As a passive investor in Southside Bancshares Inc., First National Bank Group Inc. in Edinburg, Tex., did not have much say in Southside's decisions to buy a bank in Fort Worth or enter the business of buying pools of car loans.
But now that the $4 billion-asset First National has won regulatory approval to exert more control over Southside's board, Southside, of Tyler, Tex., might not be doing any more deals without First National's blessing.
In fact, some observers are speculating that First National, frustrated with Southside's sagging stock price, might push the $1.9 billion-asset company to sell itself, though they stopped short of suggesting it would try to buy Southside outright.
First National officials are not talking about their plans for Southside, but Southside's chairman and chief executive, B.G. Hartley, called First National's actions "hostile."
"We obviously are not excited about" investors "buying stock who do not tell us what their plans are," Mr. Hartley said in an interview last week.
First National first applied with the Federal Reserve Board in May 2006 to eventually increase its stake to 9.9%, but it pledged then to remain a passive investor. The company and its affiliated parties had owned an 8.6% stake in Southside in early December when it asked the Fed for approval to terminate its "passivity" commitment — a request the central bank approved this month.
Brett Rabatin, an analyst with First Horizon National Corp.'s FTN Midwest Securities Inc., said Southside officials have reason to be concerned.
The privately held First National has acquired large stakes in two other Texas banks before, pushing one of them to sell and buying the other.
Industry watchers said Southside's aging management team — Mr. Hartley is 78 and its average age is 72 — makes Southside particularly vulnerable to a takeover.
"The No. 1 reason banks sell is there might not be a successor to the bank chief executive officer," said Bob Walters, the chairman of Bank Advisory Group in Austin. "And we haven't seen that they are publicly grooming somebody."
Mr. Hartley said his company has a succession plan that has been approved by the board, but he declined to make public what that plan is and said he has no intention of retiring anytime soon.
In a December filing with the Securities and Exchange Commission, First National questioned Southside's decision to buy the $124 million-asset Fort Worth Bancshares Inc. for $36 million.
"The main offices of the banks are more than 150 miles apart, and Southside is moving from a market in which it is the dominant competitor into a highly competitive urban market," First National stated in its filing.
First National also took issue with Southside's buying a 50% stake in a new company, Southside Financial Group Inc., that acquires automobile portfolios from banks, thrifts, credit unions, and other lenders throughout the country.
"Both these transactions appear to represent a significant departure from the original business model of Southside," First National said in the filing.
Southside's profit rose 11% last year, to a record $16.7 million. Its return on assets increased 6 basis points, to 0.87%, while its return on equity rose 57 basis points, to 14.05%.
Still, as with many banks and thrifts of late, Southside's share price has languished. In mid-November its shares were down more than 25% from their 52-week high of $24.76, though they have recovered somewhat since then. They were trading at $21.25 late Wednesday.
In SEC filings, First National said its suggestions for boosting Southside's market value could include the sale of the company or the disposition of certain assets.
A call to David O. Rogers Jr., First National's chairman, was not returned, and Robert Gandy, its president and CEO, declined to discuss its strategy concerning its investment in Southside.
Mr. Walters said First National has a history of buying stakes in banks "with the purpose of either acquiring control or trading them in and making a buck."
In 2004, First National received Fed approval to acquire up to 14.99% of Alamo Corp. of Texas, which was sold to Cullen/Frost Bankers Inc. of San Antonio in 2006. And in 1998, after acquiring about 5% of Nueces National Bank in Corpus Christi, First National received approval to acquire a 51% stake before buying it outright.
Still, Mr. Walters said it seems doubtful First National would want to acquire Southside because of its size.
Dan Bass, the managing director in the Houston office of Carson Medlin Co., said that if First National were to drive Southside to sell, it likely would not be soon, because it is not a seller's market.
"Now is not the time to force a sale," and First National's short-term goal is likely to gain a seat on Southside's board, he said.
Nevertheless, Mr. Rabatin said that while First National and its allies "can make some noise … I don't see them as being able to push Southside around into doing what they want them to."
