• After three years of lagging the U.S. economy, Texas is primed to grow slightly faster than the nation in 2005 (See Chart 1).
  [D]

• The expansion of the professional and business sector and the leisure and hospitality services sector is aiding the state’s improving economy, along with solid growth in health and educational services. Additionally, the construction and transportation sectors are reporting accelerating year-over-year job growth, while the economic drag from the ailing manufacturing and information sectors is diminishing.
• Continued U.S. economic growth and global trade, coupled with favorable population trends and relatively low business and living costs, will contribute to the state’s economic growth in 2005.

• Texas natural resources and mining employment growth decelerated in third quarter 2004 despite oil prices that were 45 percent higher than the year before.
• This employment decline can be attributed, in part, to the ongoing shift in oil exploration and development away from Texas to other parts of the world.
• According to the National Association of Business Economics outlook, strong economic fundamentals are expected to support oil prices above $40 per barrel through 2005, resulting in continued job growth for this sector.
• Although higher energy prices impose additional costs to consumers and industrial users, prices will provide a slightly positive benefit to the state. ¹

• In a reversal of fortunes, the metropolitan areas of Dallas, Ft. Worth, and Austin continue to exhibit job growth rates that are lagging the statewide average (See Chart 2).
  [D]

• Extended weaknesses in the airlines, telecommunications, and semiconductor and personal computer industries have restrained growth in these areas. Meanwhile, foreign trade, oil prices, tourism, and defense spending have bolstered the economies of El Paso, Houston and San Antonio.
• As the U.S. expansion strengthens in 2005, economic and employment growth in the state’s largest metropolitan areas likely will continue to accelerate.

• Population growth rates in the metropolitan areas of Dallas/Fort Worth, Austin, Houston, and San Antonio have exceeded the state since 2001.
• Many of these new residents were enticed to relocate by the expanding leisure and hospitality industry, which has finally seen a revival since 9/11.
• Additionally, many professionals are moving to take advantage of the educational and health care opportunities as well as professional business services that larger cities provide.
• This influx of new residents provides the metro areas with an abundant labor supply and increased prospects for local lenders.

• Texas is home to three of the nation's ten largest cities. The state’s population expanded almost 23 percent between 1990 and 2000, making Texas the second most populous state behind California.
• Population growth tends to propel economic activity and stimulate the need for banking offices and services. Indeed, the state’s attractive demographics and banks’ interest in capturing market share have ranked Texas second in the country for fastest branch growth during the past five years, fifth highest in terms of deposit growth.²
• While small banks (less than $1 billion in assets) have maintained a steady share of deposits, large banks (both in state and out-of-state) have experienced the lion’s share of deposit and office growth (See Chart 3).
  [D]

• Metropolitan areas held an increasing level of branches (80 percent) and deposits (89 percent) in 2004, up from 76 percent and 84 percent, respectively, in 1994.
• Looking forward, John Heasley, Texas Bankers Association executive vice president, said this trend is not expected to subside anytime soon, particularly in the urban centers and along the Interstate 35 corridor.³

• The performance gap is growing between larger banks (over $250 million in assets) and smaller banks, which represent 84 percent of Texas insured institutions (See Chart 4).
  [D]

• A modest improvement in net interest margins (NIMs) during the third quarter has been especially positive for smaller, more NIM-dependent banks. However, larger banks continue to exhibit a comparative advantage in operating efficiencies and an ability to generate sources of other non-interest income.
• Asset quality remains strong for insured institutions, with past-due and charge-off rates among the lowest levels in a decade. Texas median past-due ratios ranked 14th nationwide for third quarter 2004.

• Both bankruptcy and foreclosure rates decreased in second quarter 2004. The statewide foreclosure rate especially improved, falling to its lowest level in almost two years.
• In 2003, Texans voted for a constitutional amendment that would allow homeowners to avail themselves of home equity lines of credit (HELOC). Additionally, more consumers are turning to HELOCs as a source of cash in response to the recent cooling in mortgage refinancings. These two factors have combined to fuel a 92 percent year-over-year growth rate in Texas HELOCs as of September 2004, twice that of the nation.