Buttoned-down Barnett Grace has launched First Commercial Corp. on a buying spree in East Texas and is winning fans on Wall Street.
LITTLE ROCK -- Deservedly or not, Barnett Grace has worked in the shadow of others as chairman of First Commercial Corp.
Focused on running the state's largest bank, Mr. Grace has left the headlines to others, in particular to Curt Bradbury, his counterpart at rival Worthen Banking Corp., who is known for pulling off a stunning turnaround.
Even within his own bank, Mr. Grace is a quiet contrast to his predecessor Bill Bowen, a colorful and gregarious banker who retired in 1990 to become chief of staff to then-Coy. Bill Clinton.
"Barnett has never gotten his due," said an Arkansas banker who admires all three men. "People talk about Curt or Bill Bowen and how they were popular, or at least well known. But I don't think Barnett Grace has gotten the credit for what he has done over at First Commercial, because it isn't anything heart-grabbing."
That may be changing, at least on Wall Street.
Since last year, First Commercial has acquired 11 banks in southwestern Arkansas and northeastern Texas, creating a $1.7 billion-asset subsidiary that is one-third of the company's total assets of $4.2 billion. Even though the rapid expansion has sapped earnings short-term, analysts say the worst may be over as the expansion into East Texas continues.
In what may be the ultimate compliment to Mr. Grace, analysts from New York to Baltimore to the Midwest are willing to wait up to five years for a payback from many of the highly capitalized, low-loaned community banks he has bought at seemingly dirt-cheap prices.
"Barnett Grace has put together a very good track record for his shareholders," said Joseph Stieven, senior banking analyst at Stifel, Nicolaus & Co. in St. Louis. "They are like a miniBanc One in that they view acquisitions as a line of business that adds value."
Adds Mark Alpert, analyst at Baltimore-based Alex. Brown & Sons: "Long-term it's positive, but short-term there is a price to pay. This is not a bank that acts impulsively."
Indeed, it is a buttoned-down culture that starts at the top. Mr. Grace is a conservative banker who gives short, to-the-point answers to questions about his strategy. He makes it clear that his plan is driven by opportunity.
"In the late 1980s we said we'd like to do one acquisition a year, but things changed," he said, explaining his company's buying spree.
Already strong in many of Arkansas' best markets, First Commercial has footholds in Memphis and Oklahoma City that someday may be expanded. For now, Mr. Grace is expected to remain quietly focused on East Texas, known for its once oil-rich piney hills.
"I could see them going in a lot of directions, but the Texas cities offer them a better growth potential than some of the other markets," said Peter Tuz, analyst at Morgan Keegan & Co. in Memphis. "There are five to 10 more markets in East Texas they could be in."
To be certain, East Texas has never been confused with a high-growth corridor, but it offers better long-term returns than Arkansas without the restrictive usery laws. With virtually no competition, acquisition premiums have been relatively cheap.
Neil West, president and CEO of State First Financial Corp., the Texas subsidiary, says he has only recently run into Norwest Corp. while looking at banks in Waco, near Interstate 35, the eastern boundary of his target area.
"We think we've bought right," said Mr. West, reeling off price data ranging up to a moderate 150% of book value.
Alex. Brown's Mr. Alpert says a review of comparable deals shows that First Commercial has been rigidly loyal to its pricing. For instance, the $500,000 paid to the Federal Deposit Insurance Corp. for each of the failed New First City banks was a mere 27 cents for each $100 of deposits acquired.
That is the second lowest of 15 such deals done in East Texas, and far below the 3.99% average premium.
The company has fared equally well in unassisted deals. In its last eight transactions, Mr. Alpert concludes that First Commercial has paid a half a percentage point less, on average, in price-to-earnings multiples than its competitors in comparable deals.
The seemingly cheap prices have been in line with the company's policy of no dilution beyond one year. Only the company's largest deal, to acquire Texarkana, Ark.-based State First Financial, has violated that pricing discipline.
"We want to be in growth markets without dilution that cannot be offset in less than a year," said Mr. Grace. "It would have to be a real strategic fit for us to accept any real dilution."
With $725 million in assets and dominance in several key markets, State First met that criteria. Even though other deals have been less dilutive, First Commercial has been hard-pressed to rapidly grow earnings. The reason: The new banks have anemic loan levels that will take years to build.
"A lot of the banks they bought were privately owned, and you could conclude that they were not too interested in making loans," said James Schutz, analyst with Chicago Corp.
Many of the banks acquired have had loan levels of 35% or less, with initial return on average assets as low as 30 basis points. Mr. West won't provide a breakout on all 11 banks in his subsidiary, but says the group averages a 1% ROA through the third quarter. His goal: 1.5% as soon as possible.
"These are four- and five-year programs to bring these earnings up to where they could be," he said. "We're interested in restoring optimum earnings power to these banks."
Adds Lynn Wright, chief financial officer of First Commercial: "We see it as a real opportunity?
The strategy is distinctly super community. The company leaves local names on the banks, cuts costs in the back offices, and focuses on making loans with local credit decisions. The lack of centralization is largely to blame for the company's efficiency ratio in the mid-60s.
To build revenues, the company will eventually cross-sell the offerings of its growing securities and mortgage subsidiaries.
For Mr. Grace, the emphasis should be on high-quality service. "I remember when retail banking was 'the wrong thing to be in,' and we watched people exit that and then come back to it," he said. "We have never gotten out of that business."
Whether the East Texas expansion is successful will depend in large pan on Mr. West. In February 1993 he was put in charge of the Texas operations after leading a successful turnaround of the company's Security National Bank in Norman, Okla.
Before joining the company eight years ago, he spent the mid1980s working with troubled Oklahoma banks, good training for the task that lies ahead in Texas. "After you've worked with troubled banks, you learn what not to do," he said.
So far, the plan has been to put credit policies into place and assimilate the acquired banks. Indeed, after rapid-fire announcements of deals, the company has been silent since agreeing to buy Kilgore First Bancorp in late May.
Mr. West continues to scout the Texas prairie for opportunities at the right price, and will only say that more announcements are likely in the future.
"I know the expectations of First Commercial, and there's not a lot of hand-holding going on," he said. Shopping in East Texas' Target Assets (in millions)January '93 New First City $389.0 deposits Tyler, Lufkin Tex.June '93 Texas Commerce Bank 305.3 assets and Longview, Tex. depositsAugust '93 Clinton Bancshares 63.0 assets Clinton, Ark.November '93 State First Financial 713.3 assets Texarkana, Ark.November '93 New Boston Bancshares 76.9 assets New Boston, Tex.April '94 United American Bancshares 93.0 assets Palestine, Tex.May '94 Kilgore First Bancorp. 132.9 assets Kilgore, Tex. Source: SNL Securities First Commercial At a Glance Headquarters Little Rock, Ark.Assets $4.2 BillionROA* 1.19%ROE* 14.85%Total Capital 13.44%* Through 3QSource: First Commercial Corp.