A new bank tries to enter a tough market

D Magazine, Nov 01, 1998

THE NATION'S MOST COMPETITIVE BANKING market is about to heat up even more, and the major players in it are getting a little testy.

To understand how hot the competitive climate is, consider that 50,000 new jobs were created in Dallas-Fort Worth in the first six months of 1998, and the market seems on pace to generate 100,000 new jobs by December. Contrast that with New York. When Citicorp announced in September that as a result of its merger with Traveler's, it might lay off 1,400 workers, the news made the front page of the New York Times. In Dallas such news would be an item on the inside business pages.

Add to the fire the latest demographic news on in-country migration. The most recent projections show that over the next 20 years 10 million people will relocate to Texas. New York state, by contrast, is expected to lose 5 million people. No wonder bankers are positioning themselves to serve this market. And no wonder that local bankers are gearing up to grab their share of the expanding market from the mega-banks that now dominate the Dallas skyline. (Even with Chase Texas headquarters in Houston, and Frost spreading out from San Antonio, Dallas continues to be the banking center of the state.)

The first sign of things to come was the bold announcement this summer of a de novo independent bank, to be capitalized at $100 million, being formed by old-line Texas banking stalwarts Ted Strauss, Jody Grant, Raleigh Hortenstine, and George Jones. The announcement was probably too bold, even in this super-heated environment; the team has since scaled back its plan to a more reasonable $50 million to $80 million in initial capitalization for the new Texas Capital Bancshares. The plan is to launch in Dallas, with deposits coming from the original investors, then spread quickly to other cities in Texas through acquisition of smaller independents. The base in Dallas will be built on the acquisition of tiny Resource Bank, which Jones now heads.

With the competition for lending already so fierce, can a start-up bank succeed?

"It can work," says Eric Rothman, banking analyst for Stephens & Co. in Little Rock, Ark., "considering that there are so few independent banks in Texas. The banks in Texas were gobbled up. People said, 'Okay, it's good to be with a bigger bank.' But then they said, 'Wait, it's going to be a cookie-cutter approach to banking.' That's where a local bank has a chance to succeed."

And Wall Street hasn't missed the startling growth of the Texas market, Rothman notes. "Texas banks were pariahs during the first half of the decade. But today they're darlings because they have such opportunity to expand Investors, however are also aware of how competitive the market is. "The days of slinging a dead cat around and hitting something are gone. The environment may not be right for them."

One independent banker, Mike Shipman of North Dallas Bank & Trust. is similarly cautious. "The banking environment is extremely competitive," he says. "Rates are down, and net interest margins are less than they historically have been and continue to be squeezed, not just by bank competitors but by all lending competitors. And there's a lot of money chasing too few loans. Every lender's working hard to hold on to their very best customers."

Return of the Good-Old-Boy Network?

THE FOUNDERS OF TEXAS CAPITAL ARE BETTING on three premises. The first is, of course, that an expanding market creates room to maneuver. The second is that Texans prefer to deal with other Texans. The third is that "relationship banking" gives a competitive edge in attracting and holding customers who are turned off by the sheer anonymous bulk of the mega-banks.

To the first point, as we have seen, an expanding market also brings in competition that may soak up the best loans before a new bank even has a chance to make its case.

But it's the second point that really raises eyebrows in the office suites in downtown bank towers. Jim Erwin of NationsBank notes, "Most of the people here are Texas bankers. They've worked in Houston, Fort Worth, San Antonio, Dallas. I don't know if being a Texan is important anymore. If it' s important to the customer then it's important to us, and if it's important, we have Texas bankers." In fact, most of the leaders of the megabanks' local operations are Texans, including Bank One's Ron Steinhart and Ty Miller and Chase Texas' Todd Maclin.

As to the third point, there's no doubt in anyone's mind that relationship banking is the key to success for an independent. Financial analyst Frank Anderson is one of the most astute observers of the Texas banking scene, and he believes that Texas-owned banking will soon be a force in the financial services sector. Referring to Strauss and Grant's vision for their new bank, Anderson says, "These guys have seen Texas in good times and bad, and they've got a number of relationships. You'd like to think those relationships will lead to business."

And that is precisely the plan. Resource Bank's George Jones says it is the cornerstone of Texas Capital's strategy. "We're very focused," he says. "We're looking at privately held companies owned by individuals or families that want, need, and frankly demand a personal relationship in banking. Of course, we have to be competitive in terms of interest rates and product pricing. But we plan to add the personal element. We've done it before. And there's a proven history for this kind of philosophy."