COMMON STOCK PRECES AND: 1 f PRHCE-RELAFWES FOR A SELECTED SAMPLE: ‘ * Afimw OF “ME ommm Is of)}51:* , OF LARGE COMMERCIAL BANKS . I _ Thesis for We Dew-03¢; é} pk. D. 7 - MICHIGAN STATE UNIVERSITY ‘ Eugene Francis Drzycimski ; 1966 THESE; mum; ulzuugugnu I I mum“ m; u Mil; ll l L I B R A R Y Michigan State University This is to certify that the thesis entitled A STUDY OF THE DETERMINANTS OF COMMON STOCK PRICES AND PRICE-RELATIVES FOR A SELECTED SAMPLE OF LARGE COMMERCIAL BANKS presented by Eugene Francis Drzycimski has been accepted towards fulfillment of the requirements for PhoDo degree in Finance Major professor Date ‘ 7’ 2’ 5 0-169 . __ [2477 P" so. i) WJ‘IJ I IN A STUDY OF THE DETERMINANTS OF COMMON STOCK PRICES AND PRICE-RELATIVES FOR A SELECTED SAMPLE OF LARGE COMMERCIAL BANKS by Eugene Francis Drzycimski AN ABSTRACT OF A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Accounting and Financial Administration 1966 ABSTRACT A STUDY OF THE DETERMINANTS OF COMMON STOCK PRICES AND PRICE-RELATIVES FOR A SELECTED SAMPLE OF LARGE COMMERCIAL BANKS by Eugene F. Drzycimski The principle objective of this dissertation is to isolate those factors which are most important in determining the prices and price/ earnings ratios of the common stocks of large commercial banks. 'With one notable exception, little prior work has been done in this area. The basic methodology employed is multiple regression and correla- tion analysis of presumptive price determinants such as size, efficiency, growth, productivity, solvency, functional performance, market accept- ance, ownership concentration, cash payout, and stability. The data were obtained for a selected sample of 122 large commercial banks and holding companies for the 1960-196A period. Fewer observations were obtained for the 1955-1959 period. To reduce expected heterogeneity, the banks were grouped by: (1) Geographic areas. (2) Growth rates of deposits. (3) Preportion of loans and discounts to total assets. (4) Payout ratios. A series of arguments, both natural and logarithmic, were applied to the groups. Eugene F. Drzycimski (1) TO describe the sample experience over all ten years, the year- end bid price per share (Xh)*'was regressed on the following variables. X5 net Operating earnings per share X6 dividends per share X7 loans and discounts/assets X8 book value per Share X9 total year-end deposits X10 capital/risk assets X11 price/net Operating earnings X12 net Operating earnings/capital X13 net Operating earnings/assets X14 interest income from loans/gross Operating earnings X15 price/book value X16 earning assets/price X17 dividends/net Operating earnings X18 dividends/price X19 # shares/# owners (12/31/64) X20 capital notes or debentures X21 stock dividend X22 stock split X23 earnings retained/net Operating earnings X26 eligible for Massachusetts savings bank investment X27 net indicated earnings. Eugene F. Drzycimski (2) To replicate and extend the principal prior study by David (3) (4) Durand, the log of price (X4) was regressed on the logs of earnings (X5), dividends (X6), and book value (X8) for the years 1960-1964 with the banks grouped according to geographic location. The two major conclusions reached were that geo- graphic location no longer sharply distinguishes between banks and that the influence of book value and dividends had declined and that the influence of earnings had increased. The following argument was an attempt to explain the variation in the price/earnings ratios for year-end 1960-1964. The argu- ment was applied to the banks grouped alternatively according to growth in deposits, mean loan/assets ratios, and mean payout ratios. The log of the price/earnings ratio (X11) was tested as a function of: the logs of the variables (X7), (X9), (X10), (X12), (X13), (X14), (X17), (X19), (X20), (X21), (X22), and (X26). None of the tests achieved significant success. The highest average RZd.f. was .266 which was obtained by the payu out scheme. The highest R2d.f. for a group was .444, achieved by the high payout group. Only four variables are considered important explainers. These are deposits (X9), the payout ratio (X17), average stock holdings (X19), and usually stock dividends (X21). In an attempt to measure the influence of ownership concentra- tion on the price/earnings ratio, this price-relative was regressed on the logs of the per cent of stock held by the (5) Eugene F. Drzycimski tOp 20 stockholders (X24) and the per cent of stock held by the largest owner (X25). Both natural and logarithmic functions were employed. Taking all banks as a group, neither function produced positive adjusted R2. Either control has no effect on the variation of price/earnings ratios or this argument was in- capable of measuring it. The final argument attempts to telescope the recent history of the banks to test the influence of growth and stability in the determinants upon the price/earnings ratios. The variables in- cluded were: X76 average yearly growth rate in price X77 average yearly growth rate in earnings X78 average yearly growth rate in dividends X87 log of standard error of estimate (8) of earnings X89 log of standard error of estimate (S) of dividends X90 log of net regression coefficient (b) of loans/assets X91 log of standard error of estimate (S) of loans/assets X98 log of net regression coefficient (b) of price/book value X99 log of standard error of estimate (S) of price/book value. This single regression explained less than half of the variation of the price/earnings ratios. Stability of earnings (xa7), dividends (X89), loaning function (X91), and growth of the loaning function (X90) contributed nothing. Instability of the price/book value ratio (X99) diSplayed by far the greatest influence on and association with the price/earnings ratios. Eugene F. Drzycimski Generally, this argument performed less efficiently than did many Of the earlier tests. Some of the major conclusions reached are as follows. Growth of deposits is not necessarily efficient as measured by the rate of return on assets, nor do high growth banks sell at the highest price—relatives. Banks with high percentages of assets in loans earned the lowest rates of return on both capital and assets. Their stocks were valued at the lowest multiples of both earnings and book value. The investing banks achieved the highest price multiples. The grouping according to mean payout ratios yielded results most consistent with expectations. The high payout banks had the highest price multiples, while the low payout banks had the lowest multiples. The high payout group used the largest amount of debt, the fewest number of stock dividends, and earned the highest rate of return on assets. The low payout group used almost no debt, the largest number of stock dividends, and earned the lowest rate of return on assets. The payout scheme, then, succeeds best in isolating the value determinants and in relating these determinants to the major price-relative. Since the overnall results of the arguments were disappointing, further investigation is warranted. Alternative approaches might in- clude refinements in the present models, modifications in the statis- tical treatment, and the procurement of additional determinants. A final consideration is that relative prices of bank stocks result from non-quantifiable, subjective judgments on the part of the investing public. *All symbols beginning with "X" are identification symbols. A STUDY OF THE DETERMINANTS OF COMMON STOCK PRICES AND PRICE-RELATIVES FOR A SELECTED SAMPLE OF LARGE COMMERCIAL BANKS by Eugene Francis Drzycimski A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Accounting and Financial Administration 1966 ACKNOWLEDGMENTS The author wishes to express his appreciation to his doctoral committee: Dr. Roland I. Robinson, Chairman, and Dr. Stuart B. Mead and Dr. Rollin H. Simonds, Committee members. Each has made a valuable personal contribution to the successful completion of this disserta- tion. In a larger sense, a full measure of gratitude is offered to two men, Dr. Roland I. Robinson and Dr. Francis J. Calkins, who have provided abundant counsel and understanding during my educational career. Thanks are also extended to Dr. James Don Edwards, Chairman of the Department of Accounting and Financial Administration, for marshalling a good measure of the academic and financial support necessary to sustain the author's educational experience at Michigan State. Though words are far from adequate, I express my deep apprecia- tion to my wife, Mary Ann, for the many sacrifices she has made to enable me to complete my studies. Finally, sincere thanks are Offered my parents, to my mother for her kindness and encouragement, and to my late father for generat- ing in me the interest which gave rise to this study. It is to my father, Eugene F. Drzycimski, Sr., that this dissertation is dedicated. ii Chapter I II TABLE OF CONTENTS ACKNOWLEDGMENTS . . . . . . . . . LIST OF TABIJE . O O O O O C O 0 0 INTRODUCTION. . . . . . . . . . . Concern 0f the Study. 0 o o o 0 Psychology of the Market. . . . Price Action of Other Stock Groups. The Bank Stock Market . . . . . Bank Stock Performance. . . . . A. Phase One . . . . . . . . B. Phase Two . . . . . . . . Previous Bank Stock Price Studie A. The Collins Study . . . . B. The Durand Study. . . . . Summary............ THE SAMPLE AND ITS PROPERTIES . . O S 0 O O O O O O O O O O O O O O O O O O The Purpose of This Chapter . . . . . The Magnitude of the Banking Industry Financial Impact of the Sample. Geographic Representation . . . A Pragmatic Approach. . . . . . The Averages of the Variables Price . . . . . . . . . . . . Earnings. . . . . . . . . . . DiVidendSoooooooooo Loans . . . . . . . . . . . . Book Value. . . . . . . . . . DepOSitSooooooooooo capitalooooooooooo Price/Earnings Ratio. . . . . Efficiency of Capital . . . . Efficiency of Assets. . . . . Efficiency of Loans . . . . . Price/Book Value Ratio. . . . Earning Asset/Price Ratio . . PayOUtRatiOooooooooo YieldOOOOOOOOOOOO Average Ownership . . . . . . Leverage........... Stock Dividends . . . . . . . StOCk Split-45000000000 Earnings Retention. . . . . . iii 0 O 0 O 0 O O O O O O O O O O O O O O O O O O 0 O O O O O O O O O 0 O O O O O O O O O O O O O 0 O O O O O O O O O O O 0 O O 0 O O O O O O O O O O O O O O O O O O 0 O O O O O O O 0 O O O O O O o O O O O O 0 O O O O 0 O 0 O 0 O O 0 0 o O O O O O O O o o o o o o o o o O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O 0 O O O O O O O O O O O O O O O O O O O O O O O O O O O O 0 O O O O O O O O O O O O O O O O O O O O O O O O O 0 O O O O O O O O O O O O O O O O Q Q I O O O O O O O O O O O O O 0 O O O O O O O 0 0 O O O 0 O 0 O 0 Q 0 0 O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O 0 O 0 0 I O C O O C O O O O O O O O O O O O O O O 0 O O O O Chapter III Stock Demand . . Net PrOfitSo o 0 Price Growth . . Earnings Growth. Dividends Growth Growth in Size . O O O O '0 O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O 0 O O O O O O 0 O O O O O O O O O O O O O O O 0 Simple Correlations Between the Variables. Price A. B. Price Price Price Price Price Price Price Price Price Price Price Price I l'l I I Earnings . . Dividends. . Book Value . Loans. . . . Deposits . . Solvency . . Associations‘With.Market O O O O O O O O O O O 0 Rates of Return. Earning Assets . Dividend Relatives Market Strength. 0 Debt 0 o o o o o 0 Share Changes. . . Summary of Price Associations. 0 O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O The Relationship of Major Price-Relatives {With Other variables 0 o o o o o o o o o o o 0 O O O O O O O O O O O 0 O O O O O O O 0 O O O O O O O O O O O O O O O O O O O O 0 Price-Relatives Compared . . . . . . . . . Variable Association With Price-Relatives. Summary. 0 o o o o o o o o o o o o o o o o o o o 0 THE DURAND STUDY, REVISITED. . . . . . . The Purpose of This Chapter. . . . . . Durandfs MethOdOlogy o o o o o o o o 0 Major Conclusions of the Durand Study. 1. 2. 3. 4. 5. 6. The Partial Replication. .3. The Sample 0 o o o o o o o The Methodology. . . . . . The Analysis . . . . . . . 1. Intergroup Variation - Net Regression coeffiCientSo o o o o o o o o o o o O O O O O O 0 O O Intergroup Variation . . . . . . Intragroup Variation . . . . . . Price Explainers o . o o o o o o EXplainers of PriceaRelatives. . Conclusions on Growth. . . . . . A Measure of Solvency. . . . . . O O O O O O O O O O O O C O O O O O O O O O O O O C O O O O O O O O O 0 O O O O O O O a. Majority'ResultS o o o o o o o b. Southeastern Group . . . . . . 2. Intergroup Variation - Beta weights 3. Intragroup Variation. . . . . . . . Summary. 0 o o o o o o o o o o o o o o o o o 0 iv 0 O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O C O O O O O O O O I O O O O O O O O O O O O O O O 0 O O O O O Chapter IV EXPLANATIONS OF A MAJOR PRICE-RELATIVE . The Purpose Of This Cha tero o o o o o Juxtaposition of Price Earnings Ratios The Design Of the Arguments. . . . . . 1. Banks Grouped by an Indication of Growth. 0 O O O 2. Banks Grouped by an Indication of Banking FunCtiono o o o o o o o o o o o o o o o o o 3. Banks Grouped by Mean Payout Benefits to Owners 0 o o o o o o o o o o o o o o o o 4. A Test of the Effect of the Growth and Dis- perSion 0f Determinants o o o o o o o o o o o 5. A Test of the Influence of Breadth of Market. The AnalYSiS o o o o o o o o o o o o o o o o o o o The Statistics Employed. . . . The Differences in the Means . 1. DBPOSit GrOWtho o o o o o 2. Loans vs. Securities. . . 3. Payout Benefit to Owners. Patterns Among the Betas . . . 1. Means of the Betas. . . . a. Size 0 o o o o o o o b. OwnerShipo o o o o 0 Co PEYOUt o o o o o o o d. Stock Dividends. . . The Efficiency of the Schemes. Influence of the Variables . . Relation Between the Dependent Variables........... The Influence of Control . . . . 000.00.00.00 0 O .0 O... O... and O 0 Influence of GrOwth and.Stability. . Summary. 0 o o o o o o o o o o e V SUMMARY AND CONCLUSIONS. . . . . . Conclusions of Price Explained by Geographic O O O 0 Conclusions of the Relative-Price Explanatory Schemes. . . . . . . . . . . . . . . . A PTOfile 0f GrOWtho o o o o o o o o 0 Results Of the Loaning Activity. 0 0 Results of the Analysis of Payout. . Guidelines For Future Investigation. APPENDICES O O O O O O O O O O O O B ELIOGRAPHY O O O O O O O O O O O O O O O O O O O O O O O O O O 0 O 0 O O O O O 0 O O 0 O O O O O O O O O O O O O O O O O 0 O O O O O O O O 0 0 O O O O 0 O O O O O O O O O 0 O 0 O O O O O O O O 0 O O O O O O O O O O O O O O O O O O O O O O 0 0 O O O O O O O O O 0 Independent 0 O O O C O O O O O O O O O O O O O O O O O O O O O O O 0 O O O O O O O O O O 0 Groups. 0 O O O O O O O O O O O O O 0 O O O O O O O O O O O O O O 0 O O O O O O O O Table 1-1 1-10-A 1-10-B 1-10-0 1-10-D 2-1 LIST OF TABLES Price/Earnings Ratios of MOody's 15 New YOrk City Banks and Standard and Poor's Composit 500 and Dow Jones Industrials; 1930-1963 . . . . . Dow Jones Stock Price Averages and Yearly Ranges 30 Industrials and 15 Utilities; 1926-1964 . . Standard and Poor's Index Range and Average Index 10 New York City Banks and 16 Banks Outside NoY.Co; 1941-43 = 10, 1926-196Lf‘0 o o o o o o 0 Gross National Product, National Income, National Personal Income, Index of Consumer Prices, and Unadjusted Money Supply; 1929-1964 . . . . . . Standard and Poor's Index Range and Average Index 500 Composite, 425 Industrials, 50 Utilities, and 11 Life Insurance Companies; 1941-43 = 10, 1926-196“. 0 O O O 0 O O O O O O 0 O O O C Q 0 Moody's Weighted.Average Market Price Per Share, Earnings Per Share, Dividends Per Share, N.Y.C. Banks, Banks Outside N.Y.C., and Industrials; 1929-1964. 9 O O O O O O O O O O O O O O O O O 0 All New Securities Offered for Cash Sale in United Stat9331934-196LI'00000000000990000 Moody's 15 New York City Banks, Industrials, Utilities, and 12 Banks Outside of N.Y.C. Price/Earnings Ratios and Yields; 1929-1964 . . . . . . . . . . Mean Price/Earnings Ratios, Yields, Price Per Share, and Price as a Per Cent of Book Value - A11 Sample Institutions; 1955—1964 . . . . . . . Levels of Price Indicators For Bank Groups. . . . Efficiency Levels For Bank Groups . . . . . . . . Levels of Price Indicators For Industry Groups. . Absolute Percentage Changes; 1957-1960, 1960-1964 Number of Commercial and Stock Savings Banks and Nondeposit Trust Companies and Their Deposits By Year, for the Total United States and for Those Included in the Study; 1955-1964 . . . 9 142+ 145 146 147 148 149 150 151 152 19 20 20 22 31 Table 2-2 2-3.A 2-3.3 2-3-0 2-3-D 2-3-E 2-3-F 2—5 2-6-A 2-6-B 2-6-C 2-6-D 2-7-A 2-7-B 2-7-C 2-7-D 2-7-E Financial Assets of the Financial Sectors of the Banks Banks Banks Banks Banks Banks Economy; 1955-1964 c o o o o o o o o o o o o o and Holding Companies Included in the Study . and Holding Companies Included in the Study . and Holding Companies Included in the Study . and Holding Companies Included in the Study . and Holding Companies Included in the Study . and Holding Companies Included in the Study . Number Of Banks and Holding Companies Per Each State. Number of Observations Per Variable Per Year. . . . . Simple Means of All Variables For All Banks and Standard Deviations of All Variables For All Banks and HOIding Companies; 1955-1959 0 o o o o o o o o o 0 Simple Means of All Variables For All Banks and Holding Companies; 1960-1964 . . . . . . . . . Standard Deviations of All Variables For All Banks Simple Correlations of Market Price (#4)‘With Other Variables For All Banks and Holding Companies. and Holding Companies; 1960-1964 . . . . . . . Simple Correlations of Net Operating Earnings Per Share (#5) With Other Variables For All Banks Simple Correlations of Dividends Per Share (#6) With and HOlding CompanieS. o o o o o o o o o o o o Other Variables For All Banks and Holding Simple Correlations of Loans and Discounts as a Per Cent of Assets (#7) With Other Variables For All Banks and Holding Companies. . . . . . . . . Simple Correlations of Book Value Per Share (#8) 'With Other Variables For All Banks and vii HOlding COmPanieS; 1955-1959 0 o o o o o o o o o COMPanieSo o o o o o o o o o o o o o o o o o o o HOlding Companies. 0 o o o o o o o o o o o o o o Page 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 Table 2-7-F 2-7-G 2-7-H 2-7-I 2-7-J 2-7-K 2-7-L 2-7-M 2-7-N 2-7-0 2-7-P 2-741 2—7-R Simple Correlations Of Deposits (#9)‘With Other Variables For All Banks and Holding CompanieSoo0.000000000000000oo Simple Correlations of Capital as a Per Cent of Risk Assets (#10) With.0ther Variables For All Banks and Holding Companies . . . . . . . . . . Simple Correlations of the Ratio Of Year-End Bid Market Price to Net Operating Earnings (#11) ‘With Other Variables For All Banks and Holding Companies..................... Simple Correlations Of Net Operating Earnings as a Per Cent of Capital (#12) With Other Variables For All Banks and Holding Companies . . . . . . . . Simple Correlations of Net Operating Earnings as a Per Cent of Assets (#13) With Other Variables For All Banks and Holding Companies . . . . . . . . . . Simple Correlations of Interest Income as a Per Cent of Gross Operating Earnings (#14) With Other Variables For All Banks and Holding Companies . . . . . . . . Simple Correlations of the Ratio of Bid Market Price to Book Value (#15) With Other Variables For All Banks and Holding Companies . . . . . . . . . . . . . . . Simple Correlations of the Ratio of Earning Assets to Price (#16) With Other Variables For All Banks and Holding Companies . . . . . . . . . . . . . . . . . Simple Correlations of the Payout Ratio, Dividends/Net Operating Earnings (#17) With Other Variables For All Banks and Holding Companies . . . . . . . . . . Simple Correlations of Yield, Dividends/Price (#18) With Other Variables For All Banks and Holding Companies Simple Correlations of the Adjusted Average Number of Shares Owned (#19) With Other Variables For All Banks and Holding Companies . . . . . . . . . . . . Simple Correlations of Notes or Debentures in the Capital Structure (#20) With Other Variables For All Banks and Holding Companies . . . . . . . . . . Simple Correlations of Payment of Stock Dividend (#21) With Other Variables For All Banks and HOlding Companies 0 O O O O O O O O O O O O O O O 0 viii 171 172 173 174 174 175 175 176 176 177 177 177 178 Table 2-7-5 ' 2-7-T 2-7-U 2-8—A 2-8-B 3-1-A 3-1.3 3-1-0 3-2.1 3-2-B 3-2-0 3-2—D 3-2-E 3-2-F 3-2.0 3-2-H Simple Correlations of Stock Variables For All Banks Splits (#22) With Other and Holding Companies . . . Simple Correlations of the Retention Ratio 6423) With Other Variables For All Banks and Holding Companies Simple Correlation of the Eligibility for Investment by Massachusetts Savings Banks (#26) With Net Indicated Earnings Per Share (#27) For All Banks and Holding Companies . Data Card.#1 Format. . . . . Data Card.#2 Format. . . . . O O O O O O O O O O O O O O O O 0 O O O O O O O O O O O O O O O O O O O O O O O O O Yields, Solvency Ratios, and Profitability Ratios All Insured Commercial Banks; 1935-1964 . . . . . . List of Bank Stocks Included the Study, Group 1 and Group 2. . . . . . . List of Bank Stocks Included in the Durand Phase the Study, Group 3 and Group 4. . . . . . . List of Bank Stocks Included in the Durand Phase the Study, Group 5 and Group 6. . . . . . . Replication of Durand Study, Variables, Group 1. . . Replication of Durand Study, All Variables, Group 1. Replication of Durand Study, Variables, Group 2. . . Replication of Durand Study, Variables, Group 2. . . Replication of Durand Study, Groupjoooooooo Replication of Durand Study, All Variables, Group 3. Replication of Durand Study, Variables, Group ’4'. o o Replication of Durand Study, All Variables, Group N. ix of O O O O in the Durand Phase of O O 0 0 of O O O 0 Mean Values of All C O O O O O O O O O O O 0 O of Standard Deviations 0 O O O O O O O O 0 Mean Values of All 0 0 O O O O O O O O O O O 0 Standard Deviations of All 0 O O O O O O O O O O O O 0 Mean Values of All Variables O O O O O O O O C O O O O 0 Standard Deviations of O O O O O O O O O O O O O 0 Mean Values of All 0 O O O O O O O O O O O O 0 Standard Deviations of O O O O O O O O O O O O O O Page 178 178 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 Table 3.2-1 3-2-J 3-2-x 3-2-L 3-4 3-6 3-7-1 3-7—3 3-7-0 3-7-n 3-7—E 3-7-F 3-8 4—1 Replication of Durand Study, Mean Values of All Variables, Group 5 o o o o o o o o o o o o o o o o Replication of Durand Study, Standard Deviations Of All Variables, Group 5. o o o o o o o o o o o o Replication of Durand Study, Mean Values of All variables, Group 6 o o o o o o o o o o o o o o o o Replication of Durand Study, Standard Deviations of All Variables, Group 6 o o o o o o o o o o o o o o Replication of Durand Study, Net Regression Coeffi- cients (b's) for the Natural Log of Net Operating Earnings, Dividends, and Book Value Per Share as Price Explainers o o o o o o o o o o o o o o o o o Replication of Durand Study, Beta weights (B's) for the Natural Log of Net Operating Earnings, Dividends, and Book Value Per Share as Price EXPlainerSo o o o o o o o o o o o o o o o o o o o Durand's Cross Section Net Regression Coefficients (b's): Six Groups of Bank Stocks Over Eight Years. Replication of Durand Study, Multiple Correlation Coefficients (R) and Coefficients of Multiple Determination (R2) For Six Bank Groups; 1960-196fi. Direct and Indirect Effects of the Independent variable$,GrOUP 1. o o o o o o o o o o o o o o o 0 Direct and Indirect Effects of the Independent Variables, Group 2 o o o o o o o o o o o o o o o 0 Direct and Indirect Effects of the Independent Variables, Group 3 o o o o o o o o o o o o o o o 0 Direct and Indirect Effects of the Independent Variables, Group 4 o o o o o o o c o o o o o o o 0 Direct and Indirect Effects of the Independent variables ’ Group 5 O O O O O O O O O O O O O O O 0 Direct and Indirect Effects of the Independent Variables, Group 6 o o o o o o o o o o o o o o o a Simple Correlations Between P/B and NOE/CAP For Groups 1, 2, and 5 o o o o o o o o o o o o o 0 Banks Grouped By Rates of Growth in Deposits (79) . . . X Page 193 194 195 196 197 198 199 200 201 202 203 204 205 206 76 207 Table Page 4-2 Banks Grouped.by'Mean Over Time of Loans and Discounts as a Per Cent of Assets (7) . . . . . . . . 208 4-3 Banks Grouped.by Mean of Payout Ratio (17) Over Time . . . 209 4-4 Means of the Variables, Banks Grouped by Deposit GrOWth, Group 1 .,. o o o o o o o o o o o o o o o o o 210 4-5 Means of the Variables, Banks Grouped by Deposit GrOWth, Group 2 o o o o o o o o o o o o o o o o o o o 211 4-6 Means of the Variables, Banks Grouped by Deposit GrOWth, GrOUP 3 o o o o o o o o o o o o o o o o o o o 212 4-7 Means of the Variables, Banks Grouped by Deposit GrOWth, Group 4 o o o o o o o o o o o o o o o o o o o 213 4-8 Means of the Variables, Applicable For All Schemes, Group 5 o o o o o o o o o o o o o o o o o o o o o o o 214 4-10 Means of the Variables, Banks Grouped by Mean Over Time of Loans and Discounts as Per Cent of Assets, Group 1 o o o o o o o o o o o o o o o o o o o o o o o 215 4-11 Means of the Variables, Banks Grouped by Mean Over Time of Loans and Discounts as Per Cent of Assets, Group 2 o o o e o o o o o o o o o o o o o o o o o o o 216 4-12 Means of the Variables, Banks Grouped by Mean Over Time of Loans and Discounts as Per Cent of Assets, Group 3 o o o o o o o o o o o o o o o o o o o o o o o 217 4-14 Means of the Variables, Banks Grouped by Mean Payout Ratio Over Time, Group 1. . . . . . . . . . . . . . . 218 4-15 Means of the Variables, Banks Grouped by Mean Payout Ratio Over Time, Group 20 o o o o o o o o o o o o o o 219 4-16 Means of the Variables, Banks Grouped by Mean Payout RatiO Over Time, Group 30 o o o o o o o o o o o o o o 220 4-18 Banks Grouped by Deposit Growth, Group 1, r's, Beta's, Partials, and R2 DeleteS. o o o o o o o o o o o o o o 221 4-19 Banks Grouped by Deposit Growth, Group 2, r's, Beta's, Partials, and R2 Deletes. . . . . . . . . . . . . . . 223 4-20 Banks Grouped by Deposit Growth, Group 3, res, Beta's, Partials, and R2 Deletes. o o o o o o o o o o o o o o 225 4-21 Banks Grouped by Deposit Growth, Group 4, r's, Beta's, Partials, and R2 Deletes. o o o o o o o o o o o o o o 227 xi Table ngg 4-22 Holding Companies, Group 5, r's and Beta's . . . . . . . . 229 4-23 Banks Grouped by Mean of Loans and Discounts/Assets Over Time, Group 1, r's, Beta's, Partials, and R2 Deletes. o o o o o o o o o o o o o o o o o o o o o 230 4-24- Banks Grouped by Mean of Loans and Discounts/Assets Oger Time, Group 2, r's, Beta's, Partials, and R Deletes. o o o o o o o o o o o o o o o o o o o o o 232 4-25 Banks Grouped by Mean of Loans and Discounts/Assets Over Time, Group 3, r's, Beta's, Partials, and R Deletes. o o o o o o o o o o o o o o o o o o o o o 234 4-26 Banks Grouped by Mean Payout Ratio Over Time, Group 1, r's, Beta's, Partials, and R2 Deletes . . . . . . . . 236 4-27 Banks GrOuped.by Mean Payout Ratio Over Time, Group 2, r's, Beta's, Partials, and R2 Deletes o o o o o o o o 238 4-28 Banks Grouped by Mean Payout Ratio Over Time, Group 3, r's, Beta's, Partials, and R2 Deletes . . . . . . . . 240 4-29 Means of Beta Weights Over Time For All Groups . . . . . . 242 4-30 ‘ Means of R2 Over Time For Groups and Schemes . . . . . . . 102 4-31 COded R2 Deletes, 1964 o o o o o o o o o o o o o o o o o o 243 4-32 Group Means of Simple and Partial Correlations of #41‘With Other Variables. o o o o o o o o o o o o o o 244 4-33 Statistics Fer Control Variables . . . . . . . . . . . . . 110 4-34 Statistics For Growth and Stability. . . . . . . . . . . . 113 4-35 Percentage Changes By State For Population, Personal Income, and Deposits; 1950-1960 . . . . . . . . . . . 245 CHAPTER I INTRODUCTION Concern of the Study The purpose of this study is to isolate the leading factors which have influenced absolute and relative levels of bank stock prices. Two basic hypotheses are tested in this paper. First, that the determinants of the market price of banks' common stocks vary according to geographic location. Second, that price/earnings ratios, as primary indicators of investment worth, are largely a function of the relative functional and productive efficiency of banks. The hypotheses were tested in the following fashion. Chapter One will set forth assumptions basic to the study as well as enumerate and discuss problems endemic to research in the bank stock area. Also of concern in this chapter will be such topics as market psychology, the nature and relative performance of this investment medium, the phases of the industry's price activity, and the form and the success of pre- vious price-explanation models. The magnitude and financial impact of the sample will be discussed in Chapter Two. This section will, in addition, describe the sample over a ten-year study period employing the 9222 and standard deviation statis- tics generated by a series of cross-section, regression analysis. Ob- served associations between market price and the determinants, and between the price-relatives and these same determinants will be reported. 1 2 Chapter Three replicates and extends a significant prior work. An attempt is made to explain market price by using the three primary variables, earnings, dividends and book value per share. This argument is tested with the sample banks segregated into largely geographic groups. Of major concern is the homogeneity within groups and the consistency of variable influence between the prior and the current study. Five separate models designed to explain the ratio of bid.market price to net Operating earnings are tested and analyzed in Chapter Four. The primary, efficiency model is applied to the sample banks grouped ac- cording to three non-geographic schemes. These schemes are the rates of growth in size, the allocation of credit, and the per cent of earnings disbursed in dividends. The fourth model tests the effect of control or ownership concentration on the price/earnings ratio. The final model is designed to measure the effects of certain growth and stability determinants upon the same major price-relative. Chapter Five broadens and summarized the conclusions concerning the efficiency of the models tested in eXplaining both price and the price-relatives. Alternative hypothesgt are also presented for future investigation. Egychology of the Market In the past, attempts at an explanation of price and price- relatives at which common stocks are traded have been gounded on a premise of at least long-term rationality of the investors interacting in the market. This hypothesis is germane to the models which will be subsequently tested. Efficiency and productivity within the banking 3 industry will be defined and then compared with market values. However, it is possible that the common stocks of even the largest financial in- stitutions are bought and sold for reasons other than those arising from a determination of future worth. Or it may be that future worth is so conceived in the minds of the investors as to defy measurement by means other than in-depth interviews. An investigator must also remain aware of the element of crowd psychology evidenced frequently in stock market fashions as well as in cycles for common stocks as a group. To an extent, the market is governed by a law of action and reaction, a swing between an Optimistic appraisal of certain performance factors and a pessimistic disregard of all information. To exemplify the swings, in 1929, the Optimists carried the day with a low level of short interest coupled with price/earnings ratios of 20 and a Dow Jones Average of 386. In 1932, on the other hand, the short interest was very intense while the Dow Jones Average was at 42. Because of the drastic fall in earnings, the price/earnings ratios in that year were so high as to be completely meaningless. The same ex- tremes of reaction can be viewed when a comparison is made between the more recent periods of year-end 1961 and beginning 1962 when the Dow Jones Industrial Average was in the 720 to 735 range, and the pessimistic attitude which prevailed immediately after the sharp market fall off in May and June of 1962, when that same average had fallen to 535. Table 1-1 provides a record of price/earnings ratios while Table 1-2 supplies a history of price averages and ranges. 1;, Just as stock market cycles are often the result of changing attitudes, whole industries as well as individual issues are plagued by the same fickleness. Aluminums were extremely pOpular from 1953 to 1957, only to decline much more than did the general market in 1957 and 1959. In spite of the long bull market in the 1950's, steel stocks did almost nothing until 1959. In late 1960 and January, 1961 a bear market for international oils was in evidence: Standard Oil of New Jersey sold at $39, down from its near-term peak of $69, and Royal Dutch sold at $29, down from its peak of $61. However, within just a few months after the sharp market break in May, 1962, the Oils began to recover strongly. A well-known selection from the electronic industry is another excellent example of changing investor evaluation. In 1960, Texas Instrument sold at $256, or 66 times that year's earnings and 71 times 1959 earnings. However, by 1962, the stock declined to $49, or 23 times 1962 earnings. Examples of this swing behavior in the recreation industry are Brunswick and American Machine and Foundry. In 1961, Brunswick sold at $75, only to fall to $13 in 1962 and to $12 in 1963. American Machine and Foundry was selling at $66 in 1961, but fell to $16 in 1962. The price pattern of this stock is largely the result of investor valuation of earnings which rose from $0.83 in 1958 to $1.70 in 1961, followed by a regression of only $0.20 to $1.50 in 1962. Similar price patterns are in evidence for the banking industry as a whole. In 1927, Halter H. Woodward in the Foreward of his book, Profits_in Bank Stocks, states: "This little book is the result of the 5 firm conviction that this type of security is second to none in the point of desirability for every class of investor.”1 Later, Mr. WOodward continues: "It is intensely gratifying to one who has Spent a number of years in the bank stock business and who has made a rather close study of them and their values, to realize that the investing public is coming slowly but gradually to an understanding and appreciation of bank stocks."2 Mr.‘Woodward's gratification was short-lived. The depression took its toll of thousands of banks and of the investments of hundreds of thousands of bank stockholders. As the depositors lost their savings in the banks which closed, the owners suffered serious losses of their investments in the majority of banks which continued after the debacle. Of concern to this study is that bank stock prices did not recover for some 25 years. Two tables are supplied which describe this price history. Table 1-3 consists of the indexes of prices for 10 New YOrk City bank stocks and for 16 banks located outside of New YOrk City published by Standard and Poor's. Table 1-6 includes, among other statistics, Moody's weighted-average market price per share for 15 New York City banks. In 1931, Moody's average was less than a third what it was in 1929, and one year later, it had fallen to less than a sixth of the earlier figure. If the investing public was slow to appreciate banks before 1929, it was far more hesitant during the next quarter century. In the Foreward to David Durand's Bank Stock Prices and the Bank Capital 1Walter H. WOodward, Profits in Bank Stocks (New York: The MacMillan Company, 1927). ZIbid. , p.4. Problem, R. J. Saulnier states: ”In 1952, bank deposits were growing at a rate of about 5 per cent per year, and the problem of expanding bank capital at a similar rate was forbidding. Bank earnings were not high enough to provide the indicated funds and leave much of a margin for dividends. Moreover, many bankers were loath to issue new stock, since so many bank stocks were selling below book value. In short, bankers found themselves in an anomalous position; they were Operating an industry with proven growth potential, but were having difficulty raising capital because their stocks did not command the favored position of growth StOCkS o "3 Since the termination date of the Durand statistics (1953). the levels of bank stock prices have changed considerably. As of the end of 1964, the prices of bank stocks were reaching new post-depression highs. The stocks of the 100 or so largest banks were selling at 50 to 100 per cent above their book values. However, whereas previously (1935-1955) bank stocks sold at price/earnings ratios generally higher than those of the industrial or utility groups, following 1955, bank stocks sold at price-relative levels consistently below those of the other two categories. Table 1-8 provides the price/earnings ratios and the yields of these three industry groups as published by Moody's. For a period of two and a half decades bank stocks were largely ignored by the investing public. For a short Span of six or seven years they were of interest to the investors, so much so that in 1961 they largely out-paced the other groups. Unusual expectations could not be fulfilled, however. Once again, bankers have found their securities ignored. The investor's acceptance cycle has once again gone full-turn. 3David Durand, Bank Stock Prices and the Bank Ca ital Problem (New York: National Bureau of Economic Research, Inc., 19575: p. xi. 7 Price Action of Other Stock Groups This section is an attempt at delineating the market price move- ments as specified by certain statistical series. Tables 1-2, 1-3, 1-5, and 1-6 all present indicators of price changes. This discussion will serve as a framework into which the recent history of bank stock prices can later be inserted. Reviewing the indicators over time, Table 1-5 reveals that Standard and Poor's 500 Composite Index moved from.11.02 as the average index for the year 1940, to 40.49 in 1955. to 81.37 in 1964. The Standard and Poor's 425 Industrial Index moved a bit faster; from 10.69 in 1940, to 42.40 in 1955, to 81.37 for 1964. This same services' 50 Utility Index began at 15.05 in 1940, a bit more than doubled to 31.37 by 1955, and showed even a faster rate of growth, reaching 69.99 in 1964. The champion of this series is the Life Insurance Index of 11 companies. This index actually increased 35-fold, moving from 9.43 in 1940, to 143.00 in 1955, and reaching a level of 339.00 in 1964. Turning to the other major indicator of stock prices as given in Table 1-2, it is noted that the Dow Jones Average of 30 Blue Chip In- dustrials moved from 132 in 1940, to 438 in 1955, to a mean for the year 1964 of 829. The monthly high for the year 1964 was 891, the same level which prevailed at the end of August, 1965. While prices of the industrial stocks were multiplying, the utilities were also scoring notable gains. The Dow Jones Average of 15 utilities stood at 22 in 1940, moved up to 64 in 1955, and then more than doubled to 146 by 1964. 8 In a large measure, stock prices advanced in step with the general growth Of the economy. Using Gross National Product, as supplied by Table 1-4, as an indicator of economic achievement, perceptible growth is in evidence. This measure stood at $100 billion in 1940. By 1955, Gross National Product rose to $397 billion, and reached $622 billion by the end of 1964. Considering the long-term, over-all corporate earnings and stock prices have demonstrated a three per cent annual growth rate. Just over three per cent is the actual growth rate in constant 1959 dollars of Gross National Product during the period 1909- 1962. The actual very long-term growth rate of GNP in terms of current dollars is around 5.4 per cent. Between 1955 and 1964, Gross National Product increased at a compound rate in the neighborhood of 4.5 per cent in actual dollars. In addition to the general economic advance of the economy and the fear of inflation, other possible reasons can be found.why stock prices have reached for the sky during the post-war period. Both the institutional and the individual investor was much enamored by the possibility of growth. The definition of growth was often nebulous, but generally meant a projected growth rate of at least seven to eight per cent a year compounded, or a doubling every nine or ten years. This rate would be somewhat more than double the three per cent long- term growth rate of over-all corporate earnings and stock prices. The soaring price/earnings ratios of growth stocks acted as a strong incentive for the price/earnings ratios of a large number of the neutral or non-growth stocks. Table 1-8 supplies these ratios for various categories of stocks as derived from Moody's Investors Service. 9 In late 1961 and early 1962, it was an easy process to decide that average stocks were not out of line at 19 to 23 times earnings when growth stocks were selling in the range of 30 to 40 times earnings. When talking about growth, very often what is really meant is merely growth in market price. Between 1955 and 1961, the Dow Jones Industrial Average moved from a low month of 388 to a high month of 734. Over this same period, the earnings per share of the Standard and Poor's 500 Composite Index showed an absolute increase of five cents. In 1955, earnings per share was $3.62, while in 1962, it stood at $3.67. The price/earnings ratios for Moody's Industrials ranged from 12.43 in 1955 to 20.80 in 1961. Quite Obviously, growth can, on occasion, simply refer to changes in market price. A discussion of prices in any particular market must also con- sider the quantity of items available for sale. It has been noted that powerful forces were exerting their influence on the demand for stock. Prices also rose because the supply of stock offered for sale yearly, even including new floatations, was far short Of demand except at rising prices. Table 1-7 provides a history of new securities offered for sale from 1934 through 1964. It is estimated that between 1946 and 1964 only some $30 billion Of common stock and some $10 billion of preferred stock was offered for sale in this country. However, as these figures are gross in the sense that they include issues for refunding purposes, the net new funds flowing into purchases of stock by both individuals and institutions during this period would total in the neighborhood of $35 billion.“ 4Douglas H. Bellemore, The Strategic Investor (New York: Simmons-Broadman Publishing Co., 1963)., p. 54. 10 Looking at the supply of common shares from a different perspective, the recent annual turnover rate of shares listed on the New YOrk Stock Exchange was only about 15 per cent. Since some shares were sold more than once, the turnover rate exaggerates the actual condition, so that more than 85 per cent of the stock held on January 1 of a particular year is maintained by the same owners on January 1 of the following year. Therefore, the increase in stock prices was also a result of the rela- tive scarcity of stock, which in turn was caused by the small floating supply of outstanding shares and the comparatively small number of new issues. The Bank Stock Market Throughout this study, the term "bank stock market" is used. Actually, the market for bank stocks is not a separate entity, but rather just one shelf in a vast supermarket of equities. A share of a bank, or many banks, is just one choice of many open to the typical investor. There is another consideration which restricts the employment of the term. That restriction must largely be one of size. To even allow the analysis which follows in later sections, the assumption must be made that the stocks of large banks are traded in markets possessing attributes similar to those indigenous in other equity markets. If this assumption does not hold, a rational model employing functional and pro- ductive determinants as explainers of relative prices may prove inefficient. Viewing the banking industry as a whole, the market in which its Ownership shares are traded is highly imperfect. A number of factors Contribute to this imperfection. There is little information available 11 both of the corporation's financial and performance attributes and of the price at which others are willing to buy and sell.5 Because of the influence of control, the blocks of bank stock coming on the market are frequently large and can often be sold only at sizeable discounts. Especially for the smaller firms, artificial prices exist becuase the individual ”making the market” is often the only buyer available to the seller. Bank capital is not necessarily mobile due to the usual "local only" market for the stock. A 1964 report of the House Committee on Banking and Currency further describes the market imperfections. 1. The median number of shareholders for all banks is between 26 and 50. 2. Seventy-five per cent of all banks have less than 10,000 shares outstanding. 3. Except for the over $100 million size class,,over 75 per cent of all banks are over 51 per cent owned by local residents. 4. The total number of banks which have regularly pub- lished bid and asked quotations in the newspapers is only six per cent of all banks. 5. Of the 10,653 banks for which neither professional stock dealers nor an officer or director bought and sold securities for their own accounts, 25 per cent do not even use their good Offices to help pur- chasers and sellers locate one another. 6. Less than 50 per cent of all banks publish an annual report. 7. Of the 48 per cent of all banks which do publish annual reports, 29 per cent of these do not give the size of any valuation reserves. 5"Bank Report Fracas - Critics Charge Bankers Obscure and Omit Vital Data for Stockholders," wall Street Journal, June 4, 1965, p. 7. 12 8. Thirty-six per cent of all banks do not disclose before-tax earnings and 34 per cent of all banks do not disclose after-tax earnings. 9. Concerning the number of shares traded in 1962, of the 8,111 banks responding, 5,168 bankg had less than 1,000 shares traded in that year. Another imperfection having implications for the relative prices of bank stocks is that of ownership concentration. A community of in- terest may exist both within and among banks which arises directly or indirectly from.ownership ties. The only known study in this area was published by "The Patman Committee" in 1963.7 The general conclusion reached is that ownership of the largest member banks have character- istics similar to those found in the large industrial corporations. That is, management is generally not directly associated with ownership. As of the date of the study (June 30, 1962), in no case do the directors and officers hold.more than 50 per cent of the stock in any of the tOp 200 banks. In fact, in 59 of the banks, the combined holdings of all directors and leading officers amount to less than 2.5 per cent of the stock. In 175 of the 200 leading member banks, the combined holdings of directors and officers amount to less than 17.5 per cent of the out- standing stock. However, some variation is found among the largest member banks, both in the composition of the tOp stockholders and in the concentration 6 U. 8. Congress, House, Committee on Banking and Currency, Subcommittee on Domestic Finance, The Market For Bank Stocks, 88th Cong., 2nd. Sess., December 22, 1964, pp. 6-72. 7U. S. Congress, House, Committee on Banking and Currency, Chain Banking - Stockholder and Loan Links of 200 Largest Member Banks, 88th Cong., April 15, 1963, pp. 5-11. 13 of ownership. As regards concentration, in about half of the 200 largest banks, the tOp 20 stockholders as a group hold less than one- third of the outstanding stock. At the other extreme, in 21 of these 200 banks, the top 20 stockholders hold over 90 per cent of the stock. In another 14 of the tOp 200, the tOp 20 stockholders hold anywhere from 60 to 90 per cent of the stock, and for an additional 10 banks, the 20 largest stockholders hold from 50 to 60 per cent of the out- standing stock. It does seem, however, that diffused ownership is a character- istic of the very largest banks. In each of the 10 largest member banks the 20 largest stockholders hold an aggregate of less than 35 per cent of the outstanding stock. Moreover, in nine of the tOp 10 banks, the 20 largest stockholders hold less than one-fourth of the stock.8 In 1929, stocks trading on the New York Stock Exchange included four individual bank stocks. The Bank of New York and Trust, the Corn Exchange Bank, The Equitable Trust, and The National Bank of Commerce. Since the depression, at best only one bank stock has been traded on that exchange. In 1965, The Chase Manhattan Bank received approval for listing on the New York Stock Exchange. At best, then, bank stocks are traded in the over-the-counter market. This fact in itself may ex- plain some of the variation in market activity among the industry groups.9 It is entirely possible that more banks will request listing as a result 8Ibid. 9"The Investment Markets - Does the Over-the-Counter Market Hurt Bank Stocks?" Banking, January, 1965, p. 16. 14 of the Securities Act Amendment of 1964 which empowered both the Board of Governors of the Federal Reserve System and the Federal Deposit In- surance Corporation to issue Regulation F (effective January 1, 1965), calling for more complete stock trading disclosure and financial re- porting by state member banks.10 To further indicate the paucity of bank stock price information, it is pointed out that of the banks with deposits in excess of $10 mil- lion, less than one-third, or something under 900 of them have their month-end quotations publicly available in The Commercial and Financial Chronicle's Bank and Quotation Record. It is even more striking to find that of the 13,775 (12/31/64) commercial and stock savings banks in the United States, only some 200 of them have their stocks pOpularly quoted in such publications as The American Banker, The New York Times, Barron's, The Commercial and Financial Chronicle, and regional editions of The wall Street Journal. Of the nation's tOp 300 banks, having year- end deposit totals in excess of $100 million, less than half are quoted daily. In fact, there are 11 states with 30 of the top 300 banks, the stocks of which are not even quoted on a weekly basis.11 In the light of these market facts, it is not surprising to learn that there is no regularly published national composite bank stock price average. The information consists of a daily index of New York City bank stocks published in the American Banker. In addition, 10"Banking's Investment Forum--New Disclosure Regulations AdOpted," Bankin , February, 1965, pp. 12-14. 11Francis I. duPont and Company, Bank Growth Goals, (New York: Francis I. duPont and CO.), 1961, p. 10. 15 both Moody's and Standard and Poor's run separate, monthly, and yearly averages for both New YOrk City banks and for a small group of out-of- town banks. These data are presented in Tables 1-6 and 1-3 respectively. A considerably more inclusive stock average has been computed for the sample utilized in this study and is presented in Table 1-9. 'While the computed averages are representative only of the years 1955 through 1964, it gains major significance because of its wide diSpersion of both geographic and size attributes. This table also supplies the average yields, price/earnings ratios and price/book value ratios for the sample banks. These tables will be employed in subsequent analysis. Bank Stock Performance Because of the lack of a generally representative index of bank stock prices, a discussion of market performance can easily be biased by the little data which are available. However, the statistics pre- sented in both Tables 1-3 and 1-8 seem to indicate that the bank share prices passed through at least two phases of market acceptance during the post-war period. The Durand study was a result of the recognition of the existence of the first phase. Because of data restrictions, subsequent analyses will largely be concerned with the changes and levels which occurred during stage two. A. Phase One The first decade or so of the post-war period witnessed bank stocks wallowing in a completely uninterested market. In 1946, the Standard and Poor's index of 10 New York City banks stood at 14.06. By 1953, this index had risen to only 14.97 after drOpping as low as 16 11.48 during the interim. The Standard and Poor's index of 16 banks outside of New York City stood at 19.56 in 1946, while in 1953, its level was 30.79. During this same period, the Dow Jones Industrial Average rose from 187 to 274. A similar relation is obtained when viewing Moody's Weighted Average Market Price. In 1946, the 15 New York City banks included in the Moody average stood at $58.78. By 1953, this average had only increased to $63.60. During this period, Moody‘s Industrials rose from $49.84 to $87.05. Proceeding into the later stages of phase one, the Standard and Poor's index for 10 NeW'York City bank stocks rose from 14.97 in 1953 to 19.47 in 1957. The Standard and Poor's index of 16 banks outside of New York City increased from 30.79 to 38.40 over this same five year period. ‘While bank stock prices were increasing only slowly, the Dow Jones Industrial Average jumped from 274 in 1953 to 470 in 1957. Again, looking at Moody's Weighted Average Market Price, an increase is noted of just under 20 per cent from $63.60 in 1953 to $76.13 in 1957 for the 15 New York City banks, while Moody's Industrials grew from $76.05 to $143.65, for an increase of just under 100 per cent. Although the following comparison may extend a bit beyond the possible termination of phase one, viewing the decade of the 1950's as a whole, Moody's New York City bank average increased 82.0 per cent, for a compound yearly average growth rate of 6.2 per cent. Standard and Poor's 16 banks Outside of New York City did somewhat better, demonstrating an absolute increase of 109.6 per cent, for a compound yearly average growth rate of 7.7 per cent. 'While the rates of growth for these bank stock groups are certainly above that of the economy as 17 a whole, they suffer in comparison with other stock price indicators. During this same decade, Moody's 125 Industrials increased 199.? per cent at a compound rate of 11.6 per cent per year. The Dow Jones In- dustrial Average increased a total of 189.8 per cent at a rate of 11.2 per cent compounded yearly. As further indication of the relative weakness of the bank stock market during at least the earlier 1950's, other attributes may be ex- amined. ‘Within certain rational bounds, price/earnings ratios are considered indicative of market acceptance of equity issues. During the full tenqyear period, the price/earnings ratios of Moody's New York City banks actually decreased 15.6 per cent, falling from 14.74 in 1950 to 12.43 in 1960. ‘While Standard and Poor's other banks did not do as badly, their price-relative ratios increased by only 12.6 per cent. As the bank stocks were wallowing in an uninteresting mar- ket, the price/earnings ratios of Moody's Industrials increased absolutely by 164.7 per cent, and those of the Dow Jones Industrial Average showed even a better gain of 171.8 per cent. The reason for this poor showing for the bank groups is that while stock prices were increasing slowly, their earnings-per-share were increasing at a much faster rate. An examination of the earnings-per-share figures for the stock groups under discussion reveals a generally inverse relationship with the price/earnings ratios previously mentioned. The earnings of Moody's New YOrk City banks increased 115.9 per cent for a compound rate of growth of 8.0 per cent during the 10-year period. Next in line was Standard and Poor's other banks with an absolute increase of 85.7 per cent for a compound yearly rate of 6.4 per cent. 'While bank earnings 18 were growing at a good rate, Moody's 125 Industrials demonstrated an absolute increase Of only 13.8 per cent and the earnings of the Dow Jones Industrial Average grew absolutely only 5.4 per cent over the 10-year period. In accord.with expectations, even though dollar dividends in- creased throughout the period, the yields on market price decreased for the stock groups under examination. The ranking of the yield de- crease is largely inverse to the ranking of the gains in price made by the groups. The yields of the New York City banks decreased 27.4 per cent, those of Moody's Industrials fell absolutely 46.5 per cent, while the yields of the Dow Jones Industrial Average decreased 54.0 per cent. An interesting note is that while the prices of the New York City banks increased only 82.0 per cent as compared to a price gain of 109.6 per cent for the Outside banks, the yields on the New York stocks held up better. Of more importance, however, is the fact that the earnings of the New YOrk City banks increased 115.9 per cent as com- pared to a gain of only 85.7 per cent in the earnings of the Other banks. It would almost seem as if earnings were being penalized by the market. B. Phase Two The precise point at which the market price reactions of bank stocks actually entered the second post-war phase of activity is open to question. The writer personally feels that the year 1957 represents the true beginning. If this is true, some of the preceding analysis (1950-1960) includes the early stages of the latter phase. Nevertheless, it was well to cover the decade of the 1950's as a whole because other 19 industry studies are couched in the same temporal terms. Other writers believe that the turn did not come until 1960 when a broadening of insti- tutional interest occurred.12 ‘While it is true that the greatest activity took place in late 1960 and early 1961, there was perceptible price ap- preciation during at least the two years preceding 1960. The following analysis will dichotomize phase two into two segments, 1957-1960 and 1960-1964. So as to more effectively visualize the changes within phase two, certain data will be extracted from the tables in the Appendix and are presented below in Tables 1-10-A through 1-10-D. TABLE 1-10-A ALgvels of Price Indicators For Bank Groups Average Price Earnings Dividends Price/ Year Price Index P.S. P.S. Yield Earnings Moo '3 1 N.Y.C. Banks 1957 g 76.13 $ 6.34 $ 3.61 4.70% 12.01 1960 101.42 8.16 3.97 3.90 12.43 1964 153.75 9.07 4.57 3.00 16.95 Moody's 12 Banks Outside of N.Y.C. 1957 $ 47.30 $ 2.07 4.38% 1960 65.22 2.29 3.51 1964 96.98 2.70 2.78 Stu Sam le 1957 26.73 $ 2.65 $ 1.14 4.38% 10.40 1960 41.51 3.39 1.42 3.57 12.60 1964 63.30 3.99 1.82 2.97 16.30 12David C. Cates, "What's wrong With Bank Stocks?" Paper read before the meeting Of The Nashville Society of Security Analysts, Nashville, Tennessee, June 15, 1965. 20 TABLE 1-10-A (Continued) Levels of Price Indicators For Bank Groups Average Price Earnings Dividends Price/ Year Price Index P.S. P.S. Yield Earnings Standard and Poor's 10 N.Y.C. Banks 1957 19.47 1960 26.23 1964 39.64 Standard and Poor's 16 Banks Outside of N.Y.C. 1957 38.40 7 1960 53.10 1964 77.34 TABLE 1-10-B Efficiency Levels For Bank Groups Year R_of R on Capital Earning Power R of R on Assets All Insured Commercial Banks 1957 8306(2176) 140% (24%) '67 (27%) 1960 10.03 ( 12%) 1.37 ( 18%) .81 ( 11%) 1964 8.86 ' 1.13 ' .7 ' Sample Banks 1957 10‘20%'(6%) .76% (10%) 1960 10.80 ( 1%) .84- ( 8%) 1964 10.25 '5 .77 ' TABLE 1-10-C Levels of Price Indicators For Industry Groups 99w Jones Price Averages Industrials Utilities 1957 $470 $ 71 1960 625 92 1964 829 146 21 TABLE 1-10-C (Continued) Standard and Poor's Indexes 1941-43 = 10 Year 599. Industrial Utility Life Ins. 1957 44.38 47.63 32.19 126.30 1960 55.85 59.43 46.86 146.10 1964 81.37 86.19 69.99 339.00 Moodys Industrials Utilities PZE Yield PZE Yield 1957 13.99 4. 11% 14.49 4.92% 1960 18.00 3.48 16.95 3.84 1964 17.99 2.98 20.22 3.15 A number of observations may be made concerning the data supplied by the 1-10 Tables. Of major importance is the fact that over the full period of phase two, bank stocks enjoyed far larger price increases than were experienced during phase one. But rather than beginning their move- ment in 1960 as others have contended, bank stocks really became interest- ing as early as 1957. In fact, the computations for the sample banks demonstrate the greatest percentage increase for all the groups tested. Only Standard and Poor's Utilities did as well or better than did any of the bank groups. The other major indicators of stock price levels were all growing at slower rates than were the indicators of bank prices. An Observation of Special interest is that it was the banks not included in the publicized averages which were the ones growing at the fastest rates. This conclusion serves to underline the extreme need for a more comprehensive indicator of bank stock levels. Those presently supplied by the services are simply not representative of the industry as a whole. 22 TABLE 1-10-D Absolute Percentgge Changes: Price Changes Moody's 15 N.Y.C. Banks Moody's 12 Outside Banks S & P's 10 N.Y.C. Banks S & P's 16 Outside Banks Sample Banks D J I A Dow Jones Utilities 8 & P's 500 S & P's Industrials S & P's Utilities S & P's Life Ins. Yield Changes Moody's 15 N.Y.C. Banks Moody's 12 Outside Banks Sample Banks Moody's Industrials Moody's Utilities PIE Changes needyvs 15 N.Y.C. Banks Sample Banks Moody's Industrials Moody's Utilities Earnings Changes Moody's 15 N.Y.C. Banks Sample Banks Dividend Changes Moody's 15 N.Y.C. Banks Moody's 12 Outside Banks Sample Banks 1257-60 34% (5) 38 (3) 35 (4) 38 (3) 55 (1) 33 (6) 30 (7) 26 (8) 25 (9) 46 (2) 16 (10) -17% (4) -20 (2) ~19 (3) -12 (5) -22 (1) 4% (4) 22 (3) 29 (2) 30 (1) 29% (1) 28 (2) 10% (3) 11 (2) 25 (1) 51 (4) O\ o AAAAAAAA H- \n \‘1 O\ N 00w 0\ VVVVVVVV 132 -26% (1) -21 (2) -17 (4) -14 (5) -18 (3) 38% (1) 29 (2) no (4) 19 (3) 11% (2) 18 (1) 15% (3) 18 (2) 28 (1) As the prices of the banks were increasing during the 1957-1960 period so were earnings, dividends, rates of return on capital, and rates of return on assets. While it is true that dividends were 23 increasing, stock prices were probably responding to the larger increases in earnings during the earlier segment of phase two. In fact, it must have been the smallest banks which were demonstrating the very largest gains in Operative efficiency while the larger banks were maintaining their already high levels of rates of return on assets and capital. These conclusions are based on the relative levels of return for all insured commercial banks as compared to those earned by the sample banks. As will be indicated in detail later, the sample banks are those gener- ally listed as being within the largest 300 banks in the country. Turning to the price changes which occurred during the 1960-1964 period, certain changes in the ranking among the groups become evident. While life insurance stocks were ranked last during the earlier period, they now occupy a very certain first place. The Dow Jones Utility Average has also gained in the standings and now ranks second. ‘While the banks are still doing quite well, especially in relation to the major indicators as the Dow Jones Industrial Average and Standard and Poor's 500 and Industrials, the relative standings of banks grouped ac- cording to geographic area have now changed. During the 1957-1960 period, both indicators of outside banks outperformed those of the New York City banks. During the latter period, the opposite of this is true. The New York City banks did better than those major banks situated in other parts of the country. These trends are even more dramatically indicated by the fact that the percentage increase for the sample banks was actually three points less for the 1960-1964 period than it was for the period of 1957-1960. 24 While the prices of all bank groups increased, the more recent price appreciation does not seem to be as nicely explained as that which occurred during the earlier period. Even though both earnings and dividends continued to increase, these increments are now somewhat out of prOportion to the increments in stock prices. This is certainly evidenced by the drastic fall in yields and the perceptible increase in price/earnings ratios. ‘What is truly of interest is that this major price appreciation in bank stocks took place at the very time that all insured commercial banks were experiencing a decrease in net income after tax as a per cent of capital and in net income both before and after tax as a per cent of assets. 'Whereas previously it had been the small banks which demonstrated the largest gains in efficiency, during the 1960-1964 period it is again the small banks which now experienced the largest decreases in efficiency. The sample banks suffered only a five per cent reduction in their rate of return on capital and an eight per cent reduction in their rate of return earned on assets. While the statistics generated by the subsequent analysis of the sample banks are more representative of the industry than are those supplied by the in- vestor services, the comparative changes in the rates of return indicate that a sample including a greater number of small banks is needed to truly represent the total banking industry. Nevertheless, it is believed that this research provides at least a tentative step in the prOper direction. 25 Previous Bank Stock Price Studies The study of the relative prices of bank stocks is an area which has been generally neglected by investment analysts. In response to a question posed in a letter to him, David C. Cates, bank stock analyst of the firm of Salomon Brothers and Hutzler, states: "You are entirely right in your guess that the analysis of bank stocks has not been pur- sued at the theoretical level."13 The reasons posited by Mr. Oates for this lack Of investigation consist Of poor bank reporting practices, year-end distortions in financial statements, uninclusive capital funds totals, and illogical and unrefined ratios. Mr. Cates' criticism of available data may easily be pertinent, but need hardly be incapacitat- ing. If the studies are few, all the more reason to make the attempt. 'While attempts at explaining stock prices in other industries have been undertaken, only two price-explanatory studies dealing specifically with bank stocks have been uncovered.14 The two bank stock price studies were produced by John Collins and David Durand reSpectively. A. The Collins Study The Collins study dealt with mixed price determinants and through their use attempted to define a normal or intrinsic value.15 In this .v. 7' 13Letter from David C. Cates, Bank Stock Analyst, Salomon Brothers and Hutzler, to the author, New York, August 31, 1965. 1“For a relatively complete coverage of price studies see: Myron Gordon, The Investment Financin and Valuation of the Corporation (Homewood, Illinois: Richard D. Irwin, Inc.), 1962. 15John Collins, "How to Study the Behavior of Bank Stocks," The Financial Analysts Journal, May, 1957, pp. 109-113. 26 study, Collins employed a random sample of 37 of the larger banks and regressed their year-end price on each of four variables, one variable at a time, for first 1955, and then the year 1954. For three of the _ four variables, the correlation proved to be higher in 1954 than was originally obtained for 1955. No attempt is made to explain the changes in the correlation from one period to the next. The investigation continues by combining the variables and as- signing weights to them through the use of an adjustment formula. The final equation took the form: x1 = 2.668 + 6.554 x2 +‘12.176x3 - 0.226x4 + 2.742x5 where X1 = normal price a = the Y intercept X2 = Operating earnings per share X3 = annual dividend per share X4 = book value per share .X5 = net profits per share. Collins concludes that the formula will be predictive of the normal value of a bank stock until there is an appreciable' change in the values of the independent variables. Certain problems are evident in the use of this equation as a means of describing a normal stock value. First, an assumption is made that the year in which the weights were computed was a "normal" period for bank stocks as far as evaluation purposes are concerned. Second, that the market will continue to weigh the factors in a fashion similar to that which was obtained at this one point in time. Third, that the 37 Observations truly comprise a homogeneous group. Finally, Collins seems to make the questionable assumption that intercorrelation, es- pecially between Operating earnings and net profits per share, will not affect the total validity of the future regressions. 27 An earlier work in which this writer took part using the Collins formula in the years following 1955 showed that it lacked any value as a predictor of bank stock prices.16 In fact, if anything, the movements of Collins' normal values were inverse to the movements of the actual prices. No further use will be made of the preceding analysis. B. The Durand Study This study provides a basis for a major segment of the present work. A replication and extension of the Durand analysis provides the substance for Chapter Three which follows. Because of the subsequent lengthy coverage, only a few comments will be attempted at this juncture. .The Durand Study was undertaken under the auspices of the National Bureau of Economic Research because of an interest in the level of bank stock prices in relation to book value and the implication ofthis rela- tion on theadequaoy of bank capital.17 Looking at the capital adequacy problem from.the viewpoint of 1964, the terminal date of the present wOrk, it would seem that the war has been fought and'won. As of 1964, bankstockprices were high, relative to book value, earnings, dividends, and moat.otherdeterminants. .Other"areas of banking are under discussion at present, such as the virtues of capital notes or debentures in spe- cific capital structures and their possible effects on the earnings of the residual equity holders. g 16Eugene Drzycimski, John Fikes, and William Pincoe, "Analysis of Determi- nant Factors in Bank Stock Analysis," Unpublished paper written for the Graduate School of Business Administration, Michigan State University, East Lansing, May 25, 1962. 17DavidDurand, Bank Stock Priges and the Bank Capital Problem (New York: National Bureau of Economic Research, Inc.), 1957. 28 Although the Durand Study was concerned with problems of possibly lesser importipday, certain resultant conclusions do have implications which deserve further analysis and testing. In essence, then, this earlier work provides a well-founded.point of embarkation for the analy- sis undertaken in the present study. Marx In this chapter, attempts have been made to function in a number of separate but related areas. The major hypotheses which will be sub- sequently tested have been defined. A discussion has been carried out concerning the psychology of the stock market in general along with specific instances of market reactions. It has been noted that bank stocks have been and are subject to investor's whims. Stock price movements as described by the major price indicators have been placed in historical perSpective. The market for bank stocks themselves has been scrutinized and declared wanting. Following this exercise, bank stock price movements have been analyzed over time and then compared to the relative movements of other industry groups. Finally, the meager supply of previous bank stock price studies has been exhibited. The stage is now set for the present study to proceed along the lines set forth at the beginning of this chapter. CHAPTER II THE SAMPLE AND ITS PROPERTIES The Purpose of This Chapter This chapter will describe the group of financial institutions which provide the raw material for all phases of this study. The many aSpects of the description will include a discussion of the financial impact of the banking industry and of the sample thereof as compared to the other financial sectors of the economy. The description will largely take the form of a comparison of the means and standard devia- tions of certain statistics over time, and an analysis of the inter- correlations between these statistics. The Magnitude of the Banking Industry 'When the commercial banking industry is considered as a whole, we are talking about 13,775 commercial and stock savings banks with total despoits of $306,800 million as of December 31, 1964. Table 2-2 presents a tabulation of the financial assets of the various financial sectors of the economy from 1955 through 1964. Although the commercial banks have grown from $185,400 million at year-end 1955 to over $300 billion as of December 31, 1964, the standing of banks relative to the other financial institutions taken as a group has actually decreased. In 1955, the total footings of the non-bank financial institutions were 126 per cent of the footings of the commercial banks. By the end of 1964, this superiority had increased to 178 per cent. Over the ten years in question, the de- posits of the commercial banks increased at a compound annual rate of 29 30 5.5 per cent, while those of the non-bank financial institutions in- creased at a compound rate of 8.0 per cent per year. Nevertheless, the deposits of the commercial banks as of December, 1964 were still almost as great (less $11 billion) as the sum of the assets of all savings and loan associations, mutual savings banks, and life insurance companies. In Spite of their relatively slower growth, commercial banks remain a financial force of paramount importance. Financial Impact of the Sample It would be highly desirable if the totality of the commercial banking industry could be considered in this study. This is not possible. The primary reason for the difficulty of such a venture is that the pertinent data are simply not available for the vast majority of these banks. It is necessary, therefore, to procure a sample, which, although not necessarily representative of all commercial banks, would describe those banks of such size as to be of interest to the investing public. Generally speaking, the banks under consideration are, with two excep- tions, among the largest 300 banks in deposit size in the United States. Of the top 100 banks in deposit size as of December 31, 1964, 83 are in- cluded. Of the second 100 banks ranked according to deposit size, 28 are included. Because the data were available, two banks smaller than the 300th largest bank were also considered. In addition, data were procured for nine bank holding companies, eight of which represent banks which would be among the tOp 100 banks. The remaining holding company includes a bank which would fall within the tOp 110 commercial banks in deposit size. Exhibits 2-3-A through F give a listing of all the banks 31 and holding companies and the number of Observations for each institution included in the sample. Table 2-1 lists both the number and deposits of all the commercial banks in the United States and of those banks included in the study. This chapter will describe the levels and the relationships observed during the full ten-year period for those sample banks. Later chapters will concern themselved mainly with the period of the 1960's.1 Table 2-1. Number of Commercial and Stock Savings Banks and Nondeposit Trust Companies and Their Deposits, By Year, for the Total United States and for Those Included in the Study 1955 - 1964 (Deposits in Millions Of Dollars) Total United States Sample Banks Sample Bank Deposits Year Number Deposits Number Deposits As % of Total Deposits 1955 13.756 $193,205 81 $68,618 36 1955 13.680 198,547 86 73.497 37 1957 13,607 202,483 88 75.114 37 1958 139540 217,291 96 849437 39 1959 13,486 220,514 111 101,161 46 1960 13,484 230,532 122 114,236 50 1961 13,444 249,504 122 126,944 51 1962 13,441 263,060 122 136,273 52 1963 139583 276,230 122 145,370 53 1964 13,775 308,427 121 154,624 50 Source: FDIC Annual Rgports. k -r 1The reader may question the fact that the totals for 1964 include one less bank than those of the previous four years. During that year it was necessary to drOp the Observations of the Banc Ohio Corporation due to the unavailability of the determinant net indicated earnings. This decision will largely affect only the immediate general discussion since this holding company will be reinserted in subsequent Operations. If Bane Ohio were presently considered, deposits would be increased by $809 million to $155,433 million. This inclusion would increase the factor "Sample Bank Deposits As % Of Total Deposits" to nearly 51%. 32 Deepite the fact that the sample includes just under 1% of the total universe, as far as numbers of banks are concerned, for the period 1960-1964, it does encompass a majority Of dollars of deposits. The representation of the sample during the latter half of the 1950's is still substantially greater than a third of available deposits. As a further indication of the degree of financial concentration evidenced by the banking industry, the following figures are taken from a survey completed by the House Committee on Banking and Currency of the 88th Congress. As of June 30, 1962, the 100 largest member banks as a per cent of all commercial banks in the United States held: 47% of total assets, 46.4% of total deposits, 49.3% of total demand deposits, 41.5% of total time deposits, 48.5% of total loans, and 40.9% of total investments.2 Geographic Rgpresentation Even though this study does not pretend to be a capsule repre- sentation of all banks in the United States, an effort was made to include banks in as many states as possible. One major problem is that a number of states simple do not house institutions of interest to in- vestors residing beyond the immediate municipal or county boundaries. Nevertheless, at least one bank or holding company has been included for each of 31 states, plus the District of Columbia. As would be expected, 2U.S., Congress, House, Committee on Banking and Currency, Chain Bankipg - Stockholder and Loan Links of the 200 Largest Member Banks, 88th Cong., April 15, 1963, p. 7. 33 the State of New York leads with 19 banks and one holding company. Ohio follows with 11 banks and one holding company. The States of Washington, Alabama, Florida, Colorado, Kentucky, and Delaware each are represented by one bank, while Louisiana and Utah each have one holding company repre- sented. Table 2.4 provides a listing of the states included and the num- ber of institutions by which they are represented. In spite of the efforts made to Obtain a representative geographic inclusion, a certain imbalance remains evident. The middle northeastern states are weighed most heavily in terms of both number and financial impact. The north central states - Specifically Ohio, Illinois and Michigan - also contribute a goodly number of banks whose financial impact is most important. These banks need not be specifically repre- sentative of the area due to the existence of large numbers of small unit banks in most of the states comprising the greater Midwest. The south- east and southwest enjoy some representation as far as financial impact is concerned, but suffer in terms of the actual number of banks in existence. The Pacific Coast states, eSpecially California, may actually fare better than some other areas, particularly the Rocky Mountain states, because although represented by only nine observations, these observa- tions are of the very largest banks in predominantly branch-banking states. A Pragmatic Approach While commercial banks and holding companies taken together are not necessarily homogeneous, they are more SO than other industry groups. Therefore, it was decided to initially evaluate the totality of the 34 §§§plgp This procedure will provide a basic structure against which later comparisons may be made when the observations are more rationally grouped and the determinants more specifically chosen. The methodology by which certain descriptive statistics were ob- tained for the institutions under study was generally one of the least squares fits to arbitrary functions, i.e., the calculation of multiple regression. In running the regression at this point the assumption was made that mgrketgprice as the dependent variable was a function of all determinants at one time. This hypothesis is not statistically true, but was necessary so as to produce the desired statistics. Tables 2-8- A and B provide a listing of all the variables obtained for each institu- tion. To obtain a more complete picture of the information available for each institution for each year, Table 2-5 should be employed in con- junction with Tables 2-8-A and B, since Table 2-5 enumerates the actual number of observations for each variable for each year. This further breakdown was necessary since not all information was available for each institution for each year. All the variables are completely described in Appendix A. The Avergges of the Variables Tables 2-6-A through D provide the simple mean values along with the relevant standard deviations for each of the variables considered for each of the study years. A few comments might provide assistance in interpreting these data. 35 Russ Variable #4, price per share, was set forth in an earlier chapter as a broader indicator of bank stock price performance over the ten-year period 1955-1964. It can be seen that not until 1958 did bank stock prices begin to climb. This year of price increase was preceded by three years of relative price stability during which two of the price relatives, the price/earnings ratio and price as a per cent of book value, actually declined. The year 1261 witnessed the most perceptible advance in price, followed by a significant drOp during the following year. In terms of standard deviations around the market price average, about 66 per cent of the observations for the year 1955 should lie within the range of $13.00 per share and $43.48 per share. However, since the average presented is not weighed by the number of Shares outstanding for each institution, its form is likely to be asymmetrical. In this case, it is probably asymmetrically skewed positively to the right because none of the stocks included sold for a negative figure. For the year 1964, 66 per cent of the stocks would have sold for $63.30 plus and minus $35.68, one standard deviation. Earnings Adjusted net operating earnings per Share, Variable #5, increased rather consistently from $2.18 in 1955 to $3.99 in 1964. This change amounts to a yearly compound rate of increase of approximately 6.2 per cent. Although still uncomfortably high, the standard deviations have decreased over time so that for 1964 about 66% of the observations of earnings would fall between $1.77 and $6.21 per share. 36 Dividends Adjusted dividends per Share, Variable #6, increased from $.98 per share with a standard deviation of $.45 in 1955 to $1.82 with a standard deviation of $.88 in 1964. This change over time reflects a yearly compound rate of increase of 6.3 per cent. Lassa Variable #7, loans and discounts as a per cent of total assets, demonstrates the recognized increased allocation of credit during these ten years. This measure of loan magnitude increased some 25 per cent during this period. Of special note is the fact that the standard de- viation actually decreased. The explanation of this phenomenon in all likelihood is that more banks became more efficient in the allocation of credit via the loan desk. Book Value As we have seen, dollar dividends have increased at a Slightly faster rate than earnings per share. The result of this difference is to allow only a 5.5 per cent compound rate of increase for book value between 1955 and 1964. Again, in this instance, the standard deviations for Variable #8 are uncomfortably large. Deposits The mean values for deposits, Variable #9, may be somewhat un- realistic, since in each of the ten years the relevant standard devia- tion is larger than the average value itself. The reason for this undesirable situation is the wide range in size of the various institu- tions. The size of the largest bank is about 12 times the value of the mean of the sample. Approximately 20 banks are larger than the mean, 37 'while about 100 are smaller than the average value. Capital Capital as a per cent of risk assets, Variable #10, displays re- markable stability with low standard deviations from 1955 through 1961. Beginning in 1262, however, the ratio experienced a.perceptible decline. This occurrence is consistent with the relatively low compound rate of increase in book value and the consistent increase of loans and discounts as a per cent of total assets. Price/Earning Ratio The activity of Variable #11, the price/earnings ratio, is con- sistent with the changes in the levels of both of its components. It definitely depicts the radical increase in price which occurred in 1961 and the relative relationship of the variables in subsequent years. ESpecially gratifying are the low standard deviations around the means. Efficiency of Capital One of the complaints consistently leveled against the banking industry has been, generally, its inability to earn as high a rate of return on its capital as have other industries; and specifically, the suffering of a declining rate of return throughout the 1960's. Although the banks in this sample may have earned a relatively lower rate of re- turn than the firms in other industries, the sample banks have, in nine out of the ten study years, out-performed all the insured commercial banks taken as a group. Of special interest is the fact that although both series have declined from their recent highs of 1960, the sample banks moved from 9.78 per cent for 1963 to 10.25 per cent in 1964. On the other hand, the rate of return on capital, Variable #12, for all 38 insured commercial banks from the F.D.I.C. Annual Reports continued its decline from 8.86 per cent in 1963 to 8.65 per cent in 1964. It is far too early to so conclude, but perhaps the larger banks, which are repre- sented in this sample, may finally be experiencing a payoff from their valiant efforts at automation. The data for all insured commercial banks are presented in Table 2-9. Efficiengypof Assets The rate of return earned on assets, Variable #13, plots a course parallel to the rate of return earned on capital. In both instances, the standard deviations are desirably low, and do change in the prOper direction. Efficiepgy'of Loans Interest income on loans as a.per cent of gross Operating earnings is interesting, even though it was only computed for the period 1960- 1964. Although the standard deviations are relatively very low, the mean value for 1964 is two-tenths of one per cent less than the 1960 value. The values during the three preceding years were even lower than during the last study year. These lower levels were encountered despite the fact that loans and discounts were actually increasing as a.per cent of assets. Possible explanations for this phenomenon are the consider- able stability evidenced by interest rates during the first half of the decade Of the '60'S and the fact that the industry has been making a concerted effort to tap revenue sources other than conventional loan in- come. Portfolio maintenance has become important, since investments 3 have not had to be forced-sold during periods of increased credit demands. 3Henry Kaufman, Commercial Bank Investments In the New Environment (New York: Solomon Brothers & Hutzler, 19 5 , p. . 39 PricejBook Value Ratio Variable #15, bid market price as a per cent of book value, is largely predictable in its changes over the ten-year period. The standard deviations are well within acceptable limits. One point of interest, ‘however, is the fact that at year-end 1957, the average bank was within six percentage points of being worth more dead than alive. Earning Asset/Price Ratio Dollars of earning assets for each dollar of year-end bid market price, Variable #16, has run a generally inverse course to price as a per cent of book value. On the average, the institutions involved owned $2.71 less in earnings assets for each dollar of market price of their shares in 1964 than they did in 1955. If we were to hold potential earnings from these assets constant, it would simply mean that the investing public was capitalizing these earnings by a higher multiple. From this one measure alone it would seem that the purchaser Of bank stocks in 1964 acquired less value than would have been the case in 1955. gay-out Ratio Of considerable interest is the Obvious stability of the paypgp Eéfiip, Variable #17. we have already seen that mean dollar dividends have increased over the study period; yet, the mean payout ratio is three-tenths of one per cent less in 1964 than it was in 1955. This has occurred in spite of considerable agitation for increases in pay- out as a.means of increasing the price of the equity shares. One re- deeming factor, however, is the 16 per cent decrease in the standard dWietion. use. The decrease in yield, Variable #18, from 3.59 per cent in 1955 to 2.97 per cent in 1964, can largely be accounted for by the fact that mean stock prices rose at a compound rate of 8.5 per cent while mean dollar dividends increased at only 6.3 per cent compounded yearly. In actuality, the mean yield of the sample banks decreased at just under a 2.0 per cent yearly compound rate. During this same period, the mean yield of Moody's 15 New York City Banks decreased at a yearly compound rate of just under 3.0 per cent. It would seem as if the yields of the banks in our sample located outside of New York City have held up better than those from a sample of banks located only in that city. Average Ownership Variable #19, the adjusted mean average Share ownership, behaves in an acceptable fashion from 1960 through 1962; however, the direction of change in this variable for 1963 and 1964 was unexpected. The standard deviation around the mean for these later years raises even more questions. A review of the raw observations was undertaken in an attempt to ascertain the reasons for the increase in the average hold- ings. For a large number of institutions, the stock was more dispersed during these later years. However, the heavy consolidation of ownership by the Western Bancorporation of the stock of the First National Bank of Arizona, and the drastic reduction in the number of owners of the First National Bank and Trust Company of Oklahoma City might have been of the magnitude sufficient to produce the increases in the average holdings. The mentioned changes certainly would have been sufficient to cause the large increase in the standard deviations. 41 The next three variables - #20, #21 and.#22 - the existence of capital notes or debentures in the capital structure, the payment of a stock dividend during the year or immediately following the close of the year, and the existence of a stock split, are worthy of further inter- pretation. As explained earlier, a.gp§_denotes an occurrence, a.gegg a nonoccurrence. It is therefore possible to interpret the mean values as percentages. The standard deviations possess little meaning. Leverage Considering Variable #20, in 1255_only 3_per cent Of the sample institutions were burdened by debt in their capital structures. A low level of debt existed until 1264, at which time 22 per cent of the ob- servations reported the leverage effect of debt working for the common equity. In other words, of the 121 institutions included in the 1964 study year, some 26 of them have sold capital notes or debentures. This increase in debt is a direct result of the Comptroller of the Currency's 1962 ruling allowing national banks to sell debentures. Stock Dividends The payment of a stock dividend in lieu of or in addition to a cash dividend experienced a sizeable increase during the latter half of the 1950's and then stabilized in the 25-39 per cent range following 1960. The smallest number of banks paying occurred in 1956 when only 7 per cent paid, while the year in which the largest number paid a stock dividend was 1960, when 31 per cent chose this medium.of payment. _Stock Splits As one would expect, stock dividends, Variable #21, were far more popular than stock Splits, Variable #22. In all study years, the 42 percentage of banks paying stock dividends was far above the percentage of banks undergoing stock Splits. In most instances, the percentage of the former was many times that of the latter. The highest percentage for the latter, Zuper cent, was achieved both in 1961 and 1964. Earnings Retention Variable #23, the retention ratio, is the reciprocal of Variable #17, the payout ratio. The standard deviations of the two sets of means are identical. Of interest is the fact that both the payout ratio and, of course, the retention ratio of the sample have shown a greater degree (of stability over the relevant time period than do the ratios of all the insured commercial banks taken as a group. In addition, since 1960 mean retention ratios have Shown a somewhat moderate decrease over the values in existence toward the end of the latter 1950's. Spock Demand Variable #26, eligibility for Massachusetts savings banks invest- ment, can be interpreted in exactly the same manner as Variables #20, #21 and.#22. In 1955, 28 per cent of the institutions in the sample possessed eligibility. In 1264, this figure had risen to 56 per cent. Because of the pronounced effect of size on this variable, as the insti- tutions have grown, so has the percentage of eligibility. Each of the study years witnessed an increase over the previous year. Among others, The Bank of California (San Francisco), The County Trust Company (White Plains, N.Y.), Manufacturers' National Bank (Detroit), and each of the hOlding companies are not legal investments for savings banks in Massachusetts. 43 Net Profits Variable #27, net indicated earnings, approximates a net profits figure. Since only the mean value of the observations for one study year is available, little can be said about its level over time. As would be eXpected, the magnitude of this quantity is smaller than that reported as the mean value of net operating earnings. The standard deviation for this variable is relatively less than that for the more usable earnings indicator. Price Growth Variable #76 is the annual rate of growth in price per share. The average gap; of price growth for all 122 institutions was 2.8 per 922:. The average rate of growth in price for the 113 banks was 10.7 per cent, while the nine holding companies found their price increasing only at an 8.8 per cent rate. Earnings Growth Variable #77 is the annual rate of growth in net operating earn- ings per share. Over the study period the nine holding companies in- creased earnings at a rate of 6.7 per cent per year, while the sample 0f pgpkp were able to generate earnings at a 6.5 per cent rate. Qiyidends Growth Variable #78 is the annual growth rate in dividends per share. We have seen that the mean values of the payout ratios themselves were in 1964 similar to the values they held in 1955. However, the mean dividend growth rate for the 122 observations was 8.1 per cent as com- Pared to a mean growth rate in earnings of 6.6 per cent. The difference in eXpected results can be attributed to two methods of calculation 44 employed. Even though the average dividend growth pgpg'was 8.1 er cent, the banks increased dividends at a 7.1 per cent rate, while the nine holding companies did better, growing at a 9.1 per cent rate. Growth In Size Variable #79 is the annual growth rate in deposits. While the 113 banks were growing at an average rate of 5.7 per cent, the nine holding companies were advancing at the slightly faster rate of 6.0 per cent. Simple Correlations Between the Variables Our concern at this point will be with a measure of the degree of relationship between two variables, the Pearson product-moment cor- relation coefficient, Often called the gross or zero-order correlation coefficient. A series of tables is presented in Appendix B listing the simple correlations between variables for each study year. Specifically, these are Tables 2-7-A through U. The procedure employed in this section will be to examine alterna- tive pairs of variables for each study year in order to determine the relevant degree of association between the paired variables. It is important to keep in mind that these associations are products of all the observations for each study year and are therefore subject to the greatest amount of heterogeneity. It is also well to note that the mere existence of a high correlation between two variables does not, of itself, assure the existence of a causal relationship. On the other hand, a nonsignificant correlation obtained after a causal relationship 45 has been postulated tends very strongly to disprove a hypothesis of linear correlation. A. Associations with Market Price The explanation of the market price of a common stock has been of concern to a large number of researchers, i.e., Durand, Collins, Gordon, etc.4 Following these leads, this study has also been concerned with the market price levels and changes in the market prices of the common stocks of individual commercial banks and bank holding companies. This concern will be most in evidence in a later chapter when an attempt will be made to replicate and extend an earlier study by David Durand. In addition, subsequent chapters will involve themselves with attempts at an explanation of some of the price-relative quantities. Presently, a discussion of those variables which one would expect to be associated with market price is in order. Price - Earnings Taking the year-end bid market price as the dependent variable, we have regress it in turn on a number of the other variables discussed so far. The correlation coefficient of price on earnings has been ggg or above for each of the ten study years. This relationship proves to be the strongest, either positive or negative, of price with any of the variables. The net indicated earnings are less strongly associated with market price than are net operating earnings. The correlation coefficient for the one study year is .83. 4Specific citations for these and others are supplies in the Bibliography. Price - Dividends Of somewhat less strength, but still strongly positive, is the relation between dividends and price. The simple correlation between these two variables ranges between .62 and .8 . It should be remembered that the earnings series and the dividends series are not mutually ex- clusive. In fact, in a large measure, dividends are included in earn- ings. It would naturally be expected then that the two series would be inter-correlated. This proves to be the case, but the coefficients are only moderately significant - in the range of .68 to .76. Price - Book Value Bearing a relationship with price almost as strong as that evi- denced by earnings is book value per share. For the ten study years, the correlation ranges between .21 and .Qé. In addition, the quantities earnings and book value are very strongly related. The coefficients range over the ten study years from .93 to .98. Price - Loans Contrary to what one would expect, the quantity loans and dis— counts as a per cent of assets demonstrates almost no association with Price. In fact, during the last four study years, the correlation is slightly negative. Is it possible that the investing public has begun to feel that commercial banks have become too vulnerable because of the increase in the allocation of credit? As a further check on this tentative hypothesis, the relationship between Brigg and the quantity interest income on loans as a per cent of gross Operating earnings was taken into account. Although these data are available for only the 1960-1964 period, we find an even stronger 47 negative relation between price and the productivity of loans than was found earlier between price and the relative amount of loans. It would seem that the investing public prefers the securities of a bank whose earnings are derived from investments and sources other than the loaning function, or it may simply be that investors do not care from where their earnings come. In order to add credence to this apparent anomoly we find that there is an acceptable indication that a relative increase in loans results in a relative increase in earnings from that source. The co- efficient between Variables £2 and filfi is positive and ranges from ng tg_:éz over the five study years. Price - Deposits Total year-end deposits have been chosen as an indicator of bank size. It would seem logical to expect that pgigg should have some significant degree of association with bank size if for no other reason than that size connotes past success. This does not seem to be the case. In all years the correlation is nonsi nificant, while turning negative during the last two study years. Price - Solvency The purchaser of bank common stock is an investor, and while en- joying some measure of protection in this highly regulated industry, must still live with the possible threat of loss of his investment. A crude but usable measure of solvency is the quantity capital as a per cent of risk assets.5 Admittedly, however, this quantity might serve 5Edward‘w. Reed, Commercial Bank Mama ement (New York: Harper and Row Publishers, 1963 , p. 52 . 48 the depositor and his representative, the examiner, better than the investor as an indicator of safety. Operating under the going—concern concept, an alternative thesis might be posited which would contend that an investor would prefer less capital in relation to risk assets rather than more, because of the possibility of increased rates of re- turn on his investment. The results for the total sample actually show very little association between price and the capital/risk asset ratio, although the coefficients are positive in each year. It would seem, then, that more heavily capitalized banks do sell at somewhat higher prices. The conclusion offered, then, is that the bank stock investor does not reach for increased returns at the expense of risk. Price - Rates of Return Returning to our earlier concern with the efficiency of the em- ployment of resources as demonstrated by the rates of return on both capital and assets, we find absolutely no association between price and 3339 of return earned on capital. The high priced stocks do no better in this reSpect than do the lOWer priced equities. Concerning the pappg of return on assets, however, there is a slight tendency for the stocks of the more efficient institutions to sell at higher prices. Of further interest is the fact that there is a consistently positive - though only marginal - association between these two measures of efficiency. Over the study years the coefficients range from .25 to .#3. Price - Earning Assets The relationship between price and the number of dollars of earn- ing assets for each dollar of price is exactly as was to be expected. We have seen that the mean value of Variable #16 has experienced an 'l~ 19 almost constant decrease while average price has been rising. The re- sult of this interaction has been a uniformly negative, nonsignificant to marginal, series of coefficients. Pgipp has gone pp, production fle- has gone 9933. Price - Dividend Relatives “r The following series of coefficients is of considerable interest. [It seems that there is a slight, constant tendency for the higher priced stocks to be rewarded with a lower payout ratio. Dividends as a per cent of earnings is negatively correlated.with market price while being strongly, positively correlated with yield (dividends as a per cent of price). In addition, price bears a consistent, slight, negative correla- tion with yield. It would seem, then, that the highgpriced stocks suffer both low payouts and low yields in spite of the relatively good correla- tion between price and dividends per share. Although other factors must be exerting an influence here, the results would seem to diSprove the theory that in order to raise the price of a stock it is only necessary to increase the payout ratio.{ This hypothesis will be tested further. Price - Market Strepgph The next association is more in accord with accepted theory.' One would expect that as the market for a particular stock broadens and becomes more disperse, the price of that stock increases. Although the tendency is rather slight, the coefficients do bear out this hy- pothesis. There exists a meager, consistently negative relationship between ppipg and average stock holdings. Ownership of any single corporation is probably dollar dominated rather than dominated by the number of shares owned. However, another measure of strength of market, 50 the eligibility for Massachusetts savings bank investment, expresses a consistently decreasing relationship with price over the study years. It would seem that price is less and less a function of the stock's availability to that group of demanders. It is interesting to note that the relation between the average holdings and.Massachusetts sav- ings bank eligibility is completely nonsignificant. Price - Debt During the last 18 to 2% months a large number of banks - both small and large - have embraced the use of 9993 in their capital struc- tures. Twenty-two_per cent of the banks in this sample have employed this means of raising capital. Various reasons are posited for this increased use of "trading-on-the-equity." An enumeration of some of these reasons would consist of: the act of raising capital is less costly than by issuing an equivalent amount of stock, debt charges are tax deductible, the net cost of servicing the debt is less than cash dividends would be on a corresponding amount of equity, debt financing avoids dilution of equity interest, and the leverage should increase the return on stockholders' equity.6 All in all, it would be logical to expect an increase in efficiency, a betterment accruing to the equity holders, from the existence of debt. Unfortunately, the correlation coefficients obtained from a sample of all the institutions simply do not bear this out. Little significance should be attached to the 6David C. Cates, “Are Debentures Still a Luxury?", Address delivered be- fore the 26th Annual Bank Study Conference of the Michigan Bankers Association, Ann Arbor, Michigan, December 3, 196s. 51 coefficients other than that for 1964, because so few banks possessed debt during the early years. However, a coefficient of -.21 for 1964 is just of sufficient magnitude to raise the question of whether price is favorably affected by the existence of debt. At any rate, a con- sistently negative relationship does exist between ppipg and 9993. Price - Share Changes Concerning the relation between price and the payment of stock dividends or stock splits, pp consistent correlation is in evidence. These capital manipulations do not help to increase price; on the other hand, they do not seem to decrease the price, either. This is interest— ing, because one would expect something of a negative relation since one of the chief reasons for splits is a desired reduction in price. The ultimate effect of stock dividends on market price has not been firmly determined. What is reasonably certain, however, is that the change in market price depends heavily on the relative change in the cash dividend which accompanies the payment of the stock dividend. If the total dollars the individual investor receives as cash dividends are held constant, it would be logical to expect a reduction in price to be associated with stock dividends.7 Again, low-priced shares do not seem to be associated with the existence of stock dividends. Summary of Price Associations In summary, we have found bid market price to be highly, posi- tively correlated with net operating earnings, with net indicated 7John Lintner, "Distribution of Incomes of Corporations Among Dividends, Retained Earnings, and Taxes," American Economic Review, 46 (May, 1956), Pp- 97-113- 52 earnings, with dividends, and with book value. Price bears a nonsig— nificant or slightly positive relationship with the quantity capital as a per cent of risk assets, with the price/earnings ratios, and with the rates of return on assets. A nonsignificant or slightly negative asso- ciation is evidenced with loans as a per cent of assets, with interest income as a per cent of total earnings, with deposits as an indication of size, with earning assets per dollar of price, with payout ratios and yields, with eligibility for investment by Massachusetts savings banks, with average stock holdings, and with debt. In addition, price has a completely nonsignificant correlation with rates of return on capital, with price/book value ratios, with stock dividends, and with stock splits. B. The Relationship of Major Price-Relatives with Other Variables Price — Relatives Compared As indicated earlier, the two major price relatives included in this study are the ratio of price to net operating earnings and the ratio of price to year-end book value. It is interesting to note that after three years of strong, marginal correlation, the relation between Variable £11 and Variable £15 rose and stabilized around the .80 correla— pipp level. The reason for the unusual performance during the early period is that the means of the variables were actually decreasing. In other words, the market was ignoring growth in earnings. A word is probably in order as to the reason for utilizing two price-relatives. Why not simply use the price/earnings ratio as in other industries? It is certainly true that book value has been down- graded as an indicator of a bank's worth. However, this downgrading 53 is a recent occurrence. Bankers in the early postwar period saw them— selves as conservators and rebuilders of capital values.8 Another reason for the preoccupation with residuals was that following the war, bank stocks were analyzed as close relatives of pre- ferred stocks. The hand-hold of liquidating value provided an element of safety for the investor with the Spector of the 1930's still fresh in his mind. It is little wonder that the price/book value ratio has been an important indicator of bank stock values. As discussed in an earlier chapter, certain changes have taken place in the thinking of both bank management and bank investors, and in the makeup of these investors as a group. Today, the industry is viewed on a going-concern basis by the typical investor, be he a middle- income individual, or a pension fund, foundation, or other eleemosynary institution. Once the spotlight centers on a living entity rather than on a dead corpus, other measures of stock value become of much more im— portance. Specifically, the pricelearnings ratio becomes the effective price—relative because it so readily lends itself to comparisons with other industries which are also customarily viewed on a going-concern basis. Variable Association with Price—Relatives The more important relationships between these price-relatives and some of the other variables will be reviewed at this point. 8David C. Cates, "Book Value vs. Earning Power," Bankers Monthly, (January 15, 1966). 54 Couching the analysis in terms of the dividend-relatives, the payout ratio and yield, a consistently marginally positive, though de— creasing relationship will be found to hold between the price/earnings ratios and the payout ratios. Banks selling at higher price/earnings multiples are those which pay out a moderately higher percentage of their earnings in dividends. HOWever, deSpite the increased payout, the relatively higher price causes the yield to suffer. This is es- pecially true during the last seven study years. Because of the con- sistently negative, moderately significant coefficients, the pigpppr multiple stocks yipld relatively lppp on the investment. The same pattern emerges concerning the price/book value multiple. The negative relationship is less strong concerning the payout ratios, but is per- ceptibly stronger as far as the yield structure is concerned. Here is found an association in the range of -.50 to -.60. In summary, the stocks selling at higher pricelearnings multiples have been those enjoy- ing hi her, though decreasing, out ratios, and have been receiving relatively lower, and lessening, yields. The stocks selling at higher pricelbook value ratios have suffered generally lower payouts and con- sistently lower yields. The basic inquiry of the study is into the reasons for the varia- tion in price-relatives. There must be some static or dynamic conditions which are associated with a high price/earnings ratio, for instance. Certainly, management efficiency in the employment of resources would have some bearing. Not so, say the correlations. From 1955 through 1960 the rates of return on capital and on assets are negatively, mar- ginally to nonsignificantly related to the price/earnings ratios. 55 Following 1960, they are positively, nonsignificantly related. High price/earnings ratios do not seem to be the result of management effi— ciency so expressed. Turning to the price/book value relationships, theory appears more plausible. Although the relationship with rates of return on assets is at best marginally significant, the signs are at least cor- rect. However, when the price/book value ratios are related to the rates of return on capital, the coefficients are not only positive, but they are well within such range (.#0 - .60) as to be considered moderately significant. In essence, then, these measures of efficiency seem to be better expressed by the price/book value ratio than by the more logical price—relative, the price/earnings ratio. Among the other logical questions which can be asked is whether the large banks sell at higher price-multiples. Although the signs are correct, the correlations are just a bit better than nonsignificant. Price/earnings ratios and price/book value multipliers are just pppply associated with the surrogate for size, the dollar value of deposits. It would seem then, that for the corporation, relative price levels can be achieved and maintained even if its size is one—tenth or even one- twentieth that of the very largest banking institutions. Once some relevant size is reached (perhaps $100 or $200 million), price/earnings ratios cease to be a function of scale. It has been stated previously that the prime function of the commercial bank centers around the loan desk. To test whether banks, more efficient in this respect, tend to sell at higher multiples of price, the relations with loans and discounts as a per cent of assets and 56 interest income as a per cent of gross operating earnings may be ex- amined. The associations of both the price/earnings ratios and the price/book value multiples with loans and discounts as a per cent of assets are similar and unusual. In each case the correlations during the early years of the study Were marginal though positive. That is, relatively more loans meant higher multiples. However, during the $2§QL§ the coefficients declined so as to become negative in lgéfl. As for the relationship between interest income on loans as a per cent of gross operating earnings and the price-relatives, no discernible association is in evidence. It would seem, then, that higher price- multiples are not associated with efficiency in the loaning function. Two additional relationships are marginally discernible among the correlations with the price/earnings ratios. Throughout the ten study years there appears a consistently negative, nonsignificant to marginal association between our major price—relative and book value per share. In other words, there was a slight tendency for the shares possessing higher book values to sell at lower price multiples. The second relationship is with the average stock holdings. Over the five years during which these data were available, a slight positive associa— tion is in evidence. This fact would seem to indicate that the £232 concentrated the holdin s, the pigppp are the price—relatives. This is hardly what one would expect. Summary The purpose of this chapter has been to describe and place in juxtaposition a number of facets of the sample of banks and bank holding 57 companies throughout the ten-year period under study. Its major concern was with the price and price-relative variables and their relations with the various static and dynamic determinants. Other associations between these determinants could also have been discussed. However, it was felt that these would be of only peripheral value, given the intention of the study at this time. Some of these determinants will be included and analyzed in later chapters when a more rational statistical technique will be employed. CHAPTER III THE DURAND STUDY, REVISITED Pquse of the Chapter The object of this chapter is the replication and exten51on of the definitive work on bank stock prices. The amount of prior work on the subject of this study - bank stock prices and their determinants .- About the only study which was founded on a clearly has been small. identifiable hypothesis and tested with empirical data was that of In general, the object of Durand's study was to "measure David Durand.1 the relative importance of various factors that affect the market price of bank stocks and thereby influence the ability of banking institutions 2 Specifically, to raise capital funds by the sale of additional stock." its Object was to "investigate the factors affecting the ratio of market price to book value, for the study assumes that the ability of institu- tlons over the long-run to raise capital through stock flotation is vit'e~:LILy affected by this ratio."3 These quotations from Durand largely descI‘lbe the two major directions of his investigations. He was con- 0 ern ed initially with finding and weighing the determinants of bank 81:. Oek prices. His interest subsequently centered on isolating those 6. Durand, Bank Stock Prices and the Bank C ital Problem (New York: D63. N an at j~0nal Bureau of Economic Research, Inc., 1957 . I‘b 3w- ’ p. 1. \I biaw , p. 1. 58 ‘ 59 factors which tended to support the bank stocks at or above book value. Following these leads, this chapter will attempt to replicate and extend the Durand Study in these contexts. The replication will, of course, be limited in the sense that more recent data will be employed. In addi- tion, the relevant sample groups will not be identical, given the natural attrition and mergers which have occurred within the industry since the termination of the primary study. Durand' 5 Methodology The attempt to explain both the market price and the price to 13<>c>1< value ratio entailed the use of multiple regression as the statisti- cal]. ‘technique. Data were collected for each of eight years (1945-1952) iVDI‘ 2117 bank stocks located in various parts of the country. Most of tlléi 'Ibanks having total assets of $100 million or more in the spring of 1952 wwehmh®m The method used to reduce heterogeneity was a grouping of the Ibélrlltss into six groups. Five of the groups were geographically defined ‘eri-J—GB the other was predicated on market interest. The groups so de— fined- were: Group 1 - 17 New Ybrk City Banks Group 2 - 25 Banks of Major Investor Interest Outside of New York City Group 3 - 17 Northeastern Banksa Group h — 17 Midwestern Banksb Group 5 - 17 Southeastern Banksb Group 6 - 24 Southwestern and.Western Banksb (aOther than Grou s 1 and 2; bother than Group 2) p 60 The regression function used by Durand was the exponential P' = aBdeEe, where B is book value per share at year's end, E is net operat— ing earnings per share for the year, P is bid market price at the end of January or February of the following year, and D is dividends at the rate current at the time of the price quotation. In order to reduce the effect of scale, the logarithms of the variables were extracted. The use of logarithms assumes preportionality in the changes of the tmaruiables. The equation that was actually fitted had the form log P” == log a + b log B + d log D + e log E. Other regressions were run 111 sin attempt to find additional variables which might be explanations oi? loank stock prices. The most extensively used modification was log 1" == log a + b log B + d log D + e log E + c1 log C + c2 log A/C + 03 (:L<>é§ .A/C)2, where C is total capital and A is total assets.4 Major Conclusions of the Durand Study The procedure employed in the study enabled Durand to reach a :lilniLi;ed number of conclusions concerning his sample of bank stocks. A partial list of these includes: 1. Intergroup Variation. The influence exerted by the various factors on bank stock prices varied substantially from group to group; the persistence of these differences over the years leads to the conclusion that the groups are basically heterogeneous. 4\ %. , p. 52. A 5\\\ Dav a. 61 Book value was the strongest determinant over all the study years for the New York City Banks and for the Southwestern and Western Banks. Its influence was second in the case of the Large Banks of Investor Interest Outside of New York City, the Midwestern Banks, and the Southeastern Banks. Book value pos- sessed the smallest weight for only the Northeastern Banks. Dividends per share exerted the primary influence over all the study years for the Large Banks of Investor Interest Outside of New York City, the Northeastern Banks, the Midwestern Banks, and the Southeastern Banks. It ranked second for the New York City Banks, and third for the Southwestern and Western Banks. Earnings per share was not primary for any of the groups over all the study years. It ranked second for only the Northeastern Banks and the Southwestern and Western Banks. Earnings possessed the least weight for the four remaining groups. Table 3-5 provides a synthesis of two tables presented by Durand in his earlier works.5 This table describes both the raw and coded net regression coefficients by group and year. )C)(:I::i~C1 Durand, "Bank Stocks and the Analysis of Covariance," Econometrica, i]::E (January, 1955), p. 33. ‘ 2. 3. 62 Intragroup Variation. In addition to the intergroup varia- tion of the weights, there was also some indication of intragroup variation. In other words, the weights did not dis 1 a consistent influence over ears, within groups. a. For the New York City Banks, dividends varies from -.O6 to .40, while earnings ranged from .06 to .64. b. For the Southeastern Banks, book value showed a variation from -.05 to .44 between 1945 and 1947, while earnings Went from a .28 to a -.10 over the same period. c. Table 3-5 shows that for the Northeastern Banks, dividends exerted the greatest influence during five years, secondary influence for two years, and the least influence for 1948. For this same group, earnings exerted the largest amount of influence during the opening and closing years of the study, while taking second or third place during the inter— vening years. Nevertheless, Durand did not consider the intragroup variation incapacitating, nor did he conclude that this variation destroyed the homogeneity of the groups. Price Eyplainers. The study was preoccupied with the analysis of three factors, book value, dividends, and earnings, whose effect on bank stock prices could be estimated statistically. Although substantial efforts were made to identify other determinants, these efforts 63 yielded only negative results. The conclusion reached, therefore, is that "other factors exert a substantially smaller influence on bank stock prices than do book 6 value, dividends, and earnings." a. Additiopgl factors tested includes total capital as a surrogate for size, the assets/capital funds ratio, the risk assets/capital funds ratio, the ratio of current dividends to average past dividends, the average annual rate of increase in earnings, and a measure of the stability of earnings. A consider— able effort was also made to test whether stock prices were related to inside information such as hidden reserves and net indicated earnings. 4. Eyplainers of Price Relatives. Another conclusion of major importance reached by Durand was that "only tw0 primary factors, dividends and earnings, seemed to play a systematic and easily demonstrable role in determining ratios of bank stock prices to book value."7 The assumption is that the price/book value ratio is only affected by the earnings/ book value ratio (rate of return on capital) and the dividends/book value ratio (yield on book value). a. Attempts were made by Durand to depict the relationship between the variables through the use of scatter \ 6 Dub . . E311d, Bank Stock Prices and the Bank Ca ital Problem, p. 17. 7 ITED ‘ mg, po 50 A 8\ rbi “‘9 p. 27. 91:10- V‘g po‘. 30. A 5. b. 64 diagrams. One such diagram shows a slightly per- ceptible tendency for stocks with low yields on book value to sell at lower ratios of price to book IélEE than those stocks paying a higher return on book value.8 An alternative investigation measured the effect of various payout ratios on the price to book value ratio.9 The conclusion to be drawn from this scattergram is that there existed a pronounced tendency for the stocks of the 25 Large Banks Out- side of New York City which had the highest payout papap to gal; at higher prices relative to book yalaa than those stocks granting a lesser percen- tage of earnings in dividends. A conclusion ancilary to the one preceding is that a change in rates of return earned on capital exerts a greater effect on the price/book value ratio when it is accompanied by a change in dividends (the payout ratio) in the same direction. Conclusions on Growth. Employing a tripartite analysis of percentage changes over time for the primary price determinants, a new set of net regression coefficients was computed which measured the market's appraisal of changes in the three factors during the three periods. 6. 65 The hypothesis tested is that high weights for increased book value would have indirectly reflected the importance of retained earnings as a price determinant. A sta- tistical testing of the regression coefficients found them to be totally unreliable. Durand's tentative con— clusion is either that bank stock investors as a class are 223 particularly interested in rowth, pp that they look for growth elsewhere and buy bank stocks for income. a. Leaving the investor and looking at the investment medium itself, Durand concludes that bank stocks were not growth stocks. From the early 1930's through the mid-1950's, bank stocks were unable to maintain a consistent position at or above book value. He cites the fact that the high weights for dividends occur so frequently as an indica- tion of a general market preference for immediate returns and a skepticism about the long-run growth potential of retentions. A Measure of Solvency. In spite of the fact that this relation was ultimately found to be undetectable, Durand did hypothecate that a moderate capitalization ratio would have the most favorable effect on price. The expected nonlinearity was tested by employing the ratio assets/capital funds to the log of the base ten squared. In other words, he felt that the bank stock investor was not willing to embrace additional risk in order to 66 obtain a higher rate of return on his total investment. The Partial Replication The Sarnple Whereas Durand used a sample of 117 banks for his eight-year study, the present analysis employs only 113. The nine holding com- panies are not considered at this time. In Spite of the fewer number of observations included in the current study, its financial impact is probably greater than that achieved by the earlier analysis due to the impact of mergers on the major banks. Some examples of the con- solidations which have occurred are: the uniting of the First National Bank and the National City Bank into the First National City Bank of New York, J .P. Morgan and Co. joined with Guaranty Trust to form the Morgan Guaranty Trust, a diSputed merger occurred between the Hanover Bank and Manufacturers Trust to form the Manufacturers Hanover Trust, and there are more in all areas of the country. Tables 3-1-.A, B, and C provide a complete list of the institutions presently included along With a designation of whether they were in the Durand Study or are uIf’lfiJJue to the current effort. If a bank were originally included, it is placed in its original group. However, if a bank is unique, a judg- ment was first made to determine whether it belongs in Group 2, Banks of Major Investor Interest. The criteria for inclusion were largely the bank's size and the number of shares outstanding. If it failed in these subjective judgments, it was placed into one of the other groups Sol 81y on the basis of location. These procedures resulted in groups 015‘ . - different size from those of the original study. It is believed, k 67 however, that the resultant groups possess a higher degree of geographi- cal balance than those considered earlier. The Methodology As in the earlier study, the basic tool of analysis consists of the gagesSion of price on the three primary variables - namely, earnings, dividends, and book value. The equation takes the form: X34 = a34°35.36,38 + 1‘>34.35o36.38X35 + brats-35.3mm + b34.38o35.36X38’ where X34 is the log of price, a34'35,36,38 is the X31, intercept in space, the b's represent the rate of change of the dependent variable per unit change in each of the independent variables when the other independent variables are held constant, X35 is the lagof net gperating earnings per share, X36 is the 104 of dividends per share, and X38 is the log of book value per share.10 Whereas Durand computed a total of 48 regressions, this analysis is concerned with only 30 groups of data (six groups for five study 3’ ears, 1960-1964). This number should prove sufficient to test whether the conclusions of the earlier study remain valid into the 1960's. The <301’1clusions which will be examined are those relating to the intergroup variation of the regression coefficients and the weights within groups \ 1 O The b's are generally termed net regression coefficients. They are net in the sense that the regression of the dependent variable on the particular independent variable is measured while holding the values or the other independent variables constant. In contrast, the co- efficients of simple correlation, the r's, are called the coefficients Of gross regression because no allowance is made for indirect influences On the regression - Robert Ferber, Statistical Techniques in Market \R esearch, (New York: McGraw-Hill Book 00., 1949), p. 347. ¥ 68 of these coefficients as Well as their intragroup variation. The test- ing of other determinants will be attempted in subsequent chapters. A number of the Durand conclusions will also be investigated at that time. Specifically, the regression will consider, among others, those ques- tions raised by Durand involving the relation between the price-rela~ tives, and the yields, rates of return, payouts, and solvency indicators. The Analysis 1. Intergroup Variation - Net Regression Coefficients. One of the primary statistical touchstones of the Durand Study was the impli- cations drawn from an interpretation of the computed geometric weights, the net regression coefficients. Table 3-5 provides the b's from the earlier work. In this table, these coefficients are identified by the lower case letters, e, d, and b for the major variables, earnings, dividends, and book value per share. Table 3-3, on the other hand, depicts the statistics obtained from the current computation.11 Actually, the analysis of the intergroup variation will proceed on three levels. Since Durand employed the b's, major comparisons will be made on this basis. However, for purposes of clarification, the Beta Weights (B's) as presented in Table 3-4 and the direct and indirect effeects of the independent variables included in Tables 3-7-A to F will alsc> be utilized. 11Bc>th tables have been coded to aid identification of the strongest Valfiable within groups and both within years and over years. The $flallest code number signifies the highest weight. 69 a. Majority Results The most striking characteristic of the net regression coeffi- cients (b's) presented in Table 3—3 is a pronounced relative uniformity in all but Group 5, the Southeastern Banks. This uniformity is in direct contrast with the Durand findings. We find that the investors in 101 of the 113 banks seem to weigh earnings most strongly over each of the study years. For Durand, earnings were not strongest for any group while being secondary for only two groups. The performance for dividends and book value among the groups follows the same pattern. For all groups, except the Southeastern, dividends rank second and book value ranks third. The placements within years are consistent and stable. The relative weights of the deter- minants have certainly changed. The Durand Study found only one nega- tive weight for book value, while currently, 20 of the 30 study years shxrwed negative coefficients for book value. On the basis of the geo- metric weights it is difficult indeed to find reason to conclude that five of the six groups display such uniqueness as to be considered heterogeneous. It is possible that criteria for grouping, other than geographic, may lead to some indication of heterogeneity. This will be the concern of a later chapter. b. Southeastern Group. It is interesting to note that the relative ranking of the inde- Pmulent variables for the Southeastern Banks is identical to the ranking perc e- e- A9 09 N HM.) 1...; ww F {1' NM.) #030) (1' Var. 00 \3 mm 47 \O 10 11 12 13 14 15 16 17 18 19 20 21 22 26 218 TABLE14-14 Means of The Variables - Banks Grou ed.b Mean Layout Ratio Over Time - Group #1, n = 24 1965 98 51.0 4.28 1.09 46.0 37.43 530 14.2 12.1 11.66 .86 60.8 143 7.93 28.0 2.44 682 .08 .50 .0 19_6_1_ 98 70.5 4.21 1.12 46.3 40.33 580 13.8 16.7 11.11 .81 59.6 187 6.39 29.1 1.87 614 .04 .29 .08 .25 32% and Below 126.2 1262 98 98 60.1 68.7 4.18 4.38 1.22 1.33 46.6 49.0 42.93 46.12 634 663 13.1 12.7 14.6 16.3 10.55 10.22 .75 .75 58.8 59.7 156 166 7.77 7.23 30.9 32.8 2.22 2.11 573 874 .0 .04 .42 .50 .04 .04 .29 .29 12.61 98 72.8 4.79 1.44 50.5 49.24 700 12.4 15.9 10.25 .76 61.2 163 7.17 32.8 2.14 841 .08 .46 .04 .29 29.6.1.6. CI)\1 O\\n 43' \0 10 11 12 13 14 15 16 17 18 19 20 21 22 26 219 TABLE 4-15 Means of the Variables - Banks Grou ed b Mean 1260 68 37.2 3.15 1.41 46.4 29.45 952 14.1 12.3 10.76 64.5 132 7.75 45.3 3.83 501 .0 .26 .03 .50 1261 68 55.7 3.13 1.51 45.6 31.98 1077 14.3 18.3 9.95 .78 62.1 182 5.68 48.4 2.76 465 .0 .11 .56 1262 68 48.6 3.27 1.57 46.7 33.59 1161 13.2 15.3 9.87 .75 61.7 151 7.02 48.5 3.25 447 .0 .18 .02 .62 1953 68 57.4 3.43 1.70 50.1 35.97 1250 12.5 17.3 9.78 .75 63.1 169 6.32 49.4 2.97 422 .03 .30 .06 .67 a____________________Jl___J£7§§__ Bayout Ratio Over Time - Group_f2, n = 1264 68 61.1 3.81 1.84 51.9 38.04 1342 12.3 16.3 10.29 .76 64.6 168 6.57 48.0 3.04 405 .24 .29 .11 .67 Code N Nb) Nb) #‘UUU NM) N C'b) N b) C'WKD Var. \0 03% mm (3‘ 10 11 12 13 14 15 16 17 18 19 20 21 22 26 220 TABLE 4-16 Means of the Variables - Banks Grouped.bz Mean P out Ratio Over Time - Grou #3. N = 23 and.Above 126.2 1261 1222. 1262 1261 64 64 64 64 64 45.6 62.7 55.5 60.5 64.8 3.31 3.24 3.31 3.46 3.83 1.88 1.94 1.99 2.02 2.25 49.1 47.7 49.2 50.6 51.2 32.41 34.05 35.45 36.89 38.53 1297 1403 1479 1568 1671 15.1 15.1 14.3 13.3 12.9 14.2 20.1 17.2 17.9 17.0 10.16 9.38 9.21 9.37 10.09 .86 .80 .78 .77 .81 64.2 61.8 60.8 61.5 61.6 144 190 160 171 173 6.43 5.00 6.07 5.97 6.17 57.7 60.3 60.7 58.6 58.5 4.16 3.11 3.62 3.42 3.53 419 377 378 360 517 .04 .04 .04 .09 .26 .26 .22 .26 .13 .17 .09 .0 .04 .04 .04 .65 .65 .70 .74 .74 Code a— a— -s- x» :0 -s- x» \o H c— 81 :0 .e- \0 1r 1: a- \0 r's of f41'with Var. 37 39 40 42 47 49 20 21 26 43 44 22 Beta's 37 39 4O 42 47 49 20 21 26 43 44 22 Partials 37 39 40 42 47 49 20 21 26 43 44 22 1260 .12 -.09 .08 -.47 .22 -.06 0 -.23 -.00 -.31 .16 0 1.22 .74 .77 .15 .36 .61 -1.41 -.56 .50 .43 .10 .32 .41 -.54 -.38 1961 .16 -.01 —.OO -.03 .18 .03 O -.12 .08 .03 .34 -.01 -.59 .60 .04 .02 .24 .24 .16 .11 -.19 .31 221 TABLE 4-18 1962 .12 .10 -.1O .07 .18 -.17 .17 -.03 -.09 .17 .72 ~35 1008 .08 .05 -1.37 .26 .28 .25 .38 .37 .04 .03 ~042 .14 Banks Grouped by Deposit Growth Grou r's, Beta's, Partials, and R"Deletes 1963 .22 -.21 .06 -.20 -.29 -39 .27 -.30 -.09 .26 .01 .77 .89 .99 -.02 .74 -1.57 .21 .33 .25 .43 .39 -.01 .46 -.46 .11 1 1264 .05 -.28 .44 -.24 -.34 .51 0&2 .29 -.12 -.01 .04 .67 .75 -.07 .50 -.02 -.07 .49 -.20 -.20 .11 -.62 —.55 .63 .30 -.08 .22 -.01 -.07 .M -.15 -.26 .12 -.22 -.33 .61 Means .13 -.10 .10 -.17 -.01 .14 .08 .08 -.08 -.09 .19 .13 .71 .76 .48 .12 .42 -.20 -.20 .11 -1.11 .63 .29 .18 .34 .08 .29 -.15 -.26 .12 -.37 -.03 .61 Var. 22 Deletes 37 39 4O 42 47 49 20 21 26 43 44 22 R, D.F. R2 D.F. Banks Grpgped by Deposit Growth Group #1 r's, Beta's, Partialsj and R4 Deletes 1260 .287 .311 .346 .459 .403 .357 .250 .376 .681 .328 .464 .107 222 TABLE 4-18 (Continued) 1961 .237 .238 .193 .190 .218 .229 .210 .155 O 488 .238 -.270 1262 1261 1261 .168 .179 .102 .111 .231 .231 .069 .216 .000 .232 -.281 .375 .405 .315 .341 .442 .291 .289 .436 .665 .266 .443 .071 .774 .793 .783 .794 .793 .746 .789 .780 .791 .784 .768 .671 .891 .696 .794 .485 _e—I 223 TABLE 4-19 Banks 01400260 by Deposit Growth Group f2 r's, Beta's, Partials, and R Deletes r's of #41 with Var. 1260 1261 1262 1263 1264 Means 37 -.O5 .05 -.06 -.22 -.29 -.11 39 .39 .48 .50 .40 .29 .41 40 .29 .13 .19 .18 .27 .21 42 .01 .07 .10 -.15 -.14 -.02 47 .41 .16 .27 .35 .55 .35 49 o 39 048 049 o 52 0’4‘5 0""? 20 .19 .12 .15 -.04 .11 .11 21 .19 .21 .02 .06 .15 .13 26 023 .21 027 .30 .22 025 43 .33 .21 .29 -.06 .13 .18 44 -.16 -.10 -.20 -.15 -.20 -.16 22 .10 -.03 .05 .07 -.04 .03 Beta's 37 .22 .54 .38 .21 -.01 .23 39 .21 .30 .43 .23 .13 .26 1+0 .175 032 044 038 017 '37 42 .45 .51 .43 .10 .27 .35 47 .64 .42 .36 .31 .64 .47 49 .54 .72 .56 .38 .53 .55 20 .11 -.11 -.04 -.01 21 .26 .21 .01 .16 26 .03 -.09 -.06 -.04 43 -.24 —.55 -.37 -.33 -.52 -.40 44 -.07 -.36 -.34 -.26 -.28 -.26 22 .01 _.01 -.10 -.03 Partials 37 .18 .42 .29 .15 -.01 .21 39 .27 .37 .48 .22 .14 .30 40 .20 .18 .20 .21 .10 .18 42 .29 .32 .32 .08 .20 .24 47 .63 .44 .41 .30 .65 .49 49 .55 .62 .58 .37 .48 .52 20 .17 -.13 -.04 o 21 .30 .22 .01 .18 26 .03 -.08 -.07 -.04 43 —.13 -.27 -.17 -.21 -.25 -.21 44 -.07 -.35 -.32 -.22 -.25 -.24 22 .02 -.01 -.14 -.05 Var. R2 Deletes 37 39 40 42 47 49 20 21 26 43 44 22 R, D.F. R2 D.F. 224 TABLE 4_19 (Continued) Banks Grouped bx Deposit Growth Group {2 r's.,Beta's. Pagtials, and.R Deletes 1960 1961 1262 1263 .597 .421 .646 .442 o 580 o 373 O 578 OLI'Z5 .594 .181 .661 .428 .573 .316 .639 .450 .355 014'35 .609 .401 .443 .623 .511 .366 .665 .444 .643 .425 .674 .450 .604 _.268 .665 .429 .608 -.352 .639 .427 .675 .453 .781 .761 .821 .673 .714 .686 .728 .458 .610 .579 .675 0453 .510 .470 .530 .210 1964 .611 .603 .607 .594 .323 .493 .610 .611 .609 .586 .586 .603 .782 .662 .611 .438 r's of #41 with Var. 1260 37 -.14 39 .14 40 .21 42 -.43 47 .36 49 .13 20 O 21 .05 26 .10 43 -.26 44 .09 22 -.21 Beta's 37 -.06 39 .17 “’0 031 42 -.11 47 .13 49 .05 20 21 26 43 -.35 44 .03 22 Partials 37 -.O3 39 .16 40 .13 42 -.05 47 .10 49 .05 20 21 26 43 —.14 44 .02 22 I' 1261 -.30 .30 .21 -.26 .OL" -.46 .26 -.01 -.17 .29 .22 -.O4 .20 -.27 .28 -.01 -.09 .26 .24 -.02 .17 225 TABLE 4—20 Banks Grouped bx Deposit Growth Group £3 's, Beta's. Partials, and.R Deletes 1962 -.41 .19 .40 -.47 .44 .34 0 .05 .25 -.15 -.15 -.17 -.70 .22 -.07 .26 .32 -.O .26 -.55 .35 -.05 -.43 .35 .48 -.0 .31 1263 1264 '033 -027 .15 .12 .36 .27 -.19 -.24 .17 .33 .38 .36 .0 -.14 .25 -.20 .29 .04 .19 .01 -.15 .15 .144 .21 -.46 -. 56 .08 .22 .19 .22 -.01 -.42 .30 .18 .41 .35 -.08 -.22 036 003 ~.15 -.30 .18 -.12 .40 .65 .23 .31 -032 -.#0 .07 .25 ‘ .07 .11 ~.01 -.29 .26 .23 .45 .42 «.10 -.18 .40 .04 .14 -.27 .08 -.1O .34 .64 .21 .41 _Means -.29 .18 .29 -.32 .35 .30 I'D. 114' .04 .19 -.07 .05 -.45 .19 .13 -.25 .23 .27 -.15 .20 -.07 -.07 .31 -.31 .22 .05 -.17 .24 .33 -.14 .22 -.07 —.04 .30 .31 Var. R2 Deletes 37 39 40 42 47 49 20 21 26 43 an 22 R R, D.F. R2 R2, D.F. TABLE 4-20 (Continued) Banks Grouped bx Deposit Growth Group f3 r'sL Beta's, Partials, and R Deletes 226 1960 .289 .270 .278 .288 .283 .288 .274 .289 .538 0 .289 -.010 1961 0413 .676 .477 .456 .228 1262 .626 .702 .737 .676 .700 .659 .737 .709 .859 .792 .737 .627 126.2 .605 .644 .644 .645 .619 .557 .642 .578 .639 .643 .600 .629 .803 .602 .645 .362 % .636 .672 .689 .666 .676 .625 .683 .692 .669 .690 .480 .633 .832 .668 .693 .447 r's of £41 with Var. 1260 37 .22 39 0 40 -.39 42 -.09 47 .18 49 .11 20 -.17 21 -.12 26 .30 43 -.26 44 .41 22 O Beta's 37 -.37 39 -.15 40 -.65 42 -.18 47 .14 1+9 .07 20 21 26 43 .04 44 .47 22 Partials 37 -.14 39 -.17 4O -.19 42 -.05 47 .15 49 .07 20 21 26 43 .01 44 .41 22 1.9.61 .30 .38 -.49 903 .25 -.02 .12 .16 .46 -.15 .31 -.27 -.12 .33 -.77 -.26 .41 .00 .50 .08 -.09 .41 -.38 -.11 .34 .00 .18 .08 227 TABLE 4-21 Banks Grouped bx Deposit Growth Group f4 0 s, Beta's, Partials, and R Deletes 1962 .49 .33 -.37 .20 .12 -.02 0 .32 933 .08 .32 0 .25 .38 -.45 .32 .46 -.12 .27 .10 .19 .50 -.28 .22 -.19 .15 .11 1963 .56 .12 -.37 .34 .07 .28 .20 .09 .14 .15 .61 .15 -.12 .11 -.82 .11 -.11 -.13 .34 -.23 .16 .39 .58 .22 -.12 .17 1.54 .08 -.13 -.18 -.30 .20 .56 .30 1264 .34 6.05 -.25 .49 -.02 .14 .07 -.14 .05 .16 .37 .57 .41 .17 .16 .49 .13 -.29 -.38 -.45 -.21 -.31 .31 .70 Means .38 .16 -.37 .19 -.48 .17 .20 -.07 -.12 -.30 .11 .29 .41 .05 .22 -.25 .13 .19 -.12 -.05 -.38 .06 .29 .50 Var. R2 Deletes 37 39 40 42 47 49 20 21 26 43 44 22 R, D.F. R2, D.F. TABLE 4-21 (Continued) Banks Grouped bx Deposit Growth Group #4 r'sa Beta's, Partials._and R2 Deletes 1260 .390 .385 .381 .401 .389 .400 .402 .285 .634 .289 .403 .084 1261 .499 .400 .419 .497 .438 .503 .485 .500 .709 .487 .503 .238 1262 o 580 .460 .560 .574 .482 .583 .585 .590 .771 .615 .595 .378 1262 .754 .751 .659 .756 .754 .749 .736 .734 .747 .735 .647 .734 .870 .702 .758 .493 1264 .706 .747 .748 .676 .750 .731 .712 .693 .743 .729 .727 .516 .868 .697 .754 .486 r°s of #41‘with Var. 37 39 40 42 47 49 20 21 26 43 44 22 Beta°s 126.9. .03 -.04 -.23 .06 -.10 0 .79 -.31 .33 -.1O 0 9.98 -.81 -2.89 .30 -2.34 -.90 25.66 -9.21 1961 .14 .13 .09 .39 -.01 .09 .58 -.02 .70 -.19 -3.57 -.53 -2.36 -3.47 -.04 -.04 5.19 2.62 229 TABLE 4-22 HoldingCompaniesI Group f5 r's and.Beta's 1962 .03 .20 .25 .26 -.22 .16 O .40 0 .62 -.37 .19 2.67 .51 3.83 1.56 -1.12 -1.59 -.86 -.04 1263. ~.13 .20 .33 -.01 -.40 .29 .44 .42 -.33 -.14 -3.43 -.54 -10.47 .12.60 —1.52 1.41 7.28 .41 1264 -.55 .10 .63 -.32 -.53 .10 -2.83 .08 .52 -.23 1.59 -.71 1.26 .94 Means -.10 .12 .15 .17 -.22 .11 -.33 .55 -.07 -.28 .01 r's of #41'with Var. Beta's 37 39 42 47 49 21 26 43 Partials 37 39 42 47 21 26 43 44 1260 -.17 -.01 .18 -.29 .32 .26 0 -.27 -.27 -.42 .02 0 .01 .37 -.11 .08 .68 .55 -.O6 -.61 «.33 -.14 .01 .30 -.06 .03 .57 .56 -.O8 -.18 -.19 1 r's Beta's Partials and R Deletégi 1261 -.11 .20 .03 -.11 -.21 .13 .69 .59 .26 -.49 -.16 -.16 -.08 .26 -.09 .03 .50 .50 .28 -.30 -.05 -.15 230 TABLE 4.23 1262 -.20 .01 .30 -.02 .23 .36 0 .39 -.15 .14 -.13 -.07 -.28 .33 -.58 -1.11 .30 .40 -.63 1.10 -.26 -.22 .26 -.25 -.38 .32 .49 -.43 .42 -.31 126.2 -.12 -.02 .31 -.02 .30 .37 0 -.11 -.02 .14 -.08 O .36 .50 .51 .25 .39 .63 .41 -.59 .17 -.25 .24 .30 .14 .07 .31 .49 .38 -.31 .06 -.22 anks Grou ed b Mean of Loans and Discounts ssets Over B p x [Q Time, Grou 42 and Below n = 27 1264 -.22 -.27 .34 .04 .39 .23 -.27 .09 -.31 .37 -.11 .19 -.12 .04 -.51 -.52 .59 .47 -.04 -.70 .61 .13 -.10 .03 -.31 -.32 .55 .54 -.05 -.46 .1“ 119.222. -.17 -.01 .23 -.08 .30 .30 -.27 .01 -.15 -.O7 -.02 -.03 .33 -.18 -.23 .53 .51 .19 -.60 .28 -.14 .23 .14 -.15 Banks Grouped.b Mean.of Loans and Time Grou 42% and Below n = 27 Var. R2 Deletes 37 39 40 42 47 49 21 26 43 1960 .629 .593 .627 .628 .450 .463 .627 .539 .616 .615 .793 .630 .629 .397 TABLE 4-23 (Continued) 1961 .455 .418 .453 .457 .282 .281 .411 .403 .456 .445 .677 .345 .458 .119 231 1262 .619 .610 .613 .576 .595 .396 .521 .552 .560 .597 .798 .640 .636 .409 Discounts ssets Over ——4 1 r's Beta's Partials and R, Deletes 1223 .422 .402 .443 .452 .395 .284 .362 .397 .453 .427 .674 .337 .455 .114 1264 .581 .585 .540 .537 .402 .411 .584 .472 .487 .577 .765 .571 .585 .325 Banks Groups r's of #41 with Var. 1960 37 .13 39 .26 4O -.04 42 -.05 47 .22 49 .04 20 O 21 .26 26 .24 43 .02 44 -.07 22 -.07 Beta's 37 .03 39 .11 40 -.47 42 -.17 47 .24 49 .13 21 .28 26 .13 43 .29 44 —.14 Partials 37 .03 39 009 40 -.18 [+2 -009 47 .23 49 .14 21 .28 26 .11 43 .11 44 -.12 1261 -.03 .47 -.01 .13 .24 .21 .18 .32 .14 -.06 .02 00"" .29 -.13 .14 .21 .26 .17 .20 .10 -.17 .04 -.06 .09 .23 .29 .19 .18 .05 -.16 232 TABLE 4-24 . n = 55 1262 .01 .39 -.11 .10 .29 .14 0 .09 .25 .02 -.14 .02 .00 .21 -.41 .07 .30 .27 .10 .19 .14 -.33 .00 .20 -.16 .05 .29 .28 .10 .17 .06 -.26 126.2 .01 .31 -.08 .05 .06 .37 .14 .29 .19 -.05 -.04 .26 .18 .17 .09 .18 .04 .41 .21 .15 -.43 -.36 .16 .17 .05 .14 .04 .22 .13 -.19 -.27 d.b 'Means of Loans and Discounts Assets Over 2L____________Zz____ r's Beta's 'Partials. and.R Deletes Time Grou 2 53% — 49% 1264 -.08 .26 .02 -.04 .11 .39- .14 -.03 .14 -.02 -.09 .07 .06 .18 .12 .10 .07 .47 -.01 .03 -.4O -.33 .06 .16 .07 .07 .06 .44 -.01 .03 -.20 -.24 129.82 .0 -0017 .04 .18 .23 .14 .16 .23 .02 -.08 .06 .06 .19 -.16 .06 .17 .31 .15 .14 -.06 -.27 .06 .18 -.06 .05 .17 .31 .16 .12 -.O3 -.21 Var. R2 Deletes 1260 .233 .228 .209 .228 .191 .219 .167 .225 .225 .222 .483 .244 .234 .060 233 TABLE 4-24— (Continued) Banks Grouged by Means of Loans and DisoountslAssets Over Time, Groug f2, r'sE Beta'sa Partials, and.R Deletes '4 911:55 1961 1262 .376 .360 .329 .334 .375 .342 .372 .358 .344- .299 .318 .304 .353 .354 .357 .341 .375 .357 .361 .312 .614 .600 .485 .463 .377 .360 .235 .214 1222 .317 .314 .333 .322 .333 .196 .299 .323 .309 .282 .578 .428 .334 .183 1264 .262 .244 .261 .260 .261 .088 .264 .263 .233 .218 .514 .311 .264 .097 r's of #41 with Var. 1260 37 .02 39 .12 4O .04 42 -.O8 47 .24 49 .46 20 -.O4 21 -.O7 26 .32 43 -.05 44 .25 22 .07 Beta's 37 ~32 39 -.11 4O .11 42 .16 47 .51 49 .57 21 .10 26 .34 43 -.10 44 .12 Partials 37 .26 39 -.1O 4O .03 42 .05 47 .47 49 .55 21 .13 26 .26 43 -.03 44 .13 1261 -.27 .18 .06 .01 .11 .50 .12 .26 .24 -.04 .17 ~922 -.27 .03 .17 .17 .19 .42 .41 .04 -.25 .12 -.20 .03 .05 .06 .18 .40 .03 -.07 .14 234 TABLE 4-25 Banks Grou ed b ‘Means of Loans and Discounts Assets Over Tins Grou r's Beta's Partials and.R Deletes 5 and above, n = 31 1262 -.10 .39 .08 -.02 .16 .43 .10 .06 .46 .03 .08 0 -.22 .05 .00 .26 .30 .48 .46 —.13 .02 -.19 .04 .00 .18 ~33 .52 0’47 ~35 -.05 .02 1263 1264 .01 .11 .26 .32 -.04 .11 .08 .07 .08 .17 .59 .42 -.05 .30 .13 .02 .28 .46 -.03 -.10 .14 .41 -.05 .45 -.05 -.11 .10 .03 .01 .51 .18 .48 .27 -.05 .64 .16 .14 .10 .03 .47 -.02 -.24 .01 .56 -.05 -.13 .09 .04 .00 .41 .15 .48 .26 -.07 .61 .20 .16 .14 .02 .43 -.01 -.23 —.01 .53 Means -.05 .25 .05 .01 .15 .48 .09 .08 ~35 —.04 .21 .05 —.O7 .02 .16 .25 .24 .45 .24 .27 -.15 .17 .02 016 235 TABLE 4-25 (Continued) Banks Grou edhb Means of Loans.and Discounts.Assets Over Time Grou r's Beta's Partials and.R Deletes and Above, n =331 R2 Deletes 37 .468 .449 .511 .464 .606 39 .499 .470 .527 .460 .612 11,0 . 501;. .1469 .528 .465 0536 42 .503 .468 .513 .453 .499 47 .360 .453 .472 .426 .611 v 49 .292 .362 .350 .154 .596 1 21 .496 .367 .395 .451 .604 w 26 .468 .470 .463 .464 .526 I 43 .504 .468 .526 .465 .590 L11? OLI'95 .460 052? .465 thB R o 710 .686 0726 .682 0783 R, D.F. .506 .453 .540 .444 .647 R2 .504 .470 .528 .465 .612 R2, D.F. .256 .205 .291 .197 .419 236 TABLE 4—26 Bangs Grouged bx Mean of szput Ratio Over Time Group #1, r's. Beta's, Partials, and R Deletes :ZZZ and Below, n = 24 r's of £41 with means Var. 1260 1961 1262 1263 1264 37 .01 .13 -.02 .01 .02 .03 39 .21 .66 .47 .30 .06 .34 40 -.30 -.34 -.06 .04 .11 .11 #2 '002 035 920 003 “012 009 47 .12 .02 .03 -.11 .15 .04 49 -.07 .11 .03 .22 .34 .13 20 -.04 .24 0 .03 -.13 .02 21 .02 .34 .20 .33 .15 .21 26 .14 .43 .20 .18 .01 .19 43 -.28 .09 .14 .17 .02 .03 44 -.02 -.10 -.15 .10 .09 -.01 22 0 -.20 -.01 .03 .49 .06 Beta's 37 -2049 -025 -082 -093 -046 -099 39 .82 .37 .53 .48 '.37 .51 40 -2.73 .. -.50 -~62 -~ --93 42 -2.10 -.12 -.13 -.47 -.42 -.65 47 -.13 .12 .20 -.19 .39 .08 #9 -033 .55 .13 011 .52 .20 21 -.03 .88 .62 .35 .43 .45 26 -.08 .35 .03 -.01 -.56 -.05 43 1.65 .07 .50 .65 .61 .70 44 ~33 -.10 .09 .53 .21 .21 Partials 37 “064' -.11 ~02? -.L1'3 -.17 n.32 39 ok8 .31 040 037 027 037 no -065 vigil" -016 9.26 -011 -026 42 -.63 -.05 -.05 2.21 -.11 -.21 47 -.16 .21 .18 -.17 .31 .07 49 -.28 .55 .12 .11 .47 .19 21 -.03 .73 .43 .38 .30 .36 26 -.07 .35 .02 -.01 -~31 0 43 .56 .03 .21 .26 .20 .14 44 .26 -.09 .05 .37 .12 .14 Var. R2 Deletes R R, D.F. R2 R2, D.F. 237 TABLE 4-26 (Continued) Banks Grouped bx Mean of Payout Ratio Over Time Grou 1 r's Beta°s Partials and R Deletes and Below n = 24 1960 1261 1262 1963 1 64 .241 .809 .417 .283 .317 ~415 ~791 ~359 .319 .285 .215 .808 .447 .368 .330 .249 .811 .459 .384 .329 .535 .802 .442 .394 .269 .511 .728 .453 .404 .150 .547 .591 .336 .314 .271 .545 .785 .460 .412 .270 .345 .811 .435 .369 .312 .515 .810 .459 .321 .328 .740 .901 .679 .642 .581 j .447 .816 .213 o 0 .548 .811 .460 .412 .338 .199 .666 .045 -.040 -.171 238 TABLE 4—27 Banks Croued b Meanof Pa out Ratio Over Time Groufi £2; r's; Beta'sé Partialsé and.RE Deletes - , n = r's of #41'with Var. 1260 1261 1262 1263 1264 Means 37 .04 -.01 .02 .02 -.03 .o 39 .21 .27 .31 .20 .22 .24 40 -.01 -.02 -.05 .07 .08 -.01 42 .10 .11 .17 -.03 .01 .07 47 .09 -.O4 -.0 .16 -.25 .01 1+9 036 033 043 053 “002 033 20 0 0 0 .11 .14 .13 21 -.03 .01 .25 .10 .08 .08 26 .18 .17 .21 .17 .08 .16 43 .03 .04 .07 -.09 -.07 -.01 44 .16 .19 .05 -.02 .02 .07 22 .09 —.06 -.03 .18 .27 .09 Beta's 37 .12 -.01 .17 .29 -.06 .10 39 .20 .20 .18 .01 .12 .14 40 .17 .07 .26 .37 .02 .18 42 .47 .27 .43 .34 .14 .32 47 .41 .19 .20 .28 .22 .26 49 .50 .35 .48 .60 .45 .48 21 .03 -.04 .21 .20 -.o .08 26 .06 .05 .16 .01 -.06 .04 43 —.38 -.15 -.35 —.48 -.16 -.30 44 .10 .19 -.04 -.13 .14 .05 Partials 37 .07 -.01 .12 .25 -.05 .08 39 .19 .18 .18 .01 .11 .13 40 .08 .04 .12 .24 .02 .10 42 .24 .13 .24 .26 .12 .20 47 .37 .16 .19 .30 .22 .25 49 .45 .31 .46 .60 .42 .45 21 .04 -.04 .22 .23 -.01 .09 26 .05 .05 .15 .01 -.05 .04 43 -.17 -.07 -.16 -.31 -.13 -.17 44 .09 .15 -.04 -.12 .13 .04 239 TABLE 4—27 (Continued) Banks Grou ed.b Mean of P out Ratio ver Time Group #2, r's. Beta's Partials and.Rg Deletes Hfl-m,n=66 Var. 1960 1261 1262 1963 1264 R2 Deletes 37 .317 .231 .375 .426 .272 39 .296 .205 .362 .460 .266 40 .317 .230 .374 .427 .274 42 .278 .217 .345 .421 .263 47 .213 .211 .359 .406 .239 49 .146 .151 .217 .162 .122 21 .320 .230 .351 .429 .274 26 .318 .229 .368 .460 .272 43 .301 .227 .366 .402 .262 44 .315 .213 .382 .452 .262 R .566 .481 .619 .678 .523 R, D.F. .444 .302 .521 .601 .377 R2 .320 .231 .383 .460 .274 R2 D.F. .197 .091 .271 .362 .142 240 W Banks Grouped by Mean of Payout Ratio Sver Time Group #3. r's. Beta's, Partials, and.R Deletes r's of £41 with Var. 1260 2.13 -014 '.22 -.48 .63 .50 .07 .25 -.30 -.22 -001 -.34 .26 .46 .77 .20 .43 .45 .22 -~33 -.63 .13 .17 .29 .13 .48 .66 .38 -~39 -.24 .13 53% and Above, n = 23 1261 .00 .05 .06 -.32 .26 .62 .06 .42 -.18 -.10 -.01 .29 .18 -.34 -.27 ~59 .41 .65 .08 .02 -.50 .20 -.13 -.20 .58 .64 .09 .01 -.48 1262 -.18 .07 .04 -.23 .15 .49 .06 .19 -.24 -.11 -.08 -.09 -.17 .47 -.04 —.22 .09 .58 .28 -.33 .25 .12 -.06 .38 -.01 -.11 .11 .56 .27 -.23 .05 .07 12.63 -.08 .10 -.18 .43 -.10 ~54 -.05 ~34 -.24 .01 -.06 .10 -.14 ~33 -.46 .23 .66 ~35 -~33 .41 -.14 -.10 .39 -.24 .23 ~37 .76 .50 -~33 .21 -.11 1264 -.49 .01 .25 .26 -.07 ~34 .09 -.10 -.10 .23 -.25 -.09 -.96 .18 -1.10 -.06 .51 .66 -.02 .19 .88 .25 -.70 .22 -.49 -.06 .60 .69 -.03 .19 ~37 .22 M2222 -.18 .01 .08 .07 .17 .50 .05 .22 -.21 -.OLI‘ —.08 -.08 -.14 .32 -.23 -.02 .38 ~55 .30 -.14 .19 -.03 -.09 ~34 -.12 .43 .64 ~35 -.13 .08 -.03 Var. R2 Deletes 37 39 40 42 47 49 21 26 43 44 R, D.F. R2, D.F. Banks Grouped bx Mean of szout Ratio gger Time Group £3, rig. Beta's Partials and R Deletes 55% and.Above, n = 23 1260 1961 1262 1263 .171 0721 0503 0757 .294 .723 .420 .715 .288 .730 .504 .745 .128 .724 .498 .745 .481 .604 .498 .722 .655 .627 .272 .424 ~37? ~552 ~465 .679 -~392 ~733 .475 .729 -~239 ~735 ~503 ~749 .130 .657 .502 .756 ~875 ~857 ~710 .871 .755 ~71? ~301 ~74? .766 .735 .504 .759 ~571 .514 ~091 ~559 241 TABLE 4.28 (Continued) 1264 .451 .705 .628 .718 .560 .458 .718 .708 .675 ~705 .696 .719 .484 242 TABLE 4—29 Means of Beta Weights Over Time For All Groups Low High Var. Gr 1 Gr 2 Gr 3 Gr 4 Deposit Growth 37 .71 .23 -.45 0 39 .27 .26 .19 .16 4O .76 .37 .13 -.48 [+2 014'8 035 -025 .17 47 .12 .47 .23 .20 49 .42 .55 .27 .07 20 -.20 ~..01 -.15 -.12 21 -.20 .16 .20 -.30 26 .11 -.04 -.07 0 L73 ~1011 -014'0 “007 011 44 o -.26 .31 .29 22 .63 -.03 .27 .41 Loan/Asset 37 -.03 ".06 -.07 39 ~33 ~19 ~02 40 -.18 -.16 .16 42 -.23 .06 .25 47 .53 .17 .24 49 .57 .31 .45 21 .19 .15 .24 26 -.60 .14 .27 43 .28 -.06 -.15 44 -.14 -.27 .17 ‘anout Ratio 37 -.99 .10 -.14 39 .51 ~14 ~32 1+0 ~093 018 -023 42 -.65 .32 -.02 47 .08 .26 .38 49 .20 .48 .55 21 .45 .08 .30 26 -.05 .04 -.14 43 .70 -.30 .19 L11], .2]. .05 -003 243 TABLE 4-31 1m W. O 1N = S 30 401 e l 0. ma . a 2 .1. d e _Aufiw 0.1 .0H = 1 11 Grou 3 Grou Group 1 Group 2 Means v3.2.1.1. Deposit Growth Scheme 3891401627514. 368472w591 967512w834 385w914762 37th8 16 952 )))))))))) 5O 10. 0.8 50.8.8. hwnh7..5_./.26.n/.52 37 39 40 42 47 49 21 26 43 44 Loaning38cheme n 8mh2967351 8.47561m932 Rum/051293.47. 897361w542 )))))))))) 0070307703 0 o o . o o o o o o 88514538.“.143 ( ((((((((( 26 43 111. 37 39 40 42 47 49 21 Over All Schemes Mean of Coded Means Payout Scheme 48m5619732 )))))))))) AWOOOQJOBH/LAWn/ 5%9554MRm/Oou3 (((((((((( 164932W857 76m5219831u. 01:3mw0/9211h4024690 14.5m8210/637 )\ ’)))))))) ,nuvrnunrQJQJnquvrQJ 0.0.0....0 55872176146 (((((((((( 37 34 110 42 47 49 21 26 43 an Variable 37 39 40 42 47 20 21 26 43 22 37 39 42 47 20 21 26 43 22 37 4O 42 47 20 21 26 43 22 244 TABLE 4-32 Group Means of Simple and Partial Correlations of #41 With Other Variables Group 1 Group 2 Group 3 Part Part 1 Part r r _ r r r r Deposit Growth Scheme .13 .29 -.11 .21 -.29 -.31 -.10 .18 .41 .30 .18 .22 .10 .34 .21 .18 .29 .05 -.17 .22 -.02 .24 -.32 -.17 -.01 .08 .35 .49 .35 .24 Ola 029 oh? .52 030 033 .08 -.15 .11 0 -.14 -.14 .08 -.26 .13 .18 .04 .22 -.08 .12 .25 -.04 .19 -.07 -.O9 ~.37 .18 -.21 -.07 -.04 .19 -.03 —.16 -.24 0 .30 .13 .61 .03 -.05 .05 .31 Loaning,Scheme -.17 -.03 O .06 -.05 -.06 -.01 .23 .34 .18 .25 .02 .23 -.11 -.O4 -.O6 .05 .10 -.08 -.11 .04 .05 .01 .18 .30 .45 .18 .17 .15 .23 .30 05h .23 031 048 .46 ~.27 .14 .09 .01 .20 .16 .16 .08 .26 -.15 -.39 .23 .12 .35 .22 O .14 .02 -.03 -.O4 -.08 -.O7 -.15 -.08 -.21 .21 .16 -.02 .06 .05 Payout Scheme .03 -.32 O .08 -.18 -.09 .34 .37 .24 .13 .01 .34 .11 -.26 -.01 .10 .08 -.12 .09 -.21 .07 .20 .07 O .04 .07 .01 .25 .17 .43 .13 .19 .33 .45 .50 .64 .02 .13 .05 .21 .36 .08 .09 .22 .35 .19 O .16 .04 -.21 -.13 .03 .14 -.01 -.17 -.04 .08 -.01 .14 .07 .04 -.08 -.03 .06 .09 -.08 Group 4 Part r r .38 .05 .16 ;22 -.37 -.25 .19 .13 012 019 .10 -.12 .04 -.05 .06 -.38 .26 O 0 .06 .40 .29 .09 .50 Payout Only Mean of Means -905 -011 .20 .28 .06 -.09 .08 O .07 .25 .32 .43 .07 .17 .27 .05 -.03 -001 .01 -.01 .05 .02 245 TABLE 4.35 Percenta e Chan es B State For Po ulation Personal Income and De osits° 1 0 - 1 60 Personal State Representation Population Income Deposits No. In Stugz States Total Pefih! Total PerYr* Total PerYr* Total U. S. 19.1 1.8 76.0 5.8 4990 401 1 19 + 1 New York 12.6 1.2 67.3 5.3 35.4 3.1 2 6 California #702 3.9 121.4 8.3 7302 5.6 3 5 Illinois 15.2 1.4 65.3 5.2 35.1 3.1 4 9 Pennsylvania 7.6 .7 56.0 4.6 32.7 2.9 5 6 Michigan 21.8 2.0 68.7 5.4 56.6 4.6 6 6 Massachusetts 9.8 .9 66.9 5.3 23.1 2.1 7 11 + 1 Ohio 21.4 2.0 76.7 5.9 44.3 3.8 8 7 Texas 23.6 2.1 78.4 6.0 67.8 5.3 9 1 Washington 19.6 1.8 66.2 5.2 38.0 3.3 10 2 Oregon 1505 1.5 63.4 5.0 u3o5 307 11 2 Arizona 72.2 5.6 170.7 10.5 167.0 10.3 12 2 North Carolina 12.2 1.2 74.9 5.7 55.7 4.5 13 4 Missouri 9.5 .9 66.0 5.2 40.4 3.4 14 2 Georgia 14.3 1.4 80.9 6.1 66.3 5.2 15 2 Maryland 3005 2.7 98.7 7.1 #906 4.1 16 3 Washington,D.C. -6.1 -.6 29.2 2.6 33.2 2.9 17 3 Indiana 1800 1.7 6907 505 #507 308 18 2 Rhode Island 10.3 1.0 48.3 4.0 28.2 2.5 19 2 Connecticut 24.8 2.2 89.0 6.6 42.8 3.6 20 6 New Jersey 24.8 2.2 86.9 6.5 51.3 4.2 21 3 Tennessee 8.0 .8 67.9 5.3 64.4 5.1 22 1 Alabama 6.8 .7 80.0 6.1 76.2 5.8 23 1 Florida 7505 5.8 173.6 10.6 13905 9.1 24 1 COlorado 3101 2.8 11103 7.8 6h.3 5.1 25 3 Oklahoma 6.2 .6 71.5 5.6 57.3 4.7 26 2 Hawaii 28.9 2.6 109.3 7.7 248.7 13.3 27 1 KentUCky 2.7 .3 65.9 5.2 42.9 3.6 28 1 Delaware 38.9 3.3 96.4 7.0 29.3 2.6 29 +1 Louisiana 20.6 1.9 78.6 6.0 64.8 5.1 30 +2 Minnesota 14.0 1.3 68.2 5.3 45.5 3‘8 31 +3 Wisconsin 14.6 1.4 70.1 5.5 50.0 4.2 32 +1 Utah 28.0 2.5 91.8 6.7 73.6 5.6 Source: Francis I. duPont & CO., Bank Growth Goals, (New York, 1961). *Compounded Annual Average BIBLIOGRAPHY BIBLIOGRAPHY Public Documents U.S. House of Representatives, Committee On Banking and Currency. 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