View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

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

• Holding Companies
• Return Item Pilot
• Reg Q Suspension

A New Environment
Texas bank holding companies experience growth, join forces
ank holding
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


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
holding companies of
a d d itio n a l in s t it u ­
tions continually are
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
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
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.


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


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
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


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
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

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
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


> (/)
-i m
i- > o
> O 3D

> W cn CDJ3

- k C 0) 0) O
£D O’ =3 =3
O > 7T

~ °
01 ^ a'

0) C7

5 a. Q. cn"
zr. o

=j ^




£D O

zr o

O x;
3 _
C*T (C






o> o

0) CZ!

m' m
x (/)
> m
l <


2 wp 8
O ’





r. D 3 <