The Momentum Man

MERELY AN ASIDE, is the way Stan Richards remembers the comment. He had just plopped down in a board room chair at Mercantile’s corporate headquarters. The displays for a presentation by Richards’ advertising firm to the bank’s president, Gene Bishop, were lined up on the opposite wall. Richards’ charge had been to come up with a new system of graphics for the bank-new typography and a new logo. The centerpiece of the proposal was a red square with a white M that never quite makes it to the edge. The logo was interesting in several ways, not the least of which was the fact that red-as in red ink-was considered verboten as a symbol of banking. But Bishop liked it, in fact was pleased with the entire presentation. Puffing on his omnipresent, well-chewed cigar, he leaned over to Richards and growled, “You know what I like about that M? It has a kind of momentum to it. Do you think we could ever do something with the word ’momentum’?”

Today the effects of that casual, coffee-break comment are on banks and billboards all over Texas. Rarely has an advertising concept been so fully integrated into, or contributed so directly to the growth of a business enterprise. For years, Mercantile was an also-ran to InterFirst and Republic, the other two top banks in Dallas. Under the M-brella today are some 65 member banks with combined assets of over $20 billion. MCorp.’s computer systems subsidiary, MTech, which made its mark via MPact automatic teller machines, is one of the fastest-growing bank technology systems in the country. With its recent Mercantile/Southwest merger, MCorp has for the first time in its history a legitimate stake in the national banking sweepstakes. The story of how Mercantile came out slugging with ’Momentum’ and pulled a few key punches down the line, is a fascinating one. In some ways, it is the story of one man-Gene Bishop-a go-getter banker whose entrepreneurial style has allowed MCorp. to roll and run with the times. In others, it’s the drama of an industry that is developing as rapidly and explosively as any in American business today.



AT THE START-1916-there was another man with a gleam in his eye: R.L.

Thornton Sr., a 36-year-old former bookkeeper, ex-candy salesman, ex-bookstore owner. Thornton was convinced, so the story goes, that downtown Dallas needed a bank near the courthouse complex, west of Lamar. Thornton gathered his resources and those of two other partners and opened one, in an 18-foot room that had formerly housed the Blue Goose restaurant. In those days, banking was strictly a one-on-one enterprise. These new proprietors had to come up with a gimmick to bring consumers into their fold. “They needed to offer the public something different,” recalls former Board Chairman J.D. Francis, in a 1971 speech, “and what they had in abundance was time.” The new bankers decided to forego traditional banking hours and passed the word that they would open at 8:30 and close at 5:30. The scheme worked. At the end of the first day, Stiles, Thornton & Lund, Private Banker, counted their take: $12,903.49 in deposits.

Their marketing bravado didn’t end with innovative hours. Soon Thornton’s bank became the first in town to offer the un-bankerly “auto notes’-better known today as installment car loans.

At the end of its first year, the young bank had sold $100,000 in bank stock, received a state banking charter and adopted the more generic name of Dallas County State Bank. By 1920, it had joined the Federal Reserve system, established a savings department and moved into new digs at Main and Lamar-with two floors-one at ground level and one in the basement.

It was in 1923 that the name Mercantile Bank and Trust Co. was adopted, and in 1925 the bank’s capital hit the $1 million mark. Despite the fact that the Depression spawned rumors of insolvency, Mercantile grew steadily on the slogan that it was the “Big Friendly Bank for Everybody.”

At the helm for nearly 50 years was founder R.L. “Uncle Bob” Thornton, a four-term mayor of Dallas who is said to have run the bank with an iron fist. Banking back then was played by Who-You-Know, and Bob Thornton knew quite a few. But a rival. Republic Bank, established in 1920, was pretty good at the name game too.

Francis boasts of several Mercantile banking firsts, mostly in the realm of consumer services. They were the first to make Federal Housing Authority loans in the Thirties, the first to form a separate personal loans department, the first to make an airplane loan, the first to accept deposits by mail. But there was one first that would continue to thwart Mercantile-First National Bank, which, because it was the product of joining two existing banks, was from the day it opened, the biggest bank in town.

Although Mercantile continued to grow at an impressive rate under Bob Thornton’s rule-assets mounted to $572 million in 1964-successive regimes fostered an impression in financial circles that Mercantile was a sleepy bank, non-aggressive, on the sidelines of the game that was rapidly changing its rules.

In 1970, a milestone in banking history occurred. It was then that Congress amended the Bank Holding Act of 1957, and by doing so, paved the way to bank expansion and growth. Texas is, and always has been, a unit banking state-and that means that we don’t cotton to big banks putting up little branches all over the state. Efforts to overturn a 1905 amendment to the Texas Constitution, which prohibits banks from “doing business in more than one place,” have been continuously thwarted in the Legislature. We like to do our banking face to face, so the myth goes, and that means ensuring the survival of the independent corner bank. Few countries can rival ours in the sheer number of financial institutions-we have thousands, for example, where Canada and Australia have only three or four-and few states can rival Texas in the sheer number of unit banks. “At one time,” says a former vice president of Mercantile, “Texas had 10 percent of the separate banking charters in the entire 50 states.”

But the actions of Congress in the summer of 1970 didn’t legalize branch banking in Texas. It simply eliminated a key incentive to holding a bank-holding company to one bank. In other words, the prospect of First National’s swallowing up Podunk Bank & Trust became a downright attractive one. And First National was one of the first banks to come out of the chute in hot pursuit.

But it was the Houston-based Bank of the Southwest that would be the first to form a Texas bank-holding company. Southwest Bancshares Inc.-later to merge with MCorp and play a pivotal role in Bishop’s growth plans-was formed in early 1970, with assets of $833 million. “The next step,” explains John Cater, who later became chairman of Southwest and now is president and chief operating officer of MCorp., “was to buy up a bank and see if anybody said anything. They didn’t.” Southwest went on, over the next 13 years, to acquire some 38 banks.

Mercantile, meanwhile, sat idly on the sidelines. Its board was staunchly opposed to the whole holding-company idea. While Republic and Interfirst piled up assets that hit the $1 billion mark, Mercantile lagged behind in the $700 million range. Bank president Lewis Lyne, widely regarded as a strong, if conservative banker, had developed cancer. In 1974, the board began a search for Lyne’s successor.



GENE H. BISHOP was born on May 3, 1930, to a banker in the little town of Forest, Mississippi. It is said of him now- reverently-that he worked in banks from the time he could walk. If that attribution has a touch of Texas hyperbole, so be it. Gene Bishop has banking in his blood.

After graduating with a B.B.A. from the University of Mississippi in 1952, Bishop did a stint in the Air Force before being recruited by First National Bank of Dallas in 1954. He began as a rather unillustrious member of the credit division staff. But, by banking standards, promotions came quickly to this square-chinned, square-shouldered, soft-spoken man. By September 1968, Bishop had risen to the post of executive vice president. Fellow bankers recall that he was cast in a two-man footrace to the top-and that he lost.

With Bishop’s guidance, First National had explored the possibility of forming a holding company for the purpose of purchasing Dallas’ Lomas & Nettleton-the largest mortgage banking firm in the United States. First National was rebuffed in its takeover attempt. But L & N was so impressed with Bishop that it hired him away to be president of the target firm. Though it later lost Bishop to MCorp, L & N Chairman Jess Hay says today of that move, “Gene and I had been friends for a long time. I had come to view him as one of the if not the top banking prospects in town. He is a man of unusually gifted judgement, coupled with great integrity. While not unique, that combination in a man is rare.”

For six years, Bishop served alongside Hay-longtime civic leader and a powerful Democratic fundraiser. “I had no intention of leaving Lomas & Nettleton,” Bishop says modestly now, “and I don’t know exactly why the Mercantile board recruited me.” What Bishop is sure of is what he saw in Mercantile: the chance to take the third-ranked bank in town-a bank that hadn’t yet hopped on the holding-company bandwagon -and make it into a major financial force.

By the time Bishop came on board in 1975, Mercantile had worked its assets upwards to the $1 billion benchmark, without the get-rich-quick route of smaller-bank acquisitions. But Bishop knew in his banker’s bones that the holding-company game was here to stay, and he set about buying banks. An early target was Federated Capital Corp. of Houston-a seven-bank holding company. Its acquisition put Gene Bishop and Mercantile on the map overnight.

Up until that time-mid-1976-the Federal Reserve Board (FRB) had taken a position of casting a leery eye at mergers that it felt would limit local competition. The Fed’s ruling on Mercantile’s deal with Federated was a landmark decision. Earlier that year, Bishop had gone after the Pan National Group out of El Paso, and the FRB had turned him down-a decision that was later reversed after Mercantile sued in the 5th U.S. District Court of Appeals and won. By the end of the decade, Bishop would raise Mercantile’s assets to over $6 billion with a total of 18 member banks in the Momentum stream. He had hit the ground running.



THE LEGISLATIVE CHANGES that occurred in banking in 1970 altered the future of banking irrevocably. Further regulatory amendments in 1980, which freed savings and loans and other institutions to offer an array of financial services, would complicate the picture even further. But another revolution was taking place that would forever change the way we play the money game: the computer. And in this arena, Gene Bishop made another masterstroke.

In 1975, Mercantile paid $2 million for all of the stock in a fledgling, publicly owned data-processing firm called Affiliated Computer Systems. Looking back, Bishop admits he barely realized that he had snatched the golden egg. Intuitive reasoning told him that technology was going to play a key role in the future of banking-but never did he foresee to what extent. Affiliated Computer Systems, now called MTech, has grown into one of the strongest bank data-processing firms in the Southwest. Almost singlehandedly, it raised consumer consciousness of electronic banking with its development of the MPact network of automated teller machines (ATMs)-and the benefits of MPact as a marketing franchise are only beginning to be felt.

Bishop is the kind of manager who inspires unswerving admiration and loyalty from his troops-present and past. Says one former vice president who left Mercantile to start a venture capital firm, “I’ve worked with a lot of bankers including the chief heavyweight of them all-Citicorp’s Walter Wriston-and Gene Bishop is one of the finest bankers I’ve ever seen.” Bishop plays lord over a fiefdom in which individual managers have total rule over their domain. As he puts it, “I believe in attracting top people and giving them a lot of latitude.” “He does create the opportunity for each of us to be entrepreneurial,” says John Tolleson, managing director for retail development and marketing. “But he’s very demanding, too, in a low-key way. He expects a great deal.” Bishop’s subordinates say that they work hard to win their boss’ approval. Says Senior Vice President for Marketing David Gravelle, “When you make a mistake, your fear is not what Bishop will do to you-but what Bishop will think of you.”

MCorp’s CEO is described by those who have worked with him as a workaholic-a man totally absorbed by banking. His daily schedule at the office by 7, breakfast with key players, lunch with customers, home at 6-tends to bear that out. Occasional tennis matches at Brookhollow Country Club or on one of the indoor courts at the University Club are avowed attempts to relieve the tension that swells during even a routine week.

If Bishop shook a sleepy organization by its pin-striped lapels, he did so with alacrity, insiders say. He is known as a quick decision-maker. “Gene doesn’t study things to death,” says Tolleson. “He’s very receptive to new ideas, but also not afraid to cull out the losers.”

The backbone of Mercantile’s business- despite its early wins with consumers-had been in the area of commercial lending. Bishop saw a marketing hold here, too, that he proceeded to fill. As the other banks concentrated on bigger fish, bank officers say they went after the so-called middle market: firms with $5 to $100 million in annual sales, and credit needs of $1 to $5 million. If Mercantile avoided chasing the most lucrative business-like energy loans when the energy business still smelled sweet-it was a policy that, in 1985, appears prescient.

An energetic leader, it seems, was just what Mercantile needed to infuse it with new life. As the Mercantile Texas Corp. gathered a healthy head of steam, the banking community watched and wondered when the great Gene Bishop would stub his toe.



IN THE SUMMER of 1982, a messy brouhaha over a bank in Abilene cast a pall over Mercantile that is occasionally perceived to this day. After a story in The Dallas Morning News reported that the FBI was investigating Abilene National Bank for a number of offenses involving shady and shaky loans, the bank saw a $50 million run on its deposits and subsequent investigations by federal authorities. Mercantile had done some business with Abilene Bank Chairman Don Earney and other officials who were trying to form a holding company of banks in the West Texas oil patch.

Ostensibly to salvage what it had riding on Abilene, Mercantile stepped in and bought Abilene National for $20 million. A former Mercantile insider, who asked not to be identified, remembers planeloads of Dallas bankers hauling to Abilene for weeks inspecting the Abilene bank’s balance sheets. What turned up-or down-turned out to be much worse than Bishop had perceived.

Add to that blow two high-profile lawsuits resulting from the News story, whose author, Earl Golz, was summarily fired. Several key Abilene ex-bank officials later were indicted for bribery and embezzlement-including former chairman Earney. Mercantile itself has never been implicated in the wrongdoing, but the negative publicity didn’t help the cause then or now, as MCorp struggles to make Abilene profitable. Of the entire mess, Bishop will say only this: “Abilene is a market that is extremely important to us, and despite the problems, we think it has a real viable future. In fact, it was profitable last year. But we are not pleased with the publicity.”

Another banking scandal that smudged Mercantile happened right here in Dallas, in the Lincoln Centre Bank of Dallas on LBJ Freeway. One of Mercantile’s commercial clients, electrical contractor Jim Green, allegedly mounted an ambitious check kiting scheme between Mercantile and Lincoln Centre-where Green’s wife was on the board. In a check-kiting scheme, a person typically deposits a check that he knows to be uncollectable, then withdraws funds against that check.

Indictments issued by a federal grand jury alleged theft by Green of some $3.2 million from Lincoln Centre during a period between late 1981 and fall 1982. In a hastily arranged takeover on October 27, 1982, Mercantile stepped in to acquire Lincoln Centre for $1.8 million and assumption of the bank’s liabilities. Officials at the time were quoted as saying, “the takeover was necessary because ’unauthorized banking transactions’ threatened Lincoln Centre’s solvency.”

A former insider says Bishop was personally stung by Green’s deception. “Gene had really been impressed with Jim Green,” according to the source. “He had met him at a YPO [Young President’s Organization] meeting, and had felt that he was the kind of guy you would really want to stretch for. Those were his words.”

Like the scandal in Abilene, Lincoln Centre’s troubles did little more to Mercantile than stir up some nasty innuendoes in the press. Last December Mercantile wrote a check for $600,000 to the Lincoln shareholders-who had retained the right to recover their lost funds-to ostensibly put the matter to rest.

But Mercantile’s mistakes-if they were mistakes-have been few compared with its successes, and the biggest coup of all came in last fall’s merger with Southwest Banc-shares Inc. of Houston. The net result of dovetailing the strengths of Mercantile and Southwest is a holding company in the top 25 nationally.

Bishop and Cater, tout the combined MCorp as a perfect fit for a number of reasons. Both holding companies had member banks all over the state, and miraculously, both say, there was only one location where they overlapped. MCorp banks now cover all 15 major markets in the state, reaching some 85 percent of Texas’ urban population. Then there were obvious cost savings resulting from “economies of scale,” which neither outfit could have hoped to achieve on its own. The estimated reductions are substantial-$50 to $60 million saved over the next five years. In the banks’ areas of expertise, the two fit hand in glove. Mercantile had the obvious edge in electronic banking, while Southwest had one of the largest credit card operations in the Southwest.

But all of those reasonings are mere froufrou compared to the real significance of such an alliance. There is strength in numbers, and it will take strength to fight the encroachment of the mighty money center banks onto our turf. Interstate banking-soliciting deposits and making loans across state lines-is officially prohibited by federal law. But already the huge giants like Chase Manhattan, Citicorp and BankAmerica have a strong presence here. Banks across the United States have found ways to do business in profitable markets other than their own. One way is to set up a non-bank. “A quirk in the law says that if you don’t both take deposits and give out loans you aren’t a bank,” says Dr. C.H. Lam, professor of commerical banking at SMU. “So you have a proliferation of loan production offices that don’t take deposits. So they are non-banks.” These loan production offices aren’t necessarily little storefronts in strip shopping centers, either. Recently a Houston skyscraper was renamed Citicorp Center for its major tenant.

What small, independent banks and big, affiliated banks alike have feared is the banking giants swooping in for the kill once restrictions are lifted-a Congressional action that’s likely, Bishop says, anytime within the next decade. But the stronger its market foothold the tougher it is to force out. And the better capitalized the bank, the better its stock performance, the harder it becomes to acquire. Is the threat of an unfriendly takeover less likely for Mercantile since it became MCorp? “I don’t think we’ve eliminated the possibility,” Bishop says, “but I think it’s less likely.”

The Southwest merger was not without its stumbling blocks. At one point, the Security & Exchange Commission made inquiries into the propriety of one of Southwest’s real estate transactions. At another, some member banks were disciplined by federal regulators for failing to report and provide adequate loan-loss provisions. An article in the Wall Street Journal jumped all over Mercantile for selling its credit card operation to Southwest (before the merger was completed, but after it had been announced), claiming the action was tantamount to selling the business to itself. Shareholders in both banks were given an opportunity to vote on the merger a second time because of the complications and sagging fourth-quarter ’83 earnings at Southwest.

But approve it they did, and on Oct. 10, 1984, MCorp became a reality. The previous July had seen an announcement by the firm to absorb a new identity and a new name. The decision to change the names of Alamo National Bank in San Antonio, or Merchants and Planters in Sherman, for instance, to MBank was a studied one, Bishop says, and one that had been avoided by Mercantile in the past. In some cases, those names have been on their banks’ facades for a hundred years. “Traveling around the state making those presentations to the boards of directors was an emotional experience,” says David Gravelle. “There’s a lot of local color and heritage wrapped up in those names. Imagine a guy sitting there, grandson to the bank’s founder, hearing that the name his grandfather came up with is about to be changed.”



BUT IF MCORP has truly given Mercantile the momentum it needs to face the challenges that lie ahead, it will not be a smooth sail. There’s still trouble with a capital T in the oil patch. No bank in Texas will be immune to harm if oil prices dip near $20 a barrel. Over-extension in real estate already has bankers here quaking in their foundations – although, says MBank Dallas’ chairman George Clark, “To draw a direct analogy between Houston and Dallas would be wrong.” The precarious economics of foreign governments, especially in Mexico and Central America, continue to loom like a dark cloud.

The silver lining in all this gloom is an area of banking that has been remarkably underdeveloped, partially because of banking regulations and partially because of what Clark terms “derelict marketing.” And that is in the retail services that are beginning to proliferate, and not coincidentally, to generate significant income from fees. Among these services are discount brokerages, insurance sales, investment services, mortgage services, money management, and of course, a cornucopia of card transactions from debit to credit to a combination of the two. Imminent is a new “point of sale (POS)” terminal that will allow you to pay for your panty hose or your gasoline with an electronic debit of your checking account. POS machines are already being tested here in some Mobil gas stations, liquor stores and Tom Thumb grocery stores.

What makes MCorp particularly well-poised for the coming surge of retail services is its huge MTech/MPact network-already serving some 1,000 financial institutions across the U.S.-and its high level of consumer awareness, thanks to the successful “momentum” theme. According to Stan Richards, whose agency still handles the MCorp account, in the eight years of touting momentum, advertiser awareness has gone from only one-fifth that of Mercantile’s top rivals InterFirst and Republic, to 10 to 15 times that of the nearest competitors.

Even so, the competition is fierce and is likely to become more so. With giants like American Express, Merrill Lynch and Sears Roebuck fully into the financial fray, and well-heeled money center banks like Chase and Citicorp knocking on doors in our own backyard, MCorp must take every advantage it can, or be left behind again. There is little doubt that it is that prospect that gets Gene Bishop going every day. But as Stan Richards says, only half-jokingly, “I suspect at this point, if Walter Wriston called Gene Bishop and said, ’I’d like to buy your bank,’ Bishop would shoot back, “Well, Walter, I’d like to buy yours.’ “

Who’s on First?



IF 1984 DIDN’T put gray hair on the heads of Dallas’ big-league bankers, 1985, by most accounts, probably will. On a number of key fronts, the economic times threaten to make banking even more challenging than it has been in the past. Downswings in industries such as energy and real estate have affected, and will continue to affect, companies’ ability to pay off bank loans. Which causes banks to question the value of the loans-which they record as assets on their ledgers. Non-performing loans-defined as those 90 days or more overdue-are at historically high levels, mostly due to tumbling oil prices. Heeding some not-so-gentle suggestions from bank regulators, bankers are increasing their allocations for loan-loss provisions. So it’s not surprising that most Texas bank stocks have taken a beating on Wall Street.

On the products and services side, loosening restrictions and regulations have opened a Pandora’s box of competition while paving the way for bankers to try on a number of new hats.

Meanwhile, our three strongholds of local finance-MCorp, RepublicBank Corp., and Interfirst-continue to joust and jockey for positions of strength, both locally and nationwide. None of the three had banner years in 1984, for all of the reasons described above. Based on information from 1984 year-end financial reports, here’s how they stack up.



MCORP

Total assets: $20.7 billion

Member banks: 65

Non-performing assets: $441 million (2.13 percent of total assets)

Loan loss provisions: $175 million

Return on assets: .77 percent

Return on equity: 13.83 percent



Loan breakdown by industry:

Energy: 11 percent

Other commercial: 45 percent

Real estate: 31 percent

Consumer: 11 percent

Foreign: 2 percent



REPUBLICBANK CORP.

Total assets: $21.6 billion

Member banks: 38

Non-performing assets: $473.4 million; (2.19 percent of total assets)

Loan-loss provision: $192.5 million

Return on assets: .68 percent

Return on equity: 12.8 percent



Loan breakdown by industry:

Energy: 13.1 percent

Other commercial: 34 percent

Real estate: 33 percent

Consumer: 8 percent

Lease financing: .1 percent

Foreign: 11 percent



INTERFIRST

Total assets: $21.6 billion

Member banks: 65

Non-performing assets: $763 million; (3.53 percent of total assets)

Loan-loss provisions: $238 million

Return on assets: .57 percent

Return on equity: 10.7 percent



Loan breakdown by industry:

Energy: 18 percent

Other commercial: 31 percent

Real estate: 35 percent

Consumer: 10 percent

Lease financing: 1 percent

Foreign: 6 percent