How First National Passed Republic
and Other Stories of the Banking Game
(Page 6 of 7)
Republic is unique among Texas banks in already having an air of established empire about it, something like the assurance of China that in spite of the temporary successes of Britaip, America, Russia, and Japan, it is still the center of the world. This assurance is maintained (in the face of rather compelling evidence to the contrary) by Republic’s belief in the strength of its past and its faith in the destiny of its future. This destiny is not so much discussed as it is assumed. The assumption rests on these basic tenets:
The reorganized Howard Corporation will continue to provide, as it has for forty years, some crucial financial muscle to keep Republic dominant;
The valuation of Republic stock at thirteen times earnings is underpriced relative to First International and Texas Commerce, which are at twenty;
Republic offers services and status which no other bank can match.
The problem with this line of reasoning, like the problem with any world view consistent solely within itself, is that when it touches the outside world it doesn’t hold up. And it is the outside world, in the person of investors, which needs to be impressed by this logic in order for Republic’s stock to rise. The problems are these: Republic’s growth in earnings per share has historically not been as good as its major competitors’; the impact of the Howard Corporation is still unclear, and the detailed disclosure of its assets actually coincided with Republic’s stock going down; and Republic has not yet established a clear image of itself as an aggressively managed institution.
Still, Republic may well be able to maneuver a successful course through waters that will turn out to be only temporarily troubled. If its stock does begin to rise, then it will be in a strong position to proceed with an aggressive acquisition effort. Its strategy will have to be tailored to its position as a Johnny-come-lately to the holding company ranks. Two years of intensive activity by other holding companies have significantly reduced the number of available banks, as have recent regulatory decisions. Some the major banks still left on the acquisitions table will be likely candidates for Republic’s merger appetite, but until a clear upward trend in its stock becomes evident, Republic may have to strike some merger agreements less advantageous than those being forged by First International and Texas Commerce, which today clearly lead the pack.
The real moment of truth for Republic will come if its predictions do not come true, and if it remains lodged down in the second tier of holding companies with smaller institutions like Houston’s Allied and Federated, which are exhibiting some impressive energies of their own. Republic has been able maintain its prestige in the new world of holding company empires by its position poised to take off into an unknown future. If that prestige dips, as it might, then Republic may have to reconsider its management policy and its general position in the marketplace.
Such considerations in the last analysis may have little to do with what kind of services a bank’s customers receive,which is the final arrow in Republic’s quiver. There may be in Texas enough, banks to whom Republic’s self-proclaimed reputation as having the best services may indeed carry real weight, and for whom prices of stock represent only the fickleness of the marketplace. If this is so, then Republic could easily build a successful merger program through acquiring banks which are in sympathy with its philosophy, thereby maintaining and extending its position while telling investors to go hang.
The Regulators’ Dilemma: Is Big Best?
The energies of the new bank holding companies are redrawing the state’s banking map, but the institution which is channeling those energies and determining just what the new map will look| like is the Federal Reserve System. cording to the Bank Holding Company Act of 1970, the initial application to become a holding company and each new acquisition must be approved the Fed. Since Dallas is a regional headquarters of the Fed, all Texas bank holding company applications and acquisitions must go through its office on Akard Street, where a staff of lawyers and economists attach a recommendation for approval or disapproval. These recommendations, it should be noted, are not always followed in Washington.
Like the U.S. Supreme Court, the Fed does not discuss its policy. It speaks through its decisions. So far the decision which has spoken the loudest has been the disapproval of First International’s application to acquire Citizens First National in Tyler. The Fed apparently is embarking on a new course of actively encouraging competition among not just the five largest banks, hut competition including a second group of smaller holding companies who are effectively being allowed to negotiate with banks the big five are barred from approaching. If the Tyler principles hold, then it is quite likely that at least ten holding companies will be competing for both independent banks and for customers.
Although the big bankers will not criticize the Fed under any circumstances, they appear privately to be worried that decisions like Tyler may prevent Texas banks becoming large enough to compete nationally. Texas holding companies are small-time by national standards—stock car racers, as it were, and not Grand Prix class. First International ranked 26th in the nation in deposits in 1973. Republic was 28th; First City in Houston 43rd; Texas Commerce in Houston 48th; and Southwest Bancshares in Houston 74th. There are banks larger than the Dallas banks in San Francisco, New York, Los Angeles, Chicago, Buffalo, Pittsburgh, Detroit, Minneapolis, Boston, and Philadelphia. The largest Houston banks trail banks in cities like Phoenix; Milwaukee; Winston-Salem, North Carolina; Bala Cynwyd, Pennsylvania; Bloomfield Hills, Michigan; and Columbus, Ohio. No matter how spectacular its growth, it is virtually impossible for First International to edge past First Bank System of Minneapolis (50 percent larger than First International), into the ranks of the twenty largest U.S. banks. In size at least, Texas banks have little to brag about.
Texas banks are relatively small because Texans wanted them that way. Banking regulations filled Texas with small, localized banks, banks that would be dose to their communities and not so big and powerful as to monopolize credit. Texas has 1235 banks, more than any other state—more than eight times as many banks as California and four times as many as New York. While in 1971, before the holding company movement began, the five largest Texas banks contained 21 percent of the state’s deposits, in California the five largest banks contained 77.5 percent of the state’s deposits and, in New York, 56.2 percent. No Texas bank has even one-tenth the assets of the nation’s largest banks. A bank’s size is a fairly direct measure of the size loans it can make. Big businesses do not utilize small banks, and the inability of Texas banks to compete on the big deals has galled several generations of Texas bankers, who have watched big businessmen who are their next-door neighbors in Highland Park and River Oaks spurn their banks for the broader resources of New York and California institutions.
The bank holding company movement in Texas will make the state’s largest banks more competitive in a number of areas, but sheer size will not be one of them. The giants of banking are not sitting still, and an emerging nationwide competition among banks has them looking at Texas for customers. Holding companies dominate California, Florida, and New Jersey. New York will be open to state-wide branch banking in 1976, and it appears inevitable that the giant New York City banks will dominate that state. New York has already offered to open its borders to banks from states which will do the same for New York banks. While the U.S. will probably not see the emergence of huge banking-industry combinations like the zaibatsu which dominate Japan (imagine a merger of Chase Manhattan, IBM, and Exxon), some economists see the country eventually being dominated by around ten national bank holding companies, standing firmly astride the country’s entire financial marketplace.
There are strong political forces in the opposite direction, however. Ralph Nader has just published Citibank, a less than flattering account of the efficiency, service, and general performance of the nation’s second largest bank, First National City in New York. Congressman Wright Patman of Texarkana is laboring mightily, as he has for forty years, to limit the power of large banks and to force the Fed to be more rigid in its interpretation of holding company laws. Also, a considerable number of bankers oppose the holding companies. Their organization, the Independent Bankers Association, has as its outgoing president, Fred T. Brooks, president of Merchants State Bank of Dallas. The independent bankers rail against the size and impersonality of the big holding companies, and equate independent local banks with most of the virtues of American democracy.
While many independent banks may in fact be avoiding criticism of the holding companies because they envision selling out one day themselves, the voices have been loud enough to attract the attention of the constitutional convention currently sitting in Austin. In February, the general provisions committee proposed the continued ban on branch banking and the placement of a constitutional limitation on the size of the bank holding companies. A holding company would be barred from acquiring additional banks if it already owned more than eight percent of the domestic funds on deposit in the state. Since First International, First City, Texas Commerce, and Republic are at or near eight percent already, these holding companies are understandably opposed to this limitation. However, the committee has recently voted 12 to 5 to reconsider placing this limitation in the Constitution. The lobbying effort of 11 the holding companies to remove or to raise the limitation has been impressive and well-coordinated. Whether it will be successful remains to be seen, since for many delegates there is some political hay to be made by attacking big banks.
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