the Southwest) •
Between 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, FDIC exam staff were responsible for gathering
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 concentrated their
efforts on the larger banks, as well as those on the problem list.
An analysis of the relationship between exam frequency and bank
size and composite CAMEL ratings indicated that, nationally, there
was a statistically significant increase 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 bank size nor CAMEL ratings were statistically
significant in explaining the shortening of examination intervals.
Despite the apparent national policy of concentrating
examination resources on the largest banking institutions, there
was still a substantial reduction in the assets of banks examined
between 1981 and 1987, particularly in Texas.
It should also be noted that the entry 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 shortage 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 recorded exams during between
1984 and 1985 is attributed to a lack of data entry.
However,
summary data not subject to this bias, are in substantial agreement
with the above findings.
3. 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 increase the
potential magnitude of these changes. Available data on failed and
healthy banks are in agreement 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
support the premise that infrequent examinations increase the
potential for serious deteriorations 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 examiners 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 potential sources of difficultly for a bank.
For
example, high concentrations of loans in traditionally risky areas
such as construction and land development, poor liquidity and
inadequate capitalization are factors which can lead to failure.
Yet these condition appear in advance of 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 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 January 1989
for banks that failed in 1989).
Table 4
Last Composite CAMEL Rating for Failed/Assisted Banks
Composite CAMEL Rating
Percent
Cumulative Percent
1
1.9%
1.9%
2
9.3
11.2
3
8.5
19.8
4
27.1
46.9
5
53.1
100.0
Table 4 shows that 88.7 percent of the sample of failed banks
were rated supervisory concerns prior to failure (i.e.. had
composite CAMEL ratings of either 3, 4 or 5 ) . For comparison,
using the most recent exam among healthy banks in the sample (as
of January 1989), only 21.1 percent of healthy banks were rated
supervisory concerns.
These statistics, although general in
nature, do 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 may have
been recognized sooner had bank examinations been more frequent.
VII. Funding Bank Activities: The Role of Deposit Insurance
As discussed in Section II, Texas banking activity increased
dramatically over the last decade. In this section, the role that
deposit insurance may have played in funding this growth, as well
as the types of risks assumed by Texas banks, is examined.
Some observers have argued that the availability of flat rate
deposit insurance 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 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
successor/another institution.
Second, if deposit insurance
premiums do not rise with the riskiness of the bank, bankers will
have incentives to exploit this flaw in the premium structure 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 institutions failed.
Two were
involved in unassisted mergers, but did not fail.
The failed

holding companies are Interfirst Corporation, RepublicBank, Texas
American
Bancshares, National
Bancshares of Texas, MCorp,
BancTexas, and First City Bancorporation.
Interfirst and
RepublicBank merged in 1987 to form FirstRepublic Bancorporation,
which failed in 1988. The holding companies involved in unassisted
mergers are Texas Commerce Bank and Allied Bancshares.
The combined bank assets of these institutions grew from $30.6
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 uninsured deposits.
Deposit accounts of
$100,000 or more increased from 19.8 percent of liabilities in 1976
to 28.5 percent in 1981, and remained at high levels through 1988.

The Nine Texas Bank Holding Companies
Heiber Bants' Deposit Funding

110

o
O

Deposits of $100,000 or lore
1976

197?

1978

1979

1980

1961

1962

1983

1981 1965

Tear-end
Figure 8

Deposit insurance coverage changed over this period as veil.
The deposit insurance limit in 1974 was $40,000 for most individual
accounts
and $100,000 -for time and savings
accounts of
municipalities.
The $100,000 limit was applied to individual
retirement accounts in 1978, and finally expanded to cover all

accounts in 1980/
The above data show quite clearly that banking activity in
Texas continued to expand after the initial decline in energy
markets in 1982; however, expansion was halted with the sharp
reduction in oil prices in 1986. Only two institutions, First City
and BancTexas, stopped growing (in total asset size) after 1983.
The histories of the seven failed bank holding companies (see
Appendix 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 major metropolitan areas of Texas between 1982 and
1986, all seven institutions increased construction and land
development loans significantly (both in dollar terms and as a
percent of bank assets). Uninsured depositors reacted very slowly
to the deteriorating condition of these banks.
The collapsing
commercial real estate market led to severe asset quality problems
for all seven institutions by year-end 1986. The severity of the
situations for these banks was evident in that capital plus loss
reserves barely exceeded nonperforming assets for all seven banks
at year-end 1986. In most instances, however, these banks were
able to maintain the proportion of liabilities funded by deposit
accounts of $100,000 or more through 1986.
The findings indicate that these institutions did not have to
rely solely upon insured depositors to fund risky investments in
commercial real estate. Indeed, these banks were able to maintain
relatively high proportions of uninsured liabilities through 1986.
However, as failure became imminent for an institution, there was
some loss of uninsured depositors, which was usually offset by
borrowings from the Federal Reserve.
Given that uninsured deposits were slow to react to the
deteriorating conditions of these institutions, it would be
interesting to be able to discover more about this group.
Unfortunately,
available
financial data does not
identify
depositors in a detailed fashion. However, that data does indicate
that brokered deposits were not a significant source of funds for
this group of banks as insolvency 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 interbank deposits among members of a holding company.
Further, correspondent bank balances associated with check clearing
may have been another important source of funds.

See The First Fifty Years: A History of the FDIC 1933 1983, (1984) Federal Deposit Insurance Corporation.

Appendix A

Construction Loans
FDIC Insured Conercial Banks

2 -

1978

1979

1980

1981

1982

1983

1984

Year-end
Figure 9A

1985

1986

1987

1988

1989

Construction & Nonresidential Property
FDIC Insured Conierdal Banks

1978

1979

1980

1981

1982

1983

1984

Year-end
Figure 9B

1985

1986

1987

1988

1989

Commercial & Industrial Loans
FDIC Insured Conercial Banks

16
1978

1979

I960

1981

1982

1983

1964

Year-end
Figure 10A

1965

1986

1987

1988

1969

Nonperforming Assets
FDIC Insured Coiiercial Banks

c
a>
u

1982

1983

1981

1985

1986

Year-ena
Figure 10B

1987

1988

1989

Table 5
Domestic Crude Oil Refiner Acquisition Cost ($/barrel)
Year
Current Dollar
Constant (1982) Dollar
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988

$8.51
8.47
8.24
8.29
7.89

$3. 21
3. 37
3. 46
3. 68
3. 67
4. 17

8.42
13.30
14.15
14.01
14.19
17.70
18.16
28.27
36.52
31.22
27.79
26.49
24.04
13.01
15.09
12.13

7. 18
8. 39
8. 84
9. .5
10. 61
14. 27

24. 23
34. 33
31. 22
28. 87
28. 53
26. 66
14. 82
17.
,76
14 .76

Source: Annual Energy Review 1988, Energy Information
Administration.
Table 6
Texas Office Real Estate Market Trends:
Four City Total - Austin, Dallas, Houston, and San Antonio
Office
Office
Office
Office Employment
Inventory
Vacancy Rate
Starts
(thousands)
(average %)
(mill sq ft)
(mill sg ft)
898
29. 7%
9.15
232.45
1975
943
18. 1
240.35
1976
12.52
7. 4
1977
15.26
248.77
1,003
3. 7
259.94
1,035
24.24
1978
3. 2
276.75
1,155
25.54
1979
5. 6
300.95
1,231
34.40
1980
3. 0
70.75
326.60
1,316
1981
3. 4
50.60
358.97
1,352
1982
4. 9
1,353
415.70
37.60
1983
1,429
11. 5
473.82
39.32
1984
1,487
15. 4
510.84
68.58
1985
24. 8
553.62
1,484
32.43
1986
29. 7
578.59
1,485
7.16
1987
29. 9
587.37
1,513
5.72
1988
30. 6
593.43
1,536
5.02
1989
Source : F.W. Dodge, Real Estate Analysis and Planning Service.

Year

Table 7
Portfolio Composition of Texas Commercial Banks
(1984 - 1989)
Assets f% of assets)

12/84

12/85

12/86

12/87

12/88

12/89

Noninterest bearing balances due
Interest bearing balances due
Investment securities
Federal Funds Sold & repurchase
agreements
Gross loans and leases
Less loan & lease loss reserve
Less transfer risk reserve
Net loans and leases
Assets held in trading accounts
Premises and fixed assets
Other real estate owned
Investments in unconsolidated
subsidiaries
Customers1 liability to bank
Intangible assets
Other assets

7. 84% 8.09% 8.00% 7. 43% 7.54% 7.29%
3.52
3.31
5.16
4. 02
5.49
5.03
15. 52 14.66 14.40 16. 82 20.60 22.44
7.39
59.98
(0.92)
(0.00)
59.06
0.17
1.74
0.49

10.84
57.87
(1.40)
(0.00)
56.46
0.18
1.81
1.03

10. 85
56. 93
(2. 17)
(0. 00)
54. 76
0. 17
2. 01
1.77

8.69
51.91
(1.80)
(0.00)
50.10
0.07
2.06
1.88

11.21
47.15
(1.51)
(0.00)
45.64
0.14
2.01
2.12

1.22
0. 08
1. 99

0.03
0.92
0.07
1.90

0.03
0.06
0.07
1.97

0. 03
0. 08
0. 19
1.87

0.04
0.08
0.08
5.34

0.01
0.23
0.14
5.46

Liabilities f% of liabilities)

12/84

12/85

12/86

12/87

12/88

12/89

Deposits
Federal Funds purchased and
Repurchase agreements
Demand notes of the
U.S. Treasury
Other borrowed money
Mortgage debt
Banks liability on acceptances
Note & subordinated debt
Other liabilities

85.78

86.17

84.51

84.04

88.01

86.64

9.10

8.67

11.29

11.67

7.20

8.26

0 .49
1 .30
0 .16
1 .31
0 .38
1 .49

1.47
0. 81
0. 14
0.99
0. 37
1.39

1 .66
0 .76
0 .13
0 .06
0 .35
1 .24

1. 54
1. 07
0. 12
0.09
0. 29
1. 19

1. 24
1. 68
0. 14
0.08
0. 12
1. 52

0. 95

Core deposits
Brokered deposits

51 .23
2 .33

52. 09
1. 85

54 .00
1 .24

56. 76
0. 43

63. 89

1. 14

66.
.82
0,
.91

Capital Accounts*

12/84

12/85

12/86

12/87

12/88

12/89

6 .50
6 .43

6. 57
6. 49
8. 05

5 .98
5 .91
7 .84

5. 08
4. 89
7. 23

4. 71
4. 63
6. 49

4 .60
4 .47
6 .51

Equity capital
Tangible capital
Primary + secondary capital

6. 50
60. 45
(0. 83)
(0. 00)
59. 61
0. 10

1. 80
0.28
0. 02

7 .91

* As a percentage of appropriately adjusted assets,

1.99
0. 12
0.
.24
,23
0.
1.
,57

Table 8
Income and Expenses of Texas Commercial Banks
as a Percentage of Bank Assets
(1984 - 1988)
Inco: e & Expense
Interest Income:
Interest & fees on loans
Income from leases
Income from balances due
at banks
Income from securities
Income from assets held
in trading accounts
Income from federal funds
sold
TOTAL INTEREST INCOME
Interest Expense:
Expense on deposits
Expense on federal funds
purchased
Expense on notes issued to
U.S. Treasury
Expense on mortgage debt
Expense on notes &
subordinated debt
TOTAL INTEREST EXPENSE
NET INTEREST INCOME
Provisions for loan losses
Provisions for transfer risk
Noninterest income
Gain(losses) on securities not
held in trading accounts
Noninterest expense:
Salaries & employee benefits
Expenses on premises
other noninterest expense
NET INCOME BEFORE TAXES AND
EXTRAORDINARY ITEMS
Taxes
NET INCOME BEFORE EXTRAORDINARY
ITEMS
Extraordinary items
NET INCOME (LOSS)

12/84

12/85

12/86

12/87

12/88

12/89

7.13%
0.02

6.62%
0.02

5.81%
0.02

5.31%
0.01

4.94%
0.01

5.02
0.02

0.48
1.49

0.44
1.37

0.38
1.22

0.36
1.25

0.28
1.46

0.27
1.83

0.01

0.63
9.75

0.51
8.97

0.58
8.02

0.75
7.69

0.64
7.35

0.82
7.97

(5.57) (5.05) (4.46) (4.16) (4.12) (4.63)
(0.93) (0.66) (0.65) (0.71) (0.49) (0.64)
(0.13) (0.12) (0.10) (0.13) (0.17) (0.21)
(0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
(0.04) (0.03) (0.03) (0.03) (0.01) (0.01)
(6.68) (5.87) (5.25) (5.03) (4.80) (5.51)
3.07
3.10
2.78
2.66
2.55
2.46
(0.68) (0.92) (1.67) (1.88) (1.59) (1.34)
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
0.79

0.91

0.87

0.96

1.09

1.93

0.01

0.11

0.20

0.02

0.00

0.05

(1.19) (1.22) (1.21) (1.23) (1.25) (1.38)
(0.38) (0.42) (0.45) (0.48) (0.47) (0.50)
(0.88) (1.00) (1.14) (1.49) (1.52) (1.52)
0.75
0.56
(0.62) (1.44) (1.19) (0.30)
(0.11) (0.08) 0.13
0.03
(0.04) (0.03)
0.64
0.00
0.64

0.48
0.01
0.49

(0.49) (1.41) (1.23) (0.32)
0.01
0.01
0.01
0.02
(0.49) (1.40) (1.22) (0.31)

Table 9A
Selected Portfolio Concentrations of Texas Banks
as a Percentage of Bank Assets
(1978 - 1983)
Loan Concentrations
Loans Secured by Real Estate:
Construction & land
development
Secured by farmland
Secured by 1-4 family
residential properties
Secured by 5 or more family
residential properties
Secured by nonfarm
nonresidential properties

12/78

12/79

12/80

12/81

12/82

12/83

3.50%
0.56

3.99%
0.49

4.07%
0.46

4.16%
0.34

5.02%
0.34

6.53%
0.39

2.89

3.19

3.12

3.08

3.28

3.83

0.19

0.20

0.23

0.30

0.45

3.34

3.30

3.17

3.60

4.87

2.49

2.10

1.98

1.72

1.56

1.54

20.70

20.76

22.44

26.57

27.81

25.23

Loans for personal expenditures:
Credit cards and related
plans + other personal loans
12.61

12.60

10.76 9.42

8.78

8.46

$88.9

102.8

118.9

Loans for agricultural
production
Commercial and Industrial

Total Assets( in $ billions)

143.2

163.4

181.9

Note: The loan concentrations shown here do no comprise all categories of
loans.
These four categories of loans were selected because regional
economic trends may effect their performance more than other reported loan
categories.

Asset Quality
Nonperforming assets

12/78
NA

12/79
NA

12/80
NA

12/81
NA

12/82 12/83
1.75% 2.00%

Table 9B
Selected Portfolio Concentrations of Texas Banks
as a Percentage of Bank Assets
(1984 - 1989)
Loan Concentrations
Loans Secured by Real Estate:
Construction & land
development
Secured by farmland
Secured by 1-4 family
residential properties
Secured by 5 or more family
residential properties
Secured by nonfarm
nonresidential properties

12/84

12/85

12/86

12/87

12/88

12/89

8.30%
0.40

8. 11
0.47

7.70%
0.52

6.25%
0.59

3.66%
0.62

2 .38
0 .56

4.59

5.37

5.89

6.32

6.65

6 .49

0.52

0.57

0.62

0.72

0.65

0 .51

5.77

6. 59

7.64

9.11

8.27

7 .25

1.57

1.43

1.31

1.41

1.55

1.46

24.67

23.58

21.41

19.14

18.16

16.54

Loans for personal expenditures:
Credit cards and related
plans
0.85
Other personal loans
7.96

0 .41
7 .94

0.18
7. 35

0. 16
7. 12

0 .21
7 .61

0 .56
7 .57

208.9

207.5

189.5

171.0

174.1

Loans for agricultural
production
Commercial and Industrial

Total Assets( in $ billions)

$197.8

Asset Quality
Nonperforming assets

12/84 12/85 12/86 12/87 12/88 12/89
2.10% 2.61% 4.20% 6.58% 5.08% 5.12%

Table 10
Portfolio Composition of Failed and Assisted Texas Commercial Banks
(as of the year-end prior to failure or assistance)
(1984 - 1988)
Assets ( of assets)
%

12/84

12/85

7 .19%
3 .12
14 .21

7.57% 6. 85%
1.37
3. 26
10.18 14. 24

2 .72
67 .54
(2 .02)
(0 .00)
65 .51
0 .00
2 .92
1 .26

7.62
66.98
(3.16)
(0.00)
63.82
0.00
3.69
1.42

4. 26
66. 87
(4. 65)
(0. 00)
62. 22
0. 08
2. 82
3.49

16.58
59.46
(3.63)
(0.00)
55.82
0.49
1.69
1.90

7.98
62.64
(4.58)
(0.00)
58.06
0.08
2.17
4.89

0 .00
0 .00
0 .00
3 .06

0.00
0.00
0.00
4.33

0. 10
0. 01
0. 00
2. 66

0.02
0.08
0.42
1.99

0.24
0.16
0.30
2.13

Liabilities ( of liabilities^
%

12/84

12/85

12/86

12/87

12/88

94.51

96.56

92.02

71.18

80.87

2.31

0.38

2.47

21.05

8.34

0. 00
1. 34
0. 09
0.00
0. 19
1. 56

0. 07
0.42
0. 68
0.00
0. 14
1.74

0 .29
3 .63
0 .13
0 .01
0 .04
1 .42

2. 97
2. 62
0. 14
0. 08
0. 63
1. 33

3.83
4.94
0. 15
0. 15
0. 42
1. 30

Core deposits
Brokered deposits

65. 68
1. 61

69. 04
1. 44

56 .91
3 .14

45. 06
0. 52

51. 61
0. 83

Capital Accounts**

12/84

12/85

12/86

12/87

12/88

5. 44
5. 44
7. 39

3. 18
3. 18
6. 11

Investments in unconsolidated
subsidiaries
1
Customers liability to bank
Intangible assets
Other assets

Equity capital
Tangible capital
Primary + secondary capital

12/86

(0 .91)
(0 .91)
3 .43

12/87

12/88

8.60% 7.39%
3.84
3.68
8.57 12.92

2. 41
2. 00
5. 97

(1. 58)
(1. 89)
2. 88

* Financial statistics on banks failing (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.

Table 11
Income and Expenses of Failed and Assisted Texas Commercial Banks*
(as of the year-end prior to failure or assistance)
(1984 - 1989)
Income & Expense

( of assets)
%

Interest Income:
Interest & fees on loans
Income from leases
Income from balances due
at banks
Income from securities
Income from assets held
in trading accounts
Income from federal funds
sold
TOTAL INTEREST INCOME
Interest Expense:
Expense on deposits
Expense on federal funds
purchased
Expense on notes issued to
U.S. Treasury
Expense on mortgage debt
Expense on notes &
subordinated debt
TOTAL INTEREST EXPENSE
NET INTEREST INCOME
Provisions for loan losses
Provisions for transfer risk
Noninterest income
Gain(losses) on securities not
held in trading accounts
Noninterest expense:
Salaries & employee benefits
Expenses on premises
other noninterest expense
NET INCOME BEFORE TAXES AND
EXTRAORDINARY ITEMS
Taxes
NET INCOME BEFORE EXTRAORDINARY
ITEMS
Extraordinary items
NET INCOME (LOSS)

12/84

12/85

12 /86

12/87

12/88

9. 15%
0. 00

8. 43%
0. 04

7. 75%
0. 01

5. 01%
0. 02

6. 39%
0. 00

0.33
1.42

0. 19
1.73

0.21
1.28

0. 35
0.55

0.42
1. 05

0. 00

0. 02

0. 01

0. 39
11. 29

0. 29
10. 67

0. 28
9. 56

1. 17
7. 10

0. 66
8. 52

(7. 07) (6. 83) (6. 09) (3. 61) (5. 25)
(0. 10) (0. 06) (0. 26) (1. 23) (0. 69)
(0. 13) (0.,01) (0. 31) (0.,25) (0. 44)
(0.,01) (0.,05) (0.,01) (0.,01) (0.,02)
(0..02) (0..03) (0..00) (0..06) (0.,04)
.98) (6.
(7..32) (6.
.67) (5.
.16) (6.,44)
3,.96
3,
.69
2,.89
1.
.94
2,
.08
(2,.12) (4,.69) (6,.80) (3,.04) (4,.77)
.00)
(0 .00) (0,.00) (0,.00) (0 .00) (0.

1 .04

1 .48

1 .16

0 .88

1,
.01

(0 .03)

0 .68

0 .77

0 .03

0 .08

(1 .79) (1 .96) (1.99) (1 .06) (1 .16)
(0 .84) (0 .81) (1.08) (0 .45) (0 .56)
(1 .66) (2 .33) (3 .02) (1 .68) (2 .80)
(1 •43) (3 .94) (8 .08) (3 .38) (6 .13)
0 .01
0 .22
0 .20
(0 .06) 0 .33
(1 .37) (3 .61) (7 .86) (3 .18) (6 .12)
0 .05
0 .00
0 .00
(0 .00)
0 .00
(1.37) (3.55) (7.86) (3.18)

(6.12)

• Financial statistics on banks failing (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.

Table 12
Selected Loan Concentrations of Failed and Assisted Texas Banks
as a Percentage of Bank Assets*
(as of the year-end prior to failure or assistance)
(1984 - 1989)

Loan C9ncentmion?
Loans Secured by Real Estate:
Construction & land
development
Secured by farmland
Secured by 1-4 family
residential properties
Secured by 5 or more family
residential properties
Secured by nonfarm
nonresidential properties
Loans for agricultural
production

12/94

12/8?

»/96

12/97

12/99

5.37%
1.76

2.34
1.11

6.54%
0.34

8.71%
0.31

6.16%
0.33

9.30

6.65

9.04

4.55

6.95

2.82

0.83

1.32

0.85

0.88

5.26

10.06

9.02

8.94

11.98

4.01

5.04

1.68

0.31

0.80

21.50

27.73

23.25

21.50

20.52

Loans for personal expenditures:
Credit cards and related
plans + other personal loans
14.32

12.01

10.95

5.98

6.29

Asset Quality f% of assets1

12/94

12/9?

12/9$

12/97

12/99

6.08

8.16

13.74

10.17

13.69

1.42

3.49

1.90

4.89

Commercial and Industrial

Nonperforming assets

Components of nonperforming
assets:
Other real estate owned
1.26
Past due & nonaccrual loans
Secured by real estate
na
Commercial & Industrial
na
Consumer loans
na
Farm loans**
na
All other loans
na
Total past due & nonaccrual 4.82

1.97
5.03
4.75
5.34
4.58
4.90
2.59
2.82
0.18
0.32
0.08
0.14
[0.50] [0.29] [0.03] [0.08]
0.01
0.01
0.86
0.44
6.75 10.26
8.28
8.78

** 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 nonperforming farm loans overlap partially with
other components of nonperforming assets.
* Financial statistics on banks failing (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.

Appendix B

Austin Area Failed and Assisted Commercial Banks

O i l Prices ana Commercial Lending
40

Real Cost of Crude Oil ($)

35 -

30 -

25 -

20 -

Commercial Loans ( X )
10 -

Bad Commercial Loans (%)
5 -

197B

t
1979

t
1980

1981

t
1982

»
1983

1984

1985

1986

1987

1988

Year-enQ
Figure ilA

Office Vacancies and Real Estate Lending

Nonresidehtial Loans

1978

1979

1980

1981

1982

1983

Year-end
F i g u r e 11B

1984

1985

1986

1987

1988

Houston Area Failed and Assisted Commercial Banks

Oil

P r i c e s and Commercial

Lending

35 -

Coinercial Loans (X)
30 -

25 -

20 -

Real Cost of Crude Oil ($)

10 -

Bad Coinercial Loans (%)
5 -

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1986

Year-end
Figure 12A

Office Vacancies and Real Estate Lending

1976

1979

I960

1981

1982

1983

Year-end
Figure 12B

1984

1985

1986

1987

1988

San Antonio Area Failed and Assisted Commercial Banks

Oil

Prices and Commercial

Lending

Real Cost of Crude Oil ($)

Commercial Loans (X)
Bad Commercial Loans {%)

-t1978

1979

1980

1981

1982

1983

1984

1985

1986

1987 1988

Year-end
Figure 13A

Office vacancies and Real Estate Lending

Nonresidential LMans

1976

1979

^ 980

1981

1982

1983

Year-end
Figure 13B

1984

1985

1986

1987 1988

Appendix C

Case Histories
1. BancTexas: (Headquartered in Dallas)
BancTexas, a $1.2 billion dollar institution with 11
subsidiaries, received §150 million in FDIC open-bank assistance
in 1987. The open-bank acquisition 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 Inc. (BancTexas,
Dallas) was closed by the OCC. BancTexas, Dallas was acquired by
Hibernia National Bank on January 26, 1990, requiring $69 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 grew rapidly between 1980 and 1983. This growth was
funded by both insured and uninsured deposits, with deposits
comprising 93.54 percent of liabilities in December 1980 and 92.24
percent of liabilities in December 1983. Deposits of $100,000 or
more remained high, at between 35 percent to 40 percent of
liabilities over this period.
Brokered deposits were not a
significant source of funds, comprising approximately 1.7 percent
of liabilities in 1983. Loan portfolio composition moved toward
increased concentrations in commercial real estate during this
growth period, while commercial and industrial loan concentrations
declined between 1980 and 1983. Bank capital and earnings were
strong through 1982. In 1983, however, increased loan loss
provisioning and loan chargeoffs reduced profitability.
After 1983, BancTexas1 assets decreased. During this period
of contraction, which lasted until failure in 1987, commercial real
estate loan concentrations increased. Commercial real estate loans
increased from 10.84 percent of assets in December 1983 to 16.62
percent of assets in June 1987. As commercial real estate loan
concentrations increased, so too did nonperforming real estate
loans. Nonperforming real estate loans increased from 1.09 percent
to 8.52 percent of assets between December 1985 and June 1987.
Nonperforming commercial and industrial loans also rose from 1.91
percent to 3.29 percent of assets over this same period.
The
deterioration in asset quality resulted in increases in loan loss
provisions and chargeoffs from 1983 until the open-bank assistance

The 1990 FDIC assistance to BancTexas is added here to the
prior 1987 assistance costs since one can reasonable argue that had
the 1987 assistance been greater, subsequent assistance in 1990 may
not have been needed.

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 reserves for loan and lease losses. Although
nonperforming asset levels do not equal the potential losses on
assets, some portion of nonperforming 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. BancTexas1 adjusted capital ratio
(equity plus loss reserves minus nonperforming assets) became
negative in December 1986, falling to -5.30 percent.

BancTexas
Nonperformng Assets

8703

8412

8706

BancTexas1 funding changed during the post-1983 period of
decline. Deposits decreased from 92.24 percent to 76.93 percent
of liabilities between December 1983 and June 1987. The decline
in deposit funding was due, in part, to increases in other
borrowings, which include discount window borrowings from the
Federal Reserve. Other borrowings increased from 0.08 percent to
19.2 percent of liabilities between December 1983 and June 1987.
Deposits of $100,000 or more remained high during this period, but
did fall from 37.02 percent to 27.57 percent of liabilities between
March and June 1987.
Figure 14B indicates the trend in BancTexas1 market value from
1979 to 1989. The total market value of BancTexas1 common stock

peaked in June 1982, with shares trading at $337.50. Lover
earnings, due to asset quality problems, decreased share prices
through the July 1987 open-bank assistance to $1.63.

BancTexas
Harket Value of Conon Stock

150

7912

1012

8112

8212

8312

8412

8512

8612

8712

8812

8912

Date
Figure 14B

The trend
in BancTexas1 market value indicates that
shareholders
had
discounted
shares greatly
prior to the
announcement of open-bank assistance in February 1987. Deposit
balances of $100,000 or more decreased at the time of the open bank
assistance. Deposit balances of $100,000 or more fell from 37.02
percent of liabilities in March 1987 to 27.57 percent in June 1987.
However, the late reaction of depositors to BancTexas1 financial
condition indicates that this group was not seriously concerned
prior to the assistance agreement.
2.First citv Bancorporation: (Headquartered in Houston)
Fir.~t City Bancorporation was an $11.2 billion institution
with 59 subsidiaries when it received FDIC 13(c) open-bank
assistance in 1988. On September 9, 1987 the FDIC announced an
assistance agreement with a group of private investors. The
assistance agreement was finalized and approved on March 20, 1988.
The estimated cost to the FDIC 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 that of most of the late 1980s Texas bank failures. First City
grew rapidly during the pre-1981 boom in oil markets and continued
its rapid growth through 1983. During this growth period, First
City was able to maintain capital ratios at or above 5 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 percent over this period. Growth was funded
by both insured and uninsured deposits. Deposits of $100,000 or
more comprised 25 to 30 percent of liabilities during the 1976 to
1983 period. Brokered deposits were also a significant source of
funds, representing 7.34 percent 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 increased from 3.11
percent to 10.71 percent of bank assets, while commercial and
industrial loans rose from 21.90 percent to 30.31 percent of
assets. Although the decline in energy markets led directly to
asset quality problems for First City, most of the increase in
nonperforming assets was associated with commercial real estate
lending. As Texas commercial real state 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 10.71 percent of bank assets in December 1983 to 15.79
percent of assets in March 1988. The concentration of lending to
commercial real estate was ill timed, however, as witnessed by the
growth in nonperforming real estate assets from 0.62 percent of
assets in December 1985 to 4.04 percent of assets just prior to
failure in March 1988.
The decline in oil markets led to asset quality problems for
First City in two ways. First, as oil prices declined there was
a direct impact through increased nonperforming energy loans.
Second, the dependency of the Texas economy upon oil markets linked
the fates of the energy and commercial real estate markets. The
combined effects of declining energy and real estate markets upon
First City's capital adequacy was apparent in 1986. First City's
adjusted capital ratio was only 0.17 percent of assets, as of
December 1986 and -0.91 percent as of March 1987 (see Figure 15A).
Increased provisioning for loans losses and chargeoffs resulted in
heavy losses and declining capital for First City in 1986 and 1987.
The continued decline in equity, in addition to increasing
nonperforming assets, lowered this adjusted capital ratio to -8.4 8
percent by March 1988.

First City Bancorporation

Nonperforamg Assets

-1 -2
8412

8512

8603

6606

8609

6612

8703

6706

8709

8712

Date

Figure 15A

As First City's assets declined after 1983, the composition
of its funding changed. Deposit funding, which was 85.36 percent
of liabilities in December 1983, declined to 77.49 percent in
September 1987 and 74.49 percent in March 1988. This decline in
deposit funding was offset, in part, by increases in other borrowed
money, which includes borrowings from the Federal Reserve. Deposit
balances of $100,000 or more declined from 31.78 percent of
liabilities in December 1983 to 25.59 percent in March 1988.
Brokered deposits declined steadily from 7.34 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 v s problems, as well as management
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 common stock between 1979 and 1988. Share prices
rose from $19.38 in December 1979 to a high of $38.50 in November
1981. As earnings declined 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.

First City Bancorporation
narket Value of Coiion Stock

7912

8012

8112

8212

8312

8412

8512

8612

8712

Date
Figure 15B

The above data indicate that shareholders were avare of First
City's credit quality problems veil in advance of the announcement
of open-bank assistance in September 1987. Further, the decline
in deposit levels after 1983 may be due to some concern among
depositors, as veil as voluntary decisions by management• Hovever,
the fact that deposit balances of $100,000 or more vere nearly 30
percent of liabilities in June 1987, indicates that uninsured
depositors vere not gravely concerned that they vould suffer
losses.
3. First Republic Bancorporation: (Headquartered in Dallas)
First Republic vas formed in the second quarter of 1987 vith
the merger of Interfirst and RepublicBank. In February 1988, First
Republic experienced a deposit run.
On July 29, 1988, First
Republic vas closed and merged into NCNB Texas National (a bridge
bank). The estimated failure resolution cost for First Republic
is $2,941 million, or 62.35 percent of the total 1989 Texas failedbank resolution costs of $4,717 million.
The fate of First Republic can be traced to the impact the
declining oil and commercial real estate markets had upon
Interfirst and RepublicBank prior to merger.
Interfirst
Corporation grev rapidly vith the boom in oil prices, experiencing

peak growth prior to 1983; expansion continued until 1985. Growth
was funded by both insured and uninsured deposits, with balances
of $100,000 or more comprising 25 percent of liabilities at the
time of merger. Interfirst's financial performance appears to have
been closely tied to energy prices. Interfirst experienced a loss
in 1983 due to high loan loss provisioning.
Losses recurred in
1986 as oil prices fell sharply and continued until merger in 1987.
Interfirst invested heavily in commercial real estate, yet, at the
time of merger in June 1987, nonperforming commercial and
industrial loans comprised over half of nonperforming assets. From
the data reviewed it appears that the major difference between
Interfirst and RepublicBank, is that Interfirstvs asset quality
problems appeared or were recognized sooner than those of
RepublicBank. Indeed, RepublicBank1s history appears to be very
similar to that of Interfirst, except that reported asset quality
was better.
Subsequent to merger in mid-year 1987, First Republic became
a bank with declining assets, rising nonperforming assets, and
nearly insolvent from the start (based on adjusted capital ratios).
Nonperforming commercial real estate loans dominated asset quality
problems by the time of failure in July 1988. In addition. First
Republic relied upon Federal Reserve discount window borrowings at
time of failure, as indicated by the increase 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
42.43 percent of liabilities in December 1987 to 18.98 percent in
June 1988.

First Republic

Nonperforning Assets

u
a?

8806

First Republic
Harm Value of Couon Stock

7912

8012

8U2

8212

8312

0412

Date
Figure 16E

6512

6612

6712

8612

4. MCorp: (Headquartered in Dallas)
On March 28, 1989, 20 of the 25 MCorp banking subsidiaries,
with assets of $15.4 billion, were declared insolvent by the OCC.
A bridge bank, wholly owned by the FDIC, was formed. 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
$4,633 million.
As with most other Texas banks, MCorp grew rapidly between
1976 and 1983. However, unlike First City and BancTexas, MCorp f s
growth continued 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. Further, deposits of $100,000 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 yearend 1984, and remained low thereafter. During this growth period,
commercial real estate loan concentrations increased from 6.1
percent of assets in December 1976 to 24.64 percent in December
1986. Commercial and industrial loan concentrations 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 provisions and loan chargeoffs rose in 1982 and
remained high until failure in 1989.
Despite asset quality
problems MCorp, was able to maintain equity capital levels in
excess of 5 percent until 1986.
MCorp's asset quality problems became obvious in 1986.
MCorp's 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 percent of assets.
The declining
commercial real estate markets in Texas led to increased
nonperforming real estate loans, additional loan chargeoffs,
losses, and insolvency. Deposit funding remained nearly 80 percent
of liabilities during the post 1986 contractionary period and
interestingly, deposits of $100,000 or more reached 46.48 percent
of liabilities in December 1988.
Other borrowed money
which
includes discount window borrowing from the Federal Reserve, rose
to 6.65 percent of liabilities just prior to failure.
These trends show quite 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
problems resulted from the declining oil and real estate markets
and led to insolvency in 1988.

Hcorp

Honperfornng Assets

6412

6512

8603

8606

6609

6612

6703

6706

6709

6712

6803

8806

8809

6812

tatt

Figure 17A

The trend in total market value of MCorp's common stock
indicates that shareholders supported MCorp's growth through 1986
(see Figure 17B below). Indeed, peak market value occurred in
February 1985, when shares were trading at $23.25 per share.
Losses in 1986 helped drive share prices down to $10.13 in December
1986. After the October 1987 stock market crash, MCorp fell to
$2.38 per share at year-end 1987.

ttCorp
Value of Conon Stocl

7912

1012

1112

1212

8312

6412

Mil

6612

6712

6612

8912

As MCorp's asset quality problems became apparent in 1986,
shareholders discounted earnings more heavily. Despite growth in
market value over the 1981 to 1985 period, investors did react to
the high losses and loan chargeoffs from 1986 to 1988. Deposit
levels also fell prior to failure, however, deposits of $100,000
or more comprised 47.44 percent of liabilities in December 1988.
5. 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).
(An earlier agreement for an
open-bank acquisition by Carl Pohlad, announced in May 1988, had
fallen through.) The estimated failure resolution cost for TAB is
$898 million, or 19.38 percent 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 was greatest during the 1976 to 1983 period and
continued until early 1986, During its growth period, TAB relied
upon both insured and uninsured deposits for funding.
Deposits
comprised between 80 percent and 90 percent of liabilities from

1976 until June 1989. During this growth period, deposits of
$100,000 or more increased from 20 percent to 30 percent of
liabilities.
Further, brokered deposits increased from 2.28
percent of liabilities in 1983 to 6.13 percent in 1985.
Portfolio composition during the 1976 to 1985 period shifted
heavily toward commercial real estate lending.
Over the same
period, commercial real estate loans increased from 6.52 percent
to 24.09 percent of assets, while commercial and industrial loans
rose from 21.59 percent to 25.96 percent of assets. Profitability
was high between 1978 and 1982, with peak profitability in 1981 and
1982 (return on assets was 1.04 percent in 1981 and 1.05 percent
in 1982). In 1983, however, both loan loss provisions and loan
chargeoffs more than doubled prior period values. This signaled
the beginning of asset quality problems that only worsened in
subsequent years. As a result, bank capital, which had been well
over 6 percent between 1976 and 1982, began to decline in 1983.
Beginning in 1986, TAB'S assets began to decrease. During
this contractionary period, deposits accounted for about 80 percent
of liabilities, with accounts of $100,000 or more and brokered
deposits declining as TAB approached failure. Federal Reserve
discount window borrowings were not relied upon at the time of
failure.
During its contractionary period, TAB decreased its
concentrations of commercial real estate loans and commercial and
industrial loans somewhat. Commercial real estate loans fell from
24.09 percent to 20.65 percent of assets between 1985 and 1988
while commercial and industrial loans fell from 25.96 percent to
19.68 percent of assets over this same period. Asset quality
continued to decline however, with problem commercial real estate
loans comprising most of nonperforming assets. In 1986, TAB again
sharply increased annual loan loss provisions and chargeoffs,
resulting in losses that would continue until 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 real
estate markets, its problems began with the decline in oil markets
after 1981.

Texas American Bancs&ares
20

Nonperforning Assets

Capital • Reserves

c
0>

8412 8512 8603 8606 8609 8612 8703 8706 8709 8712 8803 8806 8809 8812 8903 8906

Date
Figure 18A

TAB'S market value closely followed it 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 announced (attempted) open-bank assistance in
May 1988, shares were trading at $1.88 per share.

Texas American Bancshares
narxet value of Couon stock

450

7912

8012

111!

8212

8312

8412

8512

8612

8712

8612

8911

TAB'S market value declined quickly with the heavy losses from
1986 through June 1989 (last financial report filed)• Depositors,
however, appear to have reacted much more slowly to TAB'S
deteriorating financial condition. Deposits of $100,000 or more
were maintained at 30 percent of liabilities in June 1988, despite
the fact the TAB'S condition warranted open-bank assistance at that
time. In an open-bank assistance transaction, uninsured depositors
would have been protected from losses. As the announced assistance
failed to work, uninsured depositors reacted. Deposit balances of
$100,000 or more fell to 24.41 percent of liabilities in March 1989
and 21.47 percent in June 1989, just prior to the closure of the
banks in July.
6. 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 $1.6 billion, were acquired by NCNB of Dallas. NBC had
sought government assistance in April 1988. Two prior attempts at
open-bank assisted acquisitions, one in 1988 and a second in 1989,
had failed to work. Although NBC is not part of the 1980 to 1989
failed bank sample considered 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
$4,633 million.
NBC had experienced a period of rapid growth between 1976 and
1983, with expansion continuing through 1986. Asset growth was
funded by both insured and uninsured deposits. Deposits comprised
about 90 percent of liabilities through June 1989. Deposits of
$100,000 or more comprised 25 percent to 30 percent of liabilities
during this growth period but decline thereafter.
Brokered
deposits were at or near zero through 1986.
During NBC's expansion, portfolio composition shifted toward
greater commercial real estate lending, increasing from 5.77
percent of assets in December 1976 to 16.26 percent in December
1986. Commercial and industrial loans increased from 12.20 percent
to 22.20 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 loss provisions and chargeoffs in 1982, NBC
maintained healthy profits (return on assets of 1.07 percent).
Profitability remained strong through 1985, even though loss
provisions remained high. As a result, bank capital was over 7
percent of assets for most of the growth period. However, in 1986
asset quality declined sharply.
Nonperforming assets increased
from 2.37 percent to 5.83 percent of assets between 1985 and 1986.
Further, loan loss provisions and loan chargeoffs tripled in 1986
to 2.05 percent and 1.57 percent of assets, respectively.
The
decline in asset quality resulted in large losses in 1986, which
only worsened in subsequent periods. In addition, NBC's adjusted
capital ratio was only 0.94 percent in December 1986, falling to
-0.08 percent in June 1987.

National Bancshares of Texas
Honperformng Assets

8512 6603 8606 8609 8612 8703 8706 8709 8712 6803 8806 8609 8812 8903 8906
Ditf

Figure 19A

After 1986, NBC declined in size. During this contractionary
period NBC maintained deposit liabilities of about 90 percent.
Because of early intervention by the FDIC in 1988, there was no
increase in Federal Reserve Bank borrowings prior to attempted
resolutions.
Deposits of $100,000 or more declined from 29.48
percent of liabilities in December 1986 to 17.54 percent in June
1989. NBC increased its concentration of brokered deposits during
the declining growth period to 3.95 percent of liabilities as of
June 1989. Commercial real estate loan concentrations continued
to rise, while commercial and industrial loan concentrations fell
during this period.
NBC reached peak market value in December 1985. Growth in
equity value was supported by strong earnings through 1985 and
relatively low nonperforming assets (2.37 percent of assets in
December 1985). However, as seen in Figure 19B, 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 announced (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.

National Bancs&ares of Texas
U r i e l Value of Couon Stock

•012

8112

1212

•312

1412

•512

•612

•712

8812

8912

Date
Figure 19B

NBC's shareholders reacted quickly 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. However, these balances
fell to 22.91 percent in December 1987 and to 17.54 percent in June
1989.

Full text of The Texas Banking Crisis : Causes and Consequences (1980-1989)

FRASER