Lone Star State of Mind

 | Jan 18, 2013 | 4:00 PM EST
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We can't talk about banks and energy without looking the mother of all U.S. energy centers: Texas. The Lone Star state has been the center of domestic energy exploration and production since black gold started bubbling up from the ground. It's home to conventional and unconventional oil fields, as well as offshore drilling in the Gulf of Mexico. The state has a third of the oil and gas reserves in the U.S. and energy is a huge part of the state economy.

The state's largest bank is one of my favorite large regional selections. Dallas-based Comerica (CMA) has extensive exposure to the oil and gas industry and provides financing for a wide range of energy-based projects. Although the bulk of deposits are in Comerica's old home state of Michigan, it has 137 branches and almost $10 billion of deposits in its new home state. The bank has based its future growth on Texas and other Western states, so its deposit base and energy exposure should continue to grow. Trading at 90% of tangible book value, the stock is still cheap enough to buy now.

One of the real problems with Texas-based banks is finding ones cheap enough to buy. The state's economy was far more resilient than most due to the strong economy based on energy, agriculture and hi-tech companies in and around Austin. Banks such Dallas-based Texas Capital (TCBI) and Prosperity Bancshares (PB) in Houston trade at very high multiples of book value and just are not attractive investments. Making matters a little more difficult, many of the community banks have remained private so far.

With a little digging, however, we can come up with banks worth investigating, and possibly investing in, even now. International Bancshares' (IBOC) International Bank of Commerce has an extensive branch network in the western and southwest portions of the state. Many locations, including the corporate headquarters in Laredo, Texas, are squarely in the Eagle Ford shale. The bank has a niche serving the fast-growing Hispanic population and does a substantial amount of cross-border business in Mexico. The bank is in great shape with a tangible-equity-to-asset ratio just over 10, and nonperforming loans that are less than 2% of total loans. Trading right at tangible book value, the bank can be bought with an eye on scaling in at lower prices over time.

The cheapest way to play banking and financial services in Texas is still Southwest Securities (SWS). Although it is primarily considered a broker and investment banker, it has a commercial banking subsidiary. The bank got into deep difficulty during the credit crisis as bad loans soared and forced it to operate under an FDIC cease-and-desist order. Since then, Hilltop Holdings (HTH) and Oak Hill Capital have injected $100 million into the company and the order was lifted last week.

The commercial bank operation is slowly getting back on track and it offers a wide range of services to customers in Dallas, San Antonio and Houston. In addition to regular commercial banking services, it is an SBA-preferred lender and offers mortgage-warehousing services for mortgage bankers in the region. In addition to the bank, you get a solid investment banking and brokerage operation. Its investment bankers have solid relationships in the oil and gas industry, and SWS should see strong activity as the Texas energy sector continues to thrive. The stock is cheap at 60% of tangible book value, and with the capital infusion and improvements in the loan portfolio, it's safe to own for most investors.

Texas has been ground-zero for the domestic energy industry since its inception and will be for many decades to come, despite other large, regional energy discoveries in the Marcellus and Bakken fields.

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