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Federal deserve Bant of Mdeiphia Review F ebru ary Mergers and the Small Unit Bank Unem ploym ent in Philadelphia Cashing in on Corn Trends over the past decade-and-a-half in the Third Federal Reserve District raise some important questions about the relationship between . . . Mergers and the Small lleil Bank Fifteen years ago the absorbing bank in a typical lieve mergers are mutually profitable. However, Third District merger would have been located in a large city. Chances were about four in ten what are the economic forces which convince so many banks that there are these profit opportu that both the absorbing and absorbed banks would be located in the same city. The absorbing nities? In particular, why have these forces had such an impact on small banks? bank would have been one of the larger banks After World War II many thought commercial in the District and the absorbed bank would have been small, with roughly $5 million resources. banking a mature industry with slowly growing Today the chances are considerably greater that the absorbing bank will be located in a services. They expected that commercial banks would decline in relative importance among smaller city. Chances are also less — only about financial markets and little innovation in products or institutions. Certainly, almost two one in ten — that the parties to the merger will decades of experience seemed to support these be located in the same city. And now the size of beliefs. During the Great Depression demand for the acquiring bank is smaller. But one thing that commercial loans had dried up, but commercial has not changed is the typical size of the absorbed banks were either unwilling or unable to search bank— still about $5 million in resources. Since World War II unit banks have been steadily disappearing. Probabilities are that they CHART 1 will continue to disappear. While at the end of NUMBER OF MERGERS IN THIRD FEDERAL 1950 there were 722 unit banks in the District, by 1967 their number had dwindled to 264 with over 80 per cent of the disappearances a result of merger. At the same time, regional rivals to the Philadelphia banks have begun to appear. Chances are good that these banks will continue to grow and will become more like the Philadel phia banks in terms of their products and services. In any case, there are as yet no signs that the merger movement has run its course. BEHIND THE MERGERS Merging banks, small and large, obviously be B U S IN E S S R E V IE W ^Includes mergers when either acquiring or acquired bank is in Third District. is produced in the Department of Research. Evan B. Alderfer is Editorial Consultant; Donald Digitized for R. FRASER Hulmes prepared the layout and artwork. The authors will be glad to receive comments on their articles. Requests for additional copies should be addressed to Bank and Public Relations, Federal Reserve Bank of Philadelphia, http://fraser.stlouisfed.org/ Philadelphia, Federal Reserve Bank Pennsylvania of St. Louis 19101. bu siness re v ie w out new outlets for their excess reserves. Then, totals, however, hide the impact of the merger World War II had turned the banks largely movement on the banking structure and particu into repositories for U.S. Government securities. larly on small unit banks. Between 1950 and 1967 Immediately after the war specialized financial about 50 per cent of the banks acquired had total institutions, such as small loan companies and resources of less than $5 million. Over 70 per cent savings and loan associations, seemed to have had total resources of less than $10 million. preempted markets that commercial banks might Most of the acquired banks were unit banks. have serviced. Even into the early 1950’s banks Many were located in one-bank communities. held more securities in their portfolios than loans. They relied almost solely on local sources of Since then, however, commercial banks have proved that they are far from moribund. They mitted to U.S. Governments and municipals, no they lent almost solely in local markets. longer invest primarily in federal debt. Instead they actively seek outlets for their funds in the municipals market, and by developing funds for their resources. Except for funds com Why do small banks make such prime targets for acquisition? The most common reasons new ways of serving business and consumers — given are problems of personnel and manage including facilities. ment succession. The banks, it is said, are not Banks, large as well as small, are importantly large enough to support on-the-job training for involved in extension of credit and services to successors, and costs of going out and hiring consumers. They have become more aggressive experienced personnel as existing management in raising funds, developing such instruments retires have skyrocketed. Also, the market for small bank equities is leasing and credit-card as certificates of deposit and making use of debenture financing. At the same time, the rapid development of computers and expanding either very thin or nonexistent. Sometimes when a swap of stock is used the merger is a way for use of such bank services as checking accounts present owners to acquire a more marketable have forced banks to take a fresh look at their own structure of operations. The move to the security. Or, a merger may be attractive to the owners of the acquired bank because they can suburbs of economic liquidate their investment at capital gains rates. growth have also had their impact on banking as and changing patterns In addition, there probably are more basic new markets for bank services have sprung up economic forces motivating the merger sweep. After all, the acquiring bank must staff the and old markets have declined or ceased to grow. In short, the 1950’s and 1960’s have been acquired bank and compete in the same labor years of great change for commercial banking. market for personnel. For all but the largest Mergers are one way banks can respond quickly banks the market for equities is thin. to changes like these. One of these basic economic forces seems to be the difficulty of many smaller banks to achieve Mergers and small banks economies that come with size. Although the With 838 commercial banks in existence in the evidence is not conclusive, a number of empirical Third District at the end of 1950 and only 503 studies during the past several years indicate that at the end of 1967, it is clear that mergers have the smallest banks are relatively high-cost opera been an important source of change in number tions for many of the products and services they of banks operating in the Third District. The sell. In these cases a small bank may be operated 3 b u siness r e v ie w more economically as part of a branch system of a larger bank than as a unit bank. CHART 2 PERCENTAGE OF ACQUIRING AND ACQUIRED NEW DEVELOPMENTS Acquired banks are almost invariably smaller than the acquiring banks, which is what most people would guess. Thus in only 16 per cent of the mergers did the acquiring bank have re sources of $10 million or less compared to 70 per cent for the acquired bank. Thirty per cent of the time the acquiring bank had resources of $100 million or more. But what is, perhaps, more surprising is the decreasing importance of mergers by banks located in the larger cities and 50,000 metropolitan areas of the District, as Table 1 100,000 100,000 Population 50,000 100,000 100,000 Population and Chart 2 indicate. From 1951-1955 both acquiring and acquired banks were located in metropolitan areas 76 District’s 60 counties, but by 1967 there had per cent of the time. But from 1961-1967 these been mergers in 58 of the 60 counties. percentages declined to 65 and 57 per cent, As the merger movement has spread among respectively. The same pattern emerges when counties, banks also have tended to look more banks are classified by city size. Merger activity outside their home cities. Between 1951 and 1955 has banks about 37 per cent of the mergers were between located outside the largest cities of the District. banks located in the same city. Between 1961 Again this is true for acquiring as well as and 1967 this percentage had declined to ten. been increasingly dominated by Banks seeking merger partners are increasing acquired banks. The changing geography of mergers also pro ly going outside their home city or town. Even vides further evidence that pervasive economic forces are at work. Between 1948 and mid-1954 so, the geographic reach of mergers has been there was no merger activity in 28 of the branching. Banks may not operate branches across state lines. With the exception of banks located in Delaware, Third District banks have Table 1 additional restrictions on geographic mobility. PERCENTAGE OF MERGING BANKS IN METROPOLITAN AND NON-METROPOLITAN AREAS M e tro p o lita n Period 1951-1955 1956-1960 1961-1967 4 N o n-M etro p olitan A c q u irin g A c q u ire d A c q u irin g A c q u ire d .. 7 6% . 69 .. 65 76% 65 57 limited, partly because of legal restrictions on 2 4% 31 35 2 4% 35 43 In New Jersey, branches are limited to the homeoffice county. In Pennsylvania, banks may operate branches only in the home-office and contiguous counties. Even, however, within the framework of these legislative restrictions, the majority of acquiring banks still did not seek partners far from the home town. Only about 25 per cent of the mergers involved a cross-over b u sin e ss r e v ie w than acquired banks, a higher ratio of risk assets of county lines. There is one notable exception to this reluc to capital, and more rapid rates of growth. tance to roam very far afield. From 1951 to 1967 In about 65 per cent of the cases the acquiring banks based in Philadelphia County acquired banks have had a higher ratio o f loans to securi 21 banks within the county and 31 outside. These ties than acquired banks. The loan-security ratio acquisitions were of the acquiring banks has usually been higher in Montgomery, Delaware, and Bucks counties — all areas of rapid eco than the District average, while the reverse is nomic Philadelphia true for the acquired banks. Most, but not all, of County, however, the number of inter-county these differences can be explained by size of bank. mergers Larger banks tend to commit a higher propor growth. Once decreases we sharply. leave In Montgomery County, acquiring banks reached outside the tion of their resources to loans than do smaller county only five times and there were 14 mergers banks. Acquiring banks are almost invariably within the county. Acquiring banks in Luzerne bigger than the acquired banks and bigger than County had only four acquisitions outside the the average for the District. Acquired banks are county smaller than the average for the District. compared with 16 inside. Banks in Schuykill, Lancaster, York, and Berks counties, In about 70 percent of the cases, the acquiring where mergers also have been frequent, behaved similarly. capital than the acquired bank. This reflects both bank has had a higher ratio of risk assets to the greater loan commitment of larger banks and ECONOMIC PROFILES Mergers are bringing about dramatic changes also the fact that smaller banks tend to have a lower deposit-capital ratio. in the banking structure; these changes are being Growth rates measured either by change in felt throughout the District. As mergers have con deposits or capital five years prior to the merger tinued and spread, however, many people have be have been a bit higher for acquiring hanks. But come concerned about the implications for users growth rates for most merger partners have been of banking services. One fear, not new but in above the average for all banks in the District. creasing, is that as smaller banks are absorbed Not surprisingly, growth-minded banks seek out into partners with growth prospects. branch networks they will become less effective suppliers of banking services to their communities. Without pretending to solve this issue, which These gross measures of performance do not suggest that acquired banks, i.e., smaller banks, are performing unique functions of lending or would require an analysis of post- as well as pre risk bearing. Acquired banks have held a larger merger performance, we have looked at the portion of their earning assets in securities than acquired and acquiring banks in terms of sever al commonly used economic measures of bank have the acquiring banks. Then too banks are performance. These are the ratios of loans to securities held, the ratios of risk assets (total assets minus cash and Government securities) to many of which can be traded in regional or national markets. Whatever the reasons, ac quiring banks seem to have had less risk aversion. capital, and growth rates of deposits and capital. It turns out that acquiring banks tend to have a somewhat higher ratio of loans to securities To the extent that growth rates are an indicator of successful performance, acquiring banks also have shown up well. ( Continued on Page 8) only one outlet for the bulk of these securities, 5 Unemployment*in Philadelphia Unemployment is at its lowest level since the end of the Korean War. More over, after a decade and a half of higher-than-national unemployment, the Philadelphia1 rate dropped below that of the United States in 1965 and has remained lower ever since. UNEMPLOYMENT IN PHILADELPHIA, TODAY VS. 1960 by Shirly H. Goetz Per cent unemployed UNEMPLOYMENT RATES -O v P e r cent unemployed Most large metropolitan areas share Philadelphia’s experience of high nonwhite unemployment NONWHITE UNEMPLOYMENT AROUND THE NATION, 1967 While total joblessness is low, nonwhites and teenagers still have difficulty in obtaining work, y <*• y TWO TROUBLE GROUPS: NONWHITES AND TEENAGERS IN PHILADELPHIA Per cent unemployed Per cent unemployed 0 2 i 4 6 8 10 12 ----- 1------- 1------- 1------- 1------- 1-------- 1------ r St. Louis Detroit Newark San Francisco-Oakland Cleveland Baltimore Chicago Los Angeles-Long Beach Houston New York Washington W hite Nonwhite 1967 SLUM UNEMPLOYMENT AROUND THE NATION, 1966 ' DURATION OF UNEMPLOYMENT IN PHILADELPHIA (5 PA. COUNTIES) To combat continued joblessness, the unemployed need training to fill exist ing vacancies. Most jobs exist in skilled areas, while the majority of unem ployed are unskilled. ARE JOBS AVAILABLE FOR THE UNEMPLOYED? PHILADELPHIA 1966 0 2 T Never worked Phoenix (Salt River Bed Area) Oakland (Bayside) UNEMPLOYMENT WITHIN THE METROPOLITAN AREA St. Louis (North Side) Los Angeles (South L. A.) Per cent unemployed -15-25 weeks-' 80 Unfortunately, while the rate of non white unemployment has decreased, it has not improved relative to the white rate. Cleveland (Hough) as do slum residents and city dwellers compared to their suburban neighbors. 26 w e e k s / or more Although joblessness is still higher in the slums and the city, it has declined more there since 1960 than in the suburbs. Per cent unemployed As total joblessness has declined, so has the duration of unemployment. P er cent o f unemployed I9 6 0 1967 White ’6 0 '67 Suburbs | and high slum unemployment. White Teen Nonwhite Teen 1966 '6 0 '66 '6 0 '6 7 N. Phila. slum s C ity Operatives San Francisco (Mission-Fillmore) 60 Detroit (Central Woodward) New Orleans (Several Areas) San Antonio (E. & W. Sides) New York (Harlem) Boston (Roxbury) 40 20 0 Operatives 196 2 1967 ■4 > V 7> Unemployed by occupational group Sources: U.S. Department of Labor, U.S. Department of Commerce, Pa. Bureau of Employment Security. y< r <1 r ‘ Except where otherwise noted, Philadelphia means the Philadelphia Metro politan Area: Bucks, Chester, Delaware, Montgomery and Philadelphia coun ties in Pennsylvania; Burlington, Camden and Gloucester counties in New Jersey. b u siness r e v ie w (Continued from Page 5) chances of success may be better. However, clusions on individual bank performance, but problems still may be encountered. The largest banks in the District have developed unfortunately, there are no very good measures extensive branch networks during the past two to determine such things as the minimum number decades, both by merging and by new branching. Ratio analysis is helpful in arriving at con of banking alternatives necessary to insure effec Hence, the chances are increased that any pro tive competition and to meet the convenience and posed merger will involve the elimination of ex needs of the community. Nevertheless, powerful isting competition because the acquiring bank economic forces are working for mergers. Even is already operating a branch in the market. without all the knowledge they require, the vari ous regulatory agencies and the courts must make not now compete in the market of the bank to Even if the acquiring bank can show that it does judgments that will importantly affect the bank be acquired, the hurdle of the potential competi ing structure in the future. tion issue may still have to be surmounted. Would the acquiring bank in the absence of the FUTURE MERGERS merger set up a new branch in the market of Without in any way predicting what supervisory the bank to be acquired? Even if it did not con or judicial policies may be, let us assume the sider establishment of a new branch a realistic merger trend continues on its recent course. What immediate alternative, might it not change its are the implications for the banking structure? mind at some time in the future? Finally, are Mergers between big banks in big cities have almost disappeared. There are several reasons for there enough potential entrants remaining to police competition? this. Good economic fits between large city banks are harder to come by just because of the mergers Regional rivals that have already taken place. However, even But one step below the largest banks, regional when two large banks think that a merger will rivals have begun to appear. Just as many Phila make them a more effective competitor, regulatory delphia-based banks have relied heavily on merg and judicial hurdles are now more difficult to ers to promote rapid growth, others are taking surmount. Several judicial landmarks in the early the merger route. 1960’s established beyond question that the anti Banking assets in the Third District have been, trust laws applied to combinations in the banking and still are, heavily concentrated in Phila industry, the Bank Merger Act of 1960 notwith standing. Further, although the Act was amended delphia-based banks. In 1950, the reserve city banks owned 24 per cent of all commercial bank in 1966, it appears probable at the time of this writing that two large banks attempting to merge will be faced with long and costly regulatory or judicial proceedings.1 Where the proposed merger is between a big city bank and a smaller assets in the Third District and by 1966 their share had increased to about 35 per cent. These banks grew by 186 per cent between 1951 and 1966— much of this by mergers. If assets of bank based outside the home-office city, the merged banks are included in the base year, growth rate declines to 76 per cent. 1 A s this issue goes to press, a ruling in the U.S. Dis trict Court in Philadelphia has turned down the proposed merger of the fifth and seventh largest banks in the Philadelphia metropolitan area. By 1967, however, there were 22 banks outside the Philadelphia Metropolitan Area with assets in excess of $100 million. These banks are still rela- 8 bu siness re v ie w The small unit bank Tame 2 DISTRIBUTION OF THIRD DISTRICT BANKS (By number of branches) N u m b e r o f b ra n ch e s N o n e ................................ 1-3 ................................ 4-6 .............................. 7-9 .............................. 10 and over .................. Total ................ D e cem b e r 1950 D e cem b e r 1967 772 56 8 264 159 36 11 33 503 — 2 838 Prime candidates for acquisition will be the 264 unit banks still remaining in the District. Most of them were founded at the turn of the century and are seasoned financial institutions, and about half of them are the only banks in their com munities. But over 30 per cent of them have total resources of less than $5 million, and 85 per cent have total resources of less than $10 million. Problems of management succession, dis economies of size, and increasing competition from branch networks of regional banks will be tively small by Philadelphia standards; never among the economic forces bringing about the disappearance of some of them. theless, they are a growing competitive force. Even in the absence of anti-trust statutes, many In 1950 they owned about 13 per cent of bank of the banks would not be available for acquisi resources in the Third District; by mid-1966 their percentage share had increased to over 21 tion by the largest banks in the District because per cent. Since 1950 the resources of these banks banks are located roughly in the eastern portion have grown by 215 per cent, with much of this growth as a result of merger. of the Third District section of Pennsylvania, but not in counties contiguous to Philadelphia. Over-all, these banks have grown at a more These are likely candidates for the branch net works of the developing regional banks. rapid rate than the Philadelphia banks — 215 vs. 186 per cent. Even now, many of them have extensive branch networks, at least by 1950 standards. While in 1950 there were only two of state banking laws. For example, 128 of these If the merger movement continues as it has been going, there will be considerably fewer unit banks in the District with ten or more branches, banks a decade hence. The large banks outside the Philadelphia Metropolitan Area will have further by 1967 there were thirty-three. Of these, all but six had their home office outside Philadelphia. narrowed the size gap between their Philadelphia As these banks grow by merger they will be able to offer a wider variety of services and to new branches. Large Philadelphia banks, finding act more like reserve city banks. For example, they will be dealers in federal funds for other banks, more important as holders of correspon dent balances, and with expanded trust depart ments. Not only will they offer increasing compe tition to the Philadelphia banks but also inter regional competition among themselves is likely rivals and themselves, both through merger and the acquisition route to growth increasingly diffi cult, may step up de novo branching activities. Alternatively, the more rapid development of de vices which will allow them to expand their com petitive area without branching, of which the credit card is one forerunner, may be in the offing. As branch networks grow, competition will be to be increased. Insofar as big banks are able more inter-regional in character. More banks will to offer certain unique banking services, con be performing the services heretofore believed to sumer alternatives will be improved. be the unique province of reserve city banks. 9 Cashing In Qn Cnrn by Evan B. A lderfer Last year the country’s corn crop went over the supplemented with grain purchases from other top. The 4,700 million-bushel harvest was 14 states to meet the requirements of local poultry- per cent over the year before and 25 per cent men and cattle feeders. Cheap corn, whether above the 1961-1965 average. local or out of state, is an inducement to overfeed. Inasmuch as most of the corn is fed to live Local poultrymen with memories of broiler stock, last year’s bumper corn crop is likely to prices degenerating to 10 cents a pound as appear this year in the form of heavy shipments recently as December 1966 are not likely to be of animals to the livestock markets. Overloaded tempted to repeat overproduction, at least not markets spell falling prices and reduced farm so soon. The chicken cycle is short — from egg to chick to marketable broiler is only a matter of income. Hoping to avoid such a turn of events, the Secretary of Agriculture met with leaders of live weeks, so there is yet time to limit production and hold the price line. stock, poultry, and general farm organizations And what of the local cattle feeder? To begin early last December. He stressed the need for live with, some of the Pennsylvania corn, especially stock and poultry producers to show restraint and the late harvested, was soft and therefore had to keep their 1968 production in line with demand. be fed immediately. Abundance of local corn is While Secretary Freeman’s admonition may a powerful stimulus to feeding. In early January, seem to have been directed primarily to farmers cattle feeding was believed to be running some in the Corn Belt, cash farm income in Pennsyl what higher than usual. “ Better to feed steers vania, New Jersey, and Delaware is also derived than sell corn at present prices,” was the com chiefly from livestock and livestock products. ment of one farmer. For years the three-state region has been a feed Feeding cattle, however, affords some dis deficit area — home-grown corn has had to be cretion in how a farmer “ sells his corn.” He may Digitized for 10 FRASER b u siness re v ie w go in for “ short feed” of 90 to 100 days or, in just often enough to encourage many feeders to any event, feed to choice grade of about 1,000 stay in business after a couple of bad years.” That pounds. At that weight it is generally considered is, if he has the money to buy cattle, or if he can best policy to sell, for several reasons. First, persuade his banker to lend him the capital. demand is more and more for lean meat. Second, And what kind of year will 1968 be? In the feeding efficiency drops rapidly as cattle pass opinion of a knowledgeable Lancaster County 1,000 pounds. An Iowa State University study cattle feeder reveals that with No. 3 corn at a dollar a bushel the cost of putting on a pound of gain on cattle of ultimate over-feeding and falling prices. For weighing 1,200 pounds is 66 per cent more than a time, cattle will be marketed light. Later, feed what it is at 1,000 pounds. Third, feeding to ers with still a lot of corn left will feed to heavier with years of experience “ the abundance of corn will have some effect by way heavier weights exerts price-depressing effects weights. Thereupon the added tonnage of beef on the market. coming on the market will depress prices.” Falling Country bankers who advance funds to cattle prices, of course, would please consumers— espe feeders, as many of them do, are well aware of cially in a period of accelerating inflation. But the risks. Cattle feeding, according to a circular lower retail prices of red meat are not necessarily issued by the Pennsylvania State University Col in the offing. So much depends upon the feeding lege of Agriculture, “ has poor years, good years, practices of thousands of cattle feeders and their and average years. The good years seem to come decisions about cattle shipments to market. 11 FOR THE R E C O R D . . . INDEX AGO Third Federal Reserve District United States Per cent change Per cent change Dec. 1967 from SUM M ARY mo. ago year ago 12 mos. 1967 from year ago Dec. 1967 from mo. ago year ago 12 mos. 1967 from year ago — i + 2 + 1 MANUFACTURING Electric power consumed — 2 Man-hours, total* ....... + 1 0 Employment, total ........ + 2 CONSTRUCTION** .......... +38 COAL PRODUCTION ........ — 1 + 5 0 + 2 + 4 +75 — 6 + 3 — 2 + 1 + 2 + 11 - 3 + + + + + - 4 2 1 1 2 It + 12 + 9 + 9 + 9 +23 + 10 + 17 + 3 +30 + 18 + 6f + 6f 0* + 3* + 3| •Production workers only ••Value of contracts •“ Adjusted for seasonal variation Banking Manufacturing LO CA L CH AN GES Metropolitan oidtiSuca i Areas* Employment Payrolls Per cent change Dec. 1967 from Per cent change Dec. 1967 from Check Payments** - 6 — 5 +25 — 7 + 5 + 2 year ago mo. ago year ago 0 — 1 +23 + 2 + 5 + 3 0 - 1 + 1 + 1 + 12 + 8 + 19 + 13 +25 + 10 + 8 + 6 + 12 + 7 + 17 + 12 + 1 0 + 1 + 3 0 + 3 tl5 SMSA’s tPhi ladelphia Trenton ......... - Total Deposits*** Per cent change Dec. 1967 from mo. ago Wilmington .... PRICES Wholesale..................... Consumer ..................... 1967 Atlantic City .... BANKING (All member banks) Deposits ...................... Loans ......................... Investments.................. U.S. Govt, securities .... Other ......................... Check payments***....... AGO mo. ago Per cent change Dec. 1967 from year ago mo. ago year ago + 4 — 2 + 16 + 6 + 1 + 9 + 1 + 2 5 0 3 + 1 - 4 + 5 + 17 Altoona .......... — 1 0 — 2 + 1 — 3 + 1 + 2 + 8 Harrisburg ...... 0 + 2 + 1 +11 - 4 + 4 + 4 + 14 Johnstown ..... 0 - 4 + 1 - 1 + 1 + 8 + 1 + 9 Lancaster ....... 0 - 1 0 0 0 + 4 + 2 + 6 Lehigh Valley .. 0 — 2 0 1 + 6 + 2 + 10 Philadelphia.... 0 - + 15 Reading ......... 0 Scranton ......... - 1 Wilkes-Barre .... York ............. 1 - - - 1 - + 2 + 2 — 3 + 9 + 4 0 + 1 + 5 + 1 + 15 0 0 — 2 + 4 - 3 + 9 + 4 + 14 1 — 4 — 4 + 2 - 2 + 5 + 2 +13 — 1 0 — 1 + 5 + 7 + 11 + 1 + 8 1 - 6 *Not restricted to corporate limits of cities but covers areas of one or more counties. **AII commercial banks. Adjusted for seasonal variation. '••Member banks only. Last Wednesday of the month.
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