How First National Passed Republic
and Other Stories of the Banking Game
(Page 5 of 7)
If so, Aston will not go down without a struggle. When he talks about the needs of Dallas, his eyes light up; when he talks about the current position of Republic, they narrow. Republic is on the defensive, and their position bewilders them and in fact seems downright unfair. First International has been getting all the attention, striding in full sunlight down the high road while Republic has seemed to be floundering in the briar patch, stuck inextricably to their financial tarbaby, the Howard Corporation—a widely varied collection of blue chip investments in oil; 20 Texas banks; six shopping centers, including Highland Park village; and undeveloped real estate. Reorganization of the Howard Corporation to conform to the Fed’s rules on what assets a bank holding company can own has been the main stumbling block preventing Republic from finally joining the other major Texas banks as a bank holding company. And so, when they finally announced their’ plans for Howard’s assets and their own holding company activities this March, Republic confidently expected their stock, which had been low in comparison to First International, to go up. It did not. On that same day, First International had just had its Waco acquisition disallowed by the Fed. Its stock went up. “We’re just snake bit,” said one Republic vice-president. “First International has got the market so charmed they could announce all their depositors had withdrawn their money and their stock would jump five points. We could say all that money had come here and sure as I’m standing here our stock would go down. It’s crazy.”
Clearly investor preference for First International, which sells at around 20 times earnings, over Republic, which sells around 13 times earnings, rankles the top men at Republic. “I ask every investor I can find,” says Aston, “what the hell’s wrong with our stock. They say, ’Not a damned thing, but holding companies have all the glamor these days.’”
Republic is counting on some of that glamor rubbing off as soon as Republic of Texas begins its holding company operations this May “We’ve had to turn banks away,” says Bill Hatfield, currently executive vice-president of Republic Bank and slated to be in the same position at Republic of Texas. “There’s not going to be any problem finding blue chip banks the minute we get the go-ahead to operate as a holding company.” Republic’s chief officers believe with the certainty of the Chosen that come this May they will begin to reclaim their rightful place as the acknowledged leader of Texas banking. “Right now everyone is talking about Bank B,” says a high-ranking officer at Republic, meaning First International. “This time next year they will be talking about us.”
Well, the visitor asks, why should a bank become part of Republic when First International, Texas Commerce, and First City all have better price-earnings ratios on their stocks and a better earnings record? Republic’s management is ready for that one. In the first place, they say, we are more innovative than any other bank. In the second place, those high price-earnings ratios can’t be sustained. People who get Republic stock will look for it to go up; buying the glamor banks like First International or Texas Commerce will likely lock a purchased bank into a stock that could decline. Besides, we have a more aggressive trust department, a better international operation, a more developed training program. We put our money in people. So our earnings are low. That’s because we had a few big loans go slow. That is just bad luck. The same thing can and will happen to other banks.
The clincher, however, is the litany: We have worked with a great number of Texas banks for many years, both the ones we own shares in and our correspondent banks. They are all part of the Republic family. They like our management and they like our community philosophy. We’re not talking about company x versus company y. These banks are our longtime friends, and they are waiting until we’re able to buy ’em. And we are going to be ready.
The new holding company offices at Republic will house, as they will at First International, a new breed of bankers. Republic, however, has a slightly more complicated personnel situation. Bobby Stewart and Dewey Presley have been working together since 1960. Whatever infighting there is at First International transpires beneath them. At Republic, Aston is the head of state presiding over a number of rival nobles, each with his fiefdom and power base, but all existing on the sufferance of Aston himself. Aston is like a strong-handed Eisenhower, a man above politics, a unifier, a father figure whose guiding hand touches his banking children from the president to the assistant cashier just returned from an operation. Aston has watched two key assistants, James Keay and James Berry, both 52, struggle for supremacy for the past 15 years. Keay appears to have won a fairly commanding position, emerging as chairman of the board of the bank and vice-chairman of the holding company. Berry is president of the holding company, but it is unclear just what his role will be with Aston above him and the very capable William Hatfield below him as executive vice-president.
Keay may seem to be in front simply because he appears more like a banker—tall, slender, elegantly dressed, looking almost like a Kennedy in spite of bifocals and a trace of an avuncular manner. Keay has Bobby Stewart’s ease of authority and apparent imperviousness to pressure. Berry, on the other hand, may be in fact equally or even more worthy. On his shoulders, however, the responsibilities of running a major bank do not sit so easily. He appears less in control; some bank employees confide that he always looks pursued. Perhaps he is, or perhaps he merely has more work to do. Behind him is Hatfield, a large, genial man with a beartrap mind. And behind Hatfield are platoons of what Aston refers to as “superstars, hot shots, race horses we can’t keep under wraps forever.”
When Aston retires, it is anybody’s guess who will end up in command. The new president of Republic Bank, Charles H. Pistor, won out over ten other senior vice-presidents for the job. His position looks strong, but Keay or Hatfield is probably the man to bet on, with Berry in the running as well. The end to such speculation is still down the road, presumably many bank acquisitions and a few personnel changes hence.
On a different level from the upper echelon is the rest of the Republic holding company team. Acquisitions will be primarily targeted by John English and Morrison Smith. English, a former senior financial analyst with the Fed, is charged with identifying target banks from a financial standpoint. Smith, whose experience with the bank examiners prior to coming to Republic and his past work with Republic’s correspondent banks have given him a detailed map of Texas banking and Texas bankers, will spearhead much of the personal negotiations and will buttress English’s analyses with his own first-hand knowledge. Sharon Cannon, a young attorney from Texas Tech formerly with the Fed, will supervise the work of Republic’s outside attorneys and will be responsible for acquisition applications and regulatory matters. Considering First’s staff of 5 attorneys, Ms. Cannon will have network cut out for her. In addition, Robert Scott is the treasurer, responsible for accounting procedures and management information systems; Lee Drain is the secretary; and Roger Jones is responsible for tax matters. Much of the staff is young. Smith and English are in their thirties and Cannon is 27. They are as yet unproven in holding company work, but their experience seems to equip them well for the task.
Republic at the Starting Gate
Before bank holding companies, prices of bank stock were of concern only to the patient investor who occasionally traded in bank stocks, most of which went quietly over the counter. Today bank stock is the crucial element in acquisition programs. Holding companies do not buy other banks; they acquire them by exchanging their stock for the stock of the target bank. The value of a holding company’s stock is what the target bank will receive for its holdings. If the holding company’s stock is valued by investors at a high level (in other words, if it has a high price-earnings ratio) then that holding company is in an excellent position to acquire other banks.
For example, let’s assume both the holding company and the target bank have profits that yield $1 per share of stock. If the holding company and the target bank simply exchange stock, then the target bank’s stockholders will receive stock which is earning the same per share as their own stock. Their earnings will be the same. However, investors set prices on bank stocks by considering other factors in addition to earnings. For example, the stock of First International and Texas Commerce sells for around twenty times what each share earns; Bank of the Southwest for around nine times; Republic around thirteen. There is a difference.
Now, if the target bank has a choice, here is the decision it must make. If it sells to First International or to Texas Commerce, then the value of the stock it receives will be twenty times earnings, or $20 per dollar of earnings. If it goes with Republic, the value will be $13 per dollar of earnings; with Southwest, $9 per dollar of earnings. A bank that earned, say, $1 million, would receive stock worth $20 million from First International and Texas Commerce.
$13 million from Republic; and $9 million from Southwest. To compete with the two leaders, other holding companies will have to give up proportionally more stock than would First International or Texas Commerce. Investors set price-earnings ratios for stock by their willingness to buy, sell, or hold certain stocks at a given price. The most important investors in setting this price are the large institutions, many in the East, whose portfolio managers deal in blocks of bank stock normally worth a minimum of $5 million. These trust managers base their estimate of a bank’s stock on many factors, among them past performance, their opinion of the bank’s management, the economic potential of the bank’s region, the regulatory climate, and their estimate as to whether the stock will go up or down.
These estimates can be very personal. When a portfolio manager for a large insurance company in Connecticut comes to Texas, he meets with bank leadership and develops an impression of their candor, their professionalism, their dedication to earnings, and their concern for the value of their bank’s stock. When he returns home he may place orders to buy 100,000 shares of bank x, and to sell 100,000 shares of bank y. Then he’s on the phone telling his friends what he learned, and within a week the institutional investor community (which is in fact quite small) is talking about it and making decisions to buy and sell massive amounts of stock. In the process bank x stock has risen four points to a new high, and the bank has received a healthy boost in closing a merger agreement with a wavering bank; bank y has fallen three points and its current merger prospects ask for time to think it over. This whole process may sound haphazard and unscientific. It is. It is also a crucial arena for any holding company seeking to build an empire. Without the confidence and support of the institutional investor community in its vital role of determining a bank’s stock price, then a holding company will be at a powerful disadvantage against another holding company. They may each have the same number of chips, but one holding company’s will be white and the other’s will be blue.
These elementary mechanics of the market in bank stocks control the engines of holding company empires. As Republic begins to gear up its holding company, it is facing some obstacles which are not insurmountable but which clearly place it at a disadvantage.
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