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BUSINESS Interstate Banking: Fable and Reality

Since the new banking laws took effect January 1, Texas banks have been waiting for their princes to come. And waiting...
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Once upon a time in the Land of Plenty, the lords from the biggest banks (called “holding corps” since it was their business to conquer and hold smaller banks, which made corps-es of their managements) realized that there were some lovely banks across the river in a neighboring land. The lords wanted the banks for their very own, but alas, the laws of the Land of Plenty forbade the lords to cross the river.

“Let us change the law,” said one of the wisest and most powerful lords. And the lords of other holding corps agreed.

But scattered across the land were many smaller banks headed by independent banking lords. They didn’t want to be held by another lord or end up as a corpse. But the bigger those holding corps grew, the larger their threat became, and the law forbidding banking lords to go across the river was the independent banking lords’ best defense. “Leave the law alone!” became their battle cry. “It was put there by our forefathers to protect us all from evil, large financial institutions,” they were heard to say.

Years passed and a great blight came across the Land of Plenty, turning it into the Land of Less. All of the lords were having trouble holding onto their banks. The lords of the holding corps and the independent banking lords stopped their feud. Now, they all had to protect the very existence of their banks. So, again they began to look out of the Land of Less and across the river, this time for help from richer banking princes in other lands. If they could marry their banks to those rich princes, they would be saved!

But alas, they had forgotten the law-it not only forbade lords from the Land of Less to hold banks from across the river, it forbade princes from across the river to hold banks from the Land of Less.

Now independent banking lords, too, were heard to cry, “Let us change the law!” Hand in hand, the banking lords went together before the lawmakers who were working overtime and asked that the law be changed. They stopped throwing barbs, they wrung a lot of hands, they convinced the lawmakers that if they would just hold off on their vacation for a few more days, just long enough to change this law about crossing the river, they could save the banks, and help the Land of Less become the Land of Plenty once again.

It happened. The law was changed. And the banking lords waited to start living happily ever after. And waited. ..

Unfortunately, the banking business in Texas is no fairy tale. And those banking lords waiting for rich rescuers on white horses from across the river may wait an eternity before they see their banks carried off in the sunset to a happily ever after. Yes, Texas Commerce Bancshares Inc. of Houston found a prince in Chemical New York Corp., but the most desirable princess is usually the first to go. Texas Commerce is among the healthiest of Texas bank holding companies. We all know what happens to ugly stepsisters. It also remains to be seen whether the offspring of the intrastate marriage between Dallas’s RepublicBank Corp. and InterFirst Corp.-which surprised everyone but Republic and InterFirst-will be healthy or of the nine-headed variety.

The interstate and branch banking laws, which went into effect on January 1, 1987. have changed the future of banking in Texas. But they were not the immediate bailout hoped for. The bridge spanning the river may be open, but few rich suitors have been willing to make the crossing.

Perhaps Texas banks expected the big money center banks in California and New York to charge into Texas just as they did into Arizona when that state passed interstate banking laws. By October 1, 1986, when those laws went into effect, virtually every Arizona bank that was considered a candidate had been bought, Valley National Corp. of Phoenix was the large ($10.7 billion in deposits), lone survivor, B. Paul Jones, executive vice president of Valley National Corp. and of its flagship, Valley National Bank, outlines the difference: “The banks in Arizona were very healthy banks. They had good, clean loan portfolios and good managements. They were in excellent positions in an excellent growth market. [The banks in Texas] have considerable problem loans, and , that makes it difficult to make an affiliation.”

Difficult, but maybe not impossible, if the lords can be patient and hold on…

Valley National intends to become a major regional banking force, having already acquired a bank in Utah. And Jones won’t rule out Texas banks as future purchase prospects: “Texas banks are still attractive for the long term. We feel that Texas is a very attractive growth market that is presently having some difficulty.”

Jones suspects that money center banks feel the same way, and most bank watchers have the same suspicions about the possible suitors. Marvin Hancock, president of Dallas’s Capital Bank (one of the “independent banking lords”), expects the rescue of Texas banks by money center banks will be a “slow go.” “The banks will look at acquisitions long and hard. But the potential here is good. This is the third most populous state, which makes it very attractive [as a deposit base],” Hancock says.

Texas, and especially Dallas, isn’t new to the merger and acquisition game. With the deregulation of the banking industry came the growth of the bank holding company. You remember, back in the early Eighties when your Neighborhood Bank became BigBank Neighborhood. Texans know the typical scenario of a takeover: larger institution buys smaller institution; smaller institution’s board and upper management stick around for the transition, and then, of their own volition or with a shove from the new owners, set off to find a new institution to call home. (Incidentally, the same thing can happen when BigBank Neighborhood becomes a BigBank branch in your neighborhood. When the bank holding companies decide to make some of their member banks into branches, that member bank president becomes simply a branch manager. That member bank board becomes redundant. Some of those board members will be absorbed into the BigBank board. Some of them won’t. But don’t expect every BigBank Neighborhood to turn into a branch overnight-conversion is an expensive proposition including a hefty fee of $1,900 for each bank involved and legal fees, plus additional operational expenses like combining accounting, changing forms and letterhead, and revamping the employment structure. Restructuring employment can also result in savings, of course, but bank holding companies are going to look carefully at each member bank before they start converting them to branches.) In the meantime, bank customers may experience a few transitional inconveniences-like getting their checks changed, getting used to the new people and the new way of doing things-but in the end, customers of the now-larger institutions usually get some expanded services.

The takeover scenario shouldn’t be all that different when the saviors from the North finally descend upon us. Small businessmen and community leaders will question whether the out-of-state owners will take an active interest in the local community. But there are laws to govern that kind of thing. The Community Reinvestment Act of 1977 encourages banks to help meet the credit needs of their local communities and requires annual statements outlining how each bank meets those needs. Still, skeptics worry. Will that Yankee really understand my community? And what about city leadership? The banking community has historically provided Dallas with leaders. Do we want those Yankees running our city? Will they care to? Or do they just want our deposits?

It wasn’t just oil and gas reserves and a booming real estate market that drew out-of-state banks to Texas. The assets that have always attracted bankers to Texas are still here: government leaders with a pro-business attitude and a large population ready to consume a variety of services. Prohibition of branch banking was once a deterrent, but the new branch banking law approved by constitutional amendment in November makes expansion easier both for out-of-state banks new to Texas and for state banks.

So what’s holding the princes back? “They don’t want to overpay.” Hancock says.

Price is exactly the reason acquisition of Texas banks is expected to go slowly. Charles Greef, a banking attorney with the Dallas firm of Jenkens & Gilchrist, says that Texas banks just may think they are worth more than out-of-state banks are willing to pay.

“Texas banks are more comfortable with their loan portfolios. They’ve seen cycles in oil and gas and in real estate. They’ve seen things go bad and get good again. The out-of-state banks haven’t been through that,” Greef says.

Mark Haynie, an attorney with Gregory, Self & Beuttenmuller who represents smaller banks and smaller bank holding companies, says even with the interstate banking law, big Texas banks with big problems are going to have to have government assistance from federal regulators before they become affordable. With the number of failed banks the fed must rescue rising, plus an increasing problem with this country’s savings and loans (the U.S. government keeps open more than 100 insolvent S&Ls at a cost of $5 million a day), federal assistance to the buyers of not-yet-failed Texas banks grows less likely. But Haynie, too, joins the chorus: the Land of Less will become the Land of Plenty once again. And when it does, who will reap the profits?

Certainly, RepublicBank’s takeover of InterFirst was an assertion that there will be one homegrown reaper in the Land of Plenty. By taking over what has been an archrival, RepublicBank (as First RepublicBank Corp.) would become the largest bank in the Southwest. With assets exceeding $35 billion, First RepublicBank would dwarf another old Dallas foe, MCorp (which had held the top position as the largest banking concern in the state with $22.2 billion in assets), and become the twelfth largest bank in the country.

InterFirst Chairman Robert H. Stewart HI (who will become First RepublicBank Corp.’s chairman of the board pending regulatory and shareholder approval of the acquisition), says being the country’s twelfth largest banking institution gives First RepublicBank Corp. a “unique opportunity” in the marketplace. In Dallas-Fort Worth, First RepublicBank, with a total of thirty-five banks in the area, will control about 40 percent of the market-certainly a “unique” position from which to conduct business. With this marriage. First Republic-Bank has both protected itself from acquisition and ensured itself a place in the Big Bank competition that is to come. Stewart knows those Big Bankers well; they’ve been nosing around Texas for much of his thirty-seven years in the business.

“Most of the bankers I know are very knowledgeable about Texas. They [institutions like Chase Manhattan, Citicorp, Manufacturers Hanover, etc.] have big offices here and are very positive on Texas. Most of them will want to increase their position in the future,” Stewart predicts.

H.R. “Bum” Bright, the man said to have initiated the Republic-InterFirst deal and a RepublicBank director, wasn’t too fond of the idea of cozying up to those New York bankers. Although an “interstate” versus an “intrastate” solution to Texas banking problems will probably be studied to death (Texas Commerce Chairman Ben F. Love predicts Harvard Business School will have a course on the subject by 1991), Bright found the choice a simple one.

“One reason 1 have been reluctant to go with a New York bank is because the big majority of them have tremendous foreign loans. If you have a loan on a building in Houston, you can see it. You can feel it. It may be empty, but in two months it will have one tenant and then two, and in three years it will be 60 percent leased. In five years it’ll be fully occupied, it’ll produce income and be a good asset. If the borrower doesn’t pay you back, you can get the sheriff to go out and post the building. It’s permanent.

“Now if that loan is to Zimbabwe or Rhodesia or wherever, are you going to go to Idi Amin and ask him for collateral when his country doesn’t make payments?” Bright asks. “I think the loans that Texas banks have on real estate and oil, well, by comparison, that collateral looks like gold.”

...While the lords in the Land of Less counted their gold again, the princes from the North waited on their fair steeds for the buying price to hit rock bottom. And the lords sat and wondered if the princes would be as handsome as they’d hoped.