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All Quiet on the Texas Front

Whenever there has been trouble in financial paradise, Texas has often been in the forefront. But this time around, it appears Texas bankers have learned a few lessons from the past.

Just witness the Lone Star State’s central role in the financial services debacle 20 years ago, which was led by profligate lending by its savings-and-loan industry. When the rubble was cleared away, nine of Texas’s top 10 banks had failed, huge tracts of residential and commercial real estate were taken over by a specially created federal agency, and numerous S&L and banking executives either went to prison or were banned from the business.

Flash forward to today’s subprime mortgage crisis. Amid the current turmoil in the U.S. banking industry, as executives at financial institutions of all stripes are braced for more bad news, Texas bankers are in surprisingly good shape.

“I’m not aware of a single bank or thrift with serious difficulties,” says John Heasley, general counsel and executive vice president at the Texas Bankers Association. “It’s the total inverse of what we saw in Texas from 1988 to 1993,” he adds.

It is also in sharp contrast to the rest of the country. The Federal Deposit Insurance Corp. reports that the number of problem banks rose to 117 in the second quarter, ended July 31, 2008. That’s an 80% increase compared with the 65 problem banks listed by the FDIC at the end of last year.

In addition, bank failures are up sharply nationwide. With the Sept. 26 seizure of mortgage giant Washington Mutual, the FDIC closed down its 13th insolvent bank through the first nine months of 2008. That’s quadruple the number of bank failures for all of last year when, according to the FDIC’s 2007 annual report, a scant three banks failed.

Amid the national turmoil, Texas’s 603 commercial banks stand out as a bright spot. At the end of first quarter 2008, according to an analysis of FDIC data by the Texas Department of Banking, banks incorporated in Texas reported a 1.13 return on assets, nearly double the 0.68 ROA for the country’s 7,240 banks. What is striking is that a little more than two years ago, Texas banks lagged the rest of the country: At yearend 2005, banks nationwide reported a 1.31 ROA, compared with Texas’s 1.26%.

“Texas is weathering the storm,” says Bob Bacon, deputy commissioner of the state banking department. “Community banks across the state kept pretty good underwriting standards, which kept them out of trouble. After the 1980s, banks here weren’t into granting loans without documentation verifying income.”

Bacon also saw much less speculation occurring in Texas over the last few years. “We didn’t have the rapid price escalation in real estate that had a lot of people in places like California and Florida thinking they could use a low teaser rate to buy property and sell it in three years and earn $100,000,” he says.

Texas bankers assert that those who had witnessed firsthand the excesses of the 1980s were especially aghast at the widespread acceptance of subprime loans to unqualified borrowers as well as the explosion by underwriters of adjustable rate mortgages. Reports Mike Mauldin, chairman, CEO, and president at Hereford State Bank, a $143 million bank in the Texas panhandle: “At state banking meetings, every one of us who went through the 1980s would say to each other, ‘Can you believe these crazy products?’”

Michael Rigby, president and CEO at privately held, $111 million Liberty Bank in the Fort Worth suburb of North Richland Hills, adds: “Regulators learned some lessons, too. And I think they watch things a little closer, which helps create a more stable banking environment.”

-Paul Sweeney is a contributing business journalist based in Austin, Texas.

Diversity in the Boardroom

A topic that is beginning to emerge in importance is the push toward a more diverse corporate directorship. Well-respected diversity organizations across the nation have been trumpeting the virtues of employee diversity for decades; now the benefits to be gained from multicultural perspectives are reaching into the ranks of governance leadership. In order to gauge directors’ opinions on this topic, Corporate Board Member magazine, a sister publication to Bank Director, recently conducted a survey asking nominating/governance committee members several questions about boardroom diversity.

The results show that many directors associate building more diverse boards with strong business objectives, especially with regard to reaching their market base and finding growth areas. More than half (52%) of the directors surveyed believe board diversity affects attentiveness to customer needs as well as increases the corporation’s ability to identify new market opportunities. But they were less inclined to state that such objectives had a proven impact on the bottom line: While 32% affirmed diversity on a board has a positive effect on increased company performance, 38% did not believe such a connection exists; another third of those surveyed were unsure.

TK Kersetter, president and CEO of Board Member Inc., the publisher of Corporate Board Member and Bank Director, says these mixed results show how the topic of boardroom diversity is gaining awareness, but is still not seen as strongly supporting the business strategy for most companies.

“Diversity in the boardroom is still a difficult issue for many corporate directors,” Kerstetter says. “While they readily admit that a diverse board will generate more sensitivity to new markets and customer service, they still seem shy to buy into the fact that those opportunities will contribute positively to the bottom line. Boardroom diversity continues to be a ‘soft’ issue.”

Still, many companies appear to be pursuing diversity objectives. Presently, among those surveyed, 64% of respondents currently have at least one woman on their board; 15% have at least one African-American member; 12% have Hispanic representation, and 12% have Asian representation. Of those, 45% affirmed that board members had been specifically recruited to add diversity to their boards. Moreover, of those respondents whose boards will be recruiting new members in the next six months, 35% expect the board to recruit a diversity candidate. Yet, some hurdles are still in place: 38% of nominating/governance chairs surveyed do not believe an adequate pool of qualified diversity candidates exists.

More than 60% of those surveyed said their board conducts ongoing analysis of current board representation to determine shortfalls in diversity; 41% said age representation is also a factor.