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MARCH 1 95 5
busin e ss
V I»W
EDERAL RESERVE
BANK OF
PHILADELPHIA
THE BRANCH AND MERGER MOVEMENT
IN THE THIRD FEDERAL RESERVE DISTRICT
This a rticle , the fifth and concluding one o f a se rie s,
d e a ls with the im pact on ban ks a n d the banking structure.
THIRD DISTRICT BANKING— 1954
Bank cred it e x p a n d e d ; ea rn in g s, e x p e n se s, and profits rose.
CURRENT TRENDS
Funds fo r home financing seem a d e q u a te to support a high
level o f resid en tia l building this yea r.
Additional copies of this issue are available
upon request to the Department of Research,
Federal Reserve Bank, of Philadelphia,
Philadelphia 1, Pa.
THE BRANCH AND MERGER MOVEMENT
This is the fifth and final article in a series on
bank branches and mergers. Preceding install
ments, published in the Business Review, and
available on request, are: August 1954, “ Back
ground” ; September 1954, “ Nature of the Move
ment” ; November 1954, “ The ‘How’ of Branches
and Mergers” ; and January 1955, “ Motives Be
hind Branches and M ergers” In this article we
present some of the implications for banks and
the banking structure.
PART V :
IMPACT ON BANKS AND THE
BANKING STRUCTURE
Although it is too early to draw definitive con
clusions about the full effects of branches and
mergers on the whole range of economic activity,
it is possible to trace the impact, thus far at least,
on that segment which relates directly to banks
and the banking structure.
Impact on banks
Banks, like other enterprises, are in business to
make money. The ultimate test of the success of
a branch or merger, from the banker’s point of
view, is simply how much it increases earnings
over expenses. The test is hard to apply, however,
because the banker can never tell exactly how
much of his profits result directly from a new
branch or merger; he never knows what would
have happened if he had not engaged in branch
and merger activity.
One thing is clear. So many banks could not
have grown so much in so short a time except
through mergers. The 42 banks that engaged in
mergers expanded their deposits, on the average,
by more than three-fourths between December
1946 and June 1954— the period covered in our
study. If you take out deposits which they ac
quired through mergers, however, you find that
the remaining deposits rose by only about onefourth. This was only a little more than the
expansion in deposits of all banks in the Third
District during the same period.
Of course the situation varied widely from bank
to bank. The chart on the next page shows how
mergers had a greater impact on the growth of
Philadelphia banks than on banks outside of
Philadelphia. In the case of some banks that
absorbed, say, only one small bank during the
period, acquired deposits might amount to only
3
b usin ess re v ie w
one-fifth of total deposit growth. When two banks
of about the same size merged or when a bank
absorbed several banks, acquired deposits might
run to 80 or 90 per cent of deposit growth. In a
few instances it appears that deposits would have
declined had it not been for accounts acquired
through merger.
These figures tell an important story for the
banks involved in mergers, but they are now past
history. The question that cannot be answered yet
is what will happen to growth from here on. You
get the general impression from bankers, however,
that, thus far at least, they are pleased. Those who
merged to enlarge lending capacity have been get
ting new large accounts. Although deposits of
new branches in many cases have not yet reached
the break-even point, they seem to be growing.
Earnings experiences vary. They depend on pre
miums paid in mergers, the level of earnings of
HOW BANKS GROW THROUGH MERGERS
PER CENT CHANGE
+80
+60
+40
+20
0
Deposits o f banks which have participated in
mergers rose substantially between December
1946 and June 1954. Most o f the increase was
because of deposits acquired through mergers.
4
absorbed banks, and costs of new branches. But
apparently on the whole they have turned out to
be more favorable than expected.
Expenses, if anything, have been heavier than
expected. They have been particularly heavy in
the short run; they may also turn out to be large,
although bankers may be less aware of them, in
the longer run. Mergers usually are cheaper than
new branches, but expenses involved in integrat
ing two banks still can depress profits for a year
or more. In addition to any premium that might
be paid, the absorbing bank often incurs other
expenses, such as enlarged pensions, at the time
of merger. Then come expenses of making the
transition to a smoothly working, efficient organi
zation. Months of overtime may have to be paid
to mesh bookkeeping methods and other proce
dures. At first the bank needs an extra-large staff
to do this job, but once the transition is com
pleted it often finds itself with surplus help.
Of all the problems resulting from mergers,
personnel problems probably cause the most sleep
less nights. They are likely to be toughest in the
consolidation of two banks of about equal size.
If the banks emphasized different kinds of busi
ness, as is often the case, the problem is reduced.
But inevitably there is some overlapping and per
sonnel must be reduced. Fortunately, only a few
mergers are between banks of about the same size;
in most mergers a larger bank absorbs a smaller
bank to acquire a branch. In this case, personnel
of the absorbed bank can be retained to operate
the branch.
In either case, however, personnel problems
may be costly—in both dollars-and-cents and in
human terms. And it may take years to work
some of them out. Turnover may take care of
surplus employees, but turnover is not so rapid
with officers. What has saved the situation more
than once—and this may help to explain why mer-
b usin ess re v ie w
gers flourish in booms—has been an expansion of
business that has absorbed surplus personnel.
Some costs of the longer-run variety show up
early if banks must renovate or expand facilities
they have acquired, raise salaries, and so on.
There is another kind of cost, however, that may
or may not show up; that is the cost of managing
branches. Branches can be expensive, and one of
WHAT PROPORTION OF BANKS HAVE
BRANCHES?
IN D EC EM B ER 1946
▼
4
A LL BANKS
93%
i---W IT H O U T B R A N C H E S --- ►
*
SM A LL BANKS
99%
IN JU N E 1954
▼
— W IT H B R A N C H E S ---- ►
86%
W ITH B R A N C H E S ---- ►
<
--- W ITHO UT B R A N C H E S --- ►
96%
W ITH BR A N C H ES50%
M E D IU M - S IZ E D
BANKS
W ITH O UT B R A N C H E S -
the problems of managing branches is how to tell
whether they are bringing in enough earnings
to be worth while. It takes money and a cost
accountant to find this out. It may also cost the
bank money if it doesn’t try to find out. Banks
face a dilemma: the more closely they integrate
operations of branches and home office the more
efficient they are likely to be, but the harder it
is to keep track of costs and earnings.
At any rate, this is a problem which will con
front an increasing number of banks. As the chart
shows, most banks still have no branches; yet
80 per cent more banks now have branches than
only a few years ago. The proportion of banks
with branches has increased in all size groups.*
Most of the branches are still being operated by
large- and medium-sized banks, but small banks
now have twice as large a share of all branches
as they had in December 1946.
Although expenses have been heavy, some
banks are beginning to experience savings
through the elimination of duplication and stream
lining of operations. It will take longer to benefit
from some of the other gains that they look for—
things like improved employee morale and more
adequate provision for management succession.
Ultimately, how banks make out will depend on
the quality of services they perform for the public.
Impact on the banking structure
LA R G E B A N K S
85%
«----- W ITH B R A N C H E S ----- ►
94%
i--- W ITHO UT BRAN CHES-— *
Although most large banks have branches and
most small banks have none, more banks of all
sizes now have branches.
The branch and merger movement has had several
important effects on the banking structure. In the
first place, mergers have reduced the number of
banks in operation. As the chart on the next page
indicates, the number of banks in the Third Dis
trict was 7 per cent lower in June 1954 than in
December 1946. But mergers have not reduced
* “ Large” banks are those with deposits over $100 million;
“ medium-sized” banks, between $10 million and $100 million;
“ small” banks, under $10 million.
5
b usin ess r e v ie w
FEWER BANKS, MORE BRANCHES
1200
1000
800
600
400
200
0
Although mergers have reduced the number of
banks in the Third District by 7 per cent, the
number of banking offices has increased by 12
per cent.
and some towns which never had a bank now have
a branch. With only a couple of exceptions, no
community had fewer banking offices at the end
than at the beginning of our study.
About two dozen communities which had one
bank in 1946, however, no longer have a bank
because it was absorbed by an out-of-town bank.
And a few towns which had two banks now have
only one. But since most banks absorbed in mer
gers remained open as branches, and since seven
out of ten communities in 1946 were already onebank towns, the over-all picture has not changed
substantially.
Mergers have tended to increase the relative
share of banking resources held by the large
banks. In 1946, banks with deposits over $100
million represented 1 per cent of all banks in this
district but held 39 per cent of the deposits. By
mid-1954 they held 50 per cent. A number of
forces have been at work to bring this about, but
mergers are one of the more important.
SHIFTS IN CLASSES OF BANKS
P E R C E N T OF TO TAL D E P O S IT S
the number of banking facilities, since almost all
the banks absorbed in mergers have continued to
operate as branches. This, plus the establishment
of more than a hundred new branches, have more
than doubled the number of branches in opera
tion. The end result is that the banking public
had 12 per cent more banking offices to use at the
closing date of our study than it had at the
beginning.
This general picture applies to communities of
all sizes throughout the district. The number of
banks in large, medium, and small communities
declined. The biggest drop, percentage-wise, was
in Philadelphia which started out with 46 and
ended with 29 banks. The number of branches,
however, increased in communities of all sizes;
6
P E R C EN T OF TO TAL B A N K IN G O F F IC E S
N A T IO N A L
BANKS
STATE
M EM BER
BANKS
STATE
N O N M EM B E R
BANKS
M UTUAL
S A V IN G S
BANKS
Mergers have reduced the share of total deposits
and banking offices held by national banks and
increased the share held by State member banks.
b usin ess r e v ie w
The branch and merger movement has also
changed somewhat the distribution by class of
bank—that is, among national banks, state banks
that are members of the Federal Reserve System,
state banks that are not members of the System,
and mutual savings banks. As the chart shows,
the principal result has been a shift of banking
offices and deposits from the national banking
system to state member banks. The shift in bank
ing offices was because of mergers, not new
branches; national banks actually increased their
branches more than state banks. But state banks
absorbed national banks more often than the other
way around, and a couple of big transactions of
this kind in Philadelphia swung a large amount
of deposits over from the national to the statebank classification.
Conclusions
The branch and merger movement is still going
at full tilt. Between June 1954—the closing date
of our study—and the end of February 1955,
banks in the Third Federal Reserve District set
up 19 more new branches and engaged in 18 more
mergers. The pace, if anything, has accelerated.
What will happen from here on is anybody’s
guess. It is clear that the movement is not yet
over. It also looks as though it is spreading more
and more from the big cities to outlying areas.
As the movement proceeds, bankers will want to
study the matter very carefully before making
decisions. And bank supervisors will want to
watch it even more closely than before to see
that it produces a healthy banking system which
contributes to economic growth and stability.
THIRD DISTRICT B A N K I N G - 1 9 5 4
Credit conditions were generally easy during
1954, as manifested in readily available reserves,
lower money rates, and a slackened demand for
credit in some sectors of the economy. Outstand
ing bank credit expanded considerably in the
Third Federal Reserve District and in the country
as a whole. Total earnings of the banks increased,
but with growing expenses their net current earn
ings before income taxes changed relatively little.
While taxes increased, profits on securities also
were larger, helping to explain higher net profits
after taxes.
Credit expansion
At the close of the year, earning assets of member
banks in the Third Federal Reserve District were
close to $7 billion, a record level for year-end
reports. The increase of more than $400 million,
the greatest in any year since World War II, was
mostly in investment portfolios but included a
substantial amount of loans.
THIRD DISTRICT MEMBER BANKS
(P re lim in a ry fig u re s )
E A R N IN G ASSETS
(D o lla r am ounts in m illio'ns)
1954
C h ange in year*
Per cent
Am ount
Loans and discou nts:
+
$5
C o m m e rc ia l and in d u s tr ia l.................. $ 1 ,2 0 8
71
+ 13%
+
8
A g ric u ltu r a l .............................................
+ 25
136
+
27
To purchase o r c a rry s e c u ritie s ........
+
9
2
9
2
5
+ M
Real estate ...............................................
O th e r loans to in d iv id u a ls —
569
+
2
Instalm en t .............................................
+
13
+ 12
274
+
30
S in g le -p a y m e n t ..................................
+
13
90
A ll o th e r ...................................................
+
io
+$185
+
&%
Total loans— gross ........................ $ 3 ,2 7 3
60
+
5
Less reserves ..................................
+
9
+$180
+
6%
T o ta l loans— net ............................ $ 3 ,2 1 3
+
118
4" 4
U. S. G o v e rn m e n t s e c u ritie s .................. 2 ,8 1 2
+
155
+ 3 0
680
State and lo c a l g o v e rn m e n t securities.
— 10
—
29
248
O th e r securities ..........................................
+$424
+
6%
T otal e a rn in g assets...................... $ 6 ,9 5 3
*1953 figures adju s te d fo r m ergers, changes in m em b ersh ip, and
re c la s s ific a tio n o f loans.
7
b usin ess re v ie w
Reserve city banks accounted for more than
half of the increase in earning assets, mainly be
cause of substantial purchases of state and local
government securities. Their purchases of Fed
eral Government issues were less than those of
the country banks and additions to loan portfolios
were little rrjore than one-half as large. Loan
details show that both classes of banks added sub
stantially to their real estate loans during this
period of a continued boom in building. Changes
in commercial and industrial loans were not large,
in keeping with the readjustments in business.
Moderate increases were reported in other loans,
although growth in consumer instalment credit
was very much less than in 1953.
Growth in deposits on a comparable basis
approximated $320 million, raising the level to
$8,040 million at the end of the year. Two-fifths
of this increase was in the time balances of indi
viduals and business concerns. Capital accounts
moved up in about the same proportion as
deposits.
Bank earnings
Total earnings of member banks in this district
rose to $267 million in 1954, according to pre
liminary figures. The increase of $12 million
over 1953, shared by reserve city and country
banks, reflected chiefly the larger volume of earn
ing assets. Record total earnings, however, were
accompanied by record expenses, which increased
a bit more than income. Salaries and wages were
8
higher; interest on deposits rose, reflecting the
growth in time deposits and higher rates paid
in many instances; increases also were reported
in other current expenses.
THIRD DISTRICT MEMBER BANKS
(P re lim in a ry fig u re s )
EA R N IN G S , EXPENSES A N D PROFITS
(D o lla r am ounts in m illio n s )
C h ange
1954
n year*
Am ount
Per cent
G o v 't s e c u ritie s .. $54.4
s e c u ritie s................ . 19.2
151.0
..................................
42.6
..................................
.................................... $267.2
Expenses— salaries and w a g e s .............. $81.6
24.0
interest on d e p o s it..............
60.4
all o th e r ..................................
Total .................. .................. $166.0
N e t cu rre n t e a rn in g s ................................ $101.2
— $0.2
+
1.4
+
8.0
+
2.8
+ $12.0
+ $5.8
+
2.8
+
4.0
+ $12.6
— $0.6
+
+
+
+
+
+
+
+
—
Recoveries, p ro fits , and transfers
fro m reserves ..........................................
Losses, charge-offs, and transfers
to reserves ..............................................
Taxes on net in c o m e ..................................
+ $ l 1.0
+ 141%
—
+
—
Earnings— on U. S.
on o th e r
on loans
a ll o th e r
Total
$18.8
23.3
38.1
.7
5.5
+
8%
6
7
5%
8%
13
7
8%
1%
3
17
$58.6
+ $5.6
N e t p ro fits .............................................. >.
+ 11%
30.9
+
3.8
Cash d iv id e n d s d e c la re d ........................
+ 14
* 1953 figures a dju sted fo r m ergers and changes in m em b ersh ip.
Net current earnings before adjustments and
income taxes declined slightly from 1953—the
first decline since 1947. But the effect upon net
profits of this small decline and of larger income
taxes was more than offset, principally by profits
on security sales. Losses and charge-offs, includ
ing transfers to valuation reserves, contributions
to pension funds, etc., changed little from 1953.
Funds remaining for the payment of dividends
or addition to undivided profits increased by $51/2
million to $58 million. Dividends also increased,
but accounted for little more than half of the net
profits.
b usin ess re v ie w
CURRENT
TRENDS
With the first quarter of 1955 soon to become a
matter of record, there is increasing evidence that
recovery is proceeding pretty much as observers
forecast around the turn of the year. Most of those
projections pointed to gradual gains spreading
over much of 1955. Few of them anticipated the
recent rapid expansion in basic steel and auto
mobiles.
Current trends in these industries doubtless
reflect among other things some hedging against
the possibility of labor-management disputes in
the late spring and early summer. In any event,
most observers seem to feel that both the steel and
automotive industries will have made their major
contributions to economic recovery before the first
half has ended. Should that prove to be the case,
more dependence would be thrown on other lines
to maintain the pace after mid-year.
The construction industry—that lent so much
support to the economy while recessionary forces
were affecting many other lines—is continuing
at a peak level. And among the major categories
of construction, residential building seems to be
one of the most buoyant. The extent to which
homebuilding can be counted on this year, how
ever, depends in a large measure on the avail
ability of funds for home financing.
We have made a spot check of the mortgage
situation and the plans of homebuilders in the
Third Federal Reserve District. The conclusions
that may be drawn from these interviews are
summarized in the following paragraphs.
Mortgage investm ent plans
rem ain substantial
Lending institutions in this area expect to invest
at least as much in home mortgages during 1955
as they did in 1954. Some life insurance com
panies already are heavily committed; others will
be active participants shortly. Mutual savings
institutions, commercial hanks, and savings and
loan associations plan to originate and purchase
a substantial volume of mortgages this year. Most
of them have been quite active in this field for
some months. The opinion has been expressed
widely that an adequate supply of funds for home
financing will continue to be available on reason
able terms. Nevertheless, there are some who look
for a progressive tightening in mortgage markets
after mid-year, particularly if the rate of housing
starts should exceed that of 1954.
Secondary m ortgage m arkets are active
Considerable strength on an over-all basis pre
vails in the secondary mortgage market. The vol
ume of transactions has not changed appreciably
in recent months but there is considerably more
activity than at this time last year. A development
of some significance, however, may be the fact
that lenders are expressing decided preferences
for certain types of mortgages. Conventionals and
FHA’s are especially favored, and some brokers
have told us there is not enough of such paper
to satisfy the demand in this area.
VA 4 V2 per cent mortgages with a down pay
ment of 5 per cent or more’ are moving in fairly
substantial volume, but they are in plentiful sup
ply in the Philadelphia market. This situation
could change quickly to one of over-supply.
Demand for the VA no-down-payment, 30-year
mortgages appears to have slackened considerably
in recent weeks. Trading in the secondary market
is on a par basis for conventionals and FHA’s.
But discounts of from one to three points are
9
b usiness re v ie w
appearing with some regularity on VA mortgages
in which there is no equity. This is particularly
true in the case of the long-term loans.
Lending terms have eased som ewhat
The Housing Act of 1954 reduced the size of
down payments and extended the maturity on
FHA insured mortgages, with the result that this
type of loan has increased in popularity in most
parts of the district. Terms on conventional mort
gages, too, are somewhat more lenient than in
the early spring of last year. Down payments have
not changed significantly, but interest rates have
softened a little, chiefly on mortgages in which
the borrower’s equity ranges upward from 40 per
cent. And savings and loan associations have
liberalized their terms to permit a down payment
of 25 per cent on mortgages running for 25 years.
On VA’s, the no-down-payment feature represents
a decided easing in terms. But lately there has
been considerably more insistence on at least a
5 per cent equity, particularly on those mortgages
that run for the 30-year maximum.
Builders’ plans reflect
considerable optimism
Most builders appear to recognize the increasingly
competitive nature of the market in which they
operate. Nevertheless, their experience in selling
houses soon after completion has continued en
couraging. Homebuilders in virtually all price
ranges express about the same high degree of
confidence they maintained through 1954. On
this basis, it seems likely that 1955 housing starts
may approximate the level reached last year. In
the vicinity of the larger cities of this district,
improved land is becoming scarce and prices are
advancing rapidly. This situation could necessitate
some shift from the lower- to the medium-price
ranges, although builders in nearly all sections
10
tell us there remains a strong demand for houses
selling from $10,000 to $12,000.
In this price range, a considerable volume of
construction is planned for 1955 in suburban
sections near Philadelphia and in the vicinity of
Trenton, New Jersey. Around Reading and in
the Allentown-Bethlehem area of Pennsylvania,
activity is expected to be heaviest in houses sell
ing from $13,500 to about $16,000. In suburban
Wilmington, New Castle, and Newark in Dela
ware, more builders may be operating in the
medium- to higher-price ranges this year than last.
Adequate financing is availab le
to builders
Thus far builders have not experienced difficulty
in arranging for either temporary or permanent
financing on projects scheduled for 1955. Con
struction loans generally are available on much
the same terms as prevailed last year, and com
mitments for mortgages on operations already
under way appear to present no problems. Ad
vance commitments covering future construction
are said to be a little more difficult to arrange,
and builders seem to feel that some further tight
ening may be expected later this year. But this
situation appears to vary with the locality. There
still are a few areas in this district where lenders
continue to encourage builders to apply for loans
on projects not yet started.
Demand for existing houses holds up
Both builders and real-estate brokers tell us the
market for old houses is holding up surprisingly
well in most sections. Buyer preferences lean
more strongly toward suburban offerings. But
there are not so many of these to choose from,
so most city row houses sell fairly promptly.
Prices of existing houses have continued to soften
in the past year and further moderate decreases
b usin ess re v ie w
appear probable. The number of old houses on
the market has been increasing slowly. Builders
are watching this situation closely. Thus far com
petition with new construction has not reached
noteworthy proportions and builders have not
expressed serious concern over the situation.
11
F O R T HE R E C O R D . . .
INDEX
MEMBER BANKS 3RD ER.D.
BIL LIO N S 9
AGO
AGO
1939
Departm ent Store
Factory*
Third Federal
Reserve District
U n ite d States
Per cent change
Per cent change
SUMMARY
January
195 5 from
mo.
ago
O UTPUT
M anufactu rin g p ro d u c tio n . . . Construction c o n tra cts*........... C o a l m ining................................ EM PLOYM ENT A N D
IN C O M E
Factory employment (T o ta l). . Factory w a g e incom e.............. -
2
8
6
year
ago
- 4
+26
- 7
12
mos.
195 5
from
ye a r
ago
12
mos.
1955
January
19 5 5 from
mo.
ago
+
+
+
2
2
3
year
ago
+ 5
+34
+ 4
1
2
-
6
3
-
1
-
TRADE**
Department store sales............ - 1
Departm ent store stocks........... — 2
+
+
5
4
+
—
1
1
+10
+ 3
B A N K IN G
( A ll member banks)
Deposits........................................
Loans............................................
Investments..................................
U.S. G ovt, secu ritie s..............
O th e r .........................................
Check paym ents.........................
+ 5
+ 7
+ 7
+ 3
+18
+ 8t
1
1
0
- 1
+ 3
-1 2
+ 6
+ 6
+10
+ 8
+15
+ 6
PRICES
W h o le s a le ..................................
Consum er.....................................
- 2
- 1
- 2
- 3
+ 2
— 18 t
ot
‘ Based on 3-month moving averages.
“ A d ju ste d fo r seasonal va ria tio n .
12
ot
-
+
1
0
t2 0 C ities
{P h ila d e lp h ia
-
3
1
1
Check
Payments
Employ
ment
LO C A L
CH A N GES
Payrolls
Stocks
Sales
Per cent
change
January
1955 from
Per cent
Per cent
Per cent
change
change
change
January
January
January
195 5 from 19 5 5 from 19 5 5 from
mo.
ago
year
ago
mo.
ago
year mo.
ago ago
A lle n to w n . . . - 1
-
7
+2
-
H a rris b u rg . . . + 1
-
9
+3
-1 3
Lancaster. . . . - 1
-
2
0
P h ila d e lp h ia ..
-1
-
6
R e a d in g ..........
-1
-
5
0
S cranton..........
-1
-
4
+1
-
7
year
ago
T re n to n ...........
0
W ilk e s -B a rre . - 2
-
0
2
-5
3
-2
W ilm in g to n .. . + 2
-
Y o rk .................
-1 0
-3
-2
-4
year mo.
ago ago
year
ago
5
Per cent
change
January
195 5 from
mo.
ago
year
ago
-
9 +17
-
8 +
-
6 +11
3
+
5 -5 7
-
4 -
6 -
1
-
1 -5 4
+
7 -
3 +
6 -1 7
0 -5 6
+
5 -
4 +10
-1 2
+11
-
3 -6 3
+ •3 -
1 +13
-1 2
+
+
2 -5 8
+11
-
8 +15
-
+14
-
1 +
3 -1 3
+
4
-
5 -3 8
+
5
5 +
3
-
1 -6 0
0 -6 6
-1 0
-5 9
+
6 -1 3
0 +
9 +
9 -
+
8
9
3 +25
‘ N o t restricted to c o rp o ra te limits o f cities but covers areas o f one o r
more counties.
@FedFRASER