How First National Passed Republic
and Other Stories of the Banking Game
(Page 3 of 7)
When Presley and Stewart set out to build a holding company team, they were looking for people whose skills and instincts transcended those used in normal banking operations. Accountants and attorneys were needed who were familiar with stocks and mergers, and with regulatory agencies. An investment and planning staff, as well as economists, were required whose horizons would be broader than one bank’s market. The whole team would have to adapt to the three basic holding company tasks: identifying, acquiring, and overseeing a growing number of member banks.
The key members of this holding company team initially came from First National, although some members came from outside companies. Paul Hill, Lubbock-born and bred with the accent, infectious humor, and expansiveness of a Panhandle Texan—complete with Texas Tech ring—became the controller and recruited a staff of accountants. Jim Byrd, a sometime-banker, sometime-professor, with a year-round sailing tan and English table manners, became the chief economist. Leonard Huber, with Byrd’s tan and Hill’s smile, is the investments and planning officer as well as the key contact for the security analysts; George Anson, the attorney who regularly entices seven-day weeks out of his small band of acquisitions specialists; Jim Merritt, the corporate secretary/treasurer who manages the constant flow of documents and filings.
As the acquisitions continued, Presley and Stewart came to realize that they were the only two bankers among the accountants, lawyers, and economists in the holding company. The growing number of member banks needed a banker to work directly with them. The two men were returning to Dallas from San Antonio last October when the name of Elvis Mason came up. While they were still on the plane they decided they wanted Mason to join them at First International, and made arrangements to talk with him at the American Bankers Association meeting in Chicago.
Mason was the successful head of his own holding company, First Security National Corporation of Beaumont, a stable and satisfying position for a man of 40. When Presley and Stewart first made their pitch. Mason was unenthusiastic. He had his house on Lake Rayburn, his position in the community, and he felt a loyalty to Beaumont. “I understand all that,” Stewart told Mason, “but in the first place this is a tremendous opportunity, and in the second place, do you want them to write on your tombstone, ’Here lies a good ole boy’?” Mason was convinced, and has joined First International as vice-chairman of the board. For the first time in fifteen years, Stewart and Presley will have a companion for early morning coffee.
First International: The Course of Empire
First International was not the first bank holding company to take advantage of the potential in the Bank Holding Act of 1970. First City, Bank of the Southwest, and Texas Commerce, all in Houston, were out there first. But when Presley and Stewart got into it, they rewrote the book.
“We started out,” says Stewart, “with our first priority to connect the two great areas of the state, Dallas and Houston. We went to the Federal Reserve in Dallas, to the Federal Reserve in Washington, and to the Justice Department, and we asked them all what we could do in Houston. The answer was that we couldn’t go with any of the big three (First City, Texas Commerce, Bank of the Southwest). So we picked Houston Citizens, the sixth largest.”
Once Houston Citizens became a part of First International on December 31, 1972, the team really went to work. There are three main stages to merger activity: targeting, negotiations, approval. The targeting sounds scientific—find healthy banks whose rates of growth are equal to or better than First International’s. Dr. James Byrd, chief economist, runs models and develops data to help determine which of the banks and regions that seem good really are. But of at least equal importance with scientific methods is the seat-of-the-pants feeling for the banks and their management which Dewey and Bob have built up through fifty years of familiarity with the Texas banking community.
After a bank has been identified, Presley and Stewart personally handle the negotiations. At First International there is no figure equivalent to Henry Kissinger. Presley and Stewart want to deal head man to head man, even though most of their target banks are one-fiftieth the size of their own. Usually the negotiations begin when Stewart calls up the president of a bank they have targeted.
“How’s this holding company thing look to you?”
“Bobby, it doesn’t look worth a damn. I wouldn’t touch it with a ten-foot pole. It’s the worst thing that’s ever happened to the state. How are you, anyway?”
“Fine, thanks. Say, Dewey and I would like to come down and talk about this holding company thing with you. Maybe buy you lunch.”
The biggest obstacle is what Bobby Stewart calls the “philosophical barrier.” Banks are pillars of a community, and bankers represent a community’s leadership more often than any other class. They control credit, and without credit, very little gets done. Local ownership and control is a symbol of dedication to local interests. Local bankers may fear that those hard-eyed big city bankers from Dallas will come in and determine who will get loans, and who won’t. Also, many of these bankers are the equivalent of Nate Adams’ generation: they founded their banks and/or have shepherded them to their present size. To sell out would risk losing their position in the community, and also, more subtly, perhaps subject them to banking management principles from places like Harvard Business School and other citadels of new-fangled ideas they might damn well just not understand. The holding company movement was a threat: to their communities, to their banks, to themselves.
Presley and Stewart combat this reaction by sticking with hard figures. The purchased bank will trade its stock for holding company stock listed on the New York Stock Exchange. The bank’s capital position will be improved; its potential loan demand will be greatly expanded; and it will enjoy data processing and management services otherwise uneconomical for a smaller bank. The clincher often comes when Presley and Stewart point out that the way the Fed is setting its policies, and with the goings on in Austin, it is possible that if the bank doesn’t get on board pretty quick they just might be left out in the cold later on.
After the initial success of the first wave of mergers had overcome much of the early suspicion, and when it became clear that First International really did want to keep the local banks’ management and boards, receptiveness increased. Banks started approaching First International. “We had one bank,” says Paul Hill, “where the president walked up to one of our people who was just down there doing some contracted data processing work and said, ’Hey, wanta buy our bank?’ ” According to Hill, the bankers who decided to go with First International agreed to the merger because of better service, because it will be better for the community, and because of improved loan capabilities. But of more than considerable importance has been the increased liquidity, marketability, and appreciation of their shareholders’ stock.
First International’s practice is to go for the healthy bank, since its earnings will enhance the earnings from First International’s assets. If it is well managed, then First International will not have to enter the touchy areas of changing management and struggling with the bank’s board. Someday, when a bank’s president or chairman of the board dies or retires, First International will very likely have to get involved by working closely with the board to plan management succession and perhaps to help locate management personnel. But for now the main innovations at the acquired banks have been improved budgeting, profit planning, and reporting techniques. For Paul Hill to do his job of monitoring the banks and plugging them into First International’s standard profit-maximization/cost-minimization banking philosophy, every bank has to adopt the same reporting system. Each bank is linked by computer to Hill’s office, where data for all of First International’s banks are entered simultaneously with their entry in the office of each bank. Hill says that it is a credit to many of these bankers that they did so well with fairly primitive accounting systems which often provided an accurate profit picture only at the end of the year. Hill’s primary job is “to get some good numbers in order to make profit planning work.”
Once Presley and Stewart have brought a bank far enough along to begin the actual merger talks, one of Hill’s accountants is dispatched to the bank. “The local bank usually puts him in a back room so no one will see him,” says Presley. “It takes time for them to get used to the idea they might sell.” The whole acquisition is reduced to the finest detail by computer, and the effects of changes in the price on First International’s stock, its price earnings ratio, and, one gets the feeling, its stationery supply, are plugged in. During final negotiations at the target bank a member of First International’s team carries a portable computer terminal. If a target banker says, “I’ve been thinking. What if we go up two tenths of a percent on our stock switch ratios?”, then the First International man can plug into a telephone and get the printout while Presley and Stewart are chewing over the idea.
Nothing is left to chance. As folksy and friendly as Stewart and Presley can be, the final deal will be nailed down in every aspect in the most professional way, with an eye always to First International’s long-run interest. “Sometimes we have to tell a banker,” says Stewart, a sort of friendly professorial tone creeping into his voice, “that if we let him dilute our stock then it’s going to be that much easier for the next guy to do it, and when that happens the man I’m talking to will then be holding our stock, and he’s going to think twice before opening the floodgates on getting what is about to become his stock diluted.”
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