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TY-15-95 TESTIMONY OF RICKI HELFER, CHAIRMAN FEDERAL DEPOSIT INSURANCE CORPORATION ON INTERSTATE BANKING BEFORE THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT COMMITTEE ON BANKING AND FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES 1:00 P.M. TUESDAY, OCTOBER 17, 1995 ROOM 2128, RAYBURN HOUSE OFFICE BUILDING Madam Chairwoman and members of the Subcommittee, I appreciate the opportunity to testify on the status of interstate banking and trends in bank consolidation. For over a decade, the growth of interstate banking has been a fundamental element of the rapidly changing structure of the nation's banking industry. Last year, Congress, advantages recognizing the economic and competitive produced by removing the long-standing geographical restraints on banking organizations, enacting the added Riegle-Neal impetus to the interstate trend by Interstate Banking Efficiency Act (the "Riegle-Neal Act"). over the last few months, between large banking and Branching This year, and especially a number of mergers organizations have and acquisitions been announced. Attachment 1 lists the largest merger announcements of 1995. Thus, the banking industry is in a period of change and transition. The challenges for the Federal Deposit Insurance Corporation and the other banking regulators as the industry passes through this time of restructuring are many. The first section of this testimony contains a description of the banking industry's ongoing restructuring, a process in which the growth of interstate banking organizations has played a central role. The description restructuring and places includes the historical recent background activity in on the mergers and acquisitions between banking organizations in the context of longer term developments. banking in Statistics. This section draws from a study on interstate progress by the FDIC's Division of Research and The study examines trends in FDIC-insured institutions 2 over the past decade. The second section of the testimony focuses on the impact of the banking industry's restructuring on customers of banks, and the community bank. third section examines the future of the The final section reviews the FDIC's statutory authority, and the agency's plans and initiatives, with respect to matters affected by the restructuring of the industry. AN INDUSTRY IN TRANSITION For much of the nation's history, state boundaries controlled and curtailed the growth of individual banking organizations. most instances, a U.S. In banking organization could not establish domestic deposit-taking offices outside of the state where its home office was home located. state was Moreover, often its ability to expand within its limited. Attachment according to their branching laws. was a banking laws limitations. that states One result of this situation industry with numerous participants geographic markets. federal 2 categorizes and protected The industry was also constrained by state and added product limitations to the geographic Under the product limitations, banking organizations were restricted to offering a limited number of financial products and services. Moreover, the limitations were often interpreted in a narrow fashion that hindered the ability of banks to adjust their products to changes in technology and the marketplace. These geographic and product limitations had a number of long- 3 term negative impacts. benefits of full Businesses and consumers did not enjoy the competition among depository institutions and between depository institutions and other providers of financial products and services. Benefits from greater competition can be in the form of lower prices, better products, and better availability of products. The less-than-optimal level of competition among depository institutions hindered the movement of banking resources. This allowed less efficient banks to command excess resources, and prevented more efficient competition financial services industry. from benefitted other from and Finally, banking organizations were constrained in their the have capital presence. meet could their to to that from bringing expertise ability markets banks segments their of the The competitive disadvantage banking organizations operated under is evidenced by their declining share of the assets of the financial services industry. 1952, banks and thrifts held For example, in 63 percent of those assets. That proportion declined steadily over the years and at midyear 1995 was 32 percent. The marketplace distortions arising from the geographic and product limitations on depository institutions led to a variety of pressures for change. At the institution level, creative management explored ways under existing laws to offer the products and services that businesses and consumers demanded. At the industry level, changes were sought in the state and federal laws that created the competitive inequities. 4 Indeed, the U.S. change over the brief period of little more than a decade, banking of industry has undergone a geographic structural considerable proportions.1 Attachment 3 enumerates mergers, failures and new charters of FDIC insured institutions over past the ten significantly. assets were years. State barriers have dropped At midyear 1984, 33 percent of the nation's banking controlled by bank and operations in two or more states. was 64 percent, thrift organizations with At midyear 1994, the proportion almost two-thirds of the nation's banking assets (See Attachment 4). banking has banking been A major consequence of the rise of interstate consolidation in the industry. The number of banking organizations has declined, and the proportions of banking assets and deposits controlled by larger banking organizations have risen. of This is reflected in a corresponding decline in the number commercial increase in banks the and number savings and assets institutions, of larger as well institutions as an (see Attachment 5). Concerning consolidation — defined as the reduction in the ‘The focus of the discussion is full-fledged interstate banking, meaning the operation of commonly owned banks or or their deposit-taking branches, in two or more states. Banking organizations have other means to conduct operations on an interstate basis, including loan production offices (LPOs), nonbank affiliates, credit cards, deposit brokers, and money desks. Use of some of these options, notably LPOs and nonbank affiliates, pre-date the efforts since the late 1970s and early 1980s to bring about full-fledged interstate banking. LPOs became popular in the 1960s, and the Bank Holding Company Act Amendments of 1970 opened the door to interstate expansion through nonbank affiliates. 5 number of institutions due to mergers and acquisitions of healthy institutions and to failures of troubled institutions offset by the addition of new institutions2 — decline in the combined number independent banks and thrifts. 14,887 to 9,804, Attachment 6) . a representative statistic is the between of holding companies and This decline was 32 percent, from year-end In contrast, bank 1984 and midyear 1995 (see the decline does not mean that new institutions are not being established. In fact, between 1984 and mid-year 1995, 2,476 new commercial banks and savings institutions were chartered. At the national level, the share of deposits held by the largest institutions has increased. industry At year- end 1984, the 42 largest banking organizations held 25 percent of the nation's domestic deposits. By midyear 1995, 25 percent of domestic deposits was held by the largest 16 banking organizations (see Attachment increased consolidation 8). It in the banking should be noted that industry at the national level has not resulted in more concentrated local banking markets. Among the reasons are that much of the consolidation has involved mergers between organizations in different markets and new 2Mergers and acquisitions that have not involved federal assistance have accounted for most of the consolidation among commercial banks and savings institutions over the last decade. From the end of 1984 through the second quarter of 1995, almost 5,800 commercial banks and savings institutions were absorbed in unassisted mergers. Over the same period, more than 2,400 insolvent banks and savings institutions were closed or merged into healthy institutions with federal assistance-, while nearly 2,500 new commercial banks and savings institutions were chartered during the period. Overall, there was a net decline of 5,652 commercial banks and savings institutions during the period (see Attachment 7). 6 institutions have entered markets. The states interstate have banking played and the a major role accompanying in industry Beginning in the late 1970s and early 1980s, acknowledged the changing economics of the growth of consolidation. a number of states banking by allowing the creation and development of interstate bank holding companies — companies that own banks in two or more states (see Attachment 9). The state laws varied considerably. Some states acted individually, while others entered into compacts with neighboring states. Some states required reciprocity — an out-of-state bank holding company could acquire an in-state bank only if the out-ofstate holding company's home state granted similar privileges to holding companies in the target state. laws, particularly those limited permissible acquisition Other state enacted pursuant to regional out-of-state entrants to compacts, those from the neighboring geographic region. Any uncertainties' regarding state initiatives to remove barriers to bank holding company expansion across state lines were eliminated in 1985. In the decision of Northeast Bancorp v. Board of Governors of the Federal Reserve System. 472 U.S. 159, the U.S. Supreme Court selectively, Company Act, companies. upheld under the the ability Douglas restrictions on of the states reduce Amendment to Bank Holding entry out-of-state holding by the to 7 In 1994, Congress element to the states' the Act, most in the removed Act added a initiatives on interstate banking. remaining expansion were Riegle-Neal state barriers to bank holding on September 29, 1995. Holding federal Under company company growth, however, will be restrained by explicit, statutory deposit concentration limits: a 10 percent nationwide and a 30 percent statewide limit.3 The Riegle-Neal Act also authorizes another form of interstate expansion for banks — branching.4 may merge across state lines, Beginning June 1, 1997, banks a process that will result in the offices of one bank becoming branches of the other. branching through mergers is subject to the same Interstate concentration limits as are interstate acquisitions by bank holding companies. States may elect to prohibit interstate branching through mergers or to authorize it prior to June 1, 1997. authorize de novo interstate branching. States may also elect to The current status of state elections is summarized in Attachment 10. 3 The Riegle-Neal concentration limits refer to the proportion of national or statewide deposits controlled by a banking organization. Generally, other than for initial entry into a state, the responsible federal banking agency cannot approve an application for a merger or an acquisition .by a banking organization if the resulting organization would exceed the statutory concentration limits. In addition, the growth of banking organizations will continue to be subject to state and federal antitrust laws. 4 Savings associations have not been subject to the same federal restrictions on branching across state lines as have banks, and a number of savings associations with branches outside their home states exist. 8 Recent announcements of mergers and acquisitions by a number of large banking organizations should be viewed in the context of the ongoing trends of consolidation and interstate growth. The long-existing economic pressures on banking organizations to grow and to cross barriers state based on lines, coupled geography, are with the removal likely to continue of legal for the foreseeable future, and the number of banking organizations likely will continue to decline for some time. Assuming the current restructuring of the industry continues, consumers of banking products and services should benefit. The marketplace over time is likely to perform its function of matching supply and demand, although there may be some disequilibrium during transition periods. competition should financial needs available at Over the foster are the met long term, innovation and lowest that economic fewer restrictions and ensure products prices. and that on consumer services are Furthermore, the reduction of legal barriers based on geographic boundaries should enable banking organizations to expand operations more easily into underserved banking markets. For their part, banking organizations also should, benefit. consolidating eliminated and industry costs is are one where being excess cut.5 In capacity addition, is being when 5A number of studies have indicated the existence of economies of scale in banking, meaning that up to a point, size can result in lower average costs, whereas beyond the point, A an 9 institution expands geographically, risk against recessions. ten years being subject to it is able to diversify both localized and its rolling For example, Attachment 11 shows that in nine of the during institutions in the period multi-state 1985 to banking 1994, banks organizations and savings failed less frequently than multi-institution banking organizations confined to single states. The lessons learned from this experience, as well as more recent experience with failed banks in California and New England, are that less diversification renders banks more vulnerable to regional economic downturns than more diversification does. Recent statistics on the profitability of the commercial banking industry in California indicate that the state's largest banks were least affected by the severe recession, reflecting their diverse income sources beyond California's borders. In addition, full interstate banking could also offer to many banks significant risk reduction through increased opportunities for building a economies of scale are less evident. Studies of scale economies in banking differ somewhat on the ranges of bank size over which economies of scale can be achieved, as well as when these economies disappear. In one recent survey of this literature, Humphrey states that studies generally find economies of scale at small banks but statistically significant diseconomies among large banks. ("Why Do Estimates of Bank Scale Economies Differ" by David B. Humphrey, Federal Reserve Bank of Richmond Economic Review. Sept/Oct 1990, pp. 38-50). Despite these conclusions, however, bankers often cite cost savings in mergers, especially when they involve institutions that operate in the same markets. As a practical matter, it is difficult to compare efficiencies after mergers because other changes are taking place that affect both revenues and expenses. In addition, post-merger cost cutting measures such as asset write-downs, severance pay, early termination of leases and contracts, and amortization of any goodwill can result in higher reported expenses for a number of years after a merger's consummation. 10 stable retail deposit base. IMPACT ON BANK CUSTOMERS The pace raised of the concerns on restructuring the part negative impacts on bank however, of such detrimental competition that is should not availability only and some customers. causing prevent quality of of the banking There effects. the any of observers is long-term banking about little Moreover, restructuring industry has evidence, the of increased the degradation services but possible industry in ensure the that availability remains widespread and that quality increases. One indication that bank customers are being served adequately in this period of restructuring is that bank growing steadily since the recession of 1990-91. month period ending this past June, loans have been For the twelve- loans of commercial banks and savings institutions grew by 10.6 percent. In addition, the FDIC's data show that roughly half of the increase in loans by commercial banks and savings institutions consists of growth in retail loans — home mortgages and other loans to consumers. And significantly, for every dollar of loans that banks and thrifts carry on their books, an additional outstanding. This 65 cents suggests that in unused the credit thrift customers are more than being met. loan commitments needs of bank is and 11 Although the number of banking organizations has been declining over the past decade, the number of banking offices has not significantly changed. As of midyear 1995, there were nearly 83,000 deposit-taking offices of banks and thrifts. number of offices was approximately 81,000. The In 1984, the fact that the number of banking offices is not much different than it was eleven years ago is an indication that access to banking offices has not been curtailed. The statistic is significant when viewed against the decline in the number of banks and thrifts described in the first section institutions of this testimony. is occurring, Although consolidation among banks and thrifts are in general not closing offices. Furthermore, electronic means of delivering banking services have grown significantly. (ATMs) reached over The number of automated teller machines 109,000 in 1994, up 15 percent from the previous year and almost double the 55,000 in existence in 1984. There also terminals. later, has been significant growth in point-of-sale These numbered 95,000 in June of 1992, and 344,000 in June of 1994, (POS) 155,000 a year an increase of more than 250 percent in two years. Finally, deposit-taking offices, ATMs, and POS terminals are not the only means through which the banking needs of customers are met. also Loan production offices and offices of nonbank affiliates are significant, and numerous. Moreover, the nation's 12 customers and businesses are served by a diverse financial industry consisting not only of depository institutions but also of such product and service providers as finance companies, credit unions, pension funds, mortgage bankers, and mutual funds. securities brokers and dealers, Regional banking companies have expanded their office networks to compete in markets beyond the states where they have established deposit-taking branches. An analysis of recent Annual Reports from six prominent bank holding companies shows that while they operate deposit-taking branches in 8 to 15 states, they have loan production offices in nearly three times as many states. In summary, the ongoing restructuring of the banking industry does not seem to have reduced the availability of bank services to their customers. THE FUTURE OF THE COMMUNITY BANK Despite the overall benefits that should result from the current restructuring of the banking industry, some observers have concerns. One set of concerns involves the community bank. What is the future of institutions based in, and serving mainly, a local community? This question is important for their customers and the communities served by these institutions. In addition, the future of these banks is particularly relevant to the FDIC, which is the primary federal regulator for two out of every institutions with less than $100 million in assets. three insured These 4,912 13 institutions hold $180 billion in deposits in more than 25 million accounts. They operate in 4 9 states and the U.S. territories. Their future is important for their customers as well. There are many reasons to believe that community banks will continue to play a critical role in the financial system. banks still account for the majority of institutions. 30, 1995, there were nearly 8,000 commercial banks Smaller As of June and savings institutions with less than $100 million in assets, accounting for two out of every three FDIC-insured depository institutions. than 95 billion percent in of all assets. insured Although institutions institutions have with less less More than than $1 $100 million in assets together represent only 6.8 percent of industry assets, they businesses. are no supply nearly one-quarter of all loans to small They operate in over 4,000 communities in which there offices of larger banks, providing essential financial services to consumers and businesses. Moreover, role smaller banks have continued to play an important in states such as California, statewide California, branching which has has long allowed been New York, allowed. unrestricted and Virginia where For example, statewide in branching since 1927, community banks generally have prospered, despite being challenged by the statewide systems of California's largest banking organizations. Recently, we have observed an increase in charters throughout the country. This would seem to indicate that community 14 banks can develop combinations of products, services, and fees that are competitive with those of larger institutions. enabling smaller banking organizations to contract Indeed, by for off-site back-office support and to offer products and services from remote vendors, technology in the form of computerized communications may be leveling the field on which small and large banks compete. In the Federal Reserve Board's most recent Annual Report to the Congress on Retail Fees and Services of Depository Institutions (September 1995), the competitive abilities of local institutions are highlighted. The report compared for the first time fees charged by in-state and out-of-state banks. The report concluded that banks average fees charged by out-of-state higher than those charged by in-state banks. are generally This would seem to support the contention that the growth of interstate banking is not necessarily a death knell for local depository institutions. If they can compete on price or service with out-of-state competitors, in-state banks would seem to be assured of a place in a restructured banking industry. The recent performance of small banks and thrifts provides testimony to their viability. in four of the last six In four of the last six years, and quarters through the middle of 1995, institutions with less than $100 million in assets have been more profitable assets than (ROA). the industry average as measured by return on In 1994, and through the first six months of 1995, 15 more than 95 percent of these institutions were profitable. More than half reported ROAs above one percent, which is recognized as a benchmark for strong profitability. More than three-quarters had ROAs above 0.75 percent. These proportions are comparable to those of larger and demonstrate the competitiveness institutions, viability of the small-bank segment. $100 million assets and in assets have the the highest and Institutions with less than lowest proportions capitalization levels of of troubled any asset-size group. Finally, along with all other banks and savings associations, community banks are protected from monopolistic unfair competition by the antitrust laws. practices and Community banks may be subject to rigorous competition, but the antitrust laws ensure that it is fair competition. The competitive effects of mergers and acquisitions between banks are considered both by the appropriate bank regulator and the Department of Justice. Combinations that would result in a monopoly are prohibited by law. Combinations that would lead to concentration in an unconcentrated market may only be approved if such anticompetitive effects would be clearly outweighed by the public interest in meeting the needs of the community to be served. In summary, the smaller service to a particular banking organization, focused on local community and taking advantage of competitive strengths resulting from that focus, continues to have 16 a place in the restructuring U.S. banking industry. FDIC INITIATIVES The restructuring of the banking industry — a restructuring due in large measure to the growth of interstate banking — many challenges federal for levels. The industry regulators foremost goal at both the poses state of banking regulation and is to ensure that regulated institutions adhere to appropriate standards of safety and soundness. prudential issues, Regulators are not just concerned with however. Congress also has given the federal banking agencies duties regarding such matters as the adequacy of banking services to communities, the prevention of discriminatory lending practices, and anti-competitive effects. The Regulatory Approval Process Many of the concerns that are raised about particular merger and acquisition transactions between large institutions, including ii"it-®^*state transactions, can be examined and alleviated during the applications process. Banking organizations have long been required to file applications with the federal banking.agencies to merge with provisions or are acquire found other in the institutions. Bank Merger Act, Pertinent the Bank legal Holding Company Act, and the Riegle-Neal Interstate Banking and Branching Efficency Act. These laws set forth criteria that the regulatory 17 agencies must consider in determining whether to approve transactions. For example, under the Bank Merger Act, approval is required from the appropriate federal institution to merge with, agency an insured acquire the assets of, liability to pay deposits made institution. for in any other depository or assume the insured depository In considering applications under the Bank Merger Act, the agencies are required to focus on the competitive effects, the financial and managerial resources and future prospects of the existing and proposed institutions, and the convenience and needs of the community to be served. Under the Riegle-Neal Act, interstate mergers are subject to the above-discussed nationwide and statewide deposit concentration limits as well as an even more probing CRA review. Merger and acquisition applications also trigger a review of an institution's record under the Community Reinvestment Act meeting the credit needs of its community, including low- in and moderate-income neighborhoods. As a result of the statutory requirements, thé. effects of merger and acquisition proposals by banking organizations receive thorough scrutiny. Competition issues, safety and soundness matters, and community service records all are examined. is satisfied that the current statutory framework The FDIC allows the 18 consequences of organizations, merger and including acquisition the largest proposals ones, to by be banking addressed adequately. Supervision Interstate banking organizations generally involve multiple charters and subsidiary banks located in different states. as the number of interstate organizations Thus, increases, the coordination of activities and the sharing of information among the banking regulators will become more important. history of working departments. and (CSBS) adoption working issued a joint agreements banking departments. the state banking matters as resolution between the encouraging FDIC and the the state Virtually every state now has some type of working agreement with the FDIC. such assisting In 1992, the FDIC and the Conference of State Bank Supervisors of with The FDIC has a long the frequency examination procedures, These agreements typically cover and type of examinations, pre common examination and application forms, the coordination of enforcement actions, the sharing of supervisory information, the training of personnel, and access to the FDIC's computerized database. The CSBS has played a key role in the cooperative process. This past May, CSBS issued a protocol on interstate banking and branching that outlined the responsibilities of home and host state 19 regulators in the evolving interstate banking environment. The FDIC is working with CSBS and state regulatory authorities in the implementation of this protocol. Among the issues under discussion are the precise roles and responsibilities of home and host states with regard to supervision, enforcement of state laws and regula tions, and the types and frequency of information exchanges. Concerning coordination among the federal banking regulators, the FDIC is currently working with the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, Thrift Supervision (OTS) and the Office of to implement Section 305 of the Riegle Community Development and Regulatory Improvement Act of 1994. This provision directs the federal banking agencies to coordinate their examinations of institutions and to develop a system for selecting a lead agency to manage a unified examination of each depository institution. This system will be particularly useful for ensuring that large multi-state institutions are adequately supervised. Since the primary federal regulator of most large banks is either the OCC or the Federal Reserve Board, the FDIC is dependent to a significant degree on those agencies, as well as the OTS, for some of the information on large institutions required to monitor risks to the deposit insurance funds. The types and amount of financial and other information needed by the FDIC for monitoring risk to the institutions, funds, for direct supervision of state nonmember and for backup supervision of nationally chartered 20 institutions and state-chartered Federal Reserve members are likely to undergo changes as industry restructuring and interstate banking growth continue. For example, in order to assess insurance risk and to monitor liquidity, examiners may need to focus more on cash flows, deposit stability, loan commitments, and borrowing arrangements. Data on geographical diversification and product segments may prove to be important. The FDIC does not expect that more information will be needed, only that the type of information may change. The FDIC is also looking at how data and information might best be gathered. While on-site examinations will continue to be a mainstay of bank supervision, they are expensive to undertake and are generally conducted no more frequently than once a year. In view of these considerations, the FDIC is investigating the use of automated examination tools, and enhanced off-site surveillance techniques. For example, the FDIC will soon field-test an automated loan review program. examiners spend This initiative will reduce the amount of time evaluating assuring a thorough review. loan quality while at the same time The program will capture relevant loan data in a standardized electronic format from a bank's data files. Those records will then be converted into an automated loan review package. This method of evaluating the loan function will reduce 21 the number of specialized loan reports requested from the institu tion by the field examiner and will reduce on-site examination time because the electronic record will be analyzed outside of the bank. Further, the FDIC is investigating the use of the Internet to permit electronic submission of applications, and to make available materials such as examination manuals, rules and regulations, and agency publications. The FDIC has already used the Internet to receive public comments on proposed rules and to provide banking statistics each quarter from the FDIC's Quarterly Banking Profile and other publications. Off-site monitoring has long been a tool of the regulators. The FDIC Report and the data and other regulators have other off-site traditionally used information to monitor Call changing risks in individual institutions and in groups of institutions and holding companies. Call Report data For example, financial ratios computed from the enable regulators to compare banks with their peers and to spot movements in an institution's risk profile over time. Call Reports also have been used to link bank performance with the condition of state and local economies. Interstate banking will likely impact the way the FDIC uses off-site data to support supervision and risk analysis. the number of institutions that operate in several Because states or regions is growing, current off-site information is becoming less 22 useful to identify high growth and high risk markets. It may be possible to monitor risks to the insurance funds more closely by having large multi-state banking organizations report on geographic and product segments. Reporting requirements would have to be structured to weigh the usefulness of the information against any significant reporting burden. This burden may be minimized or eliminated by relying on information already developed by banking organizations themselves to manage risk internally. Resolutions The resolution of a failed or failing large interstate banking organization would present the FDIC, and the other banking regulators involved, with a wide variety of difficult problems and complex issues. FDIC staff has been examining what problems and issues might arise and to the extent feasible we are formulating contingency plans for handling a large institution in trouble. In formulating these plans, the FDIC is in part drawing upon its past experiences in resolving large failed or failing institutions. Among the sizeable institutions included in the FDIC's resolution history are Continental Illinois National Bank and Trust Company (1984), eight of the ten largest banking organizations in Texas (1987-1993), Bank of New England Corporation (1991), and Southeast Bank, N.A. (1991). More broadly, the FDIC has undertaken a project to analyze the 23 lessons of the banking problems of the 1980s and early 1990s. This project will document the historical record of this period both through the study of written sources and through interviews with bank regulators, bank executives, and other industry experts. The project will attempt to distill any lessons that can be gleaned regarding early warning signals of banking problems, the efficacy of regulatory efforts to prevent failures, and the cost- effectiveness of alternative strategies for handling bank failures and disposing combined of their experience of assets. The both FDIC the project and will the draw RTC in on the handling failures and disposing of assets. Local Community Needs The Riegle-Neal Act amended the Community Reinvestment Act (1) to establish an expanded evaluation process for institutions with interstate branches; (2) to require, in CRA evaluations for institutions wholly located in one state, a separate evaluation for each metropolitan area in which an institution has branches; and (3) to require a more searching CRA review in connection applications to establish interstate banking facilities. Community Reinvestment Act (CRA) requirements with These new • are being incorporated into evaluation procedures that will go into effect on January 1, 1996, in conjunction with revised CRA regulations. The new procedures and revised regulations, which also streamline the CRA examination process for smaller institutions, are currently 24 under review by all four federal regulators of depository institutions: the FDIC, the Federal Reserve Board, the OCC, and the °f Thrift Supervision. We expect to complete that review soon. Under the expanded CRA evaluation process with interstate branches, such institutions for are institutions to receive, in addition to an overall CRA evaluation, an evaluation for each state in which they have a branch. information separately for A state-level evaluation must present each metropolitan area in which the institution has a branch and the state's nonmetropolitan area if the institution has a branch in this area. In addition, if it maintains branches in the portions of two or more states comprising a multi-state metropolitan area, an institution is to receive a separate CRA evaluation for this metropolitan area. The state- level evaluations are to be adjusted by any required evaluation for a multi-state metropolitan area. An important aspect of the revised CRA regulations is the way in which they communities. encourage This institutions to provide is particularly true for including interstate institutions, considered performance. provides in the The services rating banking of to to large institutions, that are more likely to serve multiple communities in both urban and rural areas. institution services each the of these institution's agencies will How a large areas will overall evaluate be CRA service 25 performance in several ways, including the availability of full service branches throughout the community, deliver services, alternative means to and community development services provided to low- and moderate-income areas. Convenient access to full-service branches within a community is an important factor in determining the availability of credit and non-credit financial services. The FDIC will continue to focus evaluations on an institution's current distribution of branches among all areas. particularly in An low- institution's distribution and moderate-income areas, of can branches, enhance an institution's rating. This may be particularly applying to open new branches, important for large institutions or to acquire or merge with other institutions, as such applicants will need to demonstrate how they intend to meet the convenience and needs of their communities. As in the past, the CRA evaluation will continue to take into account an institution's record of opening and closing branches, particularly branches located in low- and moderate-income areas or primarily serving low- and moderate-income individuals. The services new regulations to low- also encourage and moderate-income institutions to provide areas in other ways. In evaluating an institution, the regulators will consider ATMs, loan production offices, banking by telephone or computer, and other 26 services. Such means, however, are considered only to the extent they are effective alternatives to providing services through full service branches. Lastly, the new regulations promote community services that are targeted to low- and moderate-income individuals, or activities that revitalize or stabilize low- or moderate-income areas. The service test of the new CRA examination procedures elevates the importance of services considered vital to the development of safe and sound lending moderate-income and areas investment that opportunities otherwise may lack in the low- and capital to sustain such activity. For example, consideration government, income for or financial institutions will providing technical tribal housing or organizations economic receive expertise serving revitalization. to low- favorable non-profit, and moderate- Providing credit counseling, home buyers counseling, and home maintenance counseling to promote community development will also benefit an institution's performance. government result, In check the addition, cashing importance programs activities of such such will vital as be low-cost or considered. affordable free As services a in underserved lower income neighborhoods will be emphasized. Thus local the performances community needs are of banking subject to organizations a detailed in meeting statutory and 27 regulatory scheme. The FDIC believes that this structure provides adequate monitoring powers to the regulatory agencies and, coupled with incentives from the marketplace, sufficient motivation for banking organizations to provide localized services. SUMMARY The many mergers and acquisitions announced by banking organizations this year are part of a long-term restructuring of the banking industry. the forces of technology, economy, the and The restructuring, which is a response to marketplace, the greater the greatly mobility of expanded resources use within of the has been underway since at least the early 1980s. The Riegle-Neal Act of 1994 removed several impediments to this trend. Although the restructuring of the industry is a natural response to economic and technological changes, and may have real advantages without in encouraging its disruptive greater aspects. diversification, While the number it is not of community banks has declined, the evidence suggests they can hold their own competitively profitability, continue to against larger banking price and service. be effective organizations in terms of Community banks aire likely to competitors because they can take advantage of the opportunity to serve particular credit needs or particular markets and to offer products and services at fees that are competitive. 28 Bank customers restructuring. ultimately will benefit from the current Fewer restrictions on competition should result in innovations in products and services and greater efficiencies in meeting consumers' financial needs. The challenge to banking regulators is to ensure that any disruptive aspects are monitored mitigated industry that the is not threatened disadvantaged. so basic safety and and bank customers soundness of the are not unfairly The FDIC is striving to meet this challenge. Attachm ent 1 and t Attachm ent 1 T o p 2 5 A c q u is itio n s A n n o u n c e d in 1 9 9 5 (T h ro u g h 1 0 /1 1 ) Announcement Date 1 2 3 4 5 6 7 6 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 * 24 25 Seller 08/28/95 Chase Manhattan Corporation 07/12/95 NBD Bancorp, Inc 06/19/95 First Fidelity Bancorporation 02/21/95 Shawmut National Corporation 10/10/95 Meridian Bancorp 08/28/95 Integra Financial Corp 07/10/95 Midlantic Corporation 02/05/95 Michigan National Corporation 05/08/95 West One Bancorp 05/30/95 FirstFed Michigan Corporation 05/19/95 BanCal T ri-State Corporation 08/25/95 Fourth Financial Corporation 09/05/95 Bank South Corporation 09/11 /95 Summit Bancorporation 07/19/95 Premier Bancorp Inc 07/05/95 CSF Holdings 09/24/95 Brooklyn Bancorp Inc 08/28/95 SFFed Corp 08/07/95 FirsTier Financial Inc 03/08/Ö5 Chemical New Jersey Holdings 04/06/95 Columbia First Bank, FSB 04/28/95 Loyola Capital Corp 01/03/95 Coral Gables Fedcorp Inc 10/11/95 Boston Bancorp 08/04/95 Hawkeye Bancorporation Bank/ Thrift Bank Bank Bank Bank Bank Bank Bank Bank Bank Thrift Bank Bank Bank Bank Bank Thrift Thrift Thrift Bank Bank Thrift Thrift Thrift Thrift Bank Seller Assets Total * This merger was completed on 6/1/95. All others are pending. Securities Source: SNL Seller Total Assets ($000) 118,756,000 47,755,844 35,399,736 32,399,000 14,911,000 14,810,661 13,634,216 8,691,969 8,656,701 8,512,279 7,762,312 7,504,594 7,439,701 5,512,343 5,494,245 4,703,250 4,139,215 4,057,142 3,580,427 3,345,000 2,911,221 2,493,485 2,463,933 2,086,000 1,982,428 1369.002.902 Buyer Chemical Banking Corp First Chicago Corporation First Union Corporation Fleet Financial Group, Inc CoreStates Financial Corp. National City Corporation PNC Bank Corp National Australia Bank US Bancorp Charter One Financial, Inc Union Bank Boatmen’s Bancshares, Inc NationsBank Corp UJB Financial Coip Banc One Corporation NationsBank Corp Republic New York Corporation MacAndrews & Forbes Holdings Inc First Bank System, Inc PNC Bank Corp First Union Corporation Crestar Financial Corporation First Union Corporation Bank of Boston Mercantile Bancorporation Inc Bank/ Thrift Buyer Total Assets ($000) Bank Bank Bank Bank Bank Bank Bank Foreign Bank Thrift Bank Bank Bank Bank Bank Bank Bank Thrift Bank Bank Bank Bank Bank Bank Bank 178,531,000 72,378,000 77,854,608 48,757,090 29,031,000 34,561,538 62,094,000 NA 21,438,970 6,293,892 17,211,942 33,407,940 184,188,000 15,442,954 86,783,317 183,854,000 41,715,692 14,642,942 33,456,000 64,145,000 77,313,505 14,426,885 74,243,118 45,254,000 15,296,293 Deal Value ($MM) 11358.4 5107.0 5555.0 3645.8 3198.0 2081.7 3026.0 1517.9 1574.6 555.8 1006.4 1179.9 1624 6 1124 1 6955 516.0 529.6 266.1 7128 504.0 2328 254 5 5138 2229 345 5 Attachment 2 State Branching Laws* Boston Limitations on Branching’ Statewide Branching Enacted Within Past Ten Years Statewide Branching in Effect For Over Ten Years * States are grouped into the eight FDIC DO S supervisory regions. 'Arkansas permits statewide branching after 1998; Colorado permits statewide branching in 1997. Prepared by: Division of Research and 9 Sources: Conference of State Bank Supt Attachm ent 3 Com m ercial Banks and Savings Institutions Y ear New Institutions1 Unassisted Mergers and Total Aquisitions2_______Failures3 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 19954 598 431 316 317 217 198 122 81 69 75 52 (395) (388) (660) (678) (462) (455) (527) (525) (638) (670) (393) (149) (199) (231) (413) (537) (379) (269) (179) (51) (14) (6) 1 9 8 5 -1 9 9 5 4 2,476 (5.791) (2,427) 1 New institutions include DeNovo charters, new charters created to combine other charters, and charters created for other types of uninsured financial institutions. 2 Unassisted mergers and acquistions include combinations of charters and any voluntary liquidations. 3 Failures include assisted payouts, assisted mergers, and any transfer to the Resolution Trust Corporation. Failures do not include any assistance to institutions that remain open. 4 Through June 30.1995. Attachm ent 4 Percent of Bank and Thrift Assets in Multi-State Organizations Percent of Bank and Thrift Domestic Deposits in Multi-State Organizations Percent 70 -------------- 6/84 6 /85 ------------ 6/8 6 6 /8 7 6 /88 6/8 9 6 /9 0 6/91 6 /9 2 6 /9 3 6/94 Prepared by: Division of Research and Statistics Sources: Bank Summary of Deposits Thrift Branch Office Survey FRB NIC Database FDIC DR S RIS Database A tta c h m e n t 5 Number of F ed era lly-Insured Comm ercial Banks and Savings Institutions By Asset Size* Yr./Qtr. 95:2 94:4 93:4 92:4 91:4 90:4 89:4 88:4 87:4 86:4 85:4 84:4 84:1 Less than $100 Million Number |% of 7,930 8,254 8,837 9,401 9,982 10,576 11,177 11,911 12,676 13,221 13,631 13,807 14,034 Total $100 Million to $1 Billion Number |% of Total 64.7 65.5 66.8 67.9 68.9 69.8 70.8 71.9 73.1 74.0 75.6 77.1 78.5 30.7 30.1 28.9 28.0 27.1 26.2 25.2 24.1 23.2 22.7 21.3 20.1 19.0 3,759 3,792 3,827 3,884 3,921 3,967 3,973 3,985 4,025 4,049 3,836 3,594 3,399 $1 Billion to $5 Billion Number $5 Billion to $10 Billion % of T otal 388 389 405 426 435 470 499 511 507 484 462 409 375 Number 3.2 3.1 3.1 3.1 3.0 3.1 3.2 3.1 2.9 2.7 2.6 2.3 2.1 $10 Billion or more % of Total 92 93 87 82 86 85 88 92 71 75 68 59 50 Number 0.8 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.4 0.4 0.4 0.3 0.3 Total % of Total 80 74 64 59 58 60 59 62 57 47 36 32 28 0.7 0.6 0.5 0.4 0.4 0.4 0.4 0.4 0.3 0.3 0.2 0.2 0.2 12,249 12,602 13,220 13,852 14,482 15,158 15,796 16,561 17,336 17,876 18,033 17,901 17,886 Assets of Federally-Insured Commercial Banks and Savings Institutions By Asset Size* Less than $100 Million Yr./Qtr. Assets 95:2 94:4 93:4 92:4 91:4 90:4 89:4 88:4 87:4 86:4 85:4 84:4 84:1 $354,785 366,345 388,472 401,966 412,705 423,960 436,058 457,330 477,774 490,312 489,922 484,170 482,454 $100 Million to $1 Billion % of Total 6.8 7.3 8.3 8.9 9.1 9.1 9.2 9.7 10.6 11.3 12.3 13.3 14.3 Assets % of Total $962,844 969,139 975,725 996,429 1,008,979 1,020,390 1,028,182 1,037,334 1,031,801 1,038,162 985,035 934,770 874,915 * Excludes Institutions operating in RTC conservatorship. FDIC Division of Research and Statistics, RIS 18.6 19.3 20.7 22.0 22.2 22.0 21.8 21.9 22.9 24.0 24.7 25.6 25.9 $1 Billion to $5 Billion Assets $836,752 850,211 883,409 927,719 964,673 1,034,167 1,093,290 1,096,655 1,073,738 992,492 936,800 827,910 746,222 $10 Billion or more $5 Billion to $10 Billion % of Total 16.1 16.9 18.8 20.5 21.2 22.2 23.1 23.1 23.8 22.9 23.5 22.7 22.1 Assets $644,157 671,097 626,293 580,012 604,639 605,861 639,324 620,073 483,646 515,354 472,688 403,091 332,415 % of Total Assets 12.4 $2,389,397 2,162,509 13.4 1,833,181 13.3 1,629,763 12.8 1,552,646 13.3 1,564,271 13.0 1,530,020 13.5 1,525,893 13.1 1,435,100 10.7 1,291,245 11.9 1,108,881 11.8 1,003,176 11.0 938,115 9.9 Total % of Total 46.1 $5,187,935 43.1 5,019,301 38.9 4,707,080 35.9 4,535,889 34.2 4,543,642 33.7 4,648,649 32.4 4,726,874 32.2 4,737,285 31.9 4,502,059 29.8 4,327,565 27.8 3,993,326 27.5 3,653,117 27.8 3,374,121 Attachm ent 6 Number of Bank Holding Companies Number 7 ,0 00 r — 4 ,0 0 0 3 ,0 00 One-Bank Holding Companies 1,000 0 12/84 12/85 12/86 12/87 12/88 12/89 12/90 12/91 12/92 12/93 12/94 6/95 Multi-Bank Holding Companies 7 30 876 959 9 80 976 9 56 965 921 8 75 848 839 830 One-Bank Holding Companies 4 ,9 77 5,101 5 ,025 5,001 4,961 4 ,9 5 9 4 ,9 1 3 4 ,9 0 9 4 ,8 3 8 4 ,6 85 4 ,547 4,497 Total 5,707 5,977 5,9 84 5,981 5 ,9 37 5 ,9 15 5 ,8 7 8 5 ,8 30 5 ,7 13 5 ,5 33 5,386 5,327 Number of Banking Organizations Number 16,000 14.000 12.000 10,000 Bank Holding Com panies 8,000 6,000 4 .0 0 0 2.000 Independent Banks & Thrifts 0 12/84 12/85 12/86 12/87 12/88 12/89 12/90 12/91 12/92 12/93 12/94 6/95 Bank Holding Com panies’ 5,707 5,977 5,984 5,981 5 ,9 37 5 ,9 15 5 ,878 5 ,8 30 5 ,7 13 5 ,533 5,386 5,327 Independent Banks & Thntts 9,180 8,8 00 8,331 7 ,880 7 ,3 4 3 7 ,0 20 6 ,4 1 6 5 ,9 05 5 ,536 5 ,128 4,664 4.477 14,887 14,777 14,315 13,861 13,280 12,935 12,294 11,735 11,249 10,661 10,050 9.804 Total * Includes one-bank holding companies Prepared by: Division of Research and Statistics Sources: FRB NIC Database FDIC DRS RIS Database Attachm ent 7 Number of Commercial Banks, 1984 -1995 12/84 12/85 12/86 12/87 12/88 12/89 12/90 12/91 12/92 1 2 /93 12/94 6 /95 12/94 6 /9 5 Number of Savings Institutions, 1984 -1995* Number of Institutions 4.000 3.000 2.000 1.000 12/84 12/85 12/86 12/87 Excludes institutions in RTC conservatorship 12/88 12/89 12/90 12/91 12 /92 1 2 /93 Prepared by: Division of Research and Statistics Sources: FDIC DRS RIS Database Attachm ent 8 th e Proportion of Domestic Deposits Held by the Largest Banking Companies Number of Companies with 25% of Domestic Deposits 12/84 12/85 12/86 12/87 12/88 12/89 12/90 12/91 12/92 12/93 12/94 6/95 12/94 6/95 Number of Companies with 50% of Domestic Deposits 193 176 12/84 12/85 12/86 12/87 12/88 12/89 12/90 12/91 12/92 12/93 Number of Companies with 75% of Domestic Deposits * Includes deposits of insured commercial banks and savings institutions. Individual companies have been accounted for at their highest level of consolidation (multi-bank bank holding companies, single-bank bank holding companies or independent banks/th rifts) Prepared by: Division of Research and Statist Sources: FDIC DRS RIS Database Attachm ent 9 Number of Multi-State Organizations, 1984 -1994* * Multi-state organizations are bank holding companies and independent depository institutions with banking operations m two or more states. Prepared by: Division of Research and Statistics Sources: Bank Summary of Deposits Thrift Branch Office Survey FRB NIC Database FDIC DR S RIS Database Attachm ent 10 State Elections Under the Riegle-Neal Act as of September 29, 1995 Legislation Passed Opt-In Alabama —Brings state's existing interstate banking law into conformance with the Riegle-Neal Act, allowing nationwide banking on September 29, 1995. Allows interstate branching through mergers and acquisitions in May 1997. Colorado —Allows interstate branching through acquisition on June 1, 1997. Connecticut — Allows interstate branching d£ novo and by acquisition, effective upon passage. Delaware — Allows interstate branching by acquisition of institutions at least five years old, effective September 29, 1995. Idaho —Allows interstate branching through acquisitions, effective July 1, 1995. Illinois — Permits interstate branching through acquisition; de novo branching prohibited, effective June 1, 1997. Louisiana —Allows interstate branching by acquisition of institutions at least five years old; dg novo branching prohibited, effective June L 1997. Maryland — Out-of-state banks would have several options for establishing a presence: (1) acquisition of existing banks; (2) purchases of single bank branches; (3) de novo entry. The legislation contains a reciprocity provision. Effective September 29, 1995. Nevada — Provides for interstate branching by acquisition beginning September 28, 1995; acquired institutions must be five years old. De novo branching prohibited in counties of more than 100,000 people. New Hampshire —Allows interstate branching by acquisition of institutions at least five years old, effective June 1, 1997. North Carolina —Allows interstate branching <âg novo and by acquisition of all or substantially all of the assets of a bank or branch, effective immediately (reciprocal until June 1, 1997, unrestricted thereafter). North Dakota — Removed restrictions in state's interstate banking law. branching by acquisition or merger after May 31, 1997. Allows interstate Oregon —The first state to pass opt-in legislation. A 1993 law authorized state-chartered banks to branch across state lines. The current legislation extends this branching authority to national and state member banks. Pennsylvania —Authorizes reciprocal interstate branching by acquisition or de novo, effective upon Governor's signing of the legislation. Rhode Island —Allows interstate branching d£ novo on a reciprocal basis, permits acquisition of branch only; effective immediately. Tennessee —Provides for interstate branching on June 1, 1997. Utah — Mergers and acquisitions across state lines permitted as of June 1, 1995. Institutions must be at least five years old prior to acquisition. Dç novo branching is prohibited. Virginia — Opt-in legislation includes provision for dê novo branching on a reciprocal basis. Opt-Out Texas -- Opted out of interstate branching, sunsets on September 2, 1999. Legislation Pending Opt-in — California"', Massachusetts, Michigan, New Jersey and New York. "'Legislation authorizing interstate branching on June 1, 1997, has cleared both the House and Senate; the Governor has yet to sign the legislation. Attachm ent 11 Failures by Banking Organization (includes commercial banks and savings institutions) (dollars in thousands) Year o f failure One-institution organizations Number Failures Percent Multi-institution, one-state organizations Number Failures Percent Multi-institution, multi-state organizations Number Failures Percent 1985 14,165 144 1.02 675 3 0.44 55 0 0.00 1986 13,908 175 1.26 806 5 0.62 70 0 0.00 1987 13,362 214 1.60 858 8 0.93 101 0 0.00 1988 12,897 364 2.82 845 8 0.95 135 1 0.74 1989 12,316 466 3.78 825 11 1.33 151 0 0.00 1990 11,984 355 2.96 787 10 1.27 170 1 0.59 1991 11,332 249 2.20 779 5 0.64 187 5 2.67 1992 10,821 151 1.40 728 3 0.41 193 0 0.00 1993 10,377 48 0.46 681 1 0.15 194 0 0.00 1994 9,814 15 0.15 646 0 0.00 202 0 0.00 Sources: FDIC Division of Research RIS database and failed bank database FRB NIC database Prepared 10/10/95 by FDIC Division of Research and Statistics (WSK)