Tex. Conditions Easing Banks' Crunch Hit?

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Texas bankers like to say that their states economic strength will shield them while the mortgage crisis causes several other housing markets to crumble.

Economists and others say there is some truth to it, though they are careful to note that Texas is not immune from the impact of a souring credit environment.

Nevertheless, Texas diverse economy, the stability of home prices, and a state law that restricts home equity lending has created what may be the most stable base for banking companies trying to stay on solid footing this year, observers say.

Most of the lenders here didnt get carried away with exotic lending, Jim Gaines, an economist at Texas A&M University, said in an interview last month. We just never had the big run-up in prices that is catching all the other housing markets on the way back down.

The median home price in Texas is about 30% below the national average, according to Texas A&Ms Real Estate Center. In Austin, the states capital and most expensive city for buying a house, the average price is about $181,000, less than half the average in California. However, prices inched up in every major Texas market during the third quarter while starting to decline in other states. Statewide, prices climbed 6.3% from a year earlier, according to the Office of Federal Housing Enterprise Oversight. The November median rose a steady 3.3%, to $143,200.

The state also boasts healthy employment numbers. In November the states employers added 12,300 jobs, the Texas Workforce Commission reported last month. And the states unemployment rate stood at 4.2%, which is below the national level of 4.7%.

State Comptroller Susan Combs predicted in a November report that the Texas economy would grow 3% this year, resulting in more job creation, further population growth, and demand for housing. Economists say the report is good news for the bankers who finance the homes, cars, and other purchases that new residents make.

Comerica Inc. sees Texas as a growth state. It said its decision to move its headquarters from Detroit to Dallas last year reflected the fact that 46% of its annual revenue comes from states outside Michigan, including Texas and other Western states.

Eugenio Aleman, a senior economist at Wells Fargo & Co., tracks the Texas economy. Im still very, very bullish on Texas, he said in an interview last month. Texas is going to remain ahead of the curve.

Third-quarter cumulative net lending by Texas banks and thrifts rose 16% from a year earlier, to $171.2 billion, according to data compiled by the Federal Deposit Insurance Corp. Bank assets rose 10%, to $276 billion.

Banking companies whose business lines are contained mostly in Texas stand to fare the best this year, analysts say.

Prosperity Bancshares Inc. of Houston is a good example, according to Brad Milsaps, an analyst at Sandler ONeill & Partners LP who covers Texas banks. He said the company, which conducts most of its business in the state, has a loan-to-deposit ratio of 66% and is well positioned to fund future lending.

Third-quarter profits at Prosperity rose 45%, to $23.8 million. Its acquisitions of Bank of Navasota and Texas United Bancshares Inc. last year helped its third-quarter net interest income rise 43%, to $51 million, and it set aside just $75,000 for loan losses.

Prosperity punctuates the point better than most, Mr. Milsaps said, but the majority of regional banking companies that focus their business in Texas had a strong year. Its certainly better doing business in Texas than it is on the coasts and in the Southeast.

But analysts and economists also say that Texas will not emerge from the subprime mortgage turmoil unscathed, since the state, whose economy is larger than those of many countries, relies on doing business with other states, and its activity will slow as the national economy does. …