Texas Banks Reeling From Energy Woes

The stranger, because he wore a tie, was immediately suspect.

Charles (Pappy) Chatwell, a truck driver for a West Texas drilling firm and a 40-year veteran of the oil patch, fixed a cracked and dusty glare on the visitor and asked, “Are you from the sheriff?”

No.

“You a lawyer?”

No.

“You from the bank?”

No.

Chatwell’s scowl softened to a smile. He extended his hand. “Pleased to meet you. What can I do for you?”

The interrogation says a lot about the character of West Texans and the fortunes of the Texas oil industry. It says even more about changed attitudes toward bankers here.

When a banker is no more welcome than a process server or a lawyer, times are definitely bad. Not too long ago, when the banks were shoveling out money to anyone tied to the oil business, the friendly loan officer was everyone’s pal.

Throughout the nation’s energy belt, banks and bankers are suffering along with their customers, proving the old saw that a bank is only as strong as its borrowers. From the thrusting skyscrapers of the giant bank holding companies in Houston and Dallas to the shopping-center banks of West Texas and Oklahoma, plunging oil prices have touched off a regional banking crisis.

Chain Reaction in Southwest

The energy industry’s decline has spread in a chain reaction through the Southwest, cutting real estate values, boosting unemployment and slashing retail sales. The region’s banks reflect the troubles as their loan losses rise and their profits and stock prices tumble.

More than 50 banks have failed in Texas and Oklahoma in the past three years, and the pace is quickening. The big Texas banks, which just a few years ago were the darlings of Wall Street, today are viewed as wounded, some perhaps fatally.

These proud and aggressive institutions, whose growth in the 1970s paralleled that of the booming oil industry, today are shrinking and worrying about survival.

Federal regulators are eyeing energy lenders with growing anxiety and have asked Congress for broad powers to rescue troubled oil patch banks.

New York and California banks have been quietly approached about the possibility of buying ailing banks in Texas, Oklahoma and Louisiana, proposals that have led some Southwestern bankers to express fear of shotgun marriages to out-of-state mega-banks.

The failure of a major Texas or Oklahoma bank holding company would send shock waves through the nation’s banking network that could dwarf the effects of the 1982 collapse of Oklahoma’s Penn Square Bank, a reckless energy lender that nearly took down with it important banks in Detroit, Chicago and Seattle.

The depth of regulators’ concern is evidence of how delicate and interlinked the nation’s financial system has grown.

The troubles that Texas banks face today dramatize the dangers of over-lending in a cyclical industry, of doing business with friends, of wrong assumptions about energy prices. Lending to “th’ awl bidness,” for a decade an easy route to status and prosperity, has led many today to the brink of disaster.

The Midland-Odessa “Petroplex” is the heart of the Permian Basin, a geological formation that produces 25% of America’s oil and gas. It is home to scores of independent oil producers, drillers and oil field service firms. Nearly everyone who lives and works here has ties to the oil industry, and falling oil prices have sent the region’s economy into a tailspin.

Banks, as always, are at the center of the complex web of economic links among companies, their employees and suppliers, and the communities in which they operate.

The current crisis has strained the once easy personal relationships between bankers and borrowers--nurtured over drinks, on the golf course, at Kiwanis meetings. “Good ole boy banking,” one West Texas lender said, is dying.

“It’s hard to go out in the community, out to the country club, and see our charge-offs,” said Larry Hearn, president of Permian Bank in Odessa. “It’s a bitter pill.”

Richard McInnis, Permian’s chairman, added: “Ten years ago, you used to lend money to your friends. Now you don’t even wait on them in the lobby. I used to hunt and fish and run with all my customers. Not anymore.”

Permian Bank, which barely survived massive loan losses under previous managers, has shrunk to $40 million in assets today from $125 million in 1983. It laid off 63 of its 105 employees over the same period as it recorded net losses of $20 million.

As a result of foreclosures and defaults, the bank today owns a shopping center in Grand Prairie, Tex., costly parts of an offshore oil rig, vacant land in Elk City, Okla., several airplanes and a $200,000 blowout preventer for a drilling rig.

Hearn said there is such a glut of oil field equipment on the market in West Texas that he expects to get little more than $20,000 for the blowout preventer. The bank recently sold a drilling rig that originally cost $1.9 million for $202,000.

A bank typically lends between 50% and 80% of the value of collateral, which in the energy business is usually either “iron” (drilling equipment) or oil or gas in the ground.

If the security--in this case a drilling rig--sells for 10 cents on the dollar because no new wells are being drilled, the bank eats the difference. And it wouldn’t take many million-dollar losses to put a bank with net worth of $3 million, like Permian, under water.

Permian’s problems have many causes, but key among them was that it broke the first rule of oil patch banking: Lend on oil, not iron. Oil in the ground will always have some value, but an idle rig generates no cash. It’s a rule that many of Permian’s big Houston and Dallas competitors also forgot.

Permian’s problems in disposing of repossessed property are paltry, compared to those of the local office of the Federal Deposit Insurance Corp., the federal agency that insures bank accounts and liquidates assets of failed banks.

Special FDIC Branch

The FDIC opened a special Midland-Odessa branch three years ago after the stunning failure of First National Bank of Midland, which had $1.4 billion in assets when it was closed because of huge losses from bad energy loans. Since then, the FDIC has seized seven banks in West Texas and eastern New Mexico.

At one point in 1984, after the agency had closed three Midland-area banks in quick succession, a sardonic bumper sticker appeared on local cars: FDIC 3, Permian Basin 0.

“There’s always hostility,” said William H. Roelle, managing liquidator for the FDIC’s Midland office. “We become part of a situation only when it’s at its worst. We’re a symbol of the end of an era.”

The FDIC operates from a six-story building on the northern edge of Midland dubbed the “Emerald Palace” by local bankers because of its distinctive green reflecting windows. With a full-time staff of 326, the agency is one of the three largest employers in the area.

The FDIC is disposing of property and equipment with book value of $930 million, selling it at auction every 90 days or so, said Roelle (pronounced ro-LAY).

Outside the agency’s warehouse along Interstate 20 between Midland and Odessa are a motor home, a boat and trailer, assorted oil field equipment and about two dozen cars, including a Cadillac, two Lincolns, a BMW and a Mercedes.

The FDIC Midland office’s catalogue of foreclosed property runs 31 closely spaced pages. It includes several multimillion-dollar commercial properties and an empty 9,062-square-foot, 6-bedroom, 8-bath single-family home with a swimming pool--a gaudy monument to more prosperous times.

“Banking used to be fun,” said Hearn of Permian Bank. “I really enjoyed it.”

In Texas, where life imitates football, Ben F. Love is used to playing quarterback.

The tall, urbane chairman of Texas Commerce Bancshares is, in effect, Houston’s ambassador to the world. His board of directors is a sampling of all that matters in Texas: big oil, big construction, society, media, politics.

It includes former President Gerald R. Ford. Former Congresswoman Barbara Jordan. Lady Bird Johnson. Developer Harlan R. Crow. Prominent oilmen Bob Mosbacher and R. W. Moncrief. Former Energy Secretary Charles W. Duncan Jr. Houston Chronicle Publisher J. H. Creekmore.

Before he went to Washington, Treasury Secretary James A. Baker III sat on the TCB board, as did his father and grandfather. Mesa Petroleum Chairman T. Boone Pickens Jr. quit the board last year when he closed his Houston office.

Texas Commerce, more than any other Texas bank, benefited from and symbolized Texas’ explosive growth in the 1970s. Ben Love ran the team as it recorded an astounding 66 consecutive quarters of earnings growth, 16 undefeated seasons. His is the tallest building on Houston’s towering skyline.

Then, last year, Houston’s biggest bank was blind-sided, with profits falling 71% from 1984 levels amid embarrassing revelations of large losses on personal and business loans to two rich oilmen who sat on the TCB board.

These hits were accompanied by a drastic decline in Houston’s overall economy and a rising vacancy rate in scores of buildings whose construction TCB had financed.

So Far, So Fast

The bank’s economists forecast falling oil prices but never dreamed they would fall so far and so fast. At the end of last year, Love began to emphasize over and over in meetings with his top executives that the bank must strive to improve the quality of its loans rather than booking new business. Total assets fell to $18.6 billion at the end of this year’s first quarter, compared to $19.9 billion a year ago.

“Playing defense,” Love calls it, and he doesn’t like it.

But he insists that Texas Commerce will survive and prosper again some day.

“We don’t need rescuing. Not even remotely,” Love declared in an interview. He said Texas Commerce was more likely to be a buyer of troubled banks than an acquisition target. And he expressed fervent opposition to proposed changes in state and federal law to allow big out-of-state banks to buy up sick banks in Texas.

“If a bank in Mule Shoe fails and Citicorp is brought in to ‘save’ it, that makes a mockery of our long-established (deposit) insurance system and circumvents the law,” Love said.

While Texas Commerce’s fall from grace has been dramatic, its problems are not as bad as those of some of its competitors. First City Bancorporation, based in Houston, is considered the weakest of Texas’ six major bank holding companies and is rumored to be the most likely candidate for a forced merger. Banking regulators will not comment on the rumors, however.

First City, the nation’s 30th-largest banking firm, reported losses of $232.4 million in the first quarter of 1986 after setting aside $275 million for possible future loan losses.

The bank is the state’s biggest lender to the stricken oil field service and drilling sector, with $745 million in loans to such companies. Its real estate portfolio exceeds $3.5 billion, including more than $1 billion in the depressed Houston market.

First City officials will not discuss the possibility of a combination with a Texas or out-of-state banking company, but they do admit that the near-term picture is bleak.

“We wish we could say the worst is behind us,” the bank’s senior managers told shareholders in the company’s 1985 annual report. “Unfortunately, we expect continued substandard performance during 1986, for this economic decline is truly of historic proportions for Texas and its banking industry.”

MCorp, with headquarters in Dallas, also suffered a painful first quarter, losing $119.9 million. It increased its provision for loan losses by $220 million, 10 times the figure for the first quarter of 1985.

InterFirst, also based in Dallas, recorded a bare $2.1-million first-quarter profit as it continues a slow recovery from its 1983 disaster, when it lost $172 million.

The bank, which three years ago was the state’s largest, has written off $849 million in bad loans since 1983 and has dropped to third place.

Borrowing From the Fed

In Oklahoma City, First National Bank & Trust, once Oklahoma’s leading financial institution and a heavy energy lender, has suffered three straight years of losses totaling $131 million.

It has been borrowing more than $200 million a day from the Federal Reserve to fund its operations, and regulators have ordered it to come up with a plan for raising new capital by May 16. Even its chairman, J. G. Cairns, acknowledges that First National’s survival is in jeopardy.

“There were plenty of experts that believed that crude oil would go to $60 (a barrel) or $70 or even $100. Now, there’s no doubt they were wildly optimistic,” said oilman Pickens, speaking generally about Energy Belt bankers. “There was too much money loaned on equipment with the expectation that it was going to run at a high utilization rate. You can go long on drilling equipment pretty fast. Some restraint could have been shown.”

Houston-based bank analyst Sandra Flannigan of Paine Webber Inc. agreed with Pickens that Texas bankers created their own problems with over-optimistic oil price assumptions.

But she added: “What we’re facing is a lengthening of the workout of the problems rather than a massive collapse of financial institutions within the state. They’re hurting. But there will be more survivors than non-survivors. It all depends on how low oil prices go and how long they stay there.”

Flannigan said her chief worry today is the “trickle-down effect” of the energy recession on other bank borrowers. She said unemployment will lead to consumer loan delinquencies and single-family home foreclosures.

Commercial real estate will continue to be a disaster, especially in Houston, which has at least a five-year supply of vacant office space. Merchants and manufacturers will have trouble paying bills and bank debt as their sales decline.

“Nobody knows exactly what this is going to do to the Texas economy,” Flannigan said.

Contingency Plans

In this uncertain climate, U.S. banking regulators are quietly working to put in place contingency plans for coping with troubles of oil patch banks big and small.

Industry sources said at least four major U.S. banks--Citibank, Chase Manhattan, Chemical and First Interstate--have been approached by regulators and asked to consider the purchase of a Southwestern bank if the crisis deepens.

Banking supervisors also have eased accounting rules for write-offs of bad loans and are allowing some banks to operate temporarily below minimum capital guidelines.

Regulators have told bankers that they are making unusual efforts to avoid bank closings in the Southwest because of the potentially devastating psychological effect.

Texas Banking Commissioner James L. Sexton said banks cannot dodge the larger economic forces battering their communities. And he fears that financial stress, unemployment and foreclosures in energy producing regions could lead to the kind of violence against oil patch bankers that has erupted in farming communities over the past several years.

“Of course I worry about it,” Sexton said. “I hate to see that kind of unrest and the underlying conditions that cause it.”

In Midland, spirits have been ridden hard but not broken.

“West Texans are a tough, optimistic breed,” said Bill Parker, president of Midland’s Western Bank. “They understand the hills and valleys of the marketplace. Particularly the old timers.

“Tough times don’t last,” Parker said. “Tough people do.”