The Texas Economy: Financing AvailabilityBureau of Business Researc

Hadaway, Beverly L.

English

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) r ( Bureau of Business Research <>q~4 College and Graduate School of Business, University of Texas at Austin ~~ June 1991 The Texas Economy: Financing Availability Recovery from the 1986 downturn in the Texas economy has been slow and arduous by any economic measure. A variety of factors has contributed to the seemingly imperceptible slow pace with which much of the state is returning to prosperity: sagging oil prices (prior to the Kuwait crisis), the real estate glut, unprecedent-ed financial institution failures, and a regulatory environment that has handicapped the lending ability of the banking and thrift industries. En-tering the 1990s, 55 percent of Texas banks, representing 81 percent of Texas banking indus-try loans and 77 percent of Texas banking in-dustry assets, were lending impaired.1 In an attempt to assess both the borrowers' and the lenders' perspectives, a survey of Texas businesses and lending institutions was under-taken during the summer of 1990. The results provide some important insights. The Borrowers' Perspective Surveys were mailed to all manufacturers and wholesalers (approximately 5,000) employing twenty-five or more persons and reporting sales or revenue amounts to the Bureau of Business Research for publication in the Directory of Texas Manufacturers and the Directory of Texas Wholesalers. Approximately 30 percent of the respondents (6 percent of those surveyed) showed revenues in excess of $10 million, and 80 percent had been in business more than ten years. Surveyed about the availability of commercial bank financing, borrowers were asked to indi-cate the number of both loan applications and loan approvals in the last twelve months. Respondents making application to Texas banks experienced an 81 percent approval rate as com-pared to the 70 percent approval rate for appli-cants to non-Texas banks. Not surprisingly, the most frequent applications and the highest rates of acceptance were for working capital and equipment financing loans. Borrowers were asked why loans were reject-ed, and an attempt was made to segment the reasons by credit factors and lender policy fac-tors. Among credit factors, lack of equity, poor earnings record, and excessive existing leverage were cited as the major reasons for loan denial. The most prevalent lender policy rejection rea-son was that the loan type was not handled by the lender. Many respondents not only completed the sur-vey but also provided additional comments. Three themes emerged. First, borrowers were dismayed at the collateral-to.-loan ratio required by lenders. A recent Fortune article echoed this point, noting that for a "$4 million loan you needed to guarantee $2 million personally and put up a $2 million certificate of deposit as col-lateral for the rest." 2 A second concern was the apparent disregard for past credit history. One man, in business thirty years, wrote that he had "sought secured loans from fourteen banks un-successfully." Third, borrowers resented what they consider to be a "change in the rules" by the banking industry. Most comments on this point blame overly zealous regulators. The Lenders' Perspective Members of the Texas Bankers Association and the Texas Savings and Loan League were surveyed concerning loan approval rates today compared to two years ago, the relative impor-tance of factors affecting credit evaluation, ex-pectations concerning the level of economic activity during the 1991-1995 period, and the im-tLtl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IDr Analysis of Business Respondent Loan Application Status Panel A: All respondents Number of Approved Category · applications (percentage) Applied to Texas bank 270 81 Applied to Texas thrift 14 64 Applied to non-Texas bank 53 70 Applied to non-Texas thrift nm nm Panel B: Respondents in business 10 years or less Number of Approved Category applications (percentage) Applied to Texas bank 59 78 Applied to Texas thrift nm nm Applied to non-Texas bank 19 89 Applied to non-Texas thrift nm nm Panel C: Respondents in business more than 10 years Category Applied to Texas bank Applied to Texas thrift Applied to non-Texas bank Applied to non-Texas thrift nm: not meaningful. Number of Approved applications (percentage) 211 nm 34 nm 82 nm 59 nm pact of government regulation of banks. Ninety percent of the respondents (6 percent of those surveyed) had assets of less than $250 million. (Lender responses are skewed toward smaller banks, hence their comments may not reflect the experience of the overall Texas banking com-munity.) In recent years the state of the Texas economy and a restrictive regulatory environment for Texas banks have resulted in substantial changes in the ability and willingness of Texas banks to make loans. Compared to two years ago, current approval rates for real estate, working capital, and equipment loans showed substantial de-creases. In the case of entrepreneur and vehicle loans and letters of credit, a complete retreat from the market was noted for some lenders. When asked to indicate the importance of vari-Approval Rates by Loan Type (percentage) Loan type* Approval rate Working capital Equipment financing Vehicle financing Real estate financing Letter of credit *listed in order of frequency applied for. 70 71 59 51 85 ous factors affecting credit evaluation today ver-sus two years ago, bankers responded that cash flow, equity, and the level of existing debt are more important today; collateral and credit his-tory, less important. Lenders were generally optimistic about the level of economic activity expected in the short term (1991-1995). Only 18 percent anticipated unusually low economic activity for this period. (When borrowers were asked the same question, 11 percent anticipated unusually low levels of activity for the 1991-1995 period, indicating that borrowers, relative to lenders, are more optimis-tic for the short term.) Even less encouraging is the response of lenders as to how these expecta-tions will influence their lending opportunities. Twenty-six percent expected a decrease in lend-ing opportunities and 35 percent expected no change. In addition to completing the survey, many respondents shared their thoughts on the current state of the Texas banking industry. Dominating the comments was dissatisfaction with the heavy-handed way in which regulators were overseeing Texas lenders. Conclusion Few of the results presented here are surpris-ing to anyone who has observed the erosion of the Texas credit environment over the past few years. It is important to note the consistency of the borrower and lender responses. Both are keenly aware of the adverse impact of changing and inconsistent regulatory policies. Small to medium Texas businesses have traditionally looked to small to medium Texas banks for credit, and the changing regulatory environment tLtl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IDr J tdll 1111 11111111111 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJ[r Employment and Unemployment Rate by Metropolitan Area Total nonagricultural employment Total employment Unemployment (thousands) (thousands) rate Percentage Percentage Area Mar. 1991 Mar. 1990 change Mar. 1991 Mar. 1990 change Mar. 1991 Abilene 48.6 48.4 0.4 47.9 48.0 -0.2 5.5 Amarillo 77.5 76.8 0.9 90.1 90.1 0.0 5.0 Austin 383.8 374.5 2.5 423.4 412.6 2.6 4.4 Beaumont-Port Arthur 148.2 139.6 6.2 158.8 149.7 6.1 6.4 Brazoria 67.4 65 .3 3.2 83.4 81.1 2.8 5.2 Brownsville-Harlingen 77.4 75.4 2.7 94.7 92.4 2.5 12.8 Bryan-College Station 55.9 55. l 1.5 61.1 60.3 1.3 3.2 Corpus Christi 137.8 134.5 2.5 155.8 152. l 2.4 7.0 Dallas 1,374.7 1,365.l 0.7 1,364.9 1,357.9 0.5 5.6 El Paso 209.7 206.4 1.6 226.7 223.5 1.4 10.7 Fort Worth-Arlington 584.0 581.6 0.4 692.5 691.0 0.2 6.3 Galveston-Texas City 76.4 75.2 1.6 102.0 100.9 1.1 6.8 Houston 1,622.4 1,570.0 3.3 1,657.8 1,611.0 2.9 5.2 Killeen-Temple 72.8 73.7 -1.2 89.1 89.9 -0.9 6.8 Laredo 45.l 44.0 2.5 47.7 47 .0 1.5 12.0 Longview-Marshall 68.4 69.3 -1.3 72.7 74.2 -2.0 7.7 Lubbock 98.5 97 .6 0.9 110.2 109.1 1.0 5.1 McAllen-Edinburg-Mission 103.l 101.6 1.5 133.9 132.9 0.8 19.8 Midland 44.8 43.9 2.1 45.5 45.0 1.1 5.0 Odessa 44.2 43.5 1.6 49.0 48.1 1.9 6.0 San Angelo 36.7 36.2 1.4 41.3 41.6 -0.7 4.8 San Antonio 518.0 519.7 -0.3 564.0 565.6 -0.3 6.5 Sherman-Denison 37.7 37.5 0.5 44.5 44.7 -0.4 6.5 Texarkana 45 .8 47.l -2.8 52.0 53.4 -2.6 7.5 Tyler 62.2 61.8 0.6 69.6 69.4 0.3 6.5 Victoria 28.7 27.7 3.6 34.6 33.5 3.3 4.7 Waco 82.6 81.4 1.5 87.7 86.6 1.3 5.7 Wichita Falls 50.0 50.2 -0.4 51.7 52.0 -0.6 6.7 Total Texas 7,093.4 6,989.5 1.5 7,978.0 7,874.0 1.3 6.4 Total United States 108,610.0 109,343.0 -0.1 115,639.0 117,093.0 1.3 7.1 Note: Data are not seasonally adjusted. Figures for 1990 have undergone a major revision; previously published 1990 figures should no longer be used. Revised figures are available upon request. All 1991 figures are subject to revision. Sources: Texas Employment Commission and U.S. Department of Labor, Bureau of Labor Statistics. 1 .35 1.30 1 .25 1.20 1. 15 1. 1 0 1.05 1.00 Nonagricultural Employment In Five Largest Texas Metropolitan Areas (January 1984=1.00) Fort Worth . -. ~-· r -0.95 0.90-lllfilHHllHHffllHllllHffHfffHlflHllHlfffiffffillffHIHHlfilHllllHffHfffHlffHt 1984 1985 1986 1987 1988 1989 1990 1991 1.30 1.25 1.20 1. 15 1 . 1 0 1.05 1 .00 0.95 Total Employment In Five Largest Texas Metropolitan Areas (January 1984=1.00) Fort Worth r-. . ·~ -- . .. ~r 0 . 90-liHllHHlllHHflfillHfffHlflHllHlfffofllHIHHffllHttl-tlttHIHHllffflltfflfftoHIHI 1984 1985 1986 1987 1988 1989 1990 1991 tdll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJir tdll 1111 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr has affected their ability to conduct business. Perhaps the feelings of both the business and banking communities are best captured in the comments of a bank respondent: "Congress needs to realize that our southwestern economy has been beset by all manner of economic set-backs and that a banker needs to be there for his customer in the bad times as well as the good times." Under the present regulatory structure, the banking system is severely constrained and, at the same time, insulated from the discipline of the market. Much of the regulatory structure was designed for a less sophisticated financial environment. The risk, inherent in the banking business, cannot be adequately addressed by regulation. A complete review of deposit insur-Other Black Hispanic White Texas Population by Race and Ethnicity, 1980 0 10 20 30 40 50 60 70 Percentage ance, capital requirements, and regulatory super-vision needs to be undertaken. The objectives should be to strengthen the banking system through simplification of regulation and to as-sess risk by increasing exposure to market dis-cipline. - Beverly L. Hadaway Associate Professor of Finance University of Texas at Austin Notes 1. Harvey Rosenblum, "The Texas Credit Crunch," The Southwest &onomy (September 1990). 2. John Davidson, "Brother, Can You Spare A Loan?" Fortune (August 27, 1990): 65. Other Black Hispanic White Texas Population by Race and Ethnicity, 1990 0 10 20 30 40 50 60 70 Percentage Source: U.S. Bureau of the Census, 1990 Census of Population and Housing (data are subject to revision); 1980 Census of Population and Housing. Note: Graphics by the Bureau of Business Research staff. tdll 11 11 ! I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I !Jf[ tdll l I I I 1 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr Population in the Metropolitan Statistical Areas of Texas, 1980 and 1990 MetroEolitan Statistical Area 1980 1990 Abilene 110,932 119,655 Amarillo 173,699 187,547 Austin 536,688 781,572 Beaumont-Port Arthur 375,497 361,226 Brazoria 169,587 191,707 Brownsville-Harlingen 209,727 260,120 Bryan-College Station 93 ,588 121 ,862 Corpus Christi 326,228 349,894 Dallas 1,957 ,378 2,553,362 El Paso 479,899 591,610 Fort Worth-Arlington 973, 138 1,332,053 Galveston-Texas City 195,940 217 ,399 Houston 2,735,766 3,301 ,937 Killeen-Temple 214,656 255 ,301 Laredo 99,258 133,239 Longview-Marshall 151,752 162,431 Lubbock 211,651 222,636 McAllen-Edinburg-Mission 283,229 383,545 Midland 82,636 106,611 Odessa 115,374 118,934 San Angelo 84,784 98 ,458 San Antonio 1,071 ,954 1,302,099 Sherman-Denison 89,796 95,021 Texarkana 75,301 81,665 Tyler 128 ,366 151 ,309 Victoria 68,807 74,361 Waco 170,755 189,123 Wichita Falls 121,082 122,378 Percentage change 7 .86 7.97 45.63 -3 .80 13.04 24.03 30.21 7.25 30.45 23.28 36.88 10.95 20.70 18.93 34 .24 7 .04 5.19 35.42 29.01 3 .09 16 .13 21 .47 5.82 8.45 17 .87 8.07 10 .76 1.07 Source: U.S. Bureau of the Census, 1990 Census of Population and Housing (data are subject to revision); 1980 Census of Population and Housing. Note: Graphics by the Bureau of Business Research staff. tdll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr BUREAU OF BUSINESS RESEARCH P.O. Box 7459 Austin, Texas 78713-7459 Address correction requested. Editor: Lois Glenn Shrout Texas Business Review is published six times a year (February, April, June, August, October, and December) by the Bureau of Business Research, Graduate School of Business, University of Texas at Austin. Texas Business Review is distributed free upon request. Announcements By the time this issue reaches you, the Bureau should have detailed data from the 1990 census of population (generally referred to as STF-1). Included are breakouts by age, sex, and race, along with information on household and I NONPROFIT ORG. I 01353 SERIALS ACQUIS-GEN LIBRARIES UNIV Of TX AT AUSTIN PCL 1.114 55 451 CA"PUS l tftl 111111111111111111111111 I I I I I I I I IDr housing characteristics. Data are available for geographic areas down to the block group level. The Bureau is providing extractions from the computer tape on hard copy and diskette. Data displayed in this issue (charts on page 4; maps, page 5) were taken from summary tape PL 94-171. For more information, call (512) 471-1616. Implementing JOBS in Texas by Christopher King and Deanna Schexnayder is available through the Bureau's sales office. Presenting the findings from the initial evaluation of the Job Opportunities and Basic Skills (JOBS) pro-gram, this report also examines the status of welfare reform in Texas. For a copy of the report, call (512) 471-1616 (the cost is $8.00 plus tax). 

The Texas Economy: Financing Availability

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The Texas Economy: Financing Availability

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