MAKING MONEY

HORTLY AFTER 4 P.M. on the Monday before Christmas, Peter Bartholow got the call. It was a single phone call that would not only make 1981 a good year for Mercantile Texas Corp., the giant bank holding company of which Bartholow is senior vice president, but also for a handful of other big banks-those that have discovered that the key to success and stature in the banking business these days is simply to buy up other banks, as large and as many as possible.

The assistant secretary of the Federal Reserve Board was calling Bartholow with what amounted to a huge Christmas present for Mercantile.

“At last we have a decision on the PanNational case,” he told Bartholow. “We are going to approve the acquisition.” The call meant that after two and a half years of haggling with the federal government, after first being turned down by the Federal Reserve Board, suing the Fed and winning its case in the 5th Circuit Court of Appeals, Mercantile had been approved for the largest bank acquisition in the nation since 1976. In one fell swoop, Mercantile, the third-largest bank in Dallas, was now also the second-largest bank in El Paso and the second-largest in Waco. By picking up PanNational’s five El Paso banks and one Waco bank, Mercantile was adding $907 million in assets to its banking empire, an empire that has gone from a one-bank operation in 1974 to the fifth-largest bank holding company in Texas in 1982.

The PanNational deal would mark Mer-cantile’s third bank acquisition approval in a single year. But the deal held a significance that goes far beyond adding more assets to the billions on Mercantile’s bulging ledger sheets.

What has Dallas megabankers cautiously hopeful about the Fed’s decision on the PanNational case is what it implies for the entire bank holding company movement in the state.

In 1973, in turning down a bid by another Dallas bank holding company, First International (now called InterFirst) to acquire a bank in Tyler, the Fed had laid down guidelines that stipulated that the five-largest bank holding companies in Texas could not acquire the biggest bank in any of the state’s 24 largest banking markets. The guidelines further stipulated the second largest banks in those markets were off-limits unless they had less than half the assets of the largest banks in their markets. The third-largest banks were off-limits unless they had less than one-quarter of the assets of the largest banks in their markets.

But when Mercantile went after Pan-National and was turned down by the Fed, Mercantile went to court and won. The 5th Circuit Court of Appeals ruled that the Fed was going beyond the original intent of the antitrust legislation it was trying to enforce, and sent the application back to the Fed.

Now bankers are quietly waiting for the Fed’s written decision on the PanNational case, hoping that it means open season on another round of large bank acquisitions. But regardless of what it means to the other banks, it means one thing for certain: Mercantile, which ended 1972 with less than a billion dollars in assets, will go into 1982 topping the $7 billion mark in assets, an empire built through acquisitions.

The court decision was a fitting end for a banner year for Dallas’ leading banks. Among the other superlatives:

〈Mercantile, InterFirst and Republic-Bank increased their profits at a higher rate than ever before, between 25 and 35 percent over the preceding year, more than twice the increase of the rest of the industry.

〈They increased their 1981 loan activity by between 20 and 32 percent.

And the unusual performance translated into big price gains for the companies’ stocks on the New York Stock Exchange. Mercantile did the best, registering a 43 percent increase in the price of its stock; InterFirst, which did the worst, registered a 20 percent gain.

So why are Dallas’ three big banks doing so well? None report any recent dramatic shift in strategy. Rather, the bankers say they are still capitalizing on basically the same game InterFirst introduced to Dallas a decade ago.



“It’s a continuation of a trend,” said Bartholow. “It’s not like striking gold but knowing that the vein extends deep into the mine and you keep plowing and the vein is active.”

A decade ago, none of the Texas banks were among the 20 largest in the nation. That was principally the result of Texas law, which prohibited branch banking and literally kept Texas banks small by statute.

But the Bank Holding Company Act of 1970 set into motion a phenomenon that would change all that. When Congress passed the Bank Holding Act, it gave banks in every state the authority to form bank holding companies within their respective states. The holding companies could start new banks anywhere within their home states or, more importantly, buy up existing banks. The federal law did not have as big an effect in states that allowed branch banking and therefore had statewide banks. But in Texas (which hadn’t even allowed citywide banks) the law was like opening a game preserve to a horde of eager hunters.

The Houston banks got into banking acquisitions first, followed by First National of Dallas. Later, when it became obvious that the wave of the future was buying banks, Republic and Mercantile jumped on the bandwagon. Now Inter-First is the largest bank holding company in Texas; Republic of Texas is second, and Mercantile is fifth.

As a result of the acquisitions made through 1980, InterFirst, Republic and Mercantile ended that year with a whopping 21.7 percent of all the deposits in Texas. In other words, of the $89.4 billion deposited in Texas banks in 1980, one out of every five dollars was deposited in an institution controlled by one of the three banks within a stone’s throw of Thanks-Giving Square. If you add to that figure the collective assets of the two biggest Houston holding companies, you come up with an even more staggering figure: 38.8 percent of all the deposits in Texas banks at the end of 1980 were controlled by the state’s five biggest bank holding companies.

And in gobbling up the smaller banks, Dallas banks are beginning to achieve something that had eluded them for decades: status in the national banking community. As of the third quarter of 1981, InterFirst was the 1 lth-largest bank in the nation, Republic of Texas had broken into the inner circle at number 20, and Mercantile was number 34 -and growing.

And the Dallas big three could boast of a figure even more appealing to potential investors. Mercantile, which was considered by many banking community insiders to be stagnant before the acquisition phenomenon began, is now the most profitable regional bank in the United States. Mercantile, according to a study published January 4 by Forbes magazine, has posted a five-year average return on equity of 20.1 percent (a better return than all but one of the New York banks). Following close behind are InterFirst, at number three in the nation with a 18.6 percent return on equity, and Republic, at number eight nationally with a 17.4 percent return on equity.

The profitability and growth of the big three banks go hand-in-hand. The profits in banking are not to be made through handling thousands of nickel and dime checking and savings accounts; they cost the banks a fortune to administer. The profits lie in big commercial deposits and big commercial loans. Big bankers know that. So do small bankers. Mergers benefit both sides.

Big banks like Mercantile and Republic want to buy small banks so they can get even bigger, becoming capable of making even bigger loans, and having more markets in which to make those loans. Bigger loans mean bigger profitability, which in turn increases the value of the big banks’ stock, which in turn makes more acquisitions possible.

Small banks benefit from the acquisitions for two reasons: First, they become part of a bigger organization with more assets; they become capable of making bigger loans in their communities. Second, the owners of the smaller banks benefit from the bottom line. Banks are acquired through stock trades. You literally trade shares in small banks for shares in the big banks. If you’re one of the owners of the smaller bank, you’ve got to ask yourself a basic question: Will X amount of shares in the big bank make me more money in the future than the same amount of shares in my bank? When the big bank happens to be Mercantile, for instance, the most profitable regional bank in the nation, or In-terFirst, which is third, or Republic, which is seventh, that question isn’t very difficult to answer.

The current bank holding company battle is rooted in several decades of finance competition among the three big Dallas banks, competition that has always extended into everything the banks do.

In the early-Twenties, when Republic and Mercantile had just started and First had not yet been formed, the competition was in consumer banking.

A former Mercantile chief executive, J.D. Francis, boasted in a 1971 speech to business historians, “The founders knew that to make it they had to offer the public something other banks did not. One thing they had in abundance was time. They passed the word around that the bank would open at 8:30 a.m. and close at 5:30 p.m., contrary to standard banking practices for that day.

“The ice wagon drivers, mule buyers, jitney drivers, farmers, streetcar conductors and cotton men brought their money,” Francis said. “At the end of the day the new bankers counted $12,906.49. They had the money they needed for a new bank.”

Republic countered Mercantile’s move by calling itself the “day-and-night” bank, extending its hours to 8 p.m. daily and opening from 9 a.m. to 10 p.m. on Saturdays.

In the Thirties and Forties the banks grew bigger and First National Bank came on the scene. The focus shifted.

As soon as it was formed in 1929, First National had the advantage. It was the result of a merger of two of the city’s most prosperous banks, City National Bank and American Exchange National, each more than 50 years old. First National opened its doors as the biggest of the three, the most-established, most-conservative, stodgiest. The names in town were on the board, people like Henry C. Coke, W.W. Caruth and Alex Sanger.

Nate Adams, its first president, was already a leading power in town and instrumental in getting a branch of the Federal Reserve Bank here.

Republic and Mercantile had to be more creative to compete. Mercantile, then run by Robert L. “Uncle Bob” Thornton, continued to excel in consumer services. Thornton was the first to offer new-car loans, the first to make FHA loans on new homes and the first to have downtown drive-in banking. He also built a sizable business in big real estate loans.

Fred Florence, who headed up Republic, competed by making bigger, riskier loans, by bankrolling the energetic entrepreneur who needed capital, particularly those men involved in the growing oil and cattle businesses.

He was one of the first to make loans using oil reserves still in the ground as collateral.

By 1948, Florence’s strategy worked well enough to put Republic ahead of its rivals as the biggest bank in town.

Two years later, after Republic pulled into the leadership position, First hired away Republic’s number two man, Ben Wooten, in a blatant attempt to restore itself to the leading position. It didn’t work.

Instead, Republic continued to lead the pack. Florence passed the torch to James Aston in 1957, and Aston headed what continued to be the largest bank in the Southwest until 1973.

“Jimmy ran the bank with great style,” said a former officer who worked with Aston. “He believed that what is right is right, and if I lose a little on what’s right today, God’s going to take care of me tomorrow.”

What was right and also what was competitive was emphasis on community service and community leadership. Those were the days when you picked your bank based on how involved it was in running the city.

Those were also the days when you chose your banker through the people you socialized with, the men who moved in the right circles, the guy who got you Cotton Bowl tickets. Republic had it over the competition in all those areas.

People like Robert Cullum, the chairman of the State Fair of Texas, were on the board, so Cotton Bowl tickets weren’t any problem. And the biggest names in town, politically and socially, served with him: Erik Jonsson, John Stemmons, Stanley Marcus, Ben Lipshy, Al Meadows, Ben Carpenter and Jim Chambers.

Three years after Aston rose to power at Republic, Robert Stewart and Dewey Presley took over at First. Stewart, chairman of the board, and Presley, president, rejuvenated First, pushed it ahead of Republic, out front as the biggest of the big three, and started it down the road to last year’s banner performance.

Stewart, who still is among the top leadership in the holding company, is straight Dallas establishment. His grandfather was chairman of the board of First National, his father was on the board. He went to Southern Methodist University,where he majored in banking, and then came to work at First in 1951, starting as a cashier.

He was clearly marked for more than the bottom rungs. He rose quickly through the ranks. He was a vice president in two years, a senior vice president in eight and became president at age 35.

Unlike Stewart, Presley, now retired and acting as a consultant, came from a small town, Gilmer.

As Florence had been in his time, Stewart and Presley were innovators in their era. Their new ideas set the standard others would follow.

Together they turned the bank upside down, jolting it out of its traditional complacency and giving it a new aggressiveness. Since Republic had the edge in assets and deposits, the two decided to go after the lead in profits.

They initiated a program giving executives bonuses depending on the profits each produced. They rid the bank of its old-fogey image, hiring young executives and even instituting a retirement policy for the board.

They put First’s stock on the New York Stock Exchange and firmly established First as the businessman’s bank in Dallas.

As a result, they made First the most ready of the big three to take advantage of the new banking rules Congress adopted in the Bank Holding Act of 1970.

In Dallas that meant that the decades-old rivalry could be extended outside the city. If you chose to play, you could significantly expand your bank, take advantage of the booming economy elsewhere in the state and, if you managed it all competently, reap substantially higher profits. The law had swept away the last barrier to real growth.

Of the three banks, First led the way on the new course. Republic, because it could not make up its mind whether to play, and Mercantile, because it initially decided not to play, were left behind.

First was rewarded for taking the risk. After acquiring banks for slightly more than a year, it was again the number one banking institution in the Southwest.

At the end of 1972, First had $3.4 billion in assets to Republic’s $3.6 billion. By the end of the next year, First, with 14 new banks, had $5 billion to Republic’s $4.2 billion.

If Stewart and Presley were not the first to get into the holding company game, they were the ones who wrote the rule book. Elvis Mason, the tough-talking chief executive officer who succeeded Stewart in 1980, still follows those rules today.

Simply put, the idea is to go after the biggest banks in the healthiest markets permitted by the Federal Reserve Board, which must approve all acquisitions.

Paul L. Hill, executive vice president and chief financial officer of First, the man in charge of acquisitions, breaks down the process into three parts: targeting, negotiations and approval.

“We’re dealing with marketplaces, and,” Hill said, “it doesn’t take a Rhodes Scholar to figure out what the good banking markets in Texas are because the good banking markets are the good economic markets. You could sit down with the published data and come up with a pretty good list yourself.”

The company’s economic staff keeps track of the data for Hill. They use reports from the Census Bureau, the Bureau of Labor Statistics, and the state comptroller’s office, on retail sales, income per household and so on. “First City and Texas Commerce publish a lot of it,” Hill said. “It’s available to anyone.”

After picking the market, Hill zeros in on the bank or banks he wants. “There can be situations where specific markets don’t look as good as other markets but the bank may just be performing better … where the management of the bank is going to make the market look better.”

He checks out the management and philosophy. “Growth without earnings is not a good philosophy,” Hill said. There is always someone on the bank’s senior staff with an opinion, and there is a substantial amount of data published by the Federal Reserve telling about deposits and income.

At this point the list is drawn. “We know which banks are available and which ones we’re interested in,” Hill said.

Mason takes the next step. He picks up the telephone in his 56th-story office in the First International Building and calls the chief executive officer of the target bank.

“I always make the approach,” Mason explained. “I say, ’We’ve studied your marketplace. How would you like to come into our company. Would you be willing to consider it?’

“I call the CEO [chief executive officer] because that’s where the decision is made. The CEO typically has to be for a merger for it to go through. We operate under the theory that if the bank comes into the holding company, we can retain the management. We’ve never made an unfriendly acquisition.”

After the call, the negotiations begin in earnest. It generally takes about a month to come up with a memorandum of understanding. During that time, Hill or a member of his staff goes out to the target bank to check it out in more detail. He’ll spend anywhere from half a day to several days looking at such things as the loan portfolio and management systems.

The target bank often takes pains not to let its employees know what’s up. “I’ve been introduced as an IRS agent, an outside auditor and a correspondent banker,” Hill said.

Hill and other members of the staff, often including Mason, will meet with the target bank’s officers to set a price for the bank in stock and to deal with other matters leading to the approval of the memorandum of understanding.

“In the final analysis, most of the negotiation takes place with the CEO and the board,” Mason said. “I end up going before the board of directors to explain how we operate and the way our bank would work and the commitment to the local marketplace.”

Hill said some of those meetings with the bank’s officers have been clandestine. He has talked over multimillion dollar deals in coffee shops, on busy freeways and in motel rooms.

After the understanding is reached, it is left to the lawyers to work out the final details and to the Fed and the directors to give formal approval.

Fed approval has turned out to be the sticking point over the years. The Fed keeps changing the rules.

Under Section 3 of the Bank Holding Company Act of 1956 and a 1957 amendment, the Fed is charged with making sure that acquisitions don’t limit competition.

It was First’s proposed acquisition of Citizens First National Bank of Tyler in 1973 that forced the Fed to clarify what that meant when applied to holding company acquisitions. With 30 percent of local deposits, the Tyler bank was the largest bank in the Tyler market.

The board denied the acquisition because it thought it would discourage First from starting a new bank in Tyler and thus reduce competition. The acquisition of a smaller bank in the Tyler market or starting a new bank there was the preferred method of coming into the Tyler market, the Fed said.

The decision became known as the Tyler Doctrine, and the Fed stuck to it until mid-1976. Then it flip-flopped. That year Republic’s move to acquire First Bank and Trust of Lufkin and the $3 billion combination of Mercantile and Federated Capital Corp. of Houston, were approved.

The board didn’t flop back toward the Tyler Doctrine until 1979. In November that year it denied the application of Old Kent Financial Corp. to acquire Peoples Banking Corp. in Bay City, Michigan. Old Kent was the sixth-largest banking organization in Michigan with 3.5 percent of total deposits while Peoples was the 12th largest with 1.6 percent of the state’s deposits. The board argued that the acquisition would harm competition because both banks had dominant positions in their markets.

Mercantile’s bid to acquire the PanNational Group in El Paso was the third major application to be denied after the Old Kent decision. The reasoning was similar to the Tyler decision.

But Mercantile sued the Fed and won. The 5th Circuit Court of Appeals in New Orleans found that the reasoning behind the denial of the PanNational acquisitions was even more strict than antitrust laws passed by Congress. The court said the Fed had to abide by the looser standards of the law and sent the PanNational case back for further review.

Using the guidelines laid down by the court, the Fed approved the PanNational merger before Christmas and Bartholow got his phone call. Bank officials are waiting to see what the reasoning is this time. Although the opinion isn’t out yet, they are betting that the Tyler Doctrine has been replaced with a less stringent standard.

That would be good news for all the banks, but especially Republic and Mercantile, the late comers to the acquisitions game.

Republic held back from getting into the holding company sweepstakes because of the Howard Corporation, a subsidiary with oil and gas leases plus ownership of half a dozen shopping centers, including Highland Park Village, and minority interests in 21 other Texas banks.

Republic officers organized the corporation in 1946 taking the name from Howard County, Texas, where the oil properties were located. They nurtured it, building its profits and using its income to make loans to Republic customers. By 1971 it yielded 14 percent of Republic’s net profits for the year.

The problem was, the Fed said, that Republic could not keep the Howard and get into the acquisitions game, too.

A tug-of-war over whether to keep Howard or sell it and form a multibank holding company raged through the bank board rooms for at least a couple of years.

“The decision was reached bitterly to sell, and there was a hell of a lot of dissension,” said one former Republic official. “Many felt that Howard was better than what they could acquire.

“Aston didn’t want to sell it. He fought it as hard as he could, and then he reached the point in his mind when he felt to keep it would mean that Republic would lose its preeminent place in banking.”

Republic finally announced it would sell in 1974 and struck a deal with American Airlines for $56.7 million in cash. The money would go to buy new banks for the newly created Republic of Texas Corp. and hopefully would help Republic catch up with First again.

At Mercantile, a bank that by 1970 had become conservative to the point of being comatose, the leadership decided it didn’t want to be involved in the hurly-burly of buying new banks. Mercantile had its place and that was to be an independent bank.

“The board had a difference of opinion a few years earlier as to whether Mercantile would move into the holding company game,” said Jess Hay, chairman of Lomas and Nettleton and a Mercantile board member. “For three or four years, the more conservative voices did prevail and we did not move into the race.”

Hay was happy when a majority of the board, including himself, changed Mercantile’s mind in 1974. Now Mercantile needed someone who could make it work. Then-president Lewis Lyne was fighting cancer and had to step aside.

The board reached into Hay’s own company in 1975 to get Gene Bishop, who had a reputation as being one of the best banking talents in town.

Bishop, from the small Mississippi town of Forest, had been working in banks since he was 13. His father was a banker. He came to Dallas to work for Stewart at First and was one of the bright young comers there until Hay hired him away to be president of Lomas and Nettleton.

Since Bishop took over at Mercantile, the place has exploded with activity.

Bishop thought the holding company route was the only road to success. “It was the way to logically penetrate the state of Texas and grow to benefit customers and shareholders and ultimately to remain competitive in the commercial market,” Bishop said.

He wasted no time putting the philosophy into practice. It took only a year to form Mercantile Texas Corp. and to make the first purchase. In 1976 Mercantile announced it would buy the seven-bank Federated Capital Corp., the biggest single acquisition of any Texas bank since the holding company movement began. It would combine the state’s eighth-largest banking institution with the seventh to create the fifth.

Since then Mercantile Texas has purchased three more banks and has pending the acquisitions of 12 more with 18 banks including PanNational. The purchases have helped boost Mercantile’s assets from $1.2 billion in 1975 to $6.2 billion in September 1980.

But it’s not just in the holding company game that Bishop has made his mark. He has overhauled the organization in the manner that Stewart and Presley overhauled First.

Almost immediately, Bishop, who is more of an entrepreneur than an organization man, retooled the loan-lending operation, hired a new management team, wrote the first long-range plan the company ever had, started a new advertising campaign and devised a new marketing strategy.

“I had a pretty good feeling for what needed to be done the day I walked into the bank,” Bishop said. “There were a number of things I felt sure would work, and I felt they would work if we had the right people.”

He started several places simultaneously. Bartholow recalls that when Bishop looked at the bank’s basic lending policy he found it too conservative.

“A company that wasn’t gold-plated and was not known to the bank need not apply,” Bartholow said. “There was little aggressive restructuring of loans that allowed for risks on the surface. Bishop required that all new loan requests that officers turned down be brought to the committee to be explained. The goal was to get people to figure out how to make deals, to pursue loans on an aggressive, innovative basis.”

From loans, Bishop turned his attention to the long-range plan. When he was told the bank would have to suffer some mediocre earnings for several quarters in order to make some acquisitions, Bartholow remembers, Bishop said, “I don’t think you understand. I think we can do both the acquisitions and have higher earnings.”

He said he felt the bank could do both because the lower end of the so-called middle market for loans, those in the $1 million to $30 million range, was wide open. InterFirst and Republic were concentrating on the bigger loans. Mercantile could profitably focus its efforts toward making the $1 million to $5 million loans.

It worked immediately. The year before Bishop arrived at the bank in 1975, Mercantile loaned out $469 million. The next year loans were up 23 percent to $576 million.

Mercantile’s desire to ride the wave of the future in banking is apparent in its aggressive moves into electronic banking. The most visible part of that movement has been to establish the MPACT system of automated teller machines throughout the state.

“Automated banking is something all the banks have to have; if they don’t, they will be adversely affected,” said Bar-tholow. “But it’s not that you can use it to dominate the market. Lending is going to be and always has been the principal function of banks, and the more-recognized banks grow because of lending, not the marketing of deposit services.”

Bartholow and other bankers believe the banking industry will continue to become more computerized because it is the only way they can continue to offer both retail and wholesale services such as the processing of large sums of money for corporations.

“During the next five years, the thing that is going to cripple the banking industry is the acceleration of costs from paper processing and people for check processing,” Bartholow said. “It costs 65 cents to $1.25 to process a check, depending on volume. An electronic-impulse transaction, supposedly including all the costs associated, costs only 25 to 30 percent of that amount.”

Mercantile has about 1.2 million cardholders who can get cash or make other banking transactions on the automated teller machines at about 500 locations in Texas. In addition, the system is linked to banks in other states and to American Express. Mercantile officials expect MPACT machines to start generating about $10 million a year in revenue by the end of next year.

Mercantile’s crosstown competitors have lagged behind in the move to electronic banking. InterFirst heads a consortium of banks hooked into a system called Pulse, but has only about half as many operational banking machines as Mercantile. And Republic, which operates Teller 24, has only 81 machines in its system.

Hay remembers that when Bishop talked with Mercantile’s advertising agency, he told them the new campaign ought to reflect the new momentum he had introduced. “It’s probably one of the rare cases where the whole media concept germinated from the top,” Hay said.

Today Mercantile is thought of by other bankers and analysts as perhaps the most aggressive of the big three, the go-go company that is still growing.

Its stock is up 43 percent over 1980, according to Jim McDermott, an analyst at Keefe Bruyette & Woods in New York. Its earnings are up 25 percent over last year, and it has grown 20.9 percent over the past five years. The Value Line Investment Survey shows Mercantile has almost tripled its loan portfolio since 1976.

If Mercantile is now viewed as the go-go company, Republic is still the slightly out-of-date old maid.

For one thing, the management is older. James D. Berry, Republic’s chairman, is 60, while Bishop is 51 and Mason at Inter-First is 48. Those familiar with the company think the age factor may be holding Republic back.

“Republic has always had a reluctance to pass the mantle of power on,” said one Dallas bank official. “There has been a desire there to hold onto power as long as you can.”

“I think with Jim Berry, today’s competitive environment might have passed him up. I’m not sure he has a grasp of the business.”

Even though he is retired, Aston, who is 70, has some say. Just how much is unclear.

In addition, observers say the scrap over what to do with the Howard Corporation hurt Republic more than just a loss in the standings. “During that period they had a lot of turnover among the younger guys,” said one Dallas bank official. “I think it hurt them big.”

James G. Ehlen, an analyst for Goldman Sachs in New York, said Republic has never done as well with its earnings as In-terFirst. “It’s simply reflective of the personality of the two institutions. One has paid attention to it and the other hasn’t. It is just intertwined in the structure and mentality of the two banks.”

Berry and president Gerald D. Fronter-house counter by saying that while some figures aren’t as good as the competition’s (Republic made only .94 percent on its assets the second quarter last year versus 1.18 for InterFirst and 1.22 percent for Mercantile) they are nothing to be ashamed of.

Republic’s stock, after all, went up 24 percent last year, its earnings increased 31 percent the first nine months last year compared to the first nine months the previous year; and its earnings per share have grown at the rate of 22 percent over the past five years.

Fronterhouse said the company is mapping out a new long-range plan in which it is looking to more bank purchases both within the state and outside when and if Congress approves interstate banking.

“The company is emphasizing community service less and the bottom line more. Our fundamental purpose is shareholder orientation,” Fronterhouse said. “I think the community orientation at Republic was overplayed. Yes, we supported the city, but when you looked at our level of contributions compared to other banking institutions, you found our percentage in line with the other banks.”

And Berry rightfully claims Republic has an ace that the other two companies don’t. The sale of the Howard Corporation, which was sold for $56.7 million, is going to bring the bank another sizable payment in the next couple of years. It was part of the deal that after American got its investment out of Howard, the second payment would be made. Though Berry won’t say how much he expects, it is believed to be as much as or more than the first payment.

InterFirst may not have an ace in the vault, but analysts and observers say it’s in the best shape of any of the three banks for whatever changes occur in banking.

It’s profitable and, analysts say, its top managers, including Mason, who ascended to chairman in 1980, and president Ron Steinhart (who was appointed last year), are first-rate.

Mason, another small-town man from Vivian, Louisiana, went to Lamar University in Beaumont and ran his own holding company there, First Security National Corporation of Beaumont, before Stewart and Presley hired him away.

Mason is 48, trim and athletic-looking, and he talks like a man you wouldn’t want to mess with. “Our people understand that if they don’t perform, they don’t get paid well and they can quickly look elsewhere for employment.”

One of Mason’s principal accomplishments has been to lure Steinhart into the company. Steinhart is an entrepreneur: He has started several banks, including the Texas Commerce Bank-Dallas branch. His latest venture was the Valley View Bank. With some 38 banks either acquired or pending, many of them smaller banks such as the ones Steinhart started and ran, InterFirst can use someone like Steinhart.

The two of them have fine-tuned the operation Stewart left them (though Stewart is still around in the number three slot to help out when necessary), and reposi-tioned the company to expand in the region rather than around the world.

“The international market is no longer the attraction it once was,” said Steinhart. There are several reasons, but the most persuasive is that foreign governments are simply not as stable as governments in Texas and the surrounding states. “It’s caused us to close some international offices. We closed a branch in Paris, for instance.”

Instead, Steinhart said InterFirst is looking to increase its presence regionally. “The company has started to restructure to enable it to be a premier regional bank.”

With all the success the big three are having, it is hard to believe that some Wall Street analysts see some bad times ahead for all three. The economy will soften and earnings will not increase as much, the bears say.

Analyst McDermott has heard the gloomy predictions. “Some quarters of the investment community are reacting like the bank companies will be dropping off the cliff,” he said.

But he isn’t buying those predictions. Even if the earnings increase is only 15 percent next year, that will be double what the rest of the banking industry is expected to do.

“If anybody wants to laugh at that,”said McDermott, “so be it.”