Full text of Roundup : September 1983
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DALLAS Federal Reserve Bank of Dallas September 1983 FCA Identifies Checking Trends Interest-bearing checking accounts comprised 16 to 25 percent of all de mand deposit accounts held at banks participating in the Dallas Fed’s 1982 functional cost analysis (FCA) pro gram. That figure represents an in crease from the 10 to 16 percent range that existed in 1981. The FCA reports, which provide a breakdown of average costs, income and expense data by size of institution, show that banks with deposits in the less than $50 million range had the greatest percentage of deposits in interest-bearing accounts. For this group, the percentage grew from 16 percent in 1981 to 25 percent in 1982. The reports also indicate the in creasing costs associated with main taining demand deposit accounts. For 1982, banks with deposits over $200 million experienced a 23 percent in crease in the average cost to maintain a demand deposit account, from $4.60 per month in 1981 to $5.65 in 1982. Na tionwide, this figure was, on average, $4.67 for 1982. These increases can be attributed, in part, to the popularity of interest-bearing checking accounts and data processing expense. Earnings per demand deposit ac count were down in 1982 due to in creased costs. The average monthly net loss on each account for all par ticipating Eleventh District banks was $10.30, up 35 percent from $7.61 in 1981. However, after credit for income on funds deposited in the bank’s port folio was applied to demand deposit earnings, net earnings generally in creased. The monthly net earnings per account after portfolio credit was $19.74. For all participating banks, however, the average net portfolio yield decreased from 13.25 percent in 1981 to 12.78 percent in 1982. Banks in the over $200 million deposit range were the hardest hit in demand deposit account losses. The average net loss per account per month was $23.83, up 43 percent from $16.62. In addition, net earnings after portfolio credit for these banks decreased from $34.24 to $25.95 per ac count per month. In addition to demand deposit ac count information, the FCA reports provide income and expense data which indicate, for example, the average cost to make an instalment loan, the average cost to process a sav ings account deposit, the average cost to process and cash a check, and thousands of other figures which deal with operating costs and ratios. This year, for the first time, the report also contains separate informa tion for thrift institutions. This report is compiled from data provided by 72 par ticipating thrifts throughout the United States. INSIDE • Holding Companies • Return Item Pilot • Reg Q Suspension A New Environment Texas bank holding companies experience growth, join forces ank holding company a c tiv ity is brisk in Texas. For mations of new bank companies is that they will have to grow larger to compete na tionally. The percep tion among mid-sized bank holding com panies is that merg ing with a larger com p any w ill b e tte r enable them to par B holding com panies h ave in c re a s e d significantly over the past several years. A c q u is itio n s by holding companies of a d d itio n a l in s t it u tions continually are announced. And m e rg e rs b e tw e e n large bank holding Cochran: a "turning ■— — — ^ companies are being planned at a pace never before experienced in the state. The reasons for these developments are many. Banks may form new holding com panies to take advantage of certain tax benefits, and holding companies may ac quire additional institutions as a means of growth and expansion. Mergers of larger holding companies, however, may be due to a general perception of major changes developing in the financial services market. According to Federal Reserve Bank of Dallas Senior Vice President George C. Cochran, interstate networks are being developed to prepare for interstate banking. “The perception among large bank holding Texas Bank Deposits ■ 1977 ticipate in the emerg ing financial environ ment,” Cochran said. A bank holding point company is a corp o ra tio n w h ic h controls 25 percent or more of a bank's stock. Two types of holding companies ex is t—those which control the ownership of only one bank and those which control the ownership of_more than one bank. The Bank Holding Company Act of 1956—which is considered the first comprehensive legisla tion regarding holding companies—defined bank holding companies, controlled their expansion, and required divestiture of cer tain nonbanking activities. This act also designated the Federal Reserve Board as the agency directly responsible for regula tion, supervision and examination of hold ing companies. Prior approval from the Board was required before a holding com pany could be formed or before an existing holding company could acquire more than five percent of the voting shares of an addi tional bank. The 1956 act addressed only those companies which controlled two or more banks. One-bank holding companies were not subject to the same requirements until amendments to the act were passed in 1970. Over the past several years, both types of bank holding companies have experienced substantial growth in Texas. Dallas Fed statistics indicate that there are 401 onebank holding companies in Texas (July 1983) with over $14 billion in deposits (yearend 1982) representing 11.96 percent of the s ta te ’s to ta l d e p o s its . C om p arab le statistics for 1977 show only 61 one-bank companies with approximately $2 billion in deposits representing 3.9 percent of the state’s deposits_(see chart). Multibank holding companies total 85 with 621 sub sidiary banks (July 1983) and over $85 b illio n in d e p o s its (year-end 1982) representing 70.37 percent of the state’s deposits. In 1977, there were 34 multibank companies with 250 subsidiaries and over $28 billion in deposits representing 53.58 percent of the state’s deposits. The tax advantage afforded bank holding companies, which can facilitate debt ser vice, is the major reason for the formation Texas Bank Deposits ■ 1982 Each ch a rt represents the percentages of to ta l bank d e po sits in Texas held in banks a ffilia te d w ith m ultib a nk holding com panies, one-bank holding com panies, and banks not a ffilia te d w ith holding com panies. of most one-bank holding companies. “ But we’ve seen one-bank companies form for o th er re a so n s,’’ exp la in s Robert D. Hankins, assistant vice president in the Bank’s Holding Company Supervision Department. Holding companies also are used for estate planning purposes, to engage in nonbank activities, and to serve as a vehicle for raising capital. While sim ilar advantages exist for multibank com panies, these organizations are formed primarily as a means of growth and expan sion into new markets. The fact that Texas does not allow branch banking clearly con tributed to much of the growth. n addition to the formation of holding companies and acquisi tions of subsidiary banks, Texas this year has witnessed a number of mergers and proposed mergers among the state's largest bank holding companies. To date, the most significant was the InterFirst/First United Bancorporation merger approved by the Federal Reserve Board in April. Since that time, other top tier banking organizations in the state have initiated sim ilar merger proposals. Such mergers not only allow the organizations to make larger loans and thus more effectively serve large businesses, but also represent a reposition ing of the industry to prepare for future developments in banking. I Cochran said that the Board’s approval of the acquisition of PanNational Group by Mercantile Texas Corporation in December 1981 was the turning point. Originally denied because of possible adverse effects on probable future competition, Mercantile petitioned the U.S. Fifth Circuit Court of Ap peals. The court directed the Board to make more specific findings of fact with respect to each of several issues if it is to deny an application on the basis of probable future competition. These issues address com petition and concentration in the target market and potential entry into that market. When analyzing mergers and acquisi tions involving two organizations in the same market, the Board continues to use market share standards established by the Justice Department to evaluate probable future competition. However, the Board also is giving some weight to competition from savings and loan associations, non bank financial organizations, and other in stitutions in analyzing these cases. The Board often is willing to accept divestitures of banks or branches in the market to resolve competitive problems. According to Cochran, the Mercantile/PanNational court decision created a legal environment more conducive to mergers. “ The large number of large bank holding companies in Texas with expansion capabilities is the primary factor,” Cochran said. Eventually, however, the point could be reached where this environment no longer exists. Hankins agrees: “ As we have more and more consolidations at the top level, the number of potential entrants into a given market will diminish.” In spite of all the proposed merger activi ty in Texas, concentration of bank deposits in a few organizations does not appear to be a problem to the Board at this time, Hankins says. The top five multibank holding companies in the state, for exam ple, have 261 subsidiary banks (July 1983) with over $54 billion in deposits (year-end 1982) representing 45.28 percent of the state’s deposits. With all pending acquisi tions taken into account, those five com panies would have 302 subsidiaries, over $60 billion in deposits, and 50.39 percent of the state’s total deposits. Compared to other states, however, these concentration levels are not high (see box). And, while there are certain advantages to the large organizations that are created by mergers, small independent banks will continue to exist and be successful. “These banks have a place in the industry,” Cochran said. “There is a market for that kind of bank. Some people do not want to do business with a large organization." Fertile Ground for Mergers exas appears to be a state where merger activity is thriving among large bank holding companies. Accord ing to Dallas Fed Senior Vice President George C. Cochran and Assistant Vice T organizations in the state (year-end 1982), Texas ranks second only to Illi nois for having the most. Texas ranks 32nd among the 50 states and the District of Columbia in terms of the per cent of deposits held by the five largest banking organizations. Illinois, Penn sylvania, and Florida each have over 300 banking entities and do not rank among President Robert D. Hankins, other states where such activity is taking place include Florida, Pennsylvania, and, to a certain extent, Illinois. Texas may be fer Percent of Deposits t ile g ro u n d fo r (Top Five By State) m u ltib a n k holding 97 c o m p a n y m e rg e rs and a c q u is itio n s because, in a state which does not allow branch banking, there is no other means for a bank to expand into new markets. Illinois is another unit bank 93 ing state, and Pennsylvania allows only limited branching. Both states recently have passed legislation perm itting multibank holding companies and both are experiencing a high level of merger and acquisition activity. In addition, Texas has a large number of banking organizations and is not highly concentrated. With 1,154 such the m ost concen trated of the states. The states with the hig h est c o n c e n tra tion of bank deposits held by th e fiv e largest organizations each have over 90 percent of deposits h e ld by th e s e o rg a n iz a tio n s (see g ra p h ). H o w e ve r, three of these states— Rhode Island, Nevada, and Hawaii— have fewer than 20 banking organizations each. Arizona has 41. The four states with less than 20 percent of deposits held by the five largest organizatio ns— Kansas, West Virginia, Arkansas, and Louisi a n a -e a c h have over 200 banking organizations. Return Item Pilot Continues The Federal Reserve Bank of Dallas has received approval to implement the second phase of the return item pilot program which began on February 24, 1983. The second phase will be divided into two parts—Phase 11A and MB. During Phase 11A, Eleventh District offices will continue to accept only those items originally presented for collection through Federal Reserve Banks. Effective October 3, however, items will be returned directly to the in stitution of first deposit if located within the Eleventh District. Otherwise, the items will be returned to the Reserve Bank of last endorsement. Telephone notification will continue to be provided on nonpayment of all returns of $2,500 or more, but will be provided directly to the financial in stitution of first deposit. Price break In Phase 11A, the Dallas Fed will in troduce a price break of 25 cents per item for returns deposited that are prepared for automated processing. Phase 11A is expected to be com pleted by the first quarter of 1984. At that time, implementation of Phase MB will involve the acceptance of returns endorsed by Eleventh District institu tions whether or not the items were originally presented for collection through the Federal Reserve System. Service benefits The return item service offers finan cial institutions several benefits such as a reduced sorting burden for returns, immediate credit for qualified return items deposited with the Dallas Fed, expedited collection of return items, reduced risk of loss because of notification of all large return items, and reduced costs for other check pro cessing services. After successful completion of the return item pilot pro gram in the Eleventh District, a similar nationwide program is planned. Penalties Lifted The Board of Governors has granted a temporary suspension of early withdrawal penalties associated with Regulation Q for depositors who have incurred losses as a result of Hurricane Alicia. This action permits any member bank to pay a time deposit before m aturity to d e p o s ito rs in B ra zo ria , Chambers, Fort Bend, Galveston, Harris and Matagorda counties (retroactive to August 19, 1983) and in Liberty, Montgomery and San Jacinto counties (retroactive to August 29, 1983). The action is effective until midnight, February 18, 1984. Depositors seeking to with draw time deposit funds must submit a signed statement, ap proved by an officer of the bank, describing the disaster-related loss. I O n > (/) -i m i- > o rHm > O 3D cz>2> > W cn CDJ3 - k C 0) 0) O C £D O’ =3 =3 ZJ O > 7T O CQ. □CD H ~ ° H OD 01 ^ a' 0) C7 5 a. Q. cn" 3 £ oj zr. o o =j ^ m CD Q. O’ £D O CT mg zr o O x; 3 _ A /> C*T (C O 0 CD O to to ro > x o o > > CZ) o o> o 0) CZ! m' m x (/) > m CZ) 3J O l < m ro 33 2 wp 8 O ’ OJ O Q . CL CD 2 r. D 3 <