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SEPTEMBER 1954

business review

BANK

BRANCH AND MERGER MOVEMENT
THE THIRD FEDERAL RESERVE DISTRICT
secon d article on the su b ject, statistics are a n alyzed
four questions: How much, w hen, w here, and who?
also help to answ er the $64 question: W hy?

DEVELOPMENTS —
Bank cred it and d e p o sits e x p a n d e d over the ye a r en d ed
last June— a p e rio d o f econom ic readjustm ent.

CURRENT TRENDS
Instalment credit terms have e a se d som ew hat,
cred it risks are exam ined more closely.

Additional copies of this issue are available
upon request to the Department of Research,
Federal Reserve Bank of Philadelphia,
Philadelohia 1. Pa.

THE BRANCH AND MERGER MOVEMENT
in the Third 2
Federal Reserve District
Last month we presented the general background

tion. What follows, of course, is an over-simplifi

for changes currently being made in the banking

cation; there is no such thing as a typical case.

structure. This second article describes some basic

We have, however, collected many figures on each

facts about the nature of the branch and merger

of the 66 mergers and 118 new branches estab

movement from the end of 1946 to the middle of

lished since the end of 1946, and these statistics

this year.

reveal certain concentrations, averages, and tend
encies which stand out rather clearly.

PART II: NATURE OF THE MOVEMENT

In the first place, they show that for each hank

Because they have arisen in response to human

participating in the branch and merger movement

needs and because they are run by people, no two

there are seven others that have not. And the

banks are exactly alike. Anyone who tends to

bank which has participated typically has engaged

forget this can be reminded by statistics on merg

in only one merger or has established only one

ers and branches. Each bank has different prob

branch.

lems and reacts to them in a different way. These
variations show up in the figures.

This branch was established or merger took
place probably during the past year and a half,

Yet, a development as widespread as the cur

and chances are it was in a large* city. In the

rent branch and merger movement must be motiv
ated by certain common forces, and these too

case of a new branch, it was more likely to have
been established in the head-office city than out

should be reflected in the figures. So in this article

side; but in the case of a merger, the likelihood

we shall try to bring some order out of statistical

is greater that the two banks were in different

chaos and answer four fundamental questions:

towns. The absorbed bank may well have been

How much? When? Where? W ho? Whenever

located

the figures make it possible, we shall also try to

population.

give a partial answer to the most interesting ques
tion of all: W hy?

town

with

less

than

10,000

We are likely to be dealing with a bank of
fairly substantial size*— perhaps with deposits
of at least $60 million. Of course, when it comes

The “ typical” situation
Some of these questions are answered in a general
way in the charts on pages 4 and 5, and can be
summarized in a word picture of the typical situa

* Thro ug h o ut th is a rticle, cities are divided in to fo u r groups:
P hiladelphia, other large cities (pop u latio n over 100,000),
m edium -sized cities (10,000 to 100,000), and sm all towns (under
10 , 000) .

Banks are divided into three size groups: large (to ta l deposits
over $100 m illio n ) ; m edium (between $10 m illio n and $100
m illio n ) ; sm all (under $10 m illio n ).

A BRIEF PICTURE OF THE BRANCH
NEW

HOW MUCH

BRANCHES
Seven out of ten banks which
have established branches,
have set up only one apiece.

WHEN
47

Banks

'49

'51
'50

'A S

'53

FIRST HALF
'5 4

'52

have

established

many new branches in the past
year and a half as in the six
preceding years.

WHERE

|g§|: ggggggg H
SMALL TOW NS

MEDIUM -SIZED
CITIES

LARGE
CITIES

Almost half of the banks which

have set up branches have been

PH ILADE LPH IA

IH IIIH IIH H im iU tii H

in Philadelphia and other large

cities;
. . . and over half the branches
have been in the same city as
the head office.
IN

DIFFERENT
COUNTY

WHO

Banks with deposits over $10
S M ALL

J iA P G E

million have established three

BANKS

out of four of the new branches
. . . and state and national
banks have participated about
equally.

PER CENT

100

AND MERGER MOVEMENT
MERGERS

HOW MUCH

Most banks involved in merg
ers have absorbed only one
bank apiece.

WHEN
Mergers have become increas
47

'49
48

'51

'5 3

FIRST HALF
'5 4

'52

ingly numerous over the past
seven and a half years.

WHERE
Half of the absorbing banks
have been in Philadelphia and
other large cities . . .
. . . but seven out of ten ab
MEDIUM
SIZED
C IT IE S

S M A LL TOWNS

sorbed banks have been in
small towns and medium-sized

P H IL A D E L P H IA

LARGE
CITIES

IN SAME C ITY
IN

■

DIFFERENT
COUNTIES

cities;
. . . the merging hanks have
been located in different cities
more frequently than in the
same city.

WHO
Absorbing banks in most cases
have been large or medium
sized . . .

SM ALL

. . . but two out of three ab

M E D IU M -S IZ
BANKS

BANKS

sorbed banks have been small;
LARGE
BANKS

. . . national banks have been
involved in over three out of
four mergers.
0

PER

100

CENT

b usiness r e v ie w

to the bank which is absorbed by merger, size

Moreover, most banks that have engaged in

is quite another matter; then we are talking

mergers or new-hranch activity have been involved

about (roughly) a $5 million institution.

in only one merger or have established only one

A look at condition statements and earnings

new branch. At the other extreme is a bank which

reports suggests certain other generalizations.

has been party to five mergers, and another bank

Chances are fairly great that the absorbing bank

which has set up seven branches. Mergers have

in the typical merger had not grown so fast, since

been concentrated in fewer banks than have

1939, as the bank it absorbed. On the other hand,
the absorbing bank frequently had relatively

branches; six large banks, for example, are re
sponsible for one-third of the mergers. Most

more of its assets in loans— particularly busi

banks have used either mergers or new branches

ness loans— and had a bigger trust business. It

as a way of expanding, but over half of the

may well have had relatively lower expenses

large banks have used both.

(compared with total earnings), almost certainly
had better net earnings (as a per cent of capital),

When?

and paid definitely higher dividends (as a per

The branch and merger movement began picking

cent of capital). In the case of new branches,

up speed in 1951 and 1952. Activity in 1953

we get the same general picture by comparing

and the first half of this year alone was equal to

banks which have established branches with all
other banks.

the preceding six years.

These general conclusions are amplified, and

The question bankers are asking themselves,
of course, is whether the pace will accelerate or

in many cases modified, by a more careful look

slow down. And in this connection, it may be

at the figures.

significant that the smaller banks have begun to

How much?

covered by our study, mergers were confined

Last month we indicated that, compared with

pretty largely to large and medium-sized banks

participate only recently.

In the earlier years

other sections of the country, banks in the Third

and were quite sporadic. By 1951 they were be

District have been quite active in establishing new

coming more frequent and numerous, and were

branches, and especially active in mergers. Yet,

beginning to involve small banks outside of Phila

in another sense the movement does not seem so

delphia. By 1953 a fairly substantial share of the

extensive. Less than 100 of the district’s banks,

mergers was being carried on among small

or only about one out of eight, have absorbed

banks. New-branch activity shows a somewhat

other banks or set up new branches.

different picture, for the smaller banks outside

The relatively few banks which have been active

of Philadelphia were more active earlier.

are mainly the large banks. Almost two-thirds of

seems that the possibilities of mergers occurred

the large banks have, at one time or another,

to them later.

absorbed another bank; and an even larger pro
portion of them have set up new branches. In

Where?

contrast, barely 1 per cent of the small banks

Still, the branch and merger movement has been

have absorbed other banks, and only 3 per cent

basically a big-city phenomenon. A third of all

have established new branches.

mergers and a fourth of the new branches have

b usin ess re v ie w

involved Philadelphia banks. Close to half of the

however, we get quite a different picture. Over

mergers and new branches were located in the

half of the absorbed banks were in towns with

Philadelphia eight-county metropolitan area. No

less than 10,000 population. New-branch activity

activity has taken place in 28 of the district’s

has penetrated somewhat more into the smaller

60 counties.

centers than have mergers. In about one out of

When mergers are classified by size of city in
which the absorbing bank is located, the picture

four cases the parent bank was located in a small
town.

becomes more striking. In one out of two merg

Mergers and branches are changing the “ local”

ers, the absorbing bank was located in a city with

nature of banking, for almost three-fifths of the

population over 100,000

(including Philadel

mergers have been between banks in different

phia) : in one out of three it was in a city with

cities and over two-fifths of the new branches have

population between 10,000 and 100,000; and in

been set up outside the head-office city. The great

only one out of seven was it in a town of less

est impact of this development has been in the

than 10,000. If we classify mergers by the size

smaller towns, as is to be expected because oppor

of the town in which the absorbed bank is located,

tunities for branching out or merging with other

WHAT PROPORTION OF ALL BANKS
HAVE PARTICIPATED IN MERGERS AND NEW BRANCHES?
NEW

BRANCHES

PER CENT OF A L L BANKS IN EACH GROUP

S M ALL BANKS

M EDIU M-SIZED
BANKS

LARGE BANKS

PER CENT OF A L L BA NK S IN

A L L BANKS

S M A L L BANKS

M ERGERS

EACH GROUP

M EDIUM-SIZED

LARGE BANKS

A L L BANKS

BANKS

M o s t banks have no t been a ctive in the branch and m erg er movem ent. A much la rge r p ro p o r tio n o f
large banks than o f small banks have been involved. (C h a rt on mergers is f o r ab sorb ing banks only.)

b usiness re v ie w

banks in the same city become more limited the

are fairly good sized. In a third of the mergers

smaller the community. Philadelphia is a special

the absorbing bank had deposits over $100 mil

case because city lines and county lines are the

lion; in over half, it had deposits between $10

same. For some time, opposition to cross-county

million and $100 million; and in only a seventh

expansion has impeded establishment of branches

were deposits under $10 million. But the small

or mergers across city lines. Yet, quite recently

group contains two-thirds of the absorbed banks.

Philadelphia banks have merged with outside

Banks establishing new branches are generally

banks to the extent of one-fourth of all their
mergers.

pretty large, too, although the smaller banks have
been more active in this respect than in mergers.
Over 60 per cent of the banks in the Third Dis
trict are national hanks, so it is natural to expect

Who?

more national than state hanks to be involved

The first question almost everyone asks about the

in mergers and new branches. The figures bear

merger and branch movement is “ W h y?” We in

this out. But they also show that state banks have

tend to deal with this one later; hut a partial an

been relatively more active than national banks;

swer may come from statistics on the kind of bank

they were absorbing banks in 45 per cent of the
mergers, and parent banks in 43 per cent of the

active in the movement.
The figures show clearly that most of the banks

new-branch activity. In addition, state banks ab-

HOW ACTIVE HAVE BANKS BEEN?
NEW

M ERGERS

BRANCHES

NUMBER PER BANK

S M A L L BANKS

M EDIU M-SIZED
BANKS

LARGE BA NK S

A L L BA NK S

S M A L L BANKS

MEDIUM-SIZED
BANKS

LARGE BA N K S

A L L BA NK S

O f those banks which have e n g a g e d in mergers and new branches, la rge banks have been relativ e ly
more a ctive than small banks. (C h a rt on mergers is f o r ab sorb in g banks only.)

business re v ie w

sorbed national banks more often than national
absorbed state banks. The general effect has been

TIMING BRANCHES AND MERGERS
NEW

NUMBER

BRANCHES

to increase the banking resources of state banks
relative to national banks, and this has been par
ticularly true in Philadelphia.
These are all. perhaps, interesting facts but
when we come to some of the other characteristics
of banks— especially things like growth record,
branch-banking activity, the kinds of assets which
they hold, and their earnings experience— we get
closer to some of the motives behind the branch
and merger movement.
You might start, for example, with this theory
about mergers: fast-growing banks are taking over
stagnant banks. But the figures show that it is
not true; absorbing banks are likely to have grown
less rapidly than the banks they absorb. A look
at the figures by size of bank indicates that large
banks in general have tended to grow less rapidly
than small banks since 1939 and, of course, the
larger banks are doing most of the absorbing.
In mergers of smaller banks, the growth records
are more nearly alike. All of which suggests that
large banks are not growing so rapidly that the
momentum simply carries them into other areas:

M ERGERS

NUMBER

rather, central city banks are getting in on the
more rapid growth which smaller banks in out
lying areas have been experiencing.
Banks can do this either by merging with exist
ing banks or setting up new branches in those
areas. Which method they choose depends on
many things, but the result in both cases is an ex
pansion of branch banking. The figures suggest,
however, very few cases where mergers could be an
attempt to acquire an established branch system of
another bank: except mainly for a few fairly
large institutions, most absorbed banks had no
branches at time of merger.

_l
1947

194ft

1949

1950

1951

1952

1953

1954

Another theory might be that banks take over

Branches and mergers picked up speed in 1951
and 1952, spre ad in g fr o m la rge t o small banks.

other banks for the loans they have. This does

(M ergers are g r o u p e d by size o f ab sorb in g bank.)

business re v ie w

not seem to be strictly true. Certainly, mergers

have roughly the same asset pattern. Complemen

would be unlikely unless the absorbing bank saw

tariness, apparently, is not important there.

prospects of profits from loans, but at time of

In view of growth experience, you might come

merger the banks being absorbed have usually

up with still another theory: banks absorb other

had a smaller proportion of their assets in loans

banks with higher earnings.

than have the absorbing banks. Here again the

tainly true that prospects of earnings are a mo

difference is partly explained by the fact that the

tivating force, but the figures show that earnings

largest banks are likely to be in loans relatively
more heavily than most other banks. The differ

of absorbed banks are likely to be less favorable
than earnings of absorbing banks. One reason

ences are less when two banks of about the same
size are merging.

may be the higher proportion of loans in the as

As might be expected, the composition of the

be that absorbing banks hold relatively less of

loan portfolios of absorbing banks is different

their funds idle; but this is not true in mergers

Again, it is cer

set structure of absorbing banks. Another may

from that of absorbed banks— partly because of

involving large and small banks because large

differences in size of the two institutions. Absorb

banks generally have higher cash holdings (in

ing banks are quite likely to have a larger propor

cluding reserves).

tion of business and consumer loans, and less farm

A more important reason for differences in

and real-estate loans. Differences in investment

earnings, perhaps, is expenses.

portfolios are not clear-cut except that the large

banks are merging, expenses are often about the

If two smaller

Philadelphia banks usually have had heavier hold

same; but where a large bank takes over a smaller

ings of securities other than U.S. Governments

bank, expenses are likely to be relatively lower

than have the banks they absorbed. Trust business

(as a percentage of total earnings) in the absorb

almost always is relatively more important in the

ing bank than in the absorbed bank.

absorbing than the absorbed bank.

Because expenses are relatively lower ( as a per

These differences bring us to another theory:

centage of total earnings) net current earnings of

banks merge in order to form a more well-rounded

the absorbing bank are likely to be relatively

bank. Whether this is actually a motive or not, the

higher. Partly because of this and partly because

facts above indicate that banks actually do become

absorbing banks usually have a lower ratio of

more well-rounded, in the sense that the structure

capital to so-called “ risk assets,” their return on

of the two banks is never exactly alike. But the

capital is usually higher. And because dividend

figures suggest only a few cases where this might

policies apparently are more liberal, dividends as

be a dominant reason. These are large banks of

a percentage of capital are still greater than those

about equal size but with quite different structures

of absorbed banks.

— one bank having a large trust and consumer-

All of this has to do with mergers. It is fairly

credit business merging with another having heavy

easy to analyze the characteristics of banks in

commercial-loan volume; or a bank having large

volved in mergers because you can simply com

consumer and real-estate loans merging with a

pare one bank against another. With branches,

bank with large business loans. If you examine

the only possibility is to compare banks which

mergers between smaller banks of about equal

have established branches with all banks of about

size, however, you find that both banks usually

the same size. When you make this comparison

b usiness re v ie w

HOW ABSORBING BANKS COMPARE WITH ABSORBED BANKS
These charts show some o f the differences between absorbing banks and absorbed banks.
which

measures a given

ve rtical scale fo r each absorbing bank.
line.

In each cha rt a percentage

bank cha racte ristic is p lo tte d on the horizontal scale fo r each absorbed bank and on the
If the percentage fo r both banks is the same, the d o t will fall on the diagonal

If the percentage fo r the absorbing bank is higher than fo r the absorbed bank, the d o t will fa ll above the line;

if it is lower, the d o t w ill fa ll below the line.

The percentages in the u p per righ t-ha nd corner o f each c h a rt indica te

the p ro p o rtio n o f dots fa llin g above and below the line.

ABSORBING BANK

1.
Deposits o f absorbing

+ 300%

banks have

grown less ra p id ly since 1939.
+ 200%

10 0 %

A bsorbing banks have a higher ra tio
o f loans to to ta l assets . . .
+ 200%

+ 300%,

20%

40%

60%,

3.
. . . a lower ra tio o f expenses to to ta l
earnings . . .

4.
. . . a lower ra tio o f ca p ita l accounts
20%

to so-called "risk assets" . . .

•

* 68%

•

*
•

•

:
5%

. . .
••••".
, • * •

5.
. . .

10%

40%

•

15%

30%,

• g

a higher ra tio o f net current

‘

10%

•’
:

. • •
* •
•••
3% —

earnings to to ta l ca p ita l accounts . . .

- t p

•
•• •*

•
2%
•
i
5%

i
i
10%
15%
ABSORBED BANK

6.
. . . and a higher ra tio o f dividends to
total cap ital accounts.

*
•1
2%

1
1
3%
4%>
ABSORBED BANK

1
5%

business r e v ie w

the results are not so clear-cut as with mergers
but reveal the same general picture.

tive, yet the movement has been spreading. A
question worth considering is whether mergers
will become more prevalent among smaller banks.

Conclusions

Third, the figures shed some light on elements

We have presented a lot of facts and figures in

underlying mergers and branches. They are of

this article, but we have done it deliberately be

limited value because there are many things that

cause so few facts have been available on the sub

do not show up in statistics. It seems significant

ject. One disadvantage of this approach, however,
is that important points may be lost in a maze of

that, for many banks, mergers are, in a way, a
defensive measure. They are a way of speeding up

statistics. In summary, therefore, these few main
points seem to stand out:

ing areas. On the other hand, the figures suggest

First, the figures give some idea of the relative

that absorbing banks have tended to make more

importance of the branch and merger movement

profitable use of their funds than have absorbed

a lagging growth trend and expanding into grow

as a banking phenomenon. And, in general, they

banks. Their loans are a relatively greater pro

suggest that recent developments have not been

portion of total assets, their expenses take a

so extensive as some might think. Most banks in

smaller cut out of total earnings, and earnings

most areas have not participated. Of those that

are higher compared with capital. And in at least

have, most are large banks in large centers. Small

two respects, absorbed banks appear to be more

banks have participated mainly by being ab

conservative; they have higher capital ratios and

sorbed. Out of this comes an important question

pay out a smaller proportion of earnings as divi

as to how much branches and mergers have af

dends. Behind these figures is management, and

fected the concentration of banking facilities. We

this is hard to measure. We shall go into this

shall look into this question later.

and other reasons underlying the branch and

Second, although most banks have not been ac

merger movement in a later article.

B A N K IN G DEVELO PM ENTSTHIRD DISTRICT
From mid-year to mid-year
Readjustment was a significant characteristic of

supply of funds increased and demand from some

the economy during the year ended June 30. In

sectors declined. Reductions in reserve require

the field of money and credit increasing ease was

ments against member bank deposits and lower

manifest, reflected partly in substantial declines in

discount rates at the Reserve Banks were among

bond yields and open market money rates as the

the contributing factors. Deposits and outstanding

b usiness re v ie w

credit of the member banks in the Third Federal
Reserve District and nationally expanded consid
erably.

MEMBER BANK LO ANS
(Third Federal Reserve District)
BILLIONS $

At mid-year, deposits of the member banks in
this district totaled approximately $7.7 billion.
After adjustment for mergers, the figures show an
increase over June 1953 of well over $300 million
— the largest for any like period since 1950. De
mand deposits of individuals and business con
cerns changed little, but there were substantial
additions to their time balances and to the bal
ances of government— Federal, State and local.
Earning assets of Third District banks also
were up more than $300 million, or nearly
5 per cent, from June 1953 to June 1954.

the year preceding, sharply rising loans were
offset to a considerable extent by reduced hold
ings of United States Government securities. This
was not the case in the period under review.
Growth in loans slowed considerably, but invest
ment portfolios increased nearly as much, as banks
purchased public obligations, both Federal and
municipal.

Investments in corporate securities

again declined somewhat. The experience of re
serve city banks, located in Philadelphia, differed

increased, but much more moderately than a year

from that of the country banks. Credit expansion

earlier. The availability of mortgage money and

at reserve city banks was largely in securities,

the continued high level of construction resulted

both Federal Government and municipal issues,

in an increase in real estate loans equal to or

and to only a limited extent in loans. Country

slightly larger than in the year ended June 1953.

banks, on the other hand, added considerably to

Expansion in loans to purchase or carry securities

their loans but reported little change in aggre

also was reported, as well as growth in agricultural

gate investment portfolios.

paper incident to the purchase of certificates of

Details of the over-all increase of $170 million

interest in Commodity Credit Corporation loans.

in loans to nearly $3.2 billion reflect some of the

Earnings reports of the member banks in

signs of the times. Loans to commerce and indus

this district for the first half of 1954 reflect the

try, earlier a major factor in loan expansion, de

growth in earning assets.

creased in the latest twelve-month period. The

show gross earnings of nearly $132 million, up

decrease was not particularly large, as higher

about $6 million on an adjusted basis from a year

country bank figures partly offset a decline at re

earlier. As in other post-war years, increasing

serve city banks. Instalment loans to consumers

income on loans was the major factor in this rise.

Preliminary figures

b usin ess r e v ie w

But current expenses also continued to move up

the figures bank by bank, the number reporting

ward and in about the same amount.

a decline in net current earnings was larger than

Conse

quently, net current earnings before recoveries,

the number experiencing

charge-offs, and income taxes were virtually the

higher gross earnings than a year earlier were

same as in the first six months of 1953. Checking

reported in the great majority of cases.

CURRENT

increases,

although

TRENDS

The over-all pattern of late-summer economic de

Instalment credit terms are under pressure

velopments seems to have strengthened the belief

Because so many people buy consumer du

held by many business observers that the period

rables on the instalment plan, considerable pres

of readjustment may soon be over. Productive

sure has been developing for a relaxation of fi

activity and employment have continued to be

nancing terms. A spot check of the situation in

stable, and although inventory reduction is still

this Federal Reserve District indicates some eas

in progress the rate of liquidation has diminished

ing in down-payment requirements and a gradual

somewhat. Construction, particularly in the field

lengthening of maturities. Terms of sale show

of home building, has maintained the fast pace set

more of a tendency to ease on automobiles than

earlier this year. And consumer spending, sup

on appliances. And there is greater flexibility

ported by a high level of disposable income, con

with respect to new cars than to used cars.

tinues to be a strong sustaining force.

We also found variations on an area basis.

Throughout this past year of business adjust

There is more evidence of automobile terms being

ment, consumers continued to increase their out

relaxed in Philadelphia and its suburbs than in a

lays for services but not their expenditures for

number of smaller city areas of the district. In

goods.

Johnstown, York, and Harrisburg there are some

Consequently,

keen competition

soon

dominated various areas of retail merchandising.

signs of tightening requirements on both down

In automobiles, for example, the struggle to main

payments and maturities. Major appliance deal

tain sales has been difficult since the very begin

ers, irrespective of their location, still show little

ning of the 1954-model year. And in appliances

inclination to ease their terms of sale. While there

and similar “ big ticket” items for household use

are scattered reports to the contrary, they relate

the going has been only a little less rough. White

chiefly to merchants who carry appliances and

goods and television sales both have experienced

Full text of Business Review (Federal Reserve Bank of Philadelphia) : September 1954

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