Patience Is a Prime Asset of Smarter Banks
It might well make you wonder about the stability of the U.S. banking system that First RepublicBank Corp. is being rescued by the federal government less than a year after it was born in the merger of the two biggest banks in Dallas, RepublicBank and Interfirst.
But the case is more a cautionary tale of one bank than a horror story about the system--grim though First Republic’s prospects may be.
So far, the Federal Deposit Insurance Corp. has pumped $1 billion in cash into First Republic and guaranteed all its deposits--including those over $100,000. And the outlook is that FDIC will be supporting the largest bank in Texas for years to come--the way it has Chicago’s Continental Illinois Bank since 1984.
An out-of-state merger for First Republic--a marriage of convenience with Citicorp or Security Pacific--is probably out of the question. Other banks would jeopardize their own soundness by taking over parts of First Republic.
Sophisticated investors might buy some of First Republic’s bad loans at a discount--bankers mention the Bass brothers, or Richard Rainwater and Morton Meyerson, the Ft. Worth businessmen who recently proposed a scheme to salvage value from failing savings and loans. But the big Dallas bank is now so weak--its non-interest paying loans total more than its basic capital--that its only certain future is as a long-term invalid.
Why did First Republic founder? And what do its troubles say about other U.S. banks as they face additional competition from overseas? Treasury Under Secretary George Gould has said the United States must have big financial institutions to meet the challenge of foreign competition, especially from Japan’s giant banks. But if an outfit as big as First Republic--$30 billion in assets, the 12th-largest U.S. banking company--can fall, what does that say about U.S. chances?
It says that if U.S. banks manage their business well, they’ll do OK.
Loans Turned Sour
The truth is, the First Republic holding company is foundering because its predecessor, RepublicBank of Dallas, expanded into an economic contraction. Yes, Texas’ well-known troubles from falling oil prices took their toll. But Republic of Dallas escaped the worst blows of the 1981-’82 downturn in oil. While smaller banks and its cross-town rival, Interfirst, suffered, Republic of Dallas was praised as Texas’ soundest bank.
But Republic misjudged the environment and lent heavily to real estate development in Dallas, Ft. Worth and Austin in the years 1984 to 1986. Then, when oil prices really collapsed in the spring of 1986, those loans started going sour--and showed up on the big bank’s books in the last year.
A point to remember is that national banking might help avoid such catastrophes. Canada, after all, suffered energy and natural resource downturns like those that hit the U.S. Southwest. But diversity of markets is one reason its national banks did not fail; good loans in Ontario could offset bad ones in Alberta. Republic’s loans, however, were almost all in Texas because U.S. banking is still a business where big institutions are confined to one state.
But most of all, First Republic’s example says the real key to the future is not a question of size but of brains. All banks are having to make tough decisions, says industry consultant David Cates, as competition in world markets intensifies and profit margins narrow. Size alone is no assurance of success.
On the contrary, the banks recognized as smartest these days are tightening up as much as they’re expanding--reducing overhead expenses and selling operations or turning away business that is outside their area of concentration. Wells Fargo is admired by analysts for wringing maximum economies out of its acquisition of Crocker Bank, First Interstate for selling off several operations in a voluntary restructuring.
North Carolina’s First Wachovia, another admired bank, is slowing its loan growth rather than lower standards in a time of soft demand. Unlike First Republic that is, First Wachovia knows how to keep its powder dry.
Other Bank Rebounds
Which is something smart banks can do even in Texas. Chairman Thomas C. Frost says his San Antonio-based bank, Cullen/Frost Bankers Inc., is profitable again after taking big losses in 1983 and surviving lesser troubles in 1986. It’s still a time, says Frost--the fourth generation of his family to run the $3.4-billion (assets) bank--to be cautious about loans, and patient for good times to return.
How patient is that? “If they don’t come in 1989,” Frost says, “then they surely will after the census of 1990 shows that all through these terrible times Texas has continued to grow in population. Then capital from around the country will flow into Texas again.”
Too bad First Republic didn’t wait.
