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73-20,347
HAYENGA, Wayne Allen, 1942THE EFFECTS OF BANK MERGERS ON FINANCIAL
SERVICES AVAILABLE TO RURAL MICHIGAN RESIDENTS.
Michigan State University, Ph.D., 1973
Economics, agricultural

University Microfilms, A XEROX Company, Ann Arbor, Michigan

THE EFFECTS OF BANK MERGERS ON FINANCIAL SERVICES
AVAILABLE TO RURAL MICHIGAN RESIDENTS
By
Wayne A. Hayenga

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of
DOCTOR OF PHILOSOPHY
Department of Agricultural Economics
1973

ABSTRACT
THE EFFECTS OF BANK MERGERS ON FINANCIAL SERVICES
AVAILABLE TO RURAL MICHIGAN RESIDENTS
By
Wayne A. Hayenga

Situation, Objectives, and Procedures
There have been many bank mergers in Michigan in
the past decade.

This situation suggested the question:

How do bank mergers and consolidations affect the banking
services available to rural residents?

To answer this

question the following specific objectives were formulated:
1.

To determine how bank ownership changes affect
lending, savings, and other banking services to
rural residents;

2.

To investigate changes in the competitive position
of rural banks after merger relative to other
institutions that provide farm credit;

3.

To obtain a feeling of how rural residents view
bank mergers in their communities;

4.

To suggest appropriate changes in bank structure
legislation.
The study was divided into three main parts.

First,

twenty-eight Michigan bank offices were surveyed during
November and December, 1971.

Fourteen interviews were held

with city banks that acquired a rural bank between June,

Wayne A. Hayenga
1966, and January, 1970.

The remaining fourteen interviews

were with rural unit banks, each of which had been selected
as a counterpart to one of the acquired rural branches.
Questions asked in these interviews determined how the
services presently available from the rural branch or in­
dependent bank differed from what was available in 1966.
The second part of the study was to poll the
acquired banks's primary competitors to ascertain how the
competitive relationship between the two organizations
changed after the merger.
The third part of the study involved a mail survey
of a knowledgable representative from each community where
the local bank had been acquired.

This representative was

questioned about his impressions of the community feeling
toward the bank ownership change, how he thought the bank
was serving the community after merger as compared to
before it was acquired, and his personal feelings on the
effects of the local bank's merger.
The field study results were analyzed using the
Bain-Caves framework of structure, conduct, and performance.
The performance criteria of equity, progressiveness, re­
source use efficiency, and efficiency were the main com­
ponents of the analysis of rural bank performance to rural
communities.

It appeared bank mergers enhanced the equity

in obtaining banking services because of liberalized credit
standards and a broader range of loan services.

The merged

banks also were more progressive as evidenced by offering

Wayne A. Hayenga
more auxiliary services and a wider range of loan service
plans.

The resource use efficiency of the acquired banks

was increased because of the higher target loan/deposit
ratios.

Market efficiency or awareness was also enhanced

by bank mergers.

It appeared that merged banks are more

aligned with money market conditions than independent banks.
Granted that these interpretations of equity, progressive­
ness, and resource use efficiency are subject to interpre­
tation.

Several of the performance variables are subjec­

tive, based upon the feelings of the people involved in the
study.
An important finding was that bank mergers had
little effect on competition between neighboring financial
institutions.

Both cooperative farm credit agency and

competing bank representatives reported no significant
change in the competitive relationship after the merger of
of the subject banks.
Community members were often unhappy with the bank
ownership change at the time of merger of the local bank
into larger banking firms.

However, by the time of the

survey the disappointment had lessened and most communities
viewed the bank mergers favorably.
A major finding with respect to Michigan agriculture
is that farm operating loans are often available at lower
interest rates from independent banks than from rural
branches of larger banks.

Independent banks frequently

charge farmers less for loan funds than they charge for

Wayne A. Hayenga
other business loans.

In contrast, the merged banks

typically charge the same rate for farm loans as other
business loans.
Implications
The major implication of the merger of rural banks
for bank customers is that more services will be available
to more people because of the merger.

These additional

services are not available without "cost," even though the
charges for the services may be similar.

One cost of merger

may be the loss of "personalized" service that is often
associated with a small firm.

A second cost may be that

people will have fewer banking firms from which to choose
to conduct business.
A major implication for farmers is that the consolication of a small town bank into a larger banking firm may
affect farmers with different sizes of businesses differ­
ently.

Because of several managment practices typically

followed by consolidated banks, merged banks may serve only
larger farmers and issue fewer farm loans than several
independent banks.
A major effect of bank mergers on other credit
agencies is that a larger bank can enter a specialized
market with a greater resource base and drive than a smaller
bank, because it can subsidize its efforts in one market
area from earnings in other markets.

It is not clear which

markets merged banks would enter, but a major point to

Wayne A. Hayenga
consider is that banks are not restricted to any
particular market.
A major implication for regulatory agencies is that
as more mergers are consumated the analysis of the effects
of merger will become more difficult, and after a time
banking competition for certain business may be lessened.
New regulations may be necessary to insure that banking
firms serve the citizens' needs.

The institution and

enforcement of new rules may be difficult, and the depth
and quality of regulatory agencies may need to be expanded.

ACKNOWLEDGMENTS

Special appreciation goes to Dr. John R. Brake who
walked the very narrow line of being my closest personal
friend and an outstanding academic advisor during my Ph.D.
program.

Both my professional and personal life benefited

from John's suggestions and counsel, rigorous standards,
and philosophy on professionalism and personal attributes.
Thanks, John.
Thanks also go to Dr. James D. Shaffer and
Dr. Bruce T. Allen.

I told Jim he was a "thorn-in-my side"

for the last three years, but my competence as an economist
and the quality of my dissertation are greater because of
his suggestions.

1 thank him for his farsighted guidance.

Bruce was quite helpful in bringing the dissertation
to its final form.

He raised my spirits back to a normal

level after the final exam by suggesting I worked on an
important question and by asking for a copy of the
dissertation.

FORWARD

'"Here's the difference it makes', I says, just to devil
him.

'How do you know I like your looks?'

look sore.

Maybe he didn't

'Nope,' I says, 'thinking it over, I don't like

your application for a loan.

Take it to the other bank,

only there ain't any,' I says, and I walks off on him."

— from Main Street by Sinclair Lewis

iii

TABLE OP CONTENTS

Chapter
I.

II.

Page
INTRODUCTION ....................................

1

1.1
1.2
1.3
1.4

1
3
3
3

The
The
The
The

Problem S e t t i n g ......................
P r o b l e m ................................
O b j e c t i v e s .............................
M e t h o d ................................

THE RURAL FINANCIAL M A R K E T ...............
2.1 Introduction

6

..............................

6

2.1.1 Financial Institutions Serving Rural
A r e a s ................................
2.1.2 The Markets for Bank Services . . .

8
10

2.2 Structure, Conduct, and Performance of
...................
Financial Institutions

16

2.2.1 Structure of Rural Michigan Financial
Institutions
.......................
2.2.2 Conduct of Rural Michigan Financial
Institutions
.......................
2.2.3 Performance of Rural Michigan
Financial Institutions
.............
2.2.4 The Effective Competition Framework
.
2.3
2.4
2.5
2.6

Michigan Banking
Prior Studies on
Alternative Bank
Reasons for Bank
2.6.1
2.6.2
2.6.3
2.6.4
2.6.5
2.6.6
2.6.7
2.6.8
2.6.9

Structure Regulation
..
Michigan Bank Structure.
S t r u c t u r e s ........ 34
M e r g e r s ........... 38

19
23
24
28
30
32

Management S u c c e s s i o n ............ 39
Lending L i m i t s .......................... 40
Profit M o t i v e .......................... 40
Economies of S c a l e .................... 41
Increased Services
................
41
Management S e n s i t i v i t y ............ 43
Profit vs. Community Service
. . .
44
Movement of F u n d s ....................... 45
Management Quality
................
45
iv

Page
2.7 Decisions on Bank Ownership Changes
. .
46
2.8 Chapter Summary
........................... 50
III.

MEASURES OF RURAL BANK PERFORMANCE

. . . .

3.1 Introduction
. . . . . . . . . .
3.2 Effective Competition in Rural Banks
. .
3.3 Rural Bank Performance Dimensions Selected
for the Field S t u d y ..................... 62
3.3.1
3.3.2
3.3.3
3.3.4
3.3.5
3.3.6
3.3.7
3.3.8
3.3.9
3.4
IV.

52
52
54

Deposit and Savings Programs
. .
64
Interest Rates Paid on Savings . .
65
Types of Charges for Loan Services
A v a i l a b l e ........................ 66
Loan/Deposit Ratio ................
69
Services to Local Public
Institutions ......................
71
Loan L i m i t .......................... 71
Auxiliary S e r v i c e s ............... 7 3
Changes in Response to Community
N e e d s ................................ 76
Decision Making on Loan Requests
.
77

Chapter S u m m a r y ............................. 78

THE FIELD STUDY - CASE S T U D I E S ............... 80
4.1
4.2
4.3
4.4
4.5

I n t r o d u c t i o n ................................ 80
The B a n k s ................................... 80
The C o m p e t i t o r s ............................. 83
The Representative Citizens .............
84
Case S t u d i e s ................................ 85
4.5.1
4.5.2
4.5.3
4.5.4
4.5.5
4.5.6
4.5.7
4.5.8
4.5.9

A Bank in a Fruit/Recreation Area .
86
A Bank in a Fruit/Recreation Area .
90
A Bank in a General Farming/
Recreation A r e a ....................... 96
A Bank in a General Farming/
Livestock A r e a ....................... 99
A Bank in a General Farming/
Livestock A r e a ...................... 104
A Bank in a Livestock/Crop Farming
A r e a ............................... 109
A Bank in a Marginal Farming/SemiUrban A r e a ......................... 115
A Bank in a General Farming/
Livestock A r e a ...................... 119
A Bank in a Livestock Farming
A r e a ............................... 124
v

Page
4.5.10
4.5.11
4.5.12
4.5.13
4.5.14
4.6
V.

A
A
A
A
A

Bank
Bank
Bank
Bank
Bank

in
in
in
in
in

a
a
a
a
a

Fruit Farming Area .
Crop Farming Area
.
General Farming Area
Crop/Livestock Area
General Farming Area

Summary of Case Analyses

.

.

THE FIELD STUDY - SUMMARY OF FINDINGS
5.1
5.2
5.3

.

.
.
.
.
.

128
135
139
144
150

.

. . 155

.

. . 158

I n t r o d u c t i o n ........................... 158
...........
159
Theoretical Framework Review
Equity Considerations of BankMergers .
. 161
5.3.1
5.3.2

5.4

Loan Service C r i t e r i a ............161
Real Estate Loan Service
A v a i l a b l e ........................ 162
5.3.3 Interest Rates on Farm and Business
L o a n s ........................... 165
5.3.4 Interest Rates on Consumer Loans
.
5.3.5 Loan Service G r o w t h ............169
5.3.6 Farm Loan Service Effects
. .
.
5.3.7 Maximum Loan L i m i t s ............172
5.3.8
Interest RateB Paid on Savings and
.
Charges on Checking Accounts
5.3.9
Summary of Equity Considerations .

174
175

Progressiveness Considerations of Bank
Mergers ................................

177

5.4.1
5.4.2
5.4.3
5.4.4
5.4.5
5.4.6
5.4.7

.

168
171

. 178
Auxiliary Services ............
Operating Hours and Facilities . . 180
. 181
Serving Community Needs
Criticism Received and Changes
Planned
......................
Management Attitudes and Factors . 186
Representative Citizen Attitudes . 188
Summary of Progressiveness
Considerations
...................
189

*,*

5.5

Resource Use Efficiency Considerations of
Bank M e r g e r s ............................... 191
5.5.1
5.5.2
5.5.3

5.6

Target Loan/Deposit Ratios - 1965 .
Target Loan/Deposit Ratios - 1970 .
Summary of Resource Use Efficiency
Considerations
...................

192
194
196

Summary of the Field S t u d y ............... 197
vi

Page
VI.

SUMMARY, MAJOR FINDINGS, AND CONCLUSIONS
6.1
6.2
6.3

Services Available ................
203
Resource Use and Service Costs . . 204
Competitive Effect of Mergers
. .205
Community Feelings ................
206

Major F i n d i n g s ........................ 207
Implications of Rural Bank Mergers . . .
209
6.5.1
6.5.2
6.5.3

6.6
6.7

. 200

I n t r o d u c t i o n ........................... 200
Review of Method and Procedure
. . . .
200
Summary of Findings— Overview
. .
.202
6.3.1
6.3.2
6.3.3
6.3.4

6.4
6.5

.

Implications for Customers
. . .
209
Implications for Other Credit
A g e n c i e s ........................ 211
Implications for Regulatory
A g e n c i e s ........................ 212

Suggestions for Further Research
. . .
Suggestions for Legislative
Consideration .............................

214
217

B I B L I O G R A P H Y ....................................... 219
APPENDICES
APPENDIX As

QUESTIONNAIRE USED FOR BANK INTERVIEWS . 223

APPENDIX B: QUESTIONNAIRE SENT TO COMMUNITY
...................................
REPRESENTATIVES

vii

232

LIST OF TABLES

Table

Page

2.1

Services Offered by the Hypothetical Banks

.

.

11

4.1

Performance Summary of Case Analysis 4.5.1,
Bank Located in a Fruit/Recreation Area

A
.

.

91

Performance Summary of Case Analysis 4.5.2,
Bank Located in a Fruit/Recreation Area

A
.

.

95

4.2
4.3

Performance Summary of Case Analysis 4.5.3, A
Bank Located in a General Farming/Recreation
Area
...............................100

4.4

Performance Summary of Case Analysis 4.5.4, A
Bank Located in a General Farming/Livestock
Area
.................. 105

4.5

Performance Summary of Case Analysis 4.5.5, A
Bank Located in a General Farming/Livestock
A r e a ...............

4.6

Performance Summary of Case Analysis 4.5.6, A
Bank Located in a Livestock/Crop Area
. .

110
. 116

4.7

Performance Summary of Case Analysis 4.5.7, A
Bank Located in a Marginal Farming/Semi-Urban
A r e a ........................................... 120

4.8

Performance Summary of Case Analysis 4.5.8, A
Bank Located in a General Farming/Livestock
Area
.................................. 125

4.9

Performance Summary of Case Analysis 4.5.9, A
Bank Located in a Livestock Farming Area
.

. 129

Performance Summary of Case Analysis 4.5.10, A
Bank Located in a Fruit Farming Area
. .

. 134

Performance Summary of Case Analysis 4.5.11, A
Bank Located in a Crop Farming Area .
. .

. 140

4.10
4.11

viii

Page
4.12

Performance Summary of Case Analysis 4.5.12, A
Bank Located in a General Farming Area .
.

. 145

4.13

Performance Summary of Case Analysis 4.5.13, A
Bank Located in a General Farming/Livestock
Area
...................... 151

4.14

Performance Summary of Case Analysis 4.5.14, A
Bank Located in a General Farming Area .
.

5.1

5.2

5.3
5.4

. 156

Number of Banks, by Type, Reporting Conventional
Real Estate Loan Policy as a Maximum Per Cent
of Value of Property, 1965 . . . . ' . . .

163

Number of Banks, by Type, Reporting Conventional
Real Estate Loan Policy as a Maximum Per Cent
of Value of Property, 1970 . . . . . . .

163

Interest Rates Charged on Conventional Real
Estate Loans by Type of Bank, 1970
. . . .

164

Number of Banks, by Type, Reporting Various
Interest Charges for Farm Operating and
Commercial and Industrial Loans, 1970
..

.

166

5.5

Number of Banks, by Type, Charging More, the
Same, or Lower Interest Operating Loans than
for Commercial and Industrial Loans .
. . .167

5.6

Number of Banks, by T y p e , Reporting Various
Interest Charges on Types of Consumer Loans,
1970

169

Farmer Cooperative Credit Agency Responses on
the Activity of Merged Banks in the Farm
Credit Market
................................

171

Representative Citizen Assessment of Community
Attitudes toward Bank Mergers .................

188

Number of Banks, by Type, Reporting Selected
Target Loan/Deposit Ratios, 1970 ...............

195

5.10 Number of Banks, by Type, Reporting Per Cent
Change in Target Loan/Deposit Ratios, 1965 to
1970

196

5.7

5.8
5.9

ix

LIST OF FIGURES

Figure

Page

2.1

Hypothetical Bank Locations ...................

2.2

Various Markets of Five Hypothetical Banks .

X

11
.

13

CHAPTER I
INTRODUCTION
1.1

The Problem Setting
There has been a rapid change in the financial

services demanded by rural residents in the past few years.
Both farm business loans and personal consumption loans have
been rapidly increasing.

In addition, there is an increasing

loan demand for many "service" type industries in rural areas.
Demand for other financial and bank services, e.g., trust
services, financial counseling, securities services, computer
and international service, is becoming more evidenced in
rural areas as the residents are becoming more affluent and
rural businesses are becoming larger and better managed.
What is more exciting, though, is the demand for
loan services, especially agricultural loans, that is pro­
jected for the future.

In a projection made in 1964, Brake

stated that the average Michigan farm would have six times
as much credit outstanding in 1980 than it did in 1959.^
More recently, Benson projected financial needs for large

^■John R. Brake, "Financing Michigan Farms," Research
Report No. 46, (Business) Agricultural Experiment Station,
Michigan State University, p. 7.

1

2

scale commercial farming operations for the Eastern Corn
Belt in 1980.

He summarized, "Many of the units considered

in this study will require more financing, more services,
and more liberal credit terms by 1980 than most farm lenders
are currently offering."
Four methods have been suggested to help meet the
bank services demanded by rural communities.
the use of (1) correspondent banking,

These include

(2) branch banking,

(3) agricultural credit corporations, and {4) the Federal
Reserve System discounting window.

Of these four methods,
3
branch banking has received the most support in the past.
Proponents of branch banking argue that this method would
improve services, make larger loans available, and increase
total loan availability.
Since the Bank Merger Act of 1960 was enacted, there
have been fifty-two bank consolidations in Michigan.

Addi­

tionally, thirteen banks have been sold to other banking
companies under the "voluntary sale" provision of the
Michigan Banking Laws.

Most of the consolidations and

2

Richard A. Benson, "A Comparative Analysis of
Financing Requirements of Selected Types of Farms in the
Eastern Corn Belt for 1980" (unpublished Ph.D. dissertation,
Michigan State University, 1970) , abstract.
3
For a more complete discussion, see John A. Hopkin
and Thomas L. Frey, "Problems Faced by Commercial Banks of
Illinois in Meeting the Financial Requirements of a Dynamic
Agriculture," AERR 99, Department of Agricultural Economics,
Expt. Sta. University of Illinois, April, 1969, p. 23? and
Swackhamer and Doll, Financing Modern Agriculture— Banking's
Problems and Changes, Federal Reserve Bank of Kansas City,
1969, pp. 55-62.

3
mergers have been of small rural banks being attached to
larger banks in urban areas.

These bank consolidations

present, then, the opportunity to examine the effects of
bank consolidations and mergers on banking services available
to residents in rural areas.
1.2

The Problem
The rapidly increasing demand for loan funds and

other banking services in rural areas, coupled with owner­
ship changes of several rural banks, suggest the problem:
How do bank mergers and consolidations affect the banking
services available to rural residents?
1.3

The Objectives
The specific objectives of this study are:
1.

To determine how rural bank ownership changes affect
lending, savings, and other banking services to
rural residents.

2.

To investigate the changes in the competitive
position of rural banks after merger relative to
other institutions that provide farm credit.

3.

To obtain a feeling of how rural residents view
bank mergers in their communities.

4.

To suggest appropriate changes in banking structure
legislation.

1.4

The Method
To accomplish these objectives, a group of twenty-

eight Michigan banks was surveyed during the fall of 1971.

4

Fourteen interviews were undertaken with city banks that
acquired a rural bank between June, 1966, and January, 1970.
The remaining fourteen interviews were with rural unit banks,
each of which had been selected as a counterpart to one of
the acquired rural branches.
banks included:

Criteria used for matching the

(1) being in a similar size town,

{2) being

in a similar type agricultural area, and (3) having approxi­
mately the same total assets as of 1965.
The questions asked determined how the services
presently available, either from the rural branch or
country unit bank, differed from what was available in
4
early 1966.
Measures of service included:
I.

Number of loans and interest charged on various
loan services
A.

II.
III.

Real estate
1.

Farmland

2.

Residential

3.

Other

B.

Farm loans

C.

Commerical and industrial loans

D.

Consumer loans
1.

Automobile

(New)

2.

Credit cards

3.

Residential improvements

E. All other
Target loan/deposit ratios of the banks
Loan limits of banking office

4The data collected for the merged banks were only
the data applicable to the rural branch.

5
IV.

Decision making regarding loan recipients

V.

A.

Time to service loan requests

B.

Inter-financial institutions cooperation

Deposit services available

VI.

Availability of "additional services"

VII.

A.

Trust services

B.

Credit cards

C.

Specialized loan services

D.

Floor planning for retailers

Change in customer structure

VIII.

Response to community changes

IX.

Ownership and management relationship to the
community

X.

For merged banks

X I.

A.

Reason for merger

B.

Management/continuity

Main competitors

The competitors of the merged banks were polled to
see how competition between the two institutions had changed
since consummation of the merger.
The merged banks represent the population of rural
Michigan banks that merged during the period covered.

The

control banks were selected for comparison to each of the
merged banks.

Because of the methods used to select the

banks, the assumptions for most common statistical tests
were violated.

As a consequence, the case study method was

used to analyze each of the fourteen pairs of banks.
fourteen case studies are presented in Chapter IV.

The
Statisti­

cal summaries are included in Chapter V, but the data do not
permit valid statistical tests.

CHAPTER II
THE RURAL FINANCIAL MARKET
2.1

Introduction
The rural financial market is a complex mechanism.

It encompasses several institutions which provide a multi*"
tude of functions to the residents of rural areas.

The

primary function of the rural financial market which affects
rural residents most directly is the transfer of funds from
people with "surplus" funds to people who have fund
"deficits."

This transfer function is aided by many aux­

iliary financial services such as custodial and trust
services.

Due to institutional constraints, boundary lines

for a rural financial market cannot be drawn at the limits
of a rural area.

Pipelines must be available to other

rural or urban areas when the rural area has surplus funds,
and channels should be available from other areas when a
rural community is capital deficient.
Using the above definition, it is evident that
nearly all members of the rural community have a need for
financial services.

Nearly every member of the community

has at times capital surpluses or capital deficits.

6

7
One of the serious problems that is faced in the
rural financial markets is defining the relevant market
area.

The market definition is important because it defines

the participants in the system— the buyers and the sellers
of the product or products.

An ideal market definition

takes into account substitution possibilities in both
supply and demand.

The recognition of all of the partici­

pants in the system is necessary if one is to evaluate how
the system performs for its members.
In many studies the market is defined by selecting,
with a certain amount of arbitrariness, some existing
political unit boundary line, i.e., county, township, or
Standard Metropolitan Statistical Area*

But in the case

of the rural financial market a boundary cannot be so easily
drawn.

The relevant market area depends upon (1) the will­

ingness and mobility of the individual customer to investi­
gate and use alternative financial services and (2) the
institutions offering the services needed by the individual.
A potential customer's willingness and mobility is
a function of many factors, i.e., type of service needed,
relationship with institution, advertising of competitors,
dealer effect, friend's experiences, habit, borrower's
education, etc.
The institutions serving a specific rural area vary
with the area.

There are many institutions offering finan­

cial services throughout Michigan, but even institutions

8
with similar names do not always offer the same services or
always attempt to serve the same clientele.
The next two sections will provide an indication of
the complexity of rural financial markets.

The first

section (2.1.1) will discuss the institutions that serve
rural areas' financial needs.

The second section (2.1.2)

will deal exclusively with banks, specifically the various
services they offer and the multitude of markets they serve,
and will expand on the definition of the market for bank
services.
2.1.1

Financial Institutions
Serving Rural Areas
Many institutions serve rural areas' capital market

needs.

Banks, savings and loans, credit unions, loan

companies, and life insurance companies are common to both
rural and urban areas.
and lenders.

They function both as depositories

In addition to these common institutions,

rural areas are served by some specialized lending institutions.

Production Credit Associations and Federal Land

Bank Associations are farmer cooperatives that loan money
to their farmer members for farm operation and farm mortgage
purposes.

To encourage sales, input suppliers provide

financing for their products.

Capital market services are

also provided by individuals who borrow and loan money and
by loan counselors who put those who "need" in touch with
those who "have."

Tax laws encourage retiring farmers who

9
sell land to finance the farm for the new owner.

The

Farmers Home Administration, a federal agency, also provides
loans to farmers and rural residents who are not able to
obtain funds from other conventional sources.
Rural savers have several alternatives open to them
also.

Several securities dealers have a network of rural

offices (usually in cities of 10,000 or more) that offer a
selection of debt and equity investments.

Mutual funds

salesmen are stationed in most rural areas.

The Production

Credit Association offices and some small loan company
offices offer investment securities to savers in rural
areas.

In addition to these local rural institutions,

there are numerous institutions based in larger cities that
advertise saving and investment services in rural areas.
Financial transfers, the act of actually moving
funds, is primarily a function of banks.

Banks are the

only institutions that can offer checking account services.^
Other agencies do offer a similar service such as money
order services and wire transfers of funds.

Banks can

also offer a multitude of other services, including safe
keeping of securities, safe deposit boxes, credit card
services, trust department services, and other related

The "Hunt Commission," a recently appointed Presi­
dential Commission to study the financial services available
in the United States, recommended that savings and loan
associations and credit unions be allowed to provide check­
ing account services.

10
financial services.

In rural areas the bank is the most

broadly based financial institution.
Banks have another important function in the rural
financial market.

It is the creation of money.

Because of

the way the rules under which banks operate are written,
rural banks can expand the money supply in the rural com­
munity.

This expansion mechanism is subject to regulation

of the Federal Reserve Board and is a major way that the
Federal Reserve Board controls the money supply.
2.1.2

The Markets for Bank Services
As stated above, a bank is the most broadly based

financial institution in rural areas.

Banks can offer more

financial services than any other institution, but they are
not required to offer a standardized package of banking
services.

Because a bank typically offers many services,

it can be considered that each service offered is for a
specific market.

This market may be defined by a special

clientele, a special geographic area, or a special need of
a group of people

(i.e., governmental unit needs).

Thus a

bank is a multiproduct firm serving a multitude of markets.
The multiproduct nature of rural financial markets
can be shown by a hypothetical case.

For example, if there

are five banks located in western Michigan as depicted by
Figure 2.1, each bank may serve a different geographic area
for each different service offered.

In the example, it can

be shown how markets differ for three services;

(1) personal

11

Bank B
Lake
Michigan
Bank A

Bank C

Bank E

Bank D

FIGURE 2.1.— Hypothetical Bank Locations,

checking and savings accounts,

(2) credit card services,

and (3) trust department services.
The five banks are assumed to be of different sizes
and therefore may offer different services.

Table 2.1 shows

the differences.
If we assume that transportation is the main “cost"
in getting access to service, the markets for the various

TABLE 2.1.— Services Offered by the Hypothetical Banks.
Size
of
Bank
(Millions)

Personal
Checking
Service
Cost

A

30

Free

B

8

C

Personal
Savings
Account
Interest
Paid

Credit
Card
Services
(Yes/No)

Trust
Department
(Yes/No)

4-1/2%

Yes

No

$.50/mo.

4

%

No

No

10

$ .50/mo.

4-1/2%

No

No

D

8

$.50/mo.

3

No

No

E

70

Yes

Yes

Bank

Free

%

4-1/2%

services exist symmetrically around the banks.

Figure 2.2

could show the potential market areas and areas of compe­
tition for each of the banks1 services.

Since Bank E has

the only trust service available, it would be a monopolist
in that market.

Two banks, A and E, have credit card

services available.

They both have exclusive market areas

around their banks but compete in the locations around
Banks B, C, and D.
The personal account market, checking service and
savings accounts, is complicated by the different interest
rates paid on savings and charges for checking account
services.

As is shown above, each bank may have an exclusive

service area where it will be able to service all customers
(depending, of course, on the customer's willingness to
travel for higher interest rates or lower checking charges).
But each bank also has an area where it competes with one
or more

other banks for the personal accounts market.
The market territory for bank services is also ex­

panded or contracted by the quality of service that each
bank provides.

If Bank E had an extremely good personal

accounts service department in comparison to the other
banks, it could be assumed that it would draw customers
from the other banks' localities.

Tying arrangements that

banks commonly practice can also affect the market terri­
tory.

For example, some banks offer "free" checking

accounts for people who have a savings account deposit or
may offer "free" safe deposit boxes for senior citizens.

13
Credit Card Markets:

A and E

—

Trust Department Service Market:

---

'

E only-H --- 1-- |

Personal Accounts (Checking and Savings)
Markets: A, B, C, D, and E -------

.Bank
Lake
Michigan
Bank A

nk

Bank E

Bank

FIGURE 2.2.— Various Markets of Five Hypothetical Banks.

14
By tying two services together the bank tries to expand its
service area further than it would by offering all services
separately.
In summation of this multifirm, multiproduct market,
it may be said that there is no firm definition of an indi­
vidual bank's market.

The final market depends upon where

competitors lie, what services they offer and what they
charge for these services, and the package of services that
customers want when they select a bank.
The hypothetical example discussed differences in
only three services offered.

There can be more differenti­

ations of various services that serve a different market.
Examples of this are large loans, i.e., over $100,000,
specialized loan services due to personnel availability to
service unusual loan requests, and specialized business
services such as large fund transfers.

Banks B and D, for

example, may not be able to compete for the $100,000 or
larger lines of credit.

Hence, the competition for this

service would be between A, C, and E, or perhaps just A
and E.
Because a bank has a different market for each
service offered, the total market area for the bank is a
"weighted average" of all of the markets served.

The

question of how to apply the weightings is one that has
received much discussion from the regulatory agencies and
people involved in bank location and bank merger decisions.
In Michigan a recent example is the decision to allow the

15
Michigan National Bank in Lansing to acquire a Grand Ledge
bank.

The crucial element in this decision was whether the

small Grand Ledge bank competed with the three larger banks
in Lansing or several smaller banks in other neighboring
towns.

It was decided that the bank in Grand Ledge did

compete more with the three larger Lansing banks than with
neighboring country banks.

To improve competition in Grand

Ledge the Michigan National Bank was allowed to acquire the
Grand Ledge bank.

In this way there were three larger banks

competing in Grand Ledge, rather than one small bank trying
to compete with the three larger banks from Lansing.

2

One of the major assumptions in this discussion of
bank markets is that the market for various services exists
symmetrically around the banks.
assumption may not hold.

In individual cases this

Using the previous example,

suppose an individual living in the primary market area
of Bank C requests a loan from his local bank.

If this

request is denied, this individual may go to any of the
four other area banks to make application for loan service.
However, if bank mergers were to occur so that banks A, B,
and C merged into one unit, and banks D and E combined, a

The landmark court case on this point is U.S. v.
Philadelphia National Bank et al. 374 U.S. 321, 358,361
(1963). The decision states . . . (T)hat in banking the
relevant geographical market is a function of each separate
customer's economic scale means simply that a workable com­
promise [on market definition] must be found.

person refused loan service would have only one other bank
to go to for loan service, rather than the four alternative
sources that he had available prior to the mergers.

This

shows that changing bank "market" definitions as is done
to justify mergers can enlarge monopolies and foreclose
some banking alternatives to some individuals.
2.2

Structure, Conduct, and Performance
of Financial Institutions
A useful framework for evaluating an industry and

its service to its customers is the structure, conduct, per­
formance method which has been developed by Joe Sain and
3
Richard Caves.
This basic framework has been expanded
into an "effective competition" concept by Stephen Sosnick.

4

This method of evaluating industry structure, conduct, and
performance has commonly been used to evaluate manufacturing
industries and industries

with broad geographic markets

but has less frequently been applied to service industries
which serve localized markets.

This section will present

an overview of the Bain-Caves structure, conduct, perform­
ance concepts and the Sosnick effective competition
3
For a more detailed description of this theoretical
view, see Joe Bain, Industrial Organization (2nd ed.; New
York: John Wiley and Sons, Inc., 1968) or Richard Caves,
American Industry: Structure, Conduct, and Performance (2nd
ed.; New York: Prentice-Hall, Inc., 1964). This discussion
revolves around Richard Caves' outlook.
See pp. 17, 37, 38,
and 97.
^Stephen H. Sosnick, "Toward a Concrete Concept of
Effective Competition," American Journal of Agricultural
Economics, L, No. 4 (1968), 827-853.

17
framework and apply this theory to Michigan financial in­
stitutions with special emphasis to rural banks.
Sosnick provides a more encompassing definition of
structure, conduct, and performance

than do Bain and Caves.

His interpretations are:

denotes all predetermined

structure

characteristics of the game and its rules that constrain the
players' choices; conduct denotes all choices or strategies
that the players adopt; and performance denotes all conse­
quences of the players choices that

are, to them or others,

payoffs of the game.
Caves relates industry structure to conduct and
then relates conduct to performance.

He states that market

structure is important because it determines the conduct
(behavior) of the firms in the industry, and conduct, in
turn, determines the industry's performance.
The major characteristics of each aspect of the
structure, conduct, performance framework are suggested by
Bain.

Market structure has six major characteristics:

(1) concentration,

(2) product differentiation,

to entry of new firms,

(3) barriers

(4) growth rate of market demand,

(5) price elasticity of market demand, and

(6) ratio of

fixed to variable costs in the short run.
The three major points in the analysis of market
conduct are (1) policies toward setting prices,

(2) policies

toward setting the quality of the product, and (3) policies
aimed at coercing rivals.

18
The four overall performance goals Caves cites are
(1) efficiency,

(2) full employment of resources,

(3) pro­

gressiveness, and (4) equity.
The banking industry can be evaluated somewhat in
this framework.

Some activities of banking firms are highly

competitive, while other activities are closely regulated.
Lanzillotti^ gives an overview of the problems involved in
analyzing the banking industry with the following statement:
Any attempt to evaluate the changes that have occurred
in the structure of banking and banking competition
must recognize at the outset that in this industry, as
in certain others, competition and regulation of entry
have been relied upon to serve the public side by side.
Regulation plays a crucial role but most students of
industrial organization and public policy, as well as
many banking authorities, have’argued for relying as
far as possible on the forces of competition.
However,
in banking it has never been quite clear that compe­
tition alone is sufficient to promote the public welfare.
Indeed, it is more important today in a highly charged
atmosphere that we recognize competition in banking for
what it is; not as a self-perpetuating system, but one
that must be conscientiously supported and encouraged.
The next three sections will discuss the structure,
conduct, and performance of Michigan financial institutions
in general.

Following this discussion, Sosnick's "effective

competition" approach will be introduced prior to a history
of Michigan banking structure and arguments for and against
branch banking by merger.

Robert F. Lanzilloti, Banking Structure in Michi­
gan (East Lansing: MSU Business Studies, Michigan State
University, 1966), pp. 3-4.

19
2.2.1

Structure of Rural Michigan
Financial Institutions
Although the rural financial market is served by

many institutions, few of them compete with any other for
more than a few of the services offered, other than the
depository services.

Most agencies accept deposits from

anyone, but loan only to selected customers.
The rural bank is probably the most broadly based
financial institution.
deposit services
services

It typically provides both demand

(checking accounts) and time deposit

(passbook savings and time certificates) and issues

many types of loans.

Types of loans available usually in­

clude farm loans, business and commercial loans, real estate
loans, and consumer loans.

In small rural communities there

is typically only one bank, so banking competition comes
from banks in nearby communities.

This may appear to be

monopoly power if customers are unwilling or unable to go
to other communities for banking service.

But, banks have

only two basic services that are generally not offered by
other financial institutions in most small communities.
These are checking account services and small business
and commercial loan services.
«

Banks make all types of real estate loans.

Com­

petition for housing mortgages comes from savings and loan
associations, individuals, and life insurance companies.
Commercial property mortgages typically come from both
banks and life insurance companies.

For farm property,

20
mortgage funds are available from banks, life insurance
companies, Federal Land Bank Associations, and, under some
circumstances, the Farmers Home Administration.
Farm operating loans also come from a wide variety
of sources.

Banks and Production Credit Associations are

both common sources of funds for this purpose.

Farm input

suppliers are becoming increasingly important as sources
of short term credit.

The Farmers Home Administration also

finances farm operations for farmers unable to get loans
through conventional sources.
Consumer loans in rural areas come from banks,
credit unions, small loan companies, and finance company
subsidiaries of manufacturing companies.

However, in many

of the sparsely populated rural areas several companies
that provide consumer loans may not be represented.
An additional consideration in the rural financial
market is the "non-institutional" sources of loan funds.
Individuals, local merchants, family members, and loan
brokers often make loans to individuals in rural areas for
many purposes.

A common source of real estate financing

in rural areas is the seller of the property.

Land and

other real estate is frequently sold by land contract.

In

this method the seller takes a debt instrument for a portion
of the value of the property to be transferred and thus
becomes a member of the local financial mechanism that
serves the community.

21

At first glance, when there are two or more insti­
tutions serving the same needs of the community, it may
appear that they compete for the business.
always the case.

This is not

For example, banks make all types of real

estate loans, but the absolute amount of real estate loans
they can make is limited by the amount of their time d e ­
posits and/or their loan portfolio plan,

if the local

demand for real estate loans exceeds the amount they can
lend, a rural bank may act as an agent for another bank
(usually a city correspondent) or a life insurance company.
These other institutions will supply mortgage funds to the
bank's customers and pay the banks for servicing the loans.
Frequently individuals who sell property on contract seek
the advice of an established lender, commonly a local banker,
who counsels them about the terms of the contract.

So, in

effect, the local lender may aid two customers by assisting
in negotiating a financing agreement.
Even though several institutions offer the same
general types of services, the terms of the agreements
offered by each may differ substantially due to regulatory
constraints or management practices of the institutions.
For example, most rural banks are reluctant to make mortgage
loans for more than fifteen or twenty years, whereas savings
and loan associations commonly write them for twenty-five
years, and life insurance companies and Federal Land Banks
amortize them over forty years.

Thus, if a borrower needs

a very long term mortgage, a bank cannot compete.

22
Non-competitive behavior is also found in consumer
loan service.

Banks typically write consumer loans directly

and also purchase consumer loan paper from commercial cus­
tomers who are in retail businesses.

Thus, even though a

purchase is financed through the retailer, the bank is
ultimately the source of loan funds.

The income from the

loan is shared in proportion to the risk, servicing, and
funds involved in the loan.
Various parts of the structure of rural financial
markets are regulated.

Regulatory action limits banks

and loan associations to do business only in certain cities.
Once granted the right to do business within the state, life
insurance companies, loan companies, and financing sub­
sidiaries of manufacturers can go into any area in the
state.

Cooperative agencies, PCA's, FLBA's, and Credit

Unions can establish anywhere they can get enough support
to justify an office.

The farmer cooperative retail

financing agencies, PCA's and FLBA's divide the state up
into exclusive areas.
Other financial institutions serving rural areas
are also regulated in some respects.

For example, savings

and loan associations and credit unions are limited as to
how much they can pay for savings deposits.

Loan companies,

savings and loan associations, and credit unions also face
some regulations in the rates they can charge for loans.
These regulations tend to set the common rates that are
charged by competitors in the area.

Lenders commonly state

23
they do not compete on price of loan services.

Rather

than make major adjustments in interest charges in the
local community to attract or repel business to achieve
their desired portfolio structure, they invest in non-local
investment that have the terms and characteristics they
desire.
2.2.2

Conduct of Rural Michigan
Financial Institutions
The range of behavior of most financial institutions

is regulated to some extent.
strictest regulations.

Banks probably come under the

Ceiling reates paid on deposits

are set by federal and state authorities, but banks can
elect to pay less than this.

The security portfolio is

frequently inspected by Federal Reserve System examiners
(if the bank is a system member), Federal Deposit Insurance
Corporation examiners, and the State Banking Commission
examiners.

The chief function of these regulations is to

prevent anything that would threaten the solvency of the
organization or would impair the safety of the deposits,
but within limits the bank officials can select the in­
vestments they desire.
Advertising and sales promotion behavior of banking
firms is seldom mentioned in the literature.
of advertising is twofold:

The purpose

(1) to get information to

potential customers and (2) to attract customers from
other financial institutions to do business with your in­
stitution.

It seems as though many rural people are unaware

24
of the types of services available from the different lenders
and the differences in terms available from lenders offering
similar services.

Thus, conduct may be improved by in­

creasing advertising expenditures to better accomplish the
goal of improved customer information.
Another measure of good conduct is the willingness
of financial service organizations to "share" customers
with other organizations.

Do many financial institutions

demand that they serve "all" of a customer's loan demands,
or are they happy with just a part of a customer's business?
If they are unable to serve some of the demands, do they
offer the customer assistance in meeting his other needs?
Are lending institutions willing to structure repayment
policies to complement other lenders' repayment practices?
2.2.3

Performance of Rural Michigan
Financial Institutions
Efficiency, full employment of resources, progress­

iveness, and equity are the four performance dimensions
advanced by Richard Caves*

There are some problems in the

measurement of these concepts and the extension of these
concepts into precise criteria, especially for a service
industry such as rural banking.

For example, "economic

efficiency" usually means providing a product or service
to the consumer in an accurate reflection of consumer
preferences and real costs.

But in a small multiproduct

service business this may be difficult, if not impossible,

25
to ascertain.

Nonetheless consumers are concerned about the

quoted price o£ services.

Because of their concern about

quoted price of a service that may have several parts to
the service, a problem arises with the trade-off of the
quoted price of the service versus the quality and quantity
of the service.

Quoted price of a service could be lower,

but a lower price may restrict the quality and quantity of
service available to an individual.

Prices of loan services

are usually quoted as a percentage charge, such as 7 per
cent for a home mortgage.

But the quoted price of 7 per

cent does not convey what down payment is required, how
much is the loan application fee, what is the prepayment
penalty, etc.

Also, the quoted price does not specify the

length of the loan, whether it is a fully amortized loan,
or if there is a larger terminal payment, etc.

Now, many

of these clauses are standardized between lenders of like
types; but if these clauses are not standardized, the
quoted price will not reflect all of the differences with­
out careful examination of the mortgage loan contract.

So,

quoted prices could probably be lowered, but the lower
price may restrict the quality and quantity of the service.
The total cost to the consumer from a lower quoted price
may be increased in terms of cash cost to gain all of the
services desired.

Thus, without a detailed examination of

the total services available there is little we can say
about the technical efficiency of the rural financial
markets.

26

Full use of resources In rural financial markets
is also hard to evaluate.

Deposits of the community are

the primary resource a bank has available for use.

When

investing these deposits, it has several alternatives, such
as

(1) loans,

(2) government securities,

(3) municipal bonds,

(4) corporate securities, and (5) holding cash.
have an obligation to "serve the community's
as a depository and lender.

Rural banks

needs" both

Because of this charge, rural

banks usually invest heavily in locally generated loans,
so the loan/deposit ratio is a measurement of how well a
bank serves the local community's loan needs.

But the

rural bank also has the obligation to protect the assets
of its depositors and to provide liquidity to the depositors.
If an extremely large amount of deposits is invested in
loans, this obligation may be impaired.
arises:

So a question

where is the maximum point of resource use

efficiency?

It could be envisioned as a point on a con­

tinuum with underutilization of resources on one end of
the scale and with exploitation of resources on the other
end of the scale.

Bank management may want to overutilize

the deposit resources because a higher loan/deposit ratio
usually means more income to the bank.
a question:

But here, too, is

where does proper resource utilization stop

and where does exploitation of resources begin which exposes
the stockholders and depositors to undue risks?
Equity as a performance dimension is generally con­
cerned with income distribution of the participants in the

27
system.

In the rural banking industry, increased equity

may be more appropriately defined as allowing more people
to have access to the services— especially loan services—
that the rural bank provides.

Relaxing standards to qualify

for loan service or making more loan programs available
would allow more people to have access to loan service from
the rural banks.

Thus there would be more equity in the

system.
Equity can also be defined in terms of fair play.
This performance feature appears to be satisfactory.

Due

to the regulations and legal restrictions that most of the
lenders face, there is very little opportunity for major
lenders to be unfair.

Even though competition does not

abound, there is limited competition, especially via ser­
vices, and a "bad press" may cause a loss of market share
of business.
Progressiveness as a performance dimension is both
hard to define and hard to measure.

Is it progressive to

offer all new programs that come along, even though there
will not be enough use of the program to justify its cost?
Is it progressive to relax credit standards to serve more
people if more loans are expected to default?

Perhaps the

question of progressiveness could be approached by asking
the general question:

How much and how fast do you change

your terms and service criteria to meet the needs of your
customers and/or potential customers, given the restrictions

28
that are imposed upon your organization by external sources?
Of course, the answer one would expect from a question of
this nature is:
of the time."

"We do all we can for all customers all
So this would be an unsatisfactory way to

measure progressiveness.

Another alternative is to ask

about recent changes made and about future changes planned
to improve service.

Answers to questions of this type should

give a better measure of bank responsiveness to customer
needs and progressiveness.
2.2.4

The Effective Competition
Framework
Sosnick has looked extensively at industry perform­

ance and has developed an exhaustive list of criteria that
must be met to have "effective competition," which is his
image of a desirable state of affairs in an industry or
market.

The criteria developed are quite specific and are

more generally applicable to a manufacturing industry than
a service industry.

Sosnick suggests that an industry can

only be effectively competitive if it is free from twentyfive flaws.

His criteria include some structure and conduct

type conditions that Caves and Bain suggest, in addition to
being quite specific about some performance measures.

Ten

of the conditions are considered undesirable both in them­
selves and their effects.
products,

They are:

(2) underuse or overuse,

(4) inefficient production,

(1) unsatisfactory

(3) inefficient exchange,

(5) bad externalities,

29
(6) spoliationf (7) exploitation/
(9) wasteful advertising,

(8) unfair tactics,

(10) irrationality.

Of these ten, the first seven relate to performance
aspects and the last three to conduct of the firm or indus­
try.

The other fifteen flaws suggested as criteria are

undesirable only because of their effects.
(1) undue profits or losses,
(3) predation,

(2) inadequate research,

(4) pre-emption,

(6) resale price maintenance,
desirable discrimination,
undesirable collaboration,
undesirable entry,
rules of trading,

They are:

(5) tying arrangements,

(7) refusals to deal,

(8) un­

(9) misallocation of risk,

(10)

(11) undesirable mergers,

(12)

(13) misinformation,

(14) inefficient

(15) misregulation.

This list, according to Sosnick, "contains every
verifiable market condition that I would regard as avoidable
and undesirable.

I would call a market effectively competi­

tive if, and only if, it had none of these twenty-five .
characteristics."
In his article Sosnick is quite specific about the
values of the criterion that, when met, make that criterion
a flaw to effective competition.

For a service industry

some of these explicit measures may need to be adjusted
from those for a manufacturing industry.

For example, in

the rural banking industry is it wasteful advertising for
a local bank to sponsor a "go to church this Sunday" ad­
vertisement?

Does setting credit standards at a level

30
where not all community members can qualify for loan service
constitute a refusal to deal?

What constitutes undue profits

or losses for a bank in a given community faced with its
risk function?

Questions of this type must be asked to

develop the values that are needed for Sosnick*s criteria.
Another problem with Sosnick*s effective competition
concept is its application from the industry level for v/hich
it was written to the individual banking markets with which
this study is concerned.

Given the regulations that are

imposed, some of the criteria are not valid, and others
must be adjusted.

But for a general overview the list de­

veloped by Sosnick provides a good benchmark to look at the
performance of an industry or firm.
The explicit measures of bank performance used in
this study are discussed in Chapter III.

In the beginning

of that chapter Sosnick*s criteria will be discussed more
fully with respect to rural banks.

Due to problems in

securing data and time constraints in analyzing performance
criteria, and since the objective of the study was to de­
termine how rural bank ownership changes did affect banking
services, many of Sosnick's criteria will not be covered
in the field survey.
2.3

Michigan Banking Structure
Regulations
Michigan banking structure regulation is currently

dominated by the major provisions of the 1937 Financial

31
Institutions Act.

This act, outgrowth of and reaction to

the many bank failures of the Great Depression, placed strict
limitations on banks' branching rights.

Prior to 1927,

National banks in Michigan could have no branches.

In 1937

the McFadden Act placed national chartered banks under the
same branching rules as state chartered banks.

This Act

allowed banks headquartered in a city of 75,000 people or
more to establish branches in the same county as the main
office or within twenty-five miles of the main office.

In

1945, the Financial Institutions Act relaxed the branching
rules to eliminate the population requirement, but it still
only allowed limited branching.

The effect of these bank

structure laws was to allow banks in fairly large cities
to establish branches in nearby rural areas, but throughout
most of rural Michigan branch banking was nonexistent.
National regulations that have an effect on Michigan
bank structure are the Bank Holding Company Act of 1956 and
the Bank Merger Act of 1960.

The Bank Holding Company Act

places in the hands of the Federal Reserve Board approval
or denial of setting up a bank holding company which is
defined

as a company holding at least 25 per cent of the

voting stock of a bank.

This statute requires that the

following factors be investigated prior to approval of a
holding company:
of the company;
(4) needs;

(1) the financial history and prospects
(2) quality of management;

(5) welfare of areas affected;

(3) convenience;
(6) dictates of

32
sound banking and the public interest;
vation of competition.

(7) and the preser­

This legislation was not used in

Michigan until 1970, when the state passed its Bank Holding
Company Act.

(As of October, 1971, there was but one

registered Bank Holding Company in Michigan.)
The Bank Merger Act of 1960 states that before bank
mergers and acquisitions can be consumated, they must receive
approval of the appropriate federal bank supervisory authori­
ties.

These are the Federal Reserve Board, Federal Deposit

Insurance Corporation, and the Comptroller of the Currency.
The criteria for approval are convenience, needs, various
banking factors, public welfare, and competitive factors.
Also, the Attorney General of the United States is required
to provide an evaluation of the competitive factors involved.
As a result of these regulations Michigan has a
preponderance of small banks.

In the past decade there have

been fifty-two mergers of banks, and there were thirteen
consolidations of banks under the voluntary sale provisions
of the bank consolidation laws.

The regulations are con­

structed so that most banks can combine when there is an
economic reason for the consolidation.
2.4

Prior Studies on Michigan
Bank Structure

Lanzillotti has done an extensive review of the
5
Michigan banking structure from 1945-1963.
The principal
Robert F. Lanzillotti, Banking Structure in Michigan
(East Lansing: MSU Business Studies, Michigan State Univer­
sity, 1966).

33

objective of his study was to compile information related
to the structure of banking in Michigan and to examine some
of the changes that had taken place.

The information used

includes published call reports, census d a t a , court records,
and Federal Reserve Board survey data.

He compares such

things as deposit concentration ratios and number of banking
offices per capita for Michigan with other states that have
different types of banking structure.

Lanzillotti also in­

cludes an extensive review of stockholder and loan links
for Michigan banks and extensively covered the bank structure
laws and court cases that have affected bank mergers and
consolidations.

Some of his conclusions that have relevance

to this study are:
1.

Through 1945-1963, Michigan had a 30 per cent
greater increase in total banking offices than
respective averages for limited branching states,
unit banking states, and the U.S. total.

2.

An aspect of this movement is the replacement move­
ment (i.e., one bank for another) that has been
taking place.
The importance of this aspect
depends upon the nature of the replaced and re­
placing banks and the alternative sources of
banking in the given and adjacent communities.

3.

Deposit concentration ratios are extremely high
in several of the Michigan Standard Metropolitan
Areas, but it is unclear how this has affected
the viability and vigor of banking competition.

4.

Efficiency of operations does not appear to be
largely a function of bank size, so it is not
clear what size a bank should be in relation to
the market served.

5.

In order to ascertain what the impact of structural
changes means in terms of banking competition, it
is necessary to examine individual bank markets
and submarkets within the state.

34
In a more recent study the Joint Senate-House Bank
Study Committee of the Michigan Legislature evaluated state
bank structure in 1969.

Some findings of interest reported

are population per banking office for each county, number
of banks per county, and the rate of return for banks of
different sizes in Michigan.

As could be expected for a

state with as diverse a land use pattern as Michigan, popu­
lation per bank office per county varies tremendously.

But,

on an average there is one bank per 6,100 people compared
to one per 6,300 for the U.S.

An unexpected finding is

that the net income after taxes as a per cent of total
assets was higher for smaller banks than for larger banks.
The after tax income (as a per cent of capital accounts)
was 9.07 per cent for banks under $5 million (deposit size),
increased to 9.87 per cent for $10 to $25 million banks, and
then dropped to 9.01 per cent for $25 to $100 million banks.
The report recommended changes in the bank structure laws
to allow bank holding companies to be established.
2.5

Alternative Bank Structures
The effect of the rules and regulations on bank

structure in rural areas in Michigan has been to foster the
establishment of a preponderance of small unit banks.
Usually there is one bank per small town.

In fact, there

are only nine towns of under 5,000 people with more than
one bank or banking office.

The smallness of these banks

is indicated by the fact that, out of the 332 banks in

35
Michigan as of December 31, 1970, 197 had less than
$20,000,000 in deposits, and 120 had less than $10,000,000
in deposits.

Most of these small banks are in rural areas.

The second most common type of bank organization in rural
communities is that of a branch of a bank headquartered
in a larger nearby city.

As of December 31, 1970, there

were no bank holding companies represented in rural areas.
There are some other quasi-legal mechanisms for
interrelated bank ownership and control, but all of these
are legally covered by the three structures mentioned
above.

They include employee pension funds of one bank

owning stock in another banking company, trust accounts
of one bank holding stock in another bank, or limited
partnerships holding stock in banking firms.
There are advantages and disadvantages to each type
of ownership structure.

The unit bank is frequently criti­

cized for being "too small" to be efficient and of good
service.

For example, the loan limit for one-third of

Michigan banks is less than $50,000.

This amount is often

not adequate to finance a medium-sized rural business or
a large farm.

The banks often do not have specialized loan

officers and may not have such services as a consumer loan
department.
The local unit bank is also prone to the risk of
a given community.

Adverse economic conditions in a small

area where a bank had most of its loans outstanding could

36

cause insolvency of the banking company.

Local economic

conditions and financing needs could fluctuate greatly so
the bank would not be able to satisfy community loan demands
during part of the year but would have excess loanable funds
available during another part of the year.
The most often cited advantage of unit banking is
that the management (and usually ownership) of the bank is
local and sensitive to local problems and needs.

It is

purported that this local character of the organization
responds more to local problems and helps the local community
develop.
In an attempt to circumvent some of the disadvantages
of being small, some rural banks have developed strong
"correspondent” relationships with larger city banks.
larger bank is, in effect, the country bank's bank.

The
In

return for the deposits which the country bank keeps with
the city bank

(for which, by law, no interest can be paid),

the city bank provides services to the country bank.

These

services may include providing specialized loan expertise,
trust services, overloan assistance, other banking services,
and specialized consulting for the rural bank.

This action

has not silenced critics of unit banks or proponents of
branch banking.

They hold that the correspondent relation­

ships leave much to be desired in terms of customer service.
The "partnership" relationship between the bankers depends
upon many factors, and frequently, if this does not mutually

37
benefit the bankers, the rural customer needing the services
of a city bank does not receive it through his local bank.
A series of arguments that support branch banking
(generally meaning the consolidation of existing unit banks)
over unit banking include:

(1) the loan size available to

a single customer would be greatly increased,

(2) the risk

of defaults due to localized conditions would be reduced,
(3) more banking services could be provided because of the
larger deposit base, and (4) there would be more flexibility
in transferring funds from surplus fund areas to deficit
fund areas.6

All of these arguments are, in effect, true.

But whether they become advantages or disadvantages to the
customers and community depends upon the bank management.
And management of branch offices are frequently criticized
for being unsympathetic to community needs because they
channel funds into external investments rather than local
investments!
Bank ownership by a bank holding company has a
limited advantage over either of the other types of bank
ownership styles.

As defined above, a bank holding company

is a corporation that controls 25 per cent or more of the
voting stock in a bank.

This amount of ownership generally

gives the holding company control of a bank.

Typically,

a bank holding company initially owns one fairly large bank

g

See Hopkin and Frey and Swackhamer and Doll for
an expanded discussion.

38
and then acquires other smaller banks.
is a separate entity.

Each of the banks

This type of ownership structure

does not increase loan limits or reduce risk by spreading
loans for each bank over a larger geographic area.

The

parent company with all of the affiliates may be large
enough to amass some specialized management talent for the
member banks and to provide some central management services
for the member banks.

But, in actuality, all a bank holding

company usually does is to increase the use of the corre­
spondent relationship more than is usually done under
separate ownership.
2.6

Reasons for Bank Mergers
Many reasons have been given for bank mergers.

Smith

summarizes many of the reasons presented in various

studies in the following lists:
From the standpoint of the acquired banks mergers
are desirable because o f :
1.

failure to provide successor management, generally
alleged to be due to the inability and/or unwilling­
ness to pay sufficient salaries to attract capable
managers;

2.

attractive prices offered for the stock of the
solicited bank which the owners find difficult or
unwise to refuse due to the limited market for the
7

David L. Smith, Economist Fed. Res. Bank of Cleve­
land, "Characteristics of merging Banks" (paper presented at
the Fifth Annual meeting of the Appalachian Finance Assoc.,
Syracuse, N.Y., April 26, 1969). Also see Currency, Annual
Report for 1964 (Washington, D.C.: Government Printing
Office, 1955), pp. 9-10.

39
stock of many small banks and the consequent market
undervaluation of the shares;
3.

high operating costs and low profits resulting from
inefficiencies and/or the inability to provide
adequate banking services;

4.

the inability of many small banks to meet the borrow
ing needs of a community due to low lending limits.
From the standpoint of the acquiring banks mergers

are desirable because of :
1.

the need or desire to grow in size and obtain addi­
tional banking offices in adjoining areas in order
to better serve existing customers and obtain addi­
tional customers;

2.

the need for larger lending limits and additional
deposits to loan;

3.

the desire to improve (or recoup) their position
due to relatively slow growth;

4.

the desire for greater profits.

2.6.1

Management Succession
Lack of successive management as a reason for merger

is explored in depth by Smith.

He expands on alternatives

that banks experiencing management voids can explore.
Options here include (1) hire new management at the going
price,

(2) merge

{as permitted by Michigan law),

(3) become

an affiliate of a bank holding company (if permitted by law)
or (4) liquidate.

Smith does not suggest another alterna­

tive, which is for the stockholders to sell their stock to
other individuals who will either manage the operation or
will hire capable management.

Since Michigan law (in the

period relevant to this study) did not permit holding

40
company affiliations, the merger alternative permitted was
often the most attractive alternative to bank ownership
groups.

Smith found that merger usually promised capital

gains for stockholders as well as salary increases and
pension benefits for the bank's employees.

He contrasts

this to the problem of attracting new management, probably
at higher salaries than had been paid, with no assurance
of increased profits.
2.6.2

Lending Limits
The other reason often cited for mergers, that of

increasing lending limits, is also assailed by Smith.

The

small banks acquired are usually merged into larger banks
(which often try to obtain more than one small bank) and
are then operated as a branch of the larger bank.

Smith

contends that this is a round about, cumbersome, and ex­
pensive way to increase lending limits.
2.6.3

Profit Motive
After discounting management succession and in­

creased lending limits, the primary reason for mergers is
that the stockholders of the acquired banks receive what
they consider to be a good price for their stock.

Or, it

can be assumed that the acquiring banks place a higher
value on the stock than the original owners, possibly
because the new owner/management will increase earnings
of the bank by fuller use of resources.

41
2.6.4

Economies of Scale
Economies of scale that are available from larger

operations is often one of the acquiring bank's stated
reasons for a bank merger.

There have been numerous studies

on scale economies in banking operations involving various
banking structures and bank sizes.

In a study of banks in

the Tenth Federal Reserve District (Kansas City) Lyle
g

Gramley

states that he could not reach any definite con­

clusions.

His difficulty resulted from lack of data and

was a consequence of the nature of the problem.

He states

that there is some improvement in efficiency (lower costs)
for larger banks.

These lower costs are made possible by

larger scale operations and greater efficiency in labor
utilization.

But the real question that arises is:

Do the

large banks serve the same customers as small banks?
believes the answer to this question is no.

Gramley

Loans at larger

banks are substantially larger (to corporate borrowers), and
the relative number of individuals to business customers is
smaller than for small banks.

Therefore, economies of scale

studies are misleading because adjustments in customer
structure have not been considered.
2.6.5

Increased Services
That a larger banking firm can offer a wider range

of services to its customers is also a reason for bank
g

Lyle Gramley, "A Study of Scale Economies in Bank­
ing," Research Department, Federal Reserve Bank of Kansas
City, November, 1962.

42
merger.

Services here include more savings and checking

account alternatives, trust services, different types of
mortgages, bank credit cards, and specialized loan services.
A larger banking firm can offer these services because it
has a broader customer base over which to spread the fixed
costs of entering into an activity.
It has usually been found that larger banks do offer
more services.

But a question arising for a rural community

is whether the people want or need these additional services
and are willing to pay the additional costs of these ser­
vices.

In many cases the poeple who benefit from the addi­

tional services available may not pay the total cost of the
additional service.

This may happen due to the way the

bank's pricing policies are established where the total
customer base may pay for the additional costs of services
used by only a few.
Additional questions that should be asked before
offering specific services include:

(1) Do people need

low down payment plans for home mortgages?
need a trust department?

(3) Do people need bank credit

cards available from the local bank?
available has a cost.

(2) Do people

Having these services

Not having these services available

also has a cost for those wanting and needing the services.
The costs should include the cash cost of the new service
and/or the general increase in costs of the banking service
if additional costs are not totally allocated to the

43
customers using the new services.

How these costs are to

be paid and/or how they should be computed is an interesting
question.
2.6.6

Management Sensitivity
An argument against bank mergers is that the

allegiance of bank management is no longer primarily to
the people of the community in which the bank office is
located.

Consequently, many people feel that rural com­

munities may lose out on potential development if the local
financial institution does not actively support new projects.
There is no way to truly measure this variable.

Proxy

measurements could include loan/deposit ratios for each
branch office.

But banks do not usually keep these types

of records; even if they did, could one determine that a
loan made through a given branch office actually benefited
the local community?

It is possible to find out where

bank officers and board members live, but is their allegiance
always to the community in which they reside?

Community

affairs involvement of bank management personnel could be
another variable used to measure community allegiance in­
volvement.

But this may. not be relevant because

(1) the

management person may not be the central power figure in
bank decision making or (2) the management person may
disassociate his business values from his personal feelings
in operating the bank.

44
2.6.7

Profits vs. Community Service
There may be a direct trade-off between short run

profits and community service for the owners of a bank.
This trade-off often tends toward short run profits in the
case of a bank that has recently changed ownership.

The

reason lies in the ways that banks are commonly sold and
financed.

If a new group purchases a bank (or controlling

interest) for cash, they frequently borrow as much as 75 to
85 per cent of the purchase price against the stock pur­
chased.

This debt is commonly financed over a five or

seven year period.

A large cash flow is required to ser­

vice this loan for the first few years of operation under
new ownership.

High return loans (and high risk loans) are

typically industrial mortgages and lower quality tax-exempt
municipals.

By the time management has enough high return

loans to generate a large cash flow to service the debt,
there may be few funds available to serve the local loan
demand.

Therefore, community service may suffer, especially

in the short run.

This cash flow need may be the same if

the bank is purchased by another banking firm or an indi­
vidual.

Most bank purchasers realize that a large amount

of "external" investments reduce the deposit growth from
within the community.

But the trade-off between long term

growth and short run profits for debt service often leans
toward short run profits.

45
2.6.8

Movement of Funds
A positive benefit of bank mergers is that a bank

with several offices can move funds from a surplus area to
a deficit area.

The ability to do that is undisputable for

banks with offices covering a diverse business area.
for many limited bank branching systems

But

(such as Michigan

has) the whole area that is served by the bank may have
similar fund needs.
Larger banks do# though# often have the ability to
enter into arrangements to adjust their flows of funds in
an area more easily than smaller banks.

The larger size

"packages" of loans that they have available may allow them
more options to discount them.

They are usually able to

get the necessary resources to deal in the Federal Funds
market more easily than smaller banks.

When larger banks

are "long" on funds# they may be able to find higher yield­
ing investments from non-local markets.

A necessary question

that must be asked about movement of funds is:

How does one

determine what sector has surplus funds and what sector has
a fund deficit?

To answer this question requires more in­

sight than we currently possess.
2.6.9

Management Quality
"Larger banks can afford to pay management higher

salaries# and thus are able to attract a higher level of
competence in managers."

This statement is frequently

found as a supporting statement for bank mergers.

The 1971

46
Michigan Bankers Association Salary survey shows that
this is true in Michigan.

For 17 banks with assets under

$5,000,000 the chief active officer was paid a median
salary of $12,600; the second man was paid $8,000.

In 50

banks with assets between $25,000,000 and $50,000,000,
median salaries were $31,000 for a chief active officer,
$18,000 for a senior vice president, and $9,500 for a
branch office manager.

If salary levels are an indication

of management ability, the 50 larger banks

(35 of which had

between 1 and 5 branches) would have better management than
the 19 smaller banks (17 of which had no branches).
Bank funded management training programs were also
more available from the larger banks.

In the $15-25 million

size banks, all of the banks compensated employees for
tuition spent for educational programs.

Also, most paid

for travel and living expenses and allowed the employee
time off

with pay for the schooling.

Alternatively, less

than half of the small banks paid the employees' tuition
for educational programs, and only one-third allowed time
off and paid expenses for schools.
2.7

Decisions on Bank Ownership Changes

9

The existing stockholders of the bank that is for
sale make most effective decisions on bank ownership changes.

^This section gives a brief overview on how decisions
to sell banks are made, the regulatory decisions when banks
are purchased by an existing banking firm, and some of the
constraints that bank purchasers may face. Much of the

47
They select, usually through the Boards o£ Directors of the
bank, the best offer they can receive for the sale of their
stock.

The sale terms can involve (1) cash,

(2) a securities

trade (either equity or debt securities of the company making
the offer), (3) employment opportunities for selling stock­
holders , (4) directorships in the acquiring bank, or
combinations of the above items.

(5)

Frequently the best offer

to the selling stockholders is from an existing banking
company.

If the selling stockholders select the offer from

an existing bank, the sale (merger) comes under the control
of the appropriate regulatory agencies.
In Michigan, the State Financial Institutions Bureau
is the initial regulatory agency for merger approval for
State banks; the Comptroller of the Currency is the initial
governing body for National banks.

After approval by the

initial regulatory agency, all merger applications go to
the District Federal Reserve Bank and the Federal Deposit
Insurance Corporation.

The final regulatory agency with

which bank mergers must be cleared is the Anti-Trust Division
of the U.S. Department of Justice.
The decision criteria to allow mergers are generally
the same among all regulatory agencies that screen merger
applications.

However, the weightings of each criterion

material in this section comes from a conference with
Graeme M. Black, retired Deputy Comm, of Banking, State
Financial Institutions Bureau. Interpretations are those
of the author and have not been cleared with Mr. Black.

48
differ, depending upon the function that the reviewing body
serves.

The decision criteria and the information gathered

are on (1) successive management in the bank about to be
acquired,

(2) banking competition in the area,

adequacy of the resulting bank,

(3) capital

(4) potential profitability

of the resulting bank, and (5) the increase

in loan limit

of the resulting bank.
The main criterion used by the State Financial
Institutions Bureau and the Comptroller of the Currency,
agencies whose primary responsibility is to provide adequate
financial service to the State, is management succession in
the bank being acquired.

Frequently rural banks are (or

consider themselves to be) too small to be able to afford
the salaries required to have a "manager-in-training" before
the existing chief executive retires.

If they are too small

for that, they also consider themselves too small to pay
high enough salaries to compete for new management personnel
after the chief executive retires.

Because of this lack of

management talent, many small banks

seek out abuyer for

the organization, and this may be an existing bank that has
in-depth management ability.
The second criterion that the Comptroller of the
Currency and the State Financial Institutions Bureau look
at is the competition in the area for financial services.
This standard is rather loosely applied by these two regu­
latory agencies because of the various definitions of the

49
"relevant market" and the character of the competing banks
in a region.

Both of these agencies generally realize that

one healthy large bank can and usually does provide better
service than a small failing organization.

But, because

the Anti-trust Division of the U.S. Justice Department
looks closely at the competition factor, even for small
banks in rural areas, the initial approval reports are
written by the State Financial Institutions Bureau and
Comptroller of the Currency to show that both competition
and service would be improved.^
The last three criteria— capital adequacy, potential
profitability, and increased loan limits of the resulting
bank— are met, under most circumstances when two banks merge,
unless one of the organizations was extremely unhealthy.
The relation of deposits to capital in the resulting bank
can fall, but this is usually negligible unless the bank
selling out is fairly large (in relation to the resulting
bank) and/or has an extremely unfavorable capital ratio.
Profit potential of the resulting bank is usually increased.
There are many specific banking activities that have scale
economies which could significantly reduce costs; and there
are few reasons to think that income would go down,

^ T h e State Financial Institutions Bureau and the
Comptroller of the Currency use several definitions of the
"relevant market" to show improved competition. They do this
by varying the relevant geographic area, showing different
competitors of comparable sizes, and by showing a lack of
services available from some of the smaller banks involved
in the merger application.

50
especially if the acquiring organization has better manage­
ment.

The loan limits of the resulting bank must increase.

Loan limits are a function of capital plus surplus; and
since these two accounts are added for the two banks, it
must increase.
The Federal Reserve Board's primary criterion is
availability of financial services, which is usually met
because of the assumption that larger organizations can
provide a wider range of services than a small organization.
The Federal Deposit Insurance Corporation tends to focus on
safety of the deposits.

Since practically all banks now

are members of the FDIC, there is really no question about
them keeping their deposits as safe after merger.

Neither

of these agencies has ever denied a merger application in
Michigan.
2,8

Chapter Summary
This chapter presented the theoretical framework

in which rural bank performance will be analyzed.

The

basic industrial organization framework of structureconduct-performance, supplemented with some of Sosnick's
ideas, was used.

Because of the nature of the rural banking

industry, some modifications of this framework as commonly
applied are necessary.
regulated.

Rural banking structure is closely

Bank office location and the ownership arrange­

ments are closely regulated by the state.

Certain conduct

of the rural banks is also regulated by law.

Performance

51
is regulated only to the extent of being sure the rural
banks make safe investments.
Rural Michigan has a preponderance of small unit
banks.

In recent years some of these have consolidated and

some of them have been acquired with the intent of operating
them as branches of larger banks in nearby cities.

Another

alternative bank ownership structure, the Bank Holding
Company, has also been used in some states.

There are

advantages and disadvantages to all types of ownership
structure.
The Michigan bank structure laws have allowed for
bank mergers since 1960.

The merger rule has been used

often in the last ten years.

Reasons for mergers and for

merger regulation have been presented from several points
of view.
The final section of this chapter explains how
decisions regarding bank ownership changes are made.

One

point to remember is that the benefits of merger occur to
the bank's owners first, and any benefits to the community
it serves may be incidental.
Chapter III will discuss Sosnick's twenty-five
criteria for effective competition with special reference
to the rural banking industry.

After the general discussion

the criteria selected for study in the field survey will
be presented.

CHAPTER III
MEASURES OF RURAL BANK PERFORMANCE
3.1

Introduction
Performance measures for banks have been defined in

many fashions.

Up to now most literature on bank perform­

ance has been flush with numerical ratios.

The reason is

that there is an abundance of secondary data available from
the Federal Reserve System, the Federal Deposit Insurance
Corporation, and state financial institutions bureaus.
Because these data are available only in aggregations for
large numbers or classes of banks, it is quite common to
define a ratio of something as a performance measure.
Examples of these ratios are:
(2) profits to assets,

(1) loans to deposits,

(3) capital to assets,

(4) rate of

return on capital, and (5) rate of growth of deposits.
These performance measures are then subjected to statistical
tests to see if differences exist.
Performance measures of this type are quite useful.
They give an indication of aggregate bank performance which
can be used by policy makers in making rule changes to see
where bank performance can be enhanced.

Ratios are also

used by individual bankers as a basis for comparing their
52

53
individual operation with an average of other operations.
However, measures of bank performance as perceived by
individuals are different.

An individual may not care

about the ratios commonly accepted by economists for
measuring bank performance.

But, he is extremely inter­

ested in the services available to him personally.

And

this is perhaps more important in a rural area where a
person may have to drive ten miles or more to find an al­
ternative bank than in an urban area where several nearby
alternatives exist.
An individual thinks his bank is "good" if his loan
request is granted, if it pays high interest rates on his
savings account, if it is open for business when he wants
it open, etc.

Bank performance as rated by an individual

is "bad" if he has to go out of his way to obtain service,
if the bank has few open hours, if his loan request is
refused or not acted upon for several days, or if the bank
makes errors in his accounts.

This chapter will discuss

measures of rural bank performance as it relates to indi­
viduals and small communities.

Sosnick's twenty-five flaws

to effective competition will be the focal point of the
discussion in the first part of the chapter.

Only the

major aspects of rural banking will be covered in this
discussion.

Some of the factors are pertinent to several

flaws but will only be discussed under the major element.
The second part of the chapter will discuss in more depth

54
the factors which formed the basis for the questions used
in the field survey.

This section will be structured ac­

cording to the Bain-Caves framework with performance
dimensions of efficiency, resource employment, progressive­
ness , and equity as they apply to individual customers
served by rural banks.
3.2

Effective Competition
in Rural Banks
Sosnick has identified twenty-five flaws that keep

a market from being effectively competitive.

From the

definition of the market in the previous chapter and the
regulations that rural banks must obey, it is evident that
there is not a great deal of competition in some rural
communities.

In industries such as this, Sosnick's criteria

provide a comprehensive listing of conditions that can be
used to evaluate the service the industry provides.
He begins his list of undesirable market charac­
teristics with ten conditions that are undesirable both in
themselves and in their effects.
Unsatisfactory products.— Unsatisfactory products
from rural banks could include loans that are not structured
according to the repayment ability of the customer, loans
that are of insufficient size to meet the customer's goals,
loans that have a "high" interest rate, and a reluctance
on the part of the bank to make certain types of loans.
Also included here would be savings program that pay "low"

55
interest rates, frequent errors in accounting, and a lack
of sufficient deposit and savings programs to fill the
local needs.

Unsatisfactory products would also include

unavailability of services that would be desirable to the
members of the rural community.
Underuse or overuse."-This flaw could most appro­
priately apply to the use of deposits the local bank con­
trols.

Large amounts of cash and government securities

and a low loan/deposit ratio would indicate underuse of
deposits for local community loan use.

An extremely high

loan/deposit ratio may lead to liquidity problems and be
dangerous for bank depositors and stockholders.
Inefficient exchange.— SoBnick includes in this
flaw giving buyers no opportunity to choose less costly
alternatives, and imposing price ceilings and floors that
create queues or surpluses.
rural banking.

These factors are evident in

Regulation Q establishes maximum rates that

can be paid on savings accounts.

Not allowing buyers

(borrowers) to choose less costly alternatives is common
also because of the practice of offering "standard" pro­
grams that may have more features than the customers would
choose if they could structure programs for themselves.
Also, many types of loans are written at standard prices.
An adjustment in loan prices would be desirable for differ­
ent situations.
Inefficient production.— The most obvious case of
inefficient production from rural banks to the borrowing

56

community would be to under utilize the deposits available
for loans to the local community.

This could come about

because the loanable funds were disbursed in other than
local loans or because the bank's portfolio plan was con­
servative in regard to making loans.

Another area of in­

efficient production would be unavailability of services that
are desired by the local community, thus forcing local
people to travel to other communities to find the desired
services.
Bad externalities .— “Inflicting costs or denying
benefits when the persons could, with mutual advantage,
contract out of the situation if negotiations were feasible"
is Sosnik's concept of bad externalities.

Because of a

rural bank's position as a "middleman" between savers and
borrowers and because of the rules, regulations, and ex­
aminations that the bank must face, it is frequently
asserted that a bank cannot negotiate in some instances.
If this is true, then bad externalities do exist because
the lack of negotiations may deny services to some community
members.
Spoliation.— Needlessly exhausting a self-renewing
resource is spoliation.

If rural bank deposits are gener­

ated primarily from the local community, investing an in­
ordinate amount of community generated deposits in non-local
investments would constitute spoliation.

This is because

non-local investments would not generate future deposits for
the community to use as future sources of loan funds.

57
Exploitation*— In the rural banking industry overuse
of deposits for loan funds would be the most obvious case
of exploitation.

Investing an injudicious amount of funds

in loans may cause liquidity problems which would, in turn,
injure depositors and stockholders.

Exploitation would

also be a factor when a local bank paid extremely low in­
terest rates on savings accounts to people who may not have
access to alternative savings programs.

A bank making many

non-local investments of deposits that were community
generated could also be considered guilty of exploitation.
Unfair tactics.— Malicious interference with com­
petitors or suppliers and fraud against customers are ex­
amples of unfair tactics.

Because banks are multiproduct

firms, they can subsidize certain parts of their business
to make inroads into a competitor's business.

An example

of this may be a bank writing home mortgage loans at a
favorable rate to restrict a saving and loan association’s
growth.

If successful, the bank could emerge as the domi­

nant home mortgage loan firm in the community and then
return to charging normal rates for mortgage service.
Because of the regulations that banks face, fraud does not
appear to be a problem.

However, a lack of understanding

of the specifics of the agreements and bank policies on
the part of some customers may lead to serious misunder­
standings.
Wasteful advertising.— Advertising that is false,
misleading, or valueless to its audience is called wasteful

58
by Sosnick.

The question of the "value" of all advertising

comes up frequently.

Is it wasteful for a rural bank to

sponsor community service type advertisements?

Questions

of this type must be answered before judgments of adver­
tising value can be answered.
Irrationality.— Self-defeating choices by buyers or
sellers constitute irrationality.

To answer the question

of whether or not this exists one needs to know more in­
formation about the utility function of the participants
in the system.

On the surface it appears that at times

there may be some irrationality in the industry, but upon
closer inspection there is often justification for the
actions.

An example of this is a bank that makes many

non-local loans.

In the long run this would be expected

to restrict deposit growth, but in the short run the return
on these investments may be higher.
The other fifteen flaws that Sosnick cites are
conditions considered undesirable because of their effects.
These conditions are:
Undue profits or losses.--Sosnick states that he
does not know how to identify unjustified profits.

Because

of the entry rules to banking and the regulations on inter­
est paid and types of investments used, there appears to
be little evidence of undue profits in rural banking.

(See

Section 2.4 for average profit figures in Michigan banking.)
Inadequate research.— Individual rural banks do not
generally have anyone whose job is a "researcher."

However,

59
bankers' associations/ city correspondent banks/ the Federal
Reserve

System, and the Comptroller of the Currency usually

have research staffs that do studies on banking.

The re­

search done by these agencies appears, however, to be
directed more toward bank operations and macro results of
banking actions than toward better servicing individual
customers.

Even if the research is the proper type, there

is the question of the dissemination of the research results
so as to benefit rural banks and rural bank customers.
Predation.— Pricing a product below the per unit
cost to injure a competitor is predation.

A similar problem

occurs when one financial institution gives an extremely
favorable rate to attract customers from a competitor; when
the competitor quits serving this type of client, the
original price cutter goes back to normal rates.

(See

unfair tactics section.)
Pre-emption.— This may be found in rural banking
when a country bank insists on being the only source of
loan funds to a borrower and is not willing to share the
customer's loan needs.

This could be harmful to the

customer if his bank is unable to meet his total financial
needs.
Tying arrangements.— Tying arrangements do exist
in rural banking.

Examples of this are "free" checking

accounts when you have a savings account deposit of a
certain size, "free" safety deposit boxes for time deposit
holders, etc.

60

Resale price maintenance.— Prices of loan service
are not set by a specific group or ruling, but are influ­
enced directly by the major money markets.

A rural bank

has the option of investing funds in local investments or
in the major money market alternatives.

Thus the price of

rural loan service is highly influenced by the major money
market interest rates.

Resale price maintenance is found

in deposit acquisition because of Regulation Q, which cites
the maximum interest rates that banks can pay for deposits.
Refusals to deal.— This flaw may be found where a
bank establishes credit standards that are too "high" to
allow many people to have access to the bank's loan service.
Undesirable discrimination.— There is probably some
undesirable discrimination in the rural banking industry
because of the examination of loans by the regulators.

A

person is refused a loan if his credit worthiness is ad­
judged poor, rather than being given a loan at a high
interest cost to compensate for the higher risk shown by
his poor credit standing.
Misallocation of risk.--This flaw is probably
prevalent in the industry because of the "quality" standards
that are established to qualify for loan service.

Also,

due to the rules and regulations, bank owners may not be
exposed to as much risk as their returns might suggest
that they face if there were freedom to enter the banking
business.

61

Undesirable collaboration.— ‘This flaw may exist in
some cases because of the attitude of some rural bankers
not to "infringe" on another bank's territory or to "steal"
customers from neighboring bankers.

This type of action

sets up a non-competitive relationship between some rural
banks.
Undesirable mergers.— Sosnick decries mergers that
reduce the number of competitors to less than three, except
for those that reduce costs.

Since bank mergers have to

be approved by the regulatory agencies, the flaw of un­
desirable mergers should not be present if regulations
are properly made and enforced.
Undesirable entry.— Because entry into banking is
regulated, this should not be a flaw.
Misinformation.— Misinformation probably exists in
the rural banking industry as much or more than in most
rural industries.

Many citizens do not understand how

their local banks function and the regulations they face.
Also, many individuals are unsophisticated in financial
dealings and do not know what options are available to
them.

Although the feeling appears to be diminishing,

some residents are reluctant to provide their lenders
with the necessary financial information so they can be
given financial counseling.
Inefficient rules of trading.— Rules that fail to
maximize the traders collective gain from trade in the

62

market are a flaw in Sosnick1s framework.

These would in­

clude Regulation Q interest rates, refusals to deal, and
some of the other flaws mentioned before.
Misrequlation.— Undoubtedly there are some regu­
lations that foster inefficiency in certain aspects of rural
banking.

But operating inefficiencies may be offset by the

gains in depositor safety by some of the regulations.
The list of twenty-five flaws contains what Sosnick
considers every verifiable market condition that is avail­
able and undesirable.

Some of them are structural elements,

some conduct elements, and some performance elements in the
Bain-Caves framework.

The advantage of an exhaustive list

like Sosnick*s is that it gives specific identification to
the flaws, whereas the Bain-Caves framework points only in
the general direction of the major flaws.

The specific

identification of flaws is a problem because of the differ­
ences in markets to which this framework is applied.
Sosnick holds an "all or none" philosophy.

Also,

A market is

effectively competitive if, and only if, it has none of
their characteristics.

Because of the various objectives

for the rural banking industry, some of these "flaws" exist.
Nonetheless, this grouping of criteria is a good point of
reference for the broader Bain-Caves framework.
3.3

Rural Bank Performance Dimensions
Selected for the Field Survey
This section will discuss the performance dimensions

covered in the field survey.

They will be discussed within

63
the Bain-Caves framework, using the performance criteria
of efficiency, employment of resources, progressiveness,
and equity as they apply to small communities and individual
customers served by rural banks.

Because of the regulations

that rural banks face and the problems in securing data,
and because the objectives of the study were to look pri­
marily at the differences in services available through
rural banks after merger, information pertaining to many of
the flaws suggested by Sosnick was not collected in the
field study.
The nine variables selected as performance
dimensions are:
1.

Deposit and savings programs available

2.

Interest rates paid on savings

3.

Types of and charges for loan services available

4.

Loan/deposit ratios

5.

Services available to local public institutions

6.

Loan limits

7.

Auxiliary services

8.

Changes in response to community needs

9.

Decision making on loan requests
Some of these performance variables are subjective,

based upon the feelings of people involved in the study:
the bankers, local citizens, competitors, and the author.
Other measures will be ratios and studies that are objective
and for which objective answers can be obtained.

64
3*3.1

Deposit and Savings Programs
One central Michigan bank (not involved or included

in this study) advertises "14 different checking plans
available."

This suggests that customers use, when offered,

different checking account services.

Checking accounts

differ in (1) statement date and frequency,
charge structure,

(2) service

(3) type of forms provided, and (4) time

lag in crediting deposits, along with some other ways.
Banks with computerized accounts have the ability to change
many variables to suit the various services.

Charges for

the services may be competitive with neighboring banks, be
set independently, or may be established on some basis such
as the customers' demands for service.
Savings programs also have differences in interest
rates paid, computation of rates, date interest is paid,
how many cost-free transactions are allowed, and when
withdrawals can be made without loss of interest earned.
A greater selection of deposit and savings programs
may represent improvements in equity and progressiveness
and fuller use of potential deposits in the rural community.
If more programs are available, more members of the commu­
nity could have their deposit and bank savings needs met
at the local bank.

These expanded programs would give more

access to the local people who had some unusual needs.
one considers potential community deposits as the major
resource available for use by the local bank, enhancing

If

65

the number of deposit and savings programs may increase the
amounts of deposits in these accounts.

Then the local bank

could use these greater deposits in its investment program.
The individual in the community may consider it a mark of
progressiveness for his local bank to offer the same pro­
grams offered by larger banks located in the cities.
3.3.2

Interest Rates Paid on Savings
"Regulation Q" is the Federal Reserve System regu­

lation that establishes the maximum rates banks can pay on
deposits.

There are reasons why banks may not want to pay

the maximum amount allowed, or why they don't want to offer
all of the savings plans that are allowed.
include

These reasons

(1) being "long" on deposits in relation to the

amount of investment alternatives,

(2) not needing to pay

high interest rates to attract deposits, and (3) not being
willing or able to service different interest rates and
conditions of the accounts.

The third reason can be a

problem if calculations are done by hand, but it is not a
valid reason for banks with computerized records and
accounts.
The same arguments can be used in regard to paying
high interest rates on savings accounts as were used in the
previous discussion of offering a large selection of de­
posit and savings programs.

Two of the reasons for not

paying high interest rates on savings— (1) being long on
deposits and (2) not needing to pay high interest rates to

66
attract deposits— may demonstrate a lack of bank management
push to find suitable investment opportunities, especially
when one considers that a bank has open to it many invest­
ment alternatives which are not open to small investors.
T h u s , it would be a measure of progressiveness, increased
equity, and greater use of community deposit potential to
pay the highest interest rates allowed on savings plans.
3.3.3

Types of Charges for Loan
Services Available
Loan service is a very important performance

dimension for individuals in rural communities.

Variables

of importance in loan service include (1) the purposes for
which loans are made,

(2) collateral necessary to qualify

for loan service, and (3) the repayment terms available.
These variables and the interest charge for loan service
are of prime importance to individuals needing such service.
Another concern is the timeliness with which loan
service is granted.

The lead time required between the

loan application and the decision to grant or refuse the
loan service is also important to the person seeking a loan.
The lending agency does need time to investigate the bor­
rower's credit references and the fund use, but an undue
amount of time required by some agencies for these inquiries
may render the loan service requested useless.
When assisting customers who are financing home
mortgages, banks have the option of affiliating with the

67
Federal Housing Authority (FHA) and/or a mortgage guarantee
insurance company, such as the Mortgage Guarantee Insurance
Corporation (MGIC).

By establishing a relationship with an

agency of this type a bank may offer what is commonly known
as a "low down payment plan" for real estate loans.

Typi­

cally these loans have a 10 per cent down payment for
qualified buyers.

This compares to a required 20 per cent

to 30 per cent down payment on conventional mortgage loans.
There is a cost to affiliate with these plans.

It

is not a direct cash cost, but the time involved to estab­
lish the relationship is incurred by the bank prior to
writing any loans under these plans.

Additional time must

also be spent by the bank loan staff to meet the necessary
paperwork requirements for each loan.

The main benefit of

the plan for the borrower is that a lower down payment is
required.

The cost to the buyer is a higher interest rate

and/or a higher cost for obtaining the loan.
Having several loan service plans available in­
creases the equity of the banking system in a local commur
nity.

It could be expected that many more people would

qualify for real estate loan service if the down payment
requirements for such service were reduced from 30 per cent
to 10 per cent.

Thus, when a bank is affiliated with a low

down payment plan more people have access to real estate
loans.

68

More people can also have access to loan service
if the purposes for which loans are granted are expanded,
or if the collateral requirements are relaxed.

In taking

these actions, though, the bank management must be careful
not to overlook its obligation to the depositors to invest
the funds in "safe" investments.
By granting loan funds for use in more enterprises
(on consumption items) resource use efficiency may be en­
hanced, since such action would increase the flow of money
to elements of the local economy that are short of funds.
This change in the flow of funds may benefit many in rural
communities.
Loan pricing in a local community can have a large
effect on the flow of funds.

If, for example, real estate

loans were written at 9 per cent interest rather than 7 per
cent interest

(given the same down payment requirement and

repayment time), some individuals may be denied use of the
real estate loan service because the payments to service
the loan would be more than they could afford.

But a trade­

off here is that loan funds that are not used in one area,
i.e., real estate, can be made available for other types
of loans.

How loans should be priced to enhance a bank's

performance for a community may not be consistent from
community to community.

But good bank performance for a

local community may include some measure of loan pricing
that would enhance community development.

Because of the

69
lack of information about loan pricing that would stimulate
local development, it is not possible to develop a criterion
that would be "good."

Even though this criterion cannot

be developed, it is interesting to notice if the banks offer
favorable rates on any types of loans, as compared to other
rates commonly charged.
3.3.4

Loan/Deposit Ratio
A bank's loan/deposit ratio is a measure of "how

much mileage"— in terms of loans-- a bank's customers re­
ceive from the deposits held by the bank.
a rough measure and assumes several things.

However, it is
If deposits

are locally generated and most loans are granted in the
community, it is a fairly good measure of how well a bank
serves the community loan needs.

With a given amount of

deposits, a bank with a higher loan/deposit ratio usually
indicates that more of a community's loan needs are met
than would be met by a bank with a lower loan/deposit ratio,
given similar loan demands.

Of course, this assumes that

the loans are made to community members, which is not always
the case.
The statement above cannot be viewed in a static
framework.

The more loans granted in the community, the

more deposits that would be generated for the bank.

This

would increase the bank's loaning capacity, which may in
turn have the effect of lowering the loan/deposit ratio for
a time until more loans can be made.

70
Also, when several banks' loan/deposit ratios are
compared it is usually assumed that they all have similar
deposit supply functions and loan demand functions.
is not always the case.

This

There are many factors, especially

in rural communities, that can affect either the deposits
or loan demands that confront an individual bank.
Good performance in terms of a loan/deposit ratio
for most country banks may be in the 65 per cent range if
there are no unusual circumstances in the community.

Ratios

above this for smaller banks may cause liquidity problems
at times.

Ratios below this may indicate that the bank has

extremely high credit standards or does not have sufficient
loan programs available to meet the needs of the local com­
munity.

A lower loan/deposit ratio may also indicate that

the bank management is conservative and is extremely careful
to avoid potential liquidity problems.
Good performance as perceived by the borrowing
members of the community would be indicated by a higher
loan/deposit ratio.

To the saving members of the community,

on the other hand, good performance would be indicated by
slightly lower loan/deposit ratios to help insure the bank's
solvency and deposit safety.

For the owners of the bank a

high loan/deposit ratio would suggest good performance
because higher loan/deposit ratios are typically associated
with a high return on the bank capital— but the loan/deposit
ratio should not be so high that liquidity problems develop.

71
3.3.5

Services to Local Public
Institutions
Local public agencies, local governmental districts,

school districts, etc., have special financial needs.

In

addition to the normal business requirements of demand de­
posit service, they have needs for special services.

These

special needs include a depository for large sums of money
after a tax collection and frequently a loan for operating
funds prior to tax collections.

Some public agencies also

desire to have the bank accept payment for taxes and other
bills, keep records, and do other types of financial work.
This type of public service work can be beneficial to the
bank, the governmental agency, and the community members.
The bank benefits because it has the deposits of the gov­
ernmental agency, while the agency benefits because often
the bank can do the work at less expense than would be
required of the agency.

The community members benefit

because many of them can conveniently pay assessments
at a place where they normally transact business.
3.3.6

Loan Limit
The maximum loan available to an individual or

corporate borrower from a Michigan bank is set by statute
at 10 per cent of the paid-in, unimpaired capital and
surplus of the bank.^

This restriction prohibits one-third

^State chartered banks can loan a maximum of 20 per
cent of capital and surplus if approved by a two-thirds vote
of the board of directors.

72
of the state's banks from making a loan in excess of $50,000
and keeps one-sixth of the banks from making a loan greater
than $25,000.

Most of the banks that face these limits are

located in rural areas where there are few alternative
financing sources.

Having a local bank of adequate size

to service all loan needs is desirable from the point of
view of a rural businessman.

Many small town businessmen

lack the contacts necessary for access to financing sources
in larger cities; so, in effect, their business size may be
limited by the loan limit of their local bank.

From the

point of view of the local businessmen, local bank perform­
ance may be increased by having larger size loans available.
But, from the point of view of others in the community want­
ing loan services, making larger loans available to the
business sector may restrict the supply of loanable funds
for other purposes.
A rural bank may expand its lending limit through
the use of a city correspondent bank.

In this type of an

arrangement, the city bank will assist the country bank
with both funds and service for large or highly specialized
loans.

A city bank benefits from providing this service

in that it usually holds deposits of the country bank and
it has another investment source.

If a satisfactory corre­

spondent relationship can be maintained by the country bank,
the low loan limit problem may be alleviated.

In this way

those bank customers with larger fund needs can be served

73
without any question of restricting funds to the bank's
other customers.
3.3.7

Auxiliary Services
To facilitate the primary function of financial

transfers many banks offer a series of additional services.
Some of these auxiliary services make the transfer function
more convenient for the bank's customers or help to make
the financial transfer process less costly.

If the bank

has a large enough customer base using the services, then
they are generally profitable for the bank also.

Three of

these facilitating functions are bank credit card service,
trust services, and retail inventory financing (floorplanning) .
Credit card services are usually "mail in" functions.
Application blanks are given to or mailed to potential cus­
tomers, and a credit check is made upon their return.

If

credit is approved for the customer, a charge plate is
mailed to the customer for his use.

After the customer

has used the charge card, bills are sent and payment is
usually received by mail.

Some sales time is usually re­

quired to convince retailers to accept charge cards.

After

this, most of the necessary work is a normal banking func­
tion.
It is an advantage to credit card users to have the
service available locally:

users and potential users can

more easily inquire about the service; in the case of an

74
error or problem, a correction or solution may be more
easily obtained at the local bank by phone call or visit
than at a distant bank by long distance phone call or letter.
From a merchant's point of view, it is also desirable to
have the service available locally:

they can receive im­

mediate credit for credit card sales rather than wait for
clearing operations at distant banks.

Zn summary, it is

positive performance to have credit card services available
from a local bank.
By having rapid

More people have access to the service.

credit to the participating merchants'

accounts it may give them some additional capital.
Trust services are also a facilitating function
that often aids in the transfer of funds.

The transfer

function that a trust department aids in is not usually the
rapid transfer but a transfer which may take place over
many years.

In the process, a custodian is needed to be

responsible for the funds while they are in the process
transfer.
use.

of

Trust services are for both business and personal

The amount of business use, or potential use, in small

towns would be difficult to determine.

On the average, an

individual's use of trust services may occur only a few
times per lifetime.

If trust services were provided by

rural banks, the services might be more readily used by the
residents than they would be if the people had to travel to
a city and deal with strangers.

So, having trust services

available locally would allow the rural residents greater
access to the service.

75
Another banking service that is useful both to a
bank's retail merchant customers and to the community mem­
bers who purchase merchandise from the retailers is floorplanning.

This is an inventory financing plan that is

primarily a service to the merchant.

As a merchant takes

delivery of inventory the bank finances the merchandise and
takes a security agreement on it.

When the merchant sells

the merchandise to the consumer# he will act as the bank's
agent and transfer the bank loan to the consumer.

This is

desirable for the consumer because it is an extremely con­
venient source of a loan.

It is desirable for the merchant

because it facilitates the sales of his products and because
the bank usually pays a fee for writing the consumer loans.
(The service fee is also necessary because the merchant must
usually take some of the risks of bad loans.)

It is de-

dirable for the bank because it may attract loan customers
who would not otherwise use the bank.

This service is not

without hazards, though# for the customer# the merchant#
and the bank.

The customer may obtain a loan from the

merchant that would not be made by a professional lender
and may then have difficulty repaying it.

In these cases

the merchant is responsible for repayments to the- bank and
may face losses in repossessing and collecting for the
bank's loan.

The bank faces the risk that the merchant's

guarantee for the loan is not "good" and that the inventory
financed will remain as good collateral.

76

Improved rural bank performance would indicate that
this service be available.

It would make loans more ac­

cessible to some community members, and it may enable local
businessmen to compete more effectively with larger business
firms that have internal financing programs.
3.3.8

Changes in Response to
Community Needs
Performance criteria should include not only what a

banking firm is doing now, but how often and how soon it
changes its service in response to community changes.
Questions to approach this criterion may include:

(1) Does

the bank act as an innovator in providing new services to
the community,

(2) does the bank respond to community demand

for the services, or (3) does the bank attempt to foreclose
the potential demand for a service?

Postive bank performance

as perceived by the community would probably be somewhere
between (1) and (2) above.
benefit to the community.

Not all new services are a
But a progressive bank should

be a "leader" and change methods and provide new services
with the changing needs of the community.

It should not be

a follower and wait until there is a substantial vocal de­
mand for different types of services.
Measurement of a bank's change in response to
community needs is difficult.
started a service are possible.

Measures of how soon a bank
But was the service pro­

vided because the bank saw other banks profitably offering

77
this service?

Or did the bank lose customers to other in­

stitutions that offered the service?

Or did the bank

deliberately not offer a service to encourage some customers
to do their banking elsewhere?

It would be difficult to

obtain objective answers to questions of this type.

Measures

of progressiveness may better come from answers to questions
about services mentioned in previous sections of this
chapter.
3.3.9

Decision Making on Loan
Requests
The person or persons who grant or deny loan requests

in a rural bank have a powerful influence on individual fi­
nancial growth and on community development.

The decision

maker may be the department head in a bank/ the president/
the board of directors, or one member of the board of
directors.

It is often difficult to determine who is the

decision maker, and, after that, it is just as hard to
determine the primary objectives of the decision maker.
Identifying these objectives may give insight into the
equity of the system by showing who has access to the
benefits of the local bank.
The bank's objectives may include (1) being a safe
depository for funds,

(2) serving the community's loan

needs, and (3) being profitable for the stockholders.
These objectives are not always compatible, so a question
arises as to the weighting of the objectives which would
maximize performance.

For small accounts, being a safe

78
depository is accomplished usually by the bank being insured
by the Federal Deposit Insurance Corporation.

Being profit­

able for the stockholders is a goal that is assumed away by
many because of the feeling that the owners will change
management if returns are unsatisfactory.
be the case.

But this may not

If returns to bank capital are not attractive,

the bank may not be able to attract capital for future ex­
pansion, which may lead to weaker bank service in the future.
Positive performance for a rural bank would be to put stress
on serving the community's loan needs but not at great ex­
pense of the other objectives.
3.4

Chapter Summary
This chapter has presented the performance dimensions

that will be used to evaluate rural banks in terms of per­
formance to community members.

The major performance

criteria were also discussed in Sosnick's framework of
twenty-five flaws to effective competition.
So far the primary performance criteria discussed
were concerned about the availability of services.

It must

be recognized that service availability is only one dimension
of bank performance— another is service quality.

And service

quality may be more important in some instances than service
availability.

Consider how costly it would be to a person,

for example, if a bank had a trust department, but the trust
officers were incompetent and lost much of the account's
capital because of bad management.

How useful is it to

79
have a wide choice of deposit and savings programs if the
bank makes numerous errors in accounting?

There are many

questions of service quality that can be raised, but for
this study service quality was assumed to be equal from
all banks.
The next chapter will present the results of the
field study by means of a case study approach.

It will

describe the differences between the paired banks and will
present reasons why some of these differences exist.

CHAPTER IV
THE FIELD STUDY - CASE STUDIES
4.1

Introduction
The field study was conducted from November, 1971,

to January, 1972.

It consisted of personal interviews with

twenty-eight bankers, a mail survey of citizens living in
the communities of fourteen merged banks, and a phone survey
of several competitors of the merged banks.
presents
(2)

This chapter

(1) the process used to select the respondents,

the primary area of questioning, and (3) the resulting

case analyses.
4. 2

The Banks
The major part of the data collecting aspect of the

study was a field survey to interview representatives from
twenty-eight banks.
banks

Fourteen of these banks were rural

(as of December 31, 1965) that had since merged into

larger banking operations.

These banks were selected from

all Michigan banks that had merged between January 1, 1966,
and December 31, 1969.

The selection criteria for these

banks included (1) being in a town of under 2500 population
(1960 census), (2) being in an agricultural area, and

80

81
(3)

being at least ten miles away from a major metropolitan

area.

These criteria produced the population of rural

Michigan banks that merged during the five-year period*
The fourteen selected banks were then paired with
banks that were still independent rural banks at the time
of the interviews (November-December, 1971).

The pairing

criteria included (1) being in a similar size town,

(2) being

a similar size bank as of 1965, and (3) being in a similar
type agricultural area.

These pairings were made with in­

formation from the Michigan Bank Directory^- and with the
assistance of several members of the Farm Management Ex­
tension Staff from the Department of Agricultural Economics.2
The main bevy of questions to these twenty-eight
banks centered on how their operations had changed from
December 31, 1965,
merger) .

(pre-merger) to December 31, 1970 (post­

This latter period was approximately one year

after the last merger was effected, so it was expected that
the major changes in bank opeations would have occurred
under the new ownership.

(See Appendix A for questionnaire

used.)
The major part of the financial data came from
Reports of Condition which all banks are required to file

^Michigan Bank Directory is published by Polk's
World Bank Directory, R. L. Polk and Co., Nashville,
Tennessee.
It is distributed annually by the Michigan
National Bank, Lansing, Michigan.
2

Myron Kelsey and Ralph Hepp.

82
with the regulatory authorities at the close of business
each year.

This report has a breakdown of assets, liabili­

ties, and capital structure, all of which is public infor­
mation.

In addition, there is a detailed breakdown of loan

types and volume outstanding of each type; this is not
public information but was supplied by all the independent
banks banks and eight of the merged banks.

The reason for

this low response from merged banks was that after the
merger former Reports of Condition were packed away and
were not readily accessible.
Non-financial data were asked from the officers of
the banks.

For the merged banks the interviews included

one of the following:

Chief Executive Officer, the rural

branch manager, or an officer responsible for the bank’s
branch operations.

The knowledge of current operations by

the officer interviewed was usually extensive; or if he did
not know the answers to the questions, he generally asked
another officer for assistance.

However, the knowledge

the interviewee had about past management practices varied
considerably.

As a result, responses to these questions

were often "best estimates," and some respondents were un­
able or unwilling even to give estimates to some questions
about past management practices.
Information from independent banks was obtained
from the Chief Executive Officer.

In all instances this

person was employed by the bank for the whole time period
in question.

The information received from these

83
respondents was readily available, and estimates for un­
recorded information can be considered fairly accurate.
4.3

The Competitors
The second data gathering aspect of the study in­

cluded a phone interview of officers in financial insti­
tutions which competed with the merged banks.

These

competitors were selected by asking the merged banks for
the names of competing financial institutions in the area.
Unfortunately some of the banks were not able to list any
direct competitors that were active in their primary
business area.

When this was the case, nearby banks or

savings and loan associations were polled.

In all instances,

whether listed as competitors or not, Production Credit
Association and Federal Land Bank Association representatives
in the subject bank's business area were questioned.
It was planned to ask these respondents about
relative changes in "market share" between the two organi­
zations after merger.

This question was not understood by

the interviewees, so the questions were changed to ask about
numbers of customers "picked up from" or "lost to" the banks
immediately after merger.

These representatives from com­

petitive institutions were also asked if there was any change
immediately after merger, if the change was still evident,
or if the prior customer pattern had been re-established.
In some cases the competitors were also asked about the
community's general feeling toward the bank after merger.

84
The quality of the responses varied tremendously.
Some of the representatives of the institutions questioned
were new employees of the organization; as a result they
could only pass on hearsay evidence and impressions gained
from other members of the organization.

Others were long

term employees and gave accurate data to questions.

All in

all, it was believed most of the respondents gave accurate
answers to the questions posed.
4.4

The Representative Citizens
A mail survey from some "representative citizens"

was the last part of the field work.

The County Extension

Director where banks had merged was asked to suggest a
person to interview— a knowledgeable citizen in the area
who was not associated as an employee or stockholder of the
bank.

This citizen was asked to describe "the image of the

bank among townspeople."

Specific questions asked of the

respondent included (1) how he though the local people
liked the bank ownership change, both immediately after the
bank merger and at the current time;

(2) what loan services

were receiving more or less consideration under new owner­
ship;

(3) if people were more aware of banking services

now than before; and (4) what changes were noticed in the
bank's advertising.

In addition to the structured questions

about community feeling and knowledge, he was asked an open' ended question about his personal feeling toward the bank
ownership change.

(See Appendix B for questionnaire used.)

05

Of the fourteen questionnaires mailed in December,
1971, thirteen responses were returned and twelve were
usable.

The quality of these responses is indeterminate.

It is known that some respondents did have a financial
interest in the bank's past ownership and that others
benefited from the bank management change.

Hence, little

can be said about the objectivity of individual responses.
4.5

Case Studies
The major findings of each pairing of a merged bank

with its independent counterpart are presented in this
chapter.

The basic outline used in each of the case studies

presented i s :
I.

II.
III.
IV.
V.

Previous ownership situation
A.

Reason for merger

B.

Financial considerations

C.

Management continuity

Service changes in the merged bank
Comparison with the independent bank
Competitor's response
Community acceptance
The case studies are headed with the major community

economic activity.

These headings indicate the type of

banking services needed by the community.
headings

The fourteen

are:

1.

A

bankina

fruit/recreation

area

2.

A

bankina

fruit/recreation

area

3.

A

bankina

general farming/recreation area

86
4.

A bank in a general farming/livestock area

5.

A bank in a general farming/livestock area

6.

A bank in a livestock/crop farming area

7.

A bank in a marginal farming/semi-urban area

8.

A bank in a general farming/livestock area

9.

A bank in a livestock farming area

10.

A bank in a fruit farming area

11.

A bank in a crop farming area

12.

A bank in a general farming area

13.

A bank in a crop farming/livestock area

14.

A bank in a general farming area

4.5.1

A Bank in a Fruit/Recreation Area
The subject bank was family owned and managed.

After

the extended illness and death of the family head, the re­
maining family members sold the business to a larger banking
firm in a nearby city.

The family had been courting the city

bank for years as a possible future owner of the bank and
had used the acquiring bank as its primary city correspondent.
Financial considerations of the merger included maintaining
the widow of the former manager as an officer until she
reached retirement age and electing her to the Board of
Directors of the bank.
After merger the service changes of the subject
bank included a liberalized lending policy.

Conventional

real estate loan policy changed from making loans of 60 per
cent of the value of property to making loans up to 80 per
cent of the value of the property.

Also, under new owner­

ship, a government sponsored plan became available so down

87
payments on real estate loans could be as low as 10 per cent.
Maximum loan available from the branch manager was changed
to $20,000, as compared with a maximum loan of $13,000 from
the previous bank Chief Executive Officer.

The target loan/

deposit ratio of the subject bank increased from 58 per cent
under previous ownership to 74 per cent under policies of
present management.

Interest rates paid on savings deposits

were less than maximum Regulation Q rates in 1965, but they
reached maximum Regulation Q rates under current ownership.
Services introduced under the new management included
complete trust services, floor planning for retail customers,
credit card services, and computerized accounts.
vious bank ownership offered none of these.

The pre­

The most

rapidly increasing loan category in number of customers
under the new ownership was real estate loans, followed by
consumer loans.
As a comparison, the control bank has not had any
lending policy change in the last five years.

Its conven­

tional real estate loan policy has been to loan 75 per cent
of appraised value; it has been at this same rate for the
last five years.

In both 1965 and 1970 the control bank

paid maximum Regulation Q interest rates.

One of the rather

unusual factors about the control bank was its large loan
demand.

In 1965 the loan/deposit ratio was 80 per cent.

Management considered this too high, but maintained it to
serve their customers.

The target loan/deposit ratio was

88

set at 65 per cent, a figure management considered more
workable for a five million dollar bank.
Fewer services were available from the control bank
than from the subject bank office.
were not available, nor

Trust department services

were the accounts computerized.

However, floor planning and credit card services were avail­
able .
Interest charges on farm operating loans differed
substantially between the subject and the control bank.

The

subject bank charged 8-1/2 per cent for farm loans, long-term
real estate loans, and commercial and industrial loans.

The

control bank only charged 7 per cent on farm loans but did
charge 8-1/2 per cent for real estate and commercial and
industrial loanB.

For automobile loans the subject bank

charged 6 per cent add-on; the control bank charged 7 per
cent add-on.

For short term residential improvement loans

the subject bank charged 6 per cent add-on, and the control
bank charged 8-1/2 per cent annual interest.

The subject

bank had longer hours; it was opened forty-two and one-half
hours per week vs. the control bank’s thirty-three and onehalf

hours.

Both banks were open one evening a week, and

neither of them was open on Saturday.
A vice president of the subject bank reported
community acceptance of the merger to be quite good, espe­
cially from commercial customers.

If anything, though, he

suggested that the positive attitudes toward the bank might

89
have been for "non-banking” reasons.

He suggested the

reasons included the fact that new subject bank management
had funded many community

projects, e.g., public park and

several smaller community

projects. This was

something

that previous management and ownership of the country bank
did not do.
The representative citizen responded that community
acceptance of the bank merger was favorable at the time of
the merger and remained that way.
bank ownership stressed real estate
loans more than past bank

He stated that the current
loans and commercial

ownership did. The

representative

citizen also stated he thought the people were now much more
aware of the range of services available from the local bank
than they had been of those available before merger, even
though he had not noticed any major change
tising.

in bank adver­

His general comment about the merger was:

"This

has been a benefit to the community by the additional
services available and the [increased] size of the bank for
loans."

The only concern the representative citizen had

was that he "would like to see the bank record deposits
at the main office (where the bookkeeping is done) the
same day deposits are made in the rural branch, instead
of recording them one day later as current arrangements
do now."
Two competitors of the bank were interviewed.

One

competitor, a bank officer in the nearby town, said that

90
his bank gained window customers because of the merger.

The

main reason that people gave for changing banks was the
subject bank's delay in recording deposits.

However, the

competing banker said that the subject bank was now able
to do a better job of servicing loans than the past owner­
ship and had taken away some of the loan customers his bank
had previously served.

However, due to an uncomfortably

high loan/deposit ratio at his bank, he was glad that the
neighboring bank was able to service some of the loan re­
quests.

The area Federal Land Bank representative who was

interviewed said he had not noticed any major change in the
farm real estate mortgage activity of the bank under the new
ownership.

He stated neither bank ownership group was active

in making long-term farm real estate loans.
A performance summary of Case Analysis 4.5.1 is
presented in Table 4.1.
4.5.2

A Bank in a Fruit/Recreation
Area
This bank consolidation may not be viewed as a

true merger.

Five executives from a larger bank forty

miles away invested in the subject bank several years ago.
In early 1969 they merged the subject bank into the larger
bank they also controlled.

Due to common ownership of the

two banks, a close relationship existed prior to merger.
The city bank was the primary correspondent for the country
bank and, in this role, supplied many services and most of

91
TABLE 4.1.— Performance Summary of Case Analysis 4.5.1, A
Bank Located in a Fruit/Recreation Area.
Acquired Bank
Control Bank

PreMerger

PostMerger

1965

1970

1965

1970

Target Loan/Deposit Ratio

58

74

84

84

Loan
a)
b)
c)

XXX
XXX
XXX

8-1/2
8-1/2
6

XXX
XXX
XXX

8-1/2
7
7

Maximum per cent of value
loaned for conventional
real estate loans:

60

80

75

75

Are low down payment real
estate loan plans
available?

XXX

Yes

XXX

No

How have credit requirements
changed from five years
ago?l

XXX

L

XXX

S

What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX

20
600

XXX
XXX

5
64

Are maximum Regulation Q
rates paid on savings
accounts?

No

Yes

Yes

Yes

How do your checking
charges compare to
your competitors?2

XXX

C

XXX

C

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

Yes
Yes
Yes
Yes
Yes

XXX
XXX
XXX
XXX
XXX

No
Yes
No
Yes
Yes

Performance Variable

Interest Rates:
Real estate (%)
Farm operating (%)
Consumer (add-on %)

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours
N.A. - Not Available

for same, L for more liberal, C for more
conservative.
2

C for comparable, H for higher, L for lower.

92

the management expertise and technical help.

Because of the

prior close association the merger caused little effect in
the community.
The primary reason for the merger was that the
subject bank was short of capital.

At the time of the

merger the subject bank had a 72 per cent loan/deposit
ratio and was unable to meet the local loan demand with
deposits generated from the rural area.

Up until the merger

the city correspondent bank (merging partner) sent out loan
funds to the rural community through loan sharing arrange­
ments*

Finally, though, it was decided it would be easier

to serve the rural community by merging the two banks.
Another reason for the merger was that a new building was
necessary, so additional capital was needed for this.
The subject bank was unwilling to furnish financial
statements; however, information about the services avail­
able was obtained.

Under the new ownership arrangement

the subject bank did liberalize the terms of its loan
policy.

Conventional real estate loans down payment re­

quirements decreased from 50 per cent in 1965 to 35 per
cent in 1970.

In addition, the subject bank began offer­

ing a 10 per cent down payment plan for real estate loans.
The target loan/deposit ratio was 75 per cent in 1965, but
because of the larger deposit base, this was decreased to
a more workable 65 per cent.

In 1965 the subject bank did

not pay maximum Regulation Q rates on savings accounts,
whereas maximum Regulation Q rates were paid after the

merger*

There was no substantial change in service charges.

New services provided by the subject bank included trust
services, floor planning, credit cards, and computerized
accounts.

The major loan portfolio change was an increase

in real estate loans.

Also since this bank office has

merged, commerical and industrial laons are receiving much
more attention from the new bank management than they did
previously.
Current interest charges on new loans from the
subject were slightly lower than the control bank.

For

example, mortgages were 8 per cent in the subject bank vs.
8-1/2 per cent in the control bank? commercial and indus­
trial loans were 8-1/2 per cent in the subject bank vs.
9-1/2 per cent in the control bank; automobile loans were
5 per cent add-on in the subject bank and 7 per cent add-on
in the control bank.

The only category where interest

rates were not lower in the subject bank was for farm
loans.

The

subject bank charged 8 per cent, whereas the

control bank charged only 7 per cent.

The branch manager

of the subject bank had loan approval authority of $10,000;
the control bank senior officer was authorized to go to
only $1,500 without loan committee or board approval.
The subject bank was open thirty-seven hours per
week and the control bank thirty-two and one-half hours.
Neither bank was open on Saturday, but both of them were
open one evening per week.

Both banks had comfortable

94
facilities.

The control bank had recently been remodeled,

and the subject bank had new facilities.
Management responsibility and sensitivity to the
subject bank area was hard to evaluate.

Six former board

members remained on the board of the merged operation.
However, the primary allegiance of these men may have been
to the city in which the larger bank was located.
The Chief Executive of the subject bank stated that
he believed the people in the local community liked the
new operation.

Additional capital had allowed a liberal­

ized loan policy, a new building was available, and interest
rates on loans had not changed significantly.

Employees

and personnel in the office remained basically the same.
The representative citizen in the subject bank area
did not respond.

Because of the population sparseness in

the area competing financial institutions were practically
nonexistant.

The nearest banking institution was eighteen

miles away.

The Federal Land Bank representative contacted

responded that the subject bank was not very active in
making farm real estate loans, but this was unchanged from
previous management policy.

He also stated farmers were

happier with the bank following the merger than they had
been before because the larger farm operating loans were
available.
A performance summary of Case Analysis 4.5.2 is
presented in Table 4.2.

95
TABLE 4.2.— Performance Summary of Case Analysis 4.5.2/ A
Bank Located in a Fruit/Recreation Area.
Acquired Bank
Control Bank

PreMerger

PostMerger

1965

1970

1965

1970

Target Loan/Deposit Ratio

75

65

70

65

Loan
a)
b)
c)

XXX
XXX
XXX

XXX
XXX
XXX

8-1/2
7
7

Performance Variable

Interest Rates:
Real estate (%)
Farm operating (%)
Consumer (add-on %)

8
8
5

Maximum per cent of value
loaned for conventional
real estate loans:

50

Are low down payment real
estate loan plans
available?

XXX

Yes

XXX

Yes

How have credit requirements
changed from five years
ago? *

XXX

L

XXX

S

What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX

10
140

XXX
XXX

1.5
83

Are maximum Regulation Q
rates paid on savings
accounts?

No

Yes

No

No

How do your checking
charges compare to
your competitors?2

XXX

C

XXX

C

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

Yes
Yes
Yes
Yes
Yes

XXX
XXX
XXX
XXX
XXX

No
Yes
NO
Yes
Yes

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours

65

66

N.A. - Not Available
for same, L for more liberal, C for more
conservative.
2

C for comparable/ H for higher, L for lower.

75

96

4.5.3

A Bank in a General Farming/
Recreation Area
The subject bank was owned and controlled by three

brothers.

One of the brothers was the Chief Executive

Officer of the bank; the other brothers were retail mer­
chants in nearby communities.

Because the manager of the

bank wanted to "semi-retire,M the family controlling the
bank negotiated a merger with a larger bank in a nearby
city.

Financial considerations of the merger were not

known, but the previous Chief Executive Officer was re­
tained to manage the banking office as a branch of the
acquiring bank.
The bank branch office was very independent of the
parent bank.

It maintained its own securities portfolio

and purchased municipal bonds for its portfolio.

It did

all of its accounting internally and processed and serviced
most of the loan requests that arose from the subject com­
munity.

Since the present manager wished to semi-retire,

he sent large and/or unusual loan requests to the main
office for servicing.

An unusual aspect of the merger was

that all of the directors of the country bank were elected
to the board of the merged operation.
Banking service considerations that were changed
included the real estate loan policy.

Previously, con­

ventional real estate loans were written for 66 per cent of
the value of the property.

Under the new policies, con­

ventional mortgages were written for 75 per cent of the

97
value of the real estate.

In addition, a 10 per cent down

payment plan was made available from the subject.

Credit

standards for approving loans were not changed.
Target loan/deposit ratios were increased.

Under

previous management the target loan/deposit ratio was BO per
cent; this was increased to 65 per cent from new management.
Savings account interest rates were below maximum Regulation
Q interest rates in 1965 and continued to be below maximum
Regulation Q rates under present ownership.
In number of loans serviced the greatest change
was in real estate mortgages; the second greatest change
was in consumer loans.

For this bank, the increase in

number of consumer loans was not as great as it had been
for many other banks in the study.

This is because the

members of the controlling family utilized the bank re­
sources to finance sales from their retail businesses.

By

doing this they were able to write a lot of consumer loans
for the bank.
Interest rates on real estate loans and consumer
loans were the same from both the subject and control bank.
Real estate loan rates were 7-3/4 per cent; farm loans were
7 per cent; commercial and industrial loans were 8 per cent;
and consumer loans were 5-1/2 per cent add-on.

For resi­

dential improvement loans the subject bank's interest rate
was 6 per cent add-on.

The control bank did not write

separate residential improvement loans but attached this
type of loan to a conventional real estate loan.

98

Mew services available in the subject bank included
trust department services, floor planning, credit card
services, and computerized accounts.

None of these services

were available from the control bank.

The subject bank was

open for business thrity-five hours per week; the control
bank was open thirty-three hours.

Both banks were open on

Saturday, but neither was open during an evening.

Both

banks had very pleasant facilities.
Two competitors of the subject bank were interviewed.
The area Production Credit Association representative re­
sponded that his organization had "picked up a lot of
business" from the subject bank because it had "lost its
agricultural orientation" under the new ownership.

Also,

he stated that his association was doing all of the loan
services for customers previously shared.

The Federal Land

Bank representative when asked about the subject bank's
activities in farm real estate mortgages stated that the
bank was making fewer farm real estate loans.

But since

the subject bank didn't do much farm mortgage business
before, there was little effect on the FLBA business.
There were no other banks in the area close enough to
compete with any of the major services the subject bank
offered.
The representative citizen felt that the community
feeling toward the bank immediately after the ownership
changed was unfavorable.

At the time of the mail survey,

though, community feeling toward the new ownership has

99
improved from what it had been immediately following the
merger.

He stated that the bank was not stressing any loans

service more after merger than before, but since the merger
it had been less active in real estate loans.

He further

responded he had not noticed any change in the bank's adver­
tising or in the awareness of community members to avail­
ability of services from the bank, as compared with services
available under previous ownership.

The respondent's per­

sonal feelings were that he did not like the ownership
change because "the Board of Directors is forty miles away
and the man in charge of the branch does not have control
over the loans issued at the bank."

He did not see any

advantage to the merger and stated that farmers, of which
he was one, were still using other means of finance.
A performance summary of Case Analysis 4.5.3 is
presented in Table 4.3.
4.5.4

A Bank in a General Farming/
Livestock Area
Lack of upcoming management talent was the primary

reason given for the merger of a four million dollar bank
in a small village with a $45 million bank in a city ten
miles away.

The former Chief Executive Officer was sixty-

three years old at the time of the merger and wished to
semi-retire.

The former CEO and his wife, who was also

employed at the bank, were the primary owners.

Terms of

the merger agreement included employment contracts for both
the former Chief Executive and his wife until they reached

100

TABLE 4.3.— Performance Summary of Case Analysis 4.5.3, A
Bank Located in a General Farming/Recreation Area.
Acquired Bank
Performance Variable

Target Loan/Deposit Ratio
Loan
a)
b)
c)

Interest Rates:
Real estate (%)
Farm operating (%)
Consumer (add-on %)

Control Bank

PreMerger

PostMerger

1965

1970

1965

1970

50

65

60

65

XXX
XXX
XXX

7-3/4
7
5-1/2

Maximum per cent of value
loaned for conventional
real estate loans:

66

75

Are low down payment real
estate loan plans
available?

XXX

How have credit requirements
changed from five years
ago?*
What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX
XXX

7-3/4
7
5-1/2

70

75

Yes

XXX

No

XXX

S

XXX

S

XXX
XXX

15
240

XXX
XXX

40
80

No

No

No

No

How do your checking
charges compare to
your competitors?2

XXX

H

XXX

L

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

Yes
Yes
Yes
Yes
Yes

XXX
XXX
XXX
XXX
XXX

No
No
No
No
Yes

Are maximum Regulation Q
rates paid on savings
accounts?

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours
N.A. - Not Available

for same, L for more liberal, C for more
conservative.
2

C for comparable, H for higher, L for lower.

101

retirement age and agreement that the man would be elected
to the Board of Directors.

Even though this couple was

still employed at the branch office, the new management
group assigned a newly hired executive to the office to
assume management responsibilities so the former owner
could semi-retire.
Bank loan criteria became more liberal after the
ownership changed.

Conventional real estate mortgage policy

changed from requiring a 30 per cent down payment under
previous management to a 20 per cent down payment under new
management.

In addition, a low down payment loan plan was

made available.

The loan/deposit ratio under the previous

ownership was at a very conservative 40 per cent; under
new management it increased to 55 per cent.

Maximum Regu­

lation Q interest rates were not paid on deposits under
previous ownership, but top rates were paid under the new
ownership.

Trust services, floor planning services, credit

card services, and computerized accounts began to be offered
through the branch office.
The greatest increase in customers for a loan
service was in real estate loans.

The magnitude of other

loan service changes through this office was not ascer­
tainable because only records of consumer loans of less
than $1500 were kept.
Target loan/deposit ratio for the control bank was
a constant 60 per cent.

It did not pay maximum Regulation Q

102

interest rates on deposits in 1965# but it did in 1970.
Consumer loans and real estate loans were reported as the
most rapidly growing loan categories.

The control bank's

conventional real estate loan policy was to make loans of
65 per cent of the value of the property in both 1965 and
1970.

It did not have a low down payment plan for real

estate loans nor did it have a trust department or make
credit card services available.

However# floor planning

service for retail customers was available.
Interest charges on loan services between the two
banks were practically the same.

Both banks charged 8 per

cent on real estate loans and commercial and industrial
loans # and both were 6 per cent add-on on auto loans.
Residential improvement loans were 5-1/2 per cent add-on
from the subject bank and 6 per cent add-on from the control
bank.

Farm operating loans were 8 per cent from the subject

bank, whereas the control bank charged only 7 per cent.
The competitors of the subject bank# the Production
Credit Association# the Federal Land Bank# and a neighboring
bank were interviewed.

The competing bank reported that

since the merger they had acquired some window customers
from the merged bank because of their longer hours.

They

did not, however, notice any appreciable change in number
of loan customers.

The Production Credit Association repre­

sentative stated the subject bank was no longer interested
in expanding farm loans.

However, he also reported the

103
bank did hold good, solid loan accounts, and their associ­
ation had not been able to attract highly desirable customers
away from the bank.
The Federal Land Bank respondent said he had not
noticed any change in the farm real estate lending activi­
ties of the subject bank.

He commented that the subject

bank did not have a farm loan representative, and, as a
result it only serviced very solid farm loans*

He stated

that the subject bank had been looking for a farm loan
representative and inquired if someone from the FLB office
would be interested in working as a farm loan service
representative for the bank.

He also reported that the

general attitude of FBLA-borrowers who banked with the
subject bank was positive.
The representative citizen stated that his impression
of the community attitude toward the change in ownership
was unfavorable immediately following the ownership change.
However, this feeling had changed to a highly favorable
current attitude.

He gave one of the strongest positive

reactions from any representative citizen contacted about
the bank ownership change.

He reported the current bank

ownership was servicing consumer loans, commercial loans,
and real estate loan customers much better than the past
ownership had.

He also stated people in the community were

now somewhat more aware of the range of services available
from the bank than they had been five years ago.

This

104
increased awareness may have come about through more adver­
tising for new accounts and advertising credit card services.
He reported the current bank ownership had improved service
to business type customers.

At first he did not personally

favor the ownership change, but at the time of the mail
survey he liked it.

"I feel the personnel have a better

understanding of business.

I can now make night deposits,

a service that wasn't available before.

As far as the

general public goes, I don't feel it's affected them very
much one way or the other."
A performance summary of Case Analysis 4.5.4 is
presented in Table 4.4.
4.5.5

A Bank in a General Farming/
Livestock Area
Lack of upcoming management talent was given as

the reason the subject bank decided to merge with a larger
city bank.

The operating manager/primary owner was sixty-

nine years old at the time of merger and considered his
bank too small to justify a "high" salary for a new manage­
ment person.

So, through a stock transfer the subject bank

was merged with a city bank fourteen miles away.

There

was no transfer of operating management to the new organi­
zation.

The previous manager retired immediately after

the merger was consumated but was elected to a Director's
position on the consolidated bank board.

Both of the other

"junior level management" employees also left after the
merger.

105
TABLE 4.4.— Performance Summary of Case Analysis 4.5.4, A
Bank Located in a General Farming/Livestock Area.
Acquired Bank
Performance Variable

Target Loan/Deposit Ratio

PreMerger

PostMerger

1965

1970

Control Bank

1965

1970

40

55

60

60

XXX
XXX
XXX

8
8
6

XXX
XXX
XXX

8
7
6

Maximum per cent of value
loaned for conventional
real estate loans:

70

80

65

65

Are low down payment real
estate loan plans
available?

XXX

Yes

XXX

No

How have credit requirements
changed from five years
ago?^

XXX

L

XXX

S

What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX

2
1500

XXX
XXX

5
62

No

Yes

No

Yes

How do your checking
charges compare to
your competitors?2

XXX

C

XXX

C

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

Yes
Yes
Yes
Yes
Yes

XXX
XXX
XXX
XXX
XXX

No
No
Yes
Yes
Yes

Loan
a)
b)
c)

Interest Rates:
Real estate (%)
Farm operating (%)
Consumer (add-on %)

Are maximum Regulation Q
rates paid on savings
accounts?

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours
N.A. - Not Available

for same, L for more liberal, C for more
conservative.
2

C for comparable, H for higher, L for lower.

106
Services available from the subject bank changed
substantially.
ized.

Requirements for loan service were liberal­

Conventional real estate loan policy in 1965 was to

grant loans of up to 55 per cent of the value of real
estate, whereas the post-merger limit was 75 per cent.

In

addition, a 10 per cent down payment plan was made available.
The loan/deposit target ratio under past ownership was 50
per cent; current ownership had a target loan/deposit ratio
of 65 per cent.

Maximum Regulation Q interest rates formerly

were not paid on deposits but were introduced under current
ownership.

A previously unavailable trust department was

added, along with floor planning service for retail custom­
ers, credit card services, and computerized accounting.
Following the ownership change, real estate loans were the
bank's most rapidly growing category of loans, followed
closely by consumer loans.

Positive increases were made in

both commercial and industrial loans and in farm operating
loans.
These service indicators contrast with the control
bank which reported no change in lending policy for the
last five years.

Real estate loan policy was and continues

to be to loan no more than 65 per cent of the value of the
real estate.

A low down payment loan plan was not available.

Loan/deposit target ratios remained at a constant 60 per
cent.

Five years ago, the control bank did not pay maximum

Regulation Q interest rates on savings accounts, but it did
by the time of the study.

The control bank Executive Officer

107
stated that consumer loans had been the most rapidly growing
line with real estate loans also increasing.

He responded

that both commercial and industrial loans and farming
operating loans had been fairly constant over the last
five years.
Loan granting authority for the branch manager of
the subject bank and the manager of the control bank were
both at $5,000.

Interest rate differences between the

two banking offices were slight.

Both banks charged 8 per

cent for commercial and industrial loans, 6 per cent add-on
for consumer auto loans and 6 per cent add-on for residen­
tial improvement loans.

Differences were in the real estate

loans where the subject bank charged 7-3/4 per cent and the
control bank charged 8 per cent.

This difference was re­

versed in the farm operating loan category, where the
subject bank charged 8 per cent and the control bank only
7 per cent.

Operating time of the subject bank was thirty-

five hours per week; the control bank was open thirty-eight
hours per week.

Neither bank was open on Saturday, but

both of them were open one evening per week.
A representative from the Production Credit Associ­
ation stated that there was no change in the responsiveness
of this banking office to farm credit needs in the area.
He reported his association picked up a few loans in the
area but there was nothing unusual about the amount of
loans that they picked up or lost to the subject bank.
However, the Federal Land Bank representative stated the

108
subject bank had increased its farm lending activity both
in production loans and in farm real estate in the area.
Two savings and loan associations from the area were also
surveyed.

Both reported that they were not near enough to

the subject banking office to be able to give a comparison
of the competitive effects of the ownership change on the
subject bank’s home mortgage activity.
The president of the acquiring bank reported that
community acceptance of new ownership of the bank was
favorable.

He said at first the community was rather un­

happy that they had lost their own local bank, but he re­
ported that current management was doing a better job of
banking and helping the community than past management and
ownership.

He believed the former management team was

old and "not at all aggressive."

The new management group,

as a result of their aggressiveness and the additional
“services available to customers, had tripled loan volume
through the branch the last five years.
The new ownership group also built a new, comfort­
able, serviceable building.

The president also stated that

their bank permitted the branch office to be more inde­
pendent than many branch banking systems allow.

The branch

office had its own credit files and its own records and
only sent the main office a daily summary of activity.
reported having a capable branch manager who was able to
take care of most operational problems.

He

109
The representative citizen also reported highly
favorable community reaction to the bank ownership change
both immediately after the change and at the time of the
study.

He said the current bank ownership was pushing farm

loans, real estate loans, and consumer loans more than past
management had.

He also stated that due to increased adver­

tising of bank services the people were now much more aware
of what services were available through the banking office
than they had been previously.
He reported that larger loans were now made avail­
able and stated that types of loans which the past manage­
ment

did not even consider, such as mobile home loans, were

now made.

He also said that the new management made more

loans available to young people.

Savings depositors were

happy because higher interest rates on savings accounts were
paid and because time certificates were now available.
According to the representative citizen, since the
ownership change many people from the community had resumed
doing banking business in the local community rather than
at other cities.

In general, he said, "I feel it is much

better."
A performance summary of Case Analysis 4.5 is
presented in Table 4.5.
4.5.6

A Bank in a Livestock/Crop
Farming Area
The subject country bank stock was widely held when

it merged with a nearby city bank.

The primary reason given

110

TABLE 4.5.— Performance Summary of Case Analysis 4.5.5, A
Bank Located in a General Farming/Livestock Area.
Acquired Bank
Control Bank

PreMerger

PostMerger

1965

1970

1965

1970

Target Loan/Deposit Ratio

50

65

60

60

Loan
a)
b)
c)

XXX
XXX
XXX

Performance Variable

Interest Rates:
Real estate (%)
Farm operating (%)
Consumer (add-on %)

Maximum per cent of value
loaned for conventional
real estate loans:

55

Are low down payment real
estate loan plans
available?

XXX

How have credit requirements
changed from five years
ago?*

7-3/4
8
6

8
7
'6

65

65

Yes

XXX

No

XXX

L

XXX

S

What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX

5
400

XXX
XXX

5
62

Are maximum Regulation Q
rates paid on savings
accounts?

No

Yes

No

Yes

How do your checking
charges compare to
your competitors?2

XXX

C

XXX

C

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

Yes
Yes
Yes
Yes
Yes

XXX
XXX
XXX
XXX
XXX

No
No
Yes
Yes
Yes

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours

75

XXX
XXX
XXX

N.A. - Not Available
for same, L for more liberal, C for more
conservative.
2

C for comparable, H for higher, L for lower.

Ill
for the merger was the lack of upcoming management talent.
Shortly after the merger the ex-president retired.

Manage­

ment continuity was maintained, though, because new bank
owners kept an Advisory Board which consisted of the former
Board of Directors in the area.

However, none of the actual

directors from the acquired bank were elected to the Board
of Directors of the combined operation.
The president of the combined bank operation stated
that there had been no substantial lending policy change.
Conventional real estate loan policy, which had previously
been to make loans of up to 75 per cent of the value of the
property, was increased to 80 per cent.

In addition, a low

down payment plan was made available from the combined bank.
Target loan/deposit ratios increased from 65 per cent to
72 per cent.

Maximum Regulation Q interest rates were paid

under both ownership structures.
Checking account charges were reduced greatly.

In

fact, the new ownership advertised free checking account
service and also offered trust services, floor planning for
its retail customers, credit cards, and computerized ac­
counts.

The officer reported that since the merger the

consumer loans had been the most rapidly growing loan type,
with real estate loans following.

There was no change in

number of farm loan and commercial and industrial loan
customers.

112

These factors compared to that of the control bank
which also stated that its lending policies had not changed
the last five years.

Its conventional real estate loan

policy was at 75 per cent both in 1965 and in 1970.

However,

the control bank did not have a low down payment plan avail­
able for real estate loans.
The target loan/deposit ratio of the control bank
was 65 per cent in 1965 and remained at 65 per cent in 1970.
It paid maximum Regulation Q interest rates on its savings
accounts in both years.

The control bank did not have a

trust department, did not offer credit cards, and did not
have computerized accounting.
for retail customers.

It did do floor planning

Consumer loans had been the most

rapidly growing loan category the last five years, with
real estate loans being a close second.
Interest charges on various types of loans from
both banks were about the same.

Both charged 8 per cent for

real estate loans and for farm loans and 6 per cent add-on
for auto loans and for residential improvement loans.

The

only difference was that the subject bank charged 8-1/2 per
cent for commerical and industrial loans, whereas the con­
trol bank only charged’8 per cent for this type of loan.
Both banks were open approximately the same hours.
The subject bank was open thirty-two hours per week, the
control bank thirty-four hours per week.

Neither bank was

open on Saturday, but both banks were open one evening per
week.

113
Competitors stated that the subject bank had de­
creased its involvement in agricultural operating loans
since the merger.

The Production Credit Association repre­

sentative said the current ownership was not as farm-oriented
as the past ownership.

He noted they did go after more of

the higher interest rate loans and tried to get farmers in
the area to use consumer loan services to buy pickup trucks
and small machinery items.

He stated that since the owner­

ship changed, the local PCA had had many more requests for
operating loans and had picked up many customers the subject
bank previously served.

He also indicated that the subject

bank had hired a farm loan representative, but after twelve
or thirteen months the employee had left because he did not
feel higher level bank management had a real interest in
farm operating loans.

The Federal Land Bank competitor

said he had not noticed any change in the subject bank's
farm real estate lending activity since the merger.
Two officers from a competing bank located in the
same town as the subject bank's headquarters related an
interesting situation.

Shortly after the merger was

announced, these two men made a concentrated effort to
solicit customers for their bank from the business area of
the acquired bank.

They reported finding 60 to 70 per cent

of the acquired bank's customers willing to change banks
when the merger occurred.

However, when the merger was

effected only a few customers actually switched from the

114
subject bank to the competitor.

The competitor gained a

major customer that was still with their bank, but most of
the smaller commercial accounts that did business with their
bank had since returned to doing business with their original
banking office.

The competitor thought the reason was con­

venience, since both banks gave similar type services.
Another competing banker stated that the subject
bank was one of the strongest and finest competitors in the
area.

He reported the subject bank was first in innovation

and change and foremost in providing quality banking service.
The subject bank president reported community re­
lations after the first six months were good and the new
organization was well accepted.

He said there was some

difficulty for the community in getting used to the change
in operations since all records were kept in the main office,
deposits were posted one day after deposit, and many of the
"unusual services" were only provided in the headquarters
office.

He stated that these changes were made slowly as

to prevent customer alienation.
The representative citizen stated that immediately
after the ownership change the community feeling was in­
different.

However, the current feeling toward the change

was highly favorable.

He reported the new bank ownership

was stressing commercial loans, consumer loans, and real
estate loans more.

Further, he said that due to increased

advertising the community was now somewhat more aware of

115
the banking services available.

More types of savings

accounts were available, and more bank involvement in
community service activities was reported.

The representa­

tive citizen felt that since the change in ownership the
bank provided more services for its customers and that the
community appeared to be pleased with changes.

He had not

heard anyone indicate a desire to return to the former
situation.
A performance summary of Case Analysis 4.5.6 is
presented in Table 4.6.
4.5.7

A Bank in a Marginal Farming/
Semi-Urban Area
The subject bank's need for additional capital was

given as the primary reason for the merger.

The bank presi­

dent stated that the former operation was too small to
service the community loan needB.

Another reason for the

merger was a lack of upcoming management talent.

The bank

previously had only one management employee, and he retired
soon after the merger.

There were no former board members

elected to the consolidated bank board.

Bank/community

relationships were maintained because four members of the
acquiring bank board had close ties to the subject community.
Under new ownership the subject bank reported that
it had liberalized its lending policies.

Conventional real

estate loan policies increased from a maximum of 66 per cent
to 70 per cent of the value of the property.

In addition,

116
TABLE 4.6.— Performance Summary of Case Analysis 4.5.6, A
Bank Located in a Livestock/Crop Area.
Acquired Bank
Control Bank

PreMerger

PostMerger
i

1965

1970

1965

1970

Target Loan/Deposit Ratio

65

72

65

65

Loan
a)
b)
c)

XXX
XXX
XXX

8
8
6

XXX
XXX
XXX

8
8
6

Maximum per cent of value
loaned for conventional
real estate loans:

75

80

75

75

Are low down payment real
estate loan plans
available?

XXX

Yes

XXX

No

How have credit requirements
changed from five years
ago?*

XXX

S

XXX

S

What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX

25
760

XXX
XXX

N.A.
65

Are maximum Regulation Q
rates paid on savings
accounts?

Yes

Yes

Yes

Yes

How do your checking
charges compare to
your competitors?2

XXX

L

XXX

C

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

Yes
Yes
Yes
Yes
Yes

XXX
XXX
XXX
XXX
XXX

No
No
No
Yes
Yes

Performance Variable

Interest Rates:
Real estate (%)
Farm operating (%)
Consumer (add-on %)

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours
N.A. - Not Available

for same, L for more liberal, C for more
conservative.
2

C for comparable, H for higher, L for lower.

117
a low down payment plan was made available.

The loan/

deposit target was at 70 per cent, whereas under previous
ownership it had been 60 per cent.

Maximum Regulation Q

interest rates were not previously paid on savings, but
after the merger maximum rates were paid on both savings
accounts and time certificates.

Checking account charges

were somewhat higher than those of competing banks in the
area.

A trust department, floor planning for retail

customers, credit card services, and computerized accounts
were available.

The greatest loan number increase was for

real estate loans; the second greatest increase was con­
sumer loans.

Farm loan and commerical and industrial loan

customer numbers remained steady.
The control bank reported no change in lending
policies the last five years.

Maximum conventional real

estate loan policies in the control bank were 66 per cent
of the value of the property and were constant the last
five years.

A low down payment plan was not available.

Target loan/deposit ratios for the control bank were
slightly less than 60 per cent.

The control bank paid

maximum Regulation Q interest rates on savings in 1965 but
did not pay them in 1970.

Its checking account charges

were comparable to other banks in the area.

Trust services,

floor planning for retail customers, credit cards, or com­
puterized accounting were not available.

The control bank

also reported real estate and consumer loan customers as

118
the most rapidly increasing for the bank.

Commercial and

industrial loans and farm loans remained steady.
Interest rate differences between the subject and
the control bank were evidenced in farm loans, commercial
and industrial loans and consumer loans.

The subject bank

charged 8 per cent for both farm loans and commercialindustrial loans, whereas the control bank charged only
7 per cent.

Both banks charged 8 per cent for real estate

loans and 7 per cent for residential improvement loans.
Consumer loan interest rates were 6 per cent add-on in the
subject bank and 5 per cent add-on in the control bank.
The loan limit of the subject bank branch manager was
$10,000, whereas in the control bank the loan limit of the
Chief Executive Officer was $30,000.

The subject bank was

open thirty-eight and one-half hours per week; the control
bank was open thirty-six hours per week.
open on Saturday.

Both banks were

The subject bank was open on Friday

evening, but the control bank was not.

The subject bank

facilities are very comfortable; the control bank facilities
are extremely old and uncomfortable.
Two competitors of the subject bank were inter­
viewed.

The Production Credit Association official said

farm loan activity of the subject bank remained basically
the same after merger.

He also stated there was not much

commercial farming in the area so a change would be hard
to perceive.

The Federal Land Bank representative reported

119
his office did not see any change in the subject bank's
aggressiveness regarding farm real estate mortgages in the
area.
The representative citizen in this area did not
respond, but responses on community acceptance of the bank
merger were asked of the competitors surveyed.

Both said

their clients who were customers of the subject bank were
quite happy with the change.

Alsor they thought the com­

munity liked the new services the acquiring bank made avail­
able.

The president of the combined operation stated that

at first there was resentment that the bank was no longer
locally owned.

He also noted the first manager was a dis­

appointing experience; however, he reported community
acceptance had improved since a new manager was hired.
A performance summary of Case Analysis 4.5.7 is
presented in Table 4.7.
4.5.8

A Bank in a General Farming/
Livestock Area
The primary reason given for the merger was lack

of upcoming management talent.

The president of the ac­

quired bank retired within one year, and the cashier retired
within three years after the merger.

Both of these gentle­

men were on the acquired bank's board and were elected to
the board of directors of the acquiring firm.
The subject bank and the control bank with which it
was compared were quite similar in many of their operations.

120

TABLE 4.7.— Performance Summary of Case Analysis 4.5.7/ A
Bank Located in a Marginal Farming/Semi-Urban
Area.
Acquired Bank
Control Bank

PreMerger

PostMerger

1965

1970

1965

1970

Target Loan/Deposit Ratio

60

70

60

60

Loan
a)
b)
c)

XXX
XXX
XXX

8
8
6

XXX
XXX
XXX

8
7
5

Maximum per cent of value
loaned for conventional
real estate loans:

66

70

66

66

Are low down payment real
estate loan plans
available?

XXX

Yes

XXX

No

How have credit requirements
changed from five years
ago?^

XXX

L

XXX

S

What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX

10
300

XXX
XXX

30
60

Are maximum Regulation Q
rates paid on savings
accounts?

No

Yes

Yes

No

How do your checking
charges compare to
your competitors?2

XXX

H

XXX

C

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

Yes
Yes
Yes
Yes
Yes

XXX
XXX
XXX
XXX
XXX

No
No
No
No
Yes

Performance Variable

Interest Rates:
Real estate (%)
Farm operating (%)
Consumer (add-on %)

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours
N.A. - Not Available

for same, L for more liberal, C for more
conservative.
2

C for comparable, H for higher, L for lower.

121

The control bank changed management but not ownership in
1966, so it was operated under different circumstances in
1970 than in 1965.

Both banks reported loan requirements

were somewhat more, liberal than five years ago.

Five years

ago the subject bank's conventional real estate mortgage
policy was to make loans up to 55 per cent of the value of
the property; under new management and control, this was
increased to 70 per cent.

The control bank's conventional

real estate loan policy in 1965 was to loan up to 60 per
cent; this, too, was increased to 70 per cent.

Both banks

had low down payment plans available for real estate loans.
The subject bank's target loan/deposit ratio was
65 per cent in 1965.
in 1970.

This had been increased to 70 per cent

For the control bank the target loan/deposit

ratio was 45 per cent in 1965 but had been increased to
65 per cent.

Both banks had paid maximum Regulation Q

interest rates on savings accounts over the last five years.
The subject bank reported its checking account charges to
be comparable to those of its competitors.

However, the

control bank reported checking service charges to be higher
than other area banks.
In the subject bank a wider range of services was
available.

Trust services, floor planning for retail

customers, and credit card services were available, and
accounts were computerized.

Neither trust services nor

credit cards were available in the control bank, although

122

it did do floor planning for retail customers and did
have computerized accounts.
Both banks responded that real estate loans and
consumer loans were the fastest and second fastest growing
loan services in their respective operations.

Both banks

also reported that commercial and industrial loans and farm
operating loan demand was steady the last five years.
terest rates on loans were nearly the same also.

In­

Both the

subject bank and control bank charged 8 per cent for real
estate loans, farm operating loans, and commercial and
industrial loans.
for consumer loans.

Both banks charged 6 per cent add-on
The only difference in reported

interest rates was that residential improvement loans were
7 per cent add-on from the subject bank and 6-1/2 per cent
add-on from the control bank.
A substantial difference was reported in the number
of hours the banks were open per week.

The subject bank

was open forty-one hours per week versus thirty-two and
one-half hours for the control bank.

Both banks were open

on Saturday; the subject bank was open on Friday evening,
but the control bank was not.
Three competitors of the subject bank were surveyed.
The Production Credit Association representative from the
area stated the subject bank was getting quite active in
farm operating loans, especially since the subject bank had
opened another branch near an industrial city.

He suggested

the subject bank channeled deposits from the industrial

123
area to the agricultural area.

He stated that many of the

PCA members who did business with the subject bank liked
the broad range of services available after the merger.
The area Federal Land Bank representative did not notice
any major change in the subject bank's farm lending activity.
He thought that this might have been because of the type of
community in which the subject bank was located:

a strong

ethnic group that borrowed very little except from family
members for farm real estate loans.
A competing banker was also interviewed.

He stated

he did not notice much difference in the subject bank's
operations after the merger.

The number of customers gained

from the subject bank area was normal as was the number of
customers lost to the subject bank.
Community acceptance of the ownership change had
been quite good.

The current president of the subject

bank stated that the ownership change was well-received
from the beginning.

He said there was not any radical

change of policies or operations when the ownership change
was effected.

The community was aware of a close associ­

ation of the two banks prior to merger, such as some common
officers and directors.

This factor helped the new banking

group to be aware of local community relations and problems.
The representative citizen responded that the com­
munity feeling toward the bank was favorable immediately
after the ownership change and remained that way.

He

stated the new bank ownership was pushing all types of

124
loans more than the past ownership.

He also suggested

people were now somewhat more aware of the range of services
available from the bank than they had been before.

He

attributed this to an increase in newspaper and radio adver­
tising.

He reported that the new ownership had improved

service to many groups of customers by making more types
of loans and taking higher risk loans.
ings were:

His personal feel­

"I was a stockholder for about twenty-five years

when the bank was run locally.

I knew more about how it was

run and used to feel more a part of it.

But, I can see

where there are advantages to being part of a larger bank;
they are in a position to make larger loans to farmers and
other businesses which seems to be the trend nowadays.
They seem to take a lot more chances on loans than the
local bank did, but with property (values) going up all
the time, they seem to come out all right.

These high

risk loans seem to be where the money is."
A performance summary of Case Analysis 4.5.8 is
presented in Table 4.8.
4.5.9

A Bank in a Livestock Area
According to the president of the merged bank, the

merger came about because the majority stockholders wanted
to withdraw their capital from the banking business.

Be­

fore merger the subject bank was very small, with slightly
over $2 million of total assets.

The merged operation

combined the subject bank office with three other fairly

125
TABLE 4.8.— Performance Summary of Case Analysis 4.5.8, A
Bank Located in a General Farming/Livestock Area.
Acquired Bank
Performance Variable

Target Loan/Deposit Ratio

PreMerger

PostMerger

1965

1970

Control Bank

1965

1970

65

70

45

65

XXX
XXX
XXX

8
8
6

XXX
XXX
XXX

8
8
6

Maximum per cent of value
loaned for conventional
real estate loans:

55

70

60

70

Are low down payment real
estate loan plans
available?

XXX

Yes

XXX

Yes

How have credit requirements
changed from five years
ago? I

XXX

L

XXX

L

What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX

10
300

XXX
XXX

9
90

Are maximum Regulation Q
rates paid on savings
accounts?

Yes

Yes

Yes

Yes

How do your checking
charges compare to
your competitors?2

XXX

C

XXX

H

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

Yes
Yes
Yes
Yes
Yes

XXX
XXX
XXX
XXX
XXX

No
No
Yes
Yes
Yes

Loan
a)
b)
c)

Interest Rates:
Real estate (%)
Farm operating (%)
Consumer (add-on %)

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours
N.A. - Not Available

for same, L for more liberal, C for more
conservative.
2

C for comparable, H for higher, L for lower.

126

small country banks.

After the merger all of the junior

management employees of the subject bank quit so a new
manager was hired.

To give continuity of service, the new

manager was assisted by an advisory committee made up of
several former directors of the country bank.
committee was discontinued

The advisory

after two years because the

members were reluctant to accept the new ownership's methods.
The subject bank branch office was independently
operated.
files.

It had its own bookkeeping system and credit

The manager was given much responsibility.

He had

authority to make loans as large as any other bank officer
without consulting the loan committee.
Both the new ownership of the subject bank and the
control bank have liberalized their loan policies over the
last five years.

The conventional real estate loan policy

for both banks in 1965 was to lend up to 60 per cent of the
value of real estate.

For the subject bank this increased

to 75 per cent; for the control bank this increased to 66
per cent.

Neither bank had a low down payment plan avail­

able for real estate loans.

The subject bank's loan/deposit

ratio remained at 63 per cent from 1965 to 1970; the control
bank's loan/deposit policy increased from 56 per cent in
1965 to 70 per cent in 1970.
Both banks paid maximum Regulation Q interest rates
on deposits in both 1965 and 1970.

They also both reported

their checking account charges were comparable to those
charged by other area banks.

Neither bank had trust

127
services, computerized accounts, or credit cards to offer
its customers.

The subject bank had floor planning services

for its retail customers but the control bank did not.
The most rapidly growing loan service for both banks
was installment credit.

Commerical and industrial loans

were the second fastest growing for the subject bank.

In­

terest rates charged by the two banks were 8 per cent for
farm operating loans, 8 per cent for commercial and indus­
trial loans, and 6 per cent add-on for residential improve­
ment loans.

Differences were in real estate loans where the

subject bank charged 8-1/2 per cent and the control bank
charged 8 per cent; and in consumer loans where the subject
bank charged 6 per cent add-on and the control bank 5-1/2
per cent add-on.

The subject bank was open thirty-three

hours per week, whereas the control bank was open thirtynine hours per week.

Both offices were open on Saturday.

The control bank was open one evening, but the subject
bank was not.
Competitors interviewed included the subject bank's
area Production Credit Association representative and a
Federal Land Bank fieldman.

The Production Credit Associ­

ation representative reported the subject bank had been
taking some farm customers from the Association.

He stated

the reason was that the bank was handy for the area farmers
to use for banking services.

He also said that after the

merger the bank had substantially increased the size of
available farm operating loans.

The Federal Land Bank

128
representative responded that he also noticed a positive
change in the attitude of the subject bank in making farm
loans.

He noted the subject bank was much more competitive

on short term real estate loans than before.

He also said

that the bank made many more large farm operating loans to
their Association members now than prior to merger.
The representative citizen did not respond.

The

community feeling, according to the President of the ac­
quiring bank, was favorable.

The people in the community

liked the change, he said, and he had never heard any
adverse feelings about the change.

He did note that for

a short period of time some management problems at the
acquired office caused some dissatisfaction.

It took some

time to find a capable new manager, but after the new
manager was established in the position, community accept­
ance was very good.
A performance summary of Case Analysis 4.5.9 is
presented in Table 4.9.
4.5.10

A Bank in a Fruit
Farming Area
The merger of the subject bank with a nearby city

bank was consumated after the former president died.

Another

member of the family controlling the bank came in to assume
bank management.

But due to problems stemming from a large

amount of low quality and overdue outstanding loans, the
controlling family was forced to find some management
assistance.

Rather than hire a new manager and write off

129
TABLE 4.9.— Performance Summary of Case Analysis 4.5.9, A
Bank Located in a Livestock Farming Area.
Acquired Bank
Control Bank

PreMerger

Post1Merger

1965

1970

1965

1970

Target Loan/Deposit Ratio

63

63

56

70

Loan
a)
b)
c)

XXX
XXX
XXX

Performance Variable

Interest Rates:
Real estate (%)
Farm operating (%)
Consumer (add-on %)

8-1/2
8
6

XXX
XXX
XXX

8
8
5-1/2

Maximum per cent of value
loaned for conventional
real estate loans:

60

75

60

66

Are low down payment real
estate loan plans
available?

XXX

No

XXX

No

How have credit requirements
changed from five years
ago?*

XXX

L

XXX

L

What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX

5
260

XXX
XXX

41
82

Are maximum Regulation Q
rates paid on savings
accounts?

Yes

Yes

Yes

Yes

How do your checking
charges compare to
your competitors?2

XXX

C

XXX

C

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

No
No
No
Yes
Yes

XXX
XXX
XXX
XXX
XXX

No
No
No
No
Yes

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours
N.A. - Not Available

for same, L for more liberal, C for more
conservative.
2

C for comparable, H for higher, L for lower.

130

their "bad" loans, they sold their stock to a nearby city
bank.

Management continuity was provided by one employee

who remained with the organization.

No former board members

were elected to the acquiring bank's board.
Service changes from the new ownership group in­
cluded more conservative loan criteria.
services were expanded.

However, other

Conventional real estate loan

policy was changed to loan up to 80 per cent of the value
of the property.
made available.

A 10 per cent down payment plan was also
Target loan/deposit ratios as of 1965 for

the subject bank are not known, but the 1970 target loan/
deposit ratio was 63 per cent.

Rates comparable to other

area banks were charged on checking accounts.

It was not

known whether the bank paid maximum Regulation Q interest
rates on savings accounts in 1965, but maximum rates were
paid on savings in 1970.
As a comparison, the control bank's lending policy
did not change from 1965 to 1970.

In both years it made

conventional real estate loans of up to 60 per cent of
the value of the property.

The target loan/deposit ratio

of the subject bank increased from 55 in 1965 to 60 per cent
in 1970.

Maximum Regulation Q interest rates were paid on

savings accounts in both periods, and checking service
charges were comparable to other area banks.
Services available from the subject bank included
trust services, floor planning for its retail accounts,

131

credit card services, and computerized accounts.

The

control bank did not have any of these services available.
Both banks reported that the greatest change in loan ser­
vices in the past five years had been for consumer loans.
In fact, before merger the subject bank did not have any
consumer loans.

The remaining three loan types available

from the subject bank had all decreased in numbers since
merger.

This was expected because of the extremely liberal

loan policy of past management.
The subject and control banks charged similar inter­
est rates for real estate loans (7-3/4 per cent) and for
farm operating loans (7 per cent).

Commercial and industrial

loan customers were charged 8 per cent interest at the sub­
ject bank and 7-3/4 per cent at the control bank.

Both

banks charged 5-1/2 per cent add-on for consumer loans.
Residential improvement loans were 5-1/2 per cent from the
subject bank and 5 per cent add-on from the control bank.
The control bank was open forty-three hours per week in­
cluding Saturday and one evening per week.

The subject

bank was open thirty-eight hours per week and was not open
on Saturday or during any evening.
Competitors of the subject bank included a Pro­
duction Credit Association representative, a Federal Land
Bank Association representative, a local Savings and Loan
Association representative, and another banker in the area.
The local Production Credit Association representative

132
stated his association had more inquiries about loans from
area farmers since the ownership change but had not gained
any substantial number of new customers at the expense of
the subject bank.
The Federal Land Bank representative stated that
under past management the subject bank was extremely farm
oriented, but it lost this orientation when it changed
ownership.

He thought that the present management was less

sympathetic with farmers' problems than past ownership had
been.

He agreed with the subject bank Vice President, who

stated that the old manager made many marginal farm oper­
ating loans which new ownership was not interested in
making or renewing.

The Federal Land Bank representative

stated that the bank competed for some residential loans.
For these loans the new bank ownership was much more
aggressive now than former ownership had been.
A competing banker, whose basic orientation was
agricultural, responded that his bank had gained many agri­
culture and agri-business loans from the subject bank's
service area after the merger.

He stated that the subject

bank now prefers to take care of the downtown merchants
and does a much better job for them than the previous
ownership.

He stated the new ownership brought in many

new banking services for area residents and provided a
broader range of home mortgage services.

Except for farm

operators, he thought service was greatly improved over
what it was before.

133

The savings and loan association manager stated that
he did not notice any major change in the bank's residential
real estate loan activity.

He did say his association was

able to pick up some savings accounts from the subject area
since the ownership change, but they had lost many more
savers to the bank than they had gained*
Community acceptance of the ownership change was
not favorable.

The Vice President stated that soon after

merger there was a lot of resentment to the ownership change.
He reported some of the resentment had subsided; but because
of the changed orientation away from agriculture and because
the bank was more selective in approving loan requests, some
resentment remained.

The representative citizen's response

was basically the same.

He reported that community feeling

was highly unfavorable immediately after the ownership
change.

He stated that the community impression of the

ownership change is still unfavorable but has improved
since the merger was effected.

He though the bank was

pushing consumer loans but was extremely restrictive on
farm loans.

Even though the bank used more radio adver-

«

tising since the ownership change, he thought the community
was less aware of the services available from the bank now
than they were under the past ownership.
A performance summary of Case Analysis 4.5.10 is
presented in Table 4.10.

134
TABLE 4.10.— Performance Summary of Case Analysis 4.5.10,
A Bank Located in a Fruit Farming Area.
Acquired Bank
Performance Variable

PreMerger

PostMerger

1965

1970

Control Bank

1965

Target Loan/Deposit Ratio

N.A.

63

55

Loan
a)
b)
c)

XXX
XXX
XXX

7-3/4
7
5-1/2

XXX
XXX
XXX

Interest Rates:
Real estate (%)
Farm operating (%)
Consumer (add-on %)

Maximum per cent of value
loaned for conventional
real estate loans:

N.A.

Are low down payment real
estate loan plans
available?

1970
60
7-3/4
7
5-1/2

80

60

60

XXX

Yes

XXX

No

How have credit requirements
changed from five years
ago?*

XXX

C

XXX

S

What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX

100
550

XXX
XXX

40
110

Are maximum Regulation Q
rates paid on savings
accounts?

N.A.

Yes

Yes

Yes

How do your checking
charges compare to
your competitors?2

XXX

C

XXX

C

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

Yes
Yes
Yes
Yes
No

XXX
XXX
XXX
XXX
XXX

No
No
No
No
Yes

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours
N.A. - Not Available

for same, L for more liberal, C for more
conservative.
2

C for comparable, H for higher, L for lower.

135
4.5.11

A Bank in a Crop
Farming Area
The reason for the subject bank's merger was lack

of upcoming management talent.

Because the previous owners

of the subject bank thought they were unable to afford
additional management talent to overlap with the present
manager, a sale of the stock was negotiated.

The present

branch manager, who was a major owner of the bank, was
strongly in favor of the merger because of the pension
arrangements available to him from the acquiring bank.
Management contintuity was provided by the ex-Chief
Executive Officer who remained with the bank for four years
until he retired.

Five of the seven directors from the

previous board remaind on the board of directors of the
combined banking firm.
Loan granting requirements had not changed sub­
stantially since the ownership change.

Conventional real

estate loan policy in 1965 was to make loans up to 60 per
cent of the value of the property.
75 per cent under current ownership.

This was increased to
Also, a low down

payment plan for real estate loans was available from the
new operating group.
The control bank had a management change in 1964.
The vice president of the comparison bank stated that their
loan criteria had also become more conservative since 1965.
In 1965 its conventional real estate loan policy was to loan
up to 70 per cent of the value of the property, and it

136

remained at that rate in 1970.

A low down payment

plan was available.
The target loan/deposit ratio of the subject bank
in 1965 was 60 per cent.

This was increased to 72 per cent

in 1970 as compared with a 70 per cent target loan/deposit
ratio in both years for the control bank.

Both banks paid

maximum Regulation Q interest rates on savings accounts in
both 1965 and 1970.

The control bank's checking account

charges were lower than their competitor's.

The subject

bank's checking account charges were comparable to their
competitors.
Services available from the subject bank included
full trust services, whereas the control bank only had
limited trust services.

The subject bank offered credit

card services, but the control bank did not.

Both banks

offered floor planning for retail customers and had com­
puterized accounts.
The subject bank reported no increases in any type
of loan serviced by their bank after merger.

The only

difference in loan service mentioned was that fewer farm
loans were outstanding.

The reason for this was attributed

to fewer farmers in the area.

The control bank, however,

reported that it had large increases in numbers of consumer
loans, and a substantial increase also in real estate loans
serviced.

For the control bank, numbers of farm operating

loans and commerical and industrial loans did not change

137
from 1965 to 1970,

Interest rates were generally higher at

the subject bank than at the control bank.

For farm oper­

ating loans the subject bank charged 8 per cent and the
control bank 7-1/2 per cent.

For commercial and industrial

loans the subject bank charged 8-1/2 per cent; the control
bank charged 8-1/4 per cent.

Consumer loans were 6 per cent

add-on in the subject bank, 5-1/2 per cent add-on in the
control bank.

On residential improvement loans the subject

bank charged 7 per cent add-on while the control bank
charged 6 per cent add-on.

Interest rates for real estate

loans were the same at both banks, 8 per cent.

The subject

bank was open forty-two hours per week, while the control
bank was only open thirty hours per week.

Neither bank

was open on Saturday, but both banks were open one evening
per week.
Three of the subject bank's competitors were inter­
viewed.

The Production Credit Association fieldman stated

the merger created no major effect on farm loan service
to the area.

The PCA had picked up some loan customers from

the bank but had also lost some loan customers to the bank.
The Federal Land Bank representative stated the subject
bank had very little money to lend for long term real estate
mortgages for farm lands.

In fact, he reported that the

bank sent most of its requests for long term farm real
estate mortgage service to his association.

He thought

the bank did a good job of servicing farm operating loans

138
and said many of his customers had operating loans from the
bank.

A nearby savings and loan association manager re­

sponded that the subject bank did less residential real
estate lending since the merger.

However, he was unable

to tell if it was because less property was being sold or
transferred in the area or if the bank did not service the
demand.

He did state his association was obtaining more

savings accounts from the subject area than they had in
the past and attributed this to the higher interest rates
on savings accounts that the savings and loan was able to
pay.
Community acceptance, according to the branch
manager, was fairly good.

He commented that the branch

office was very independent.

In fact, the subject bank

office paid higher rates on savings accounts than did the
other offices in the parent company.

He also stated that

few other services or personnel had changed, so most bank
customers noticed little difference.

The major change was

that after merger the bank went to computerized accounts
with central clearing.

This caused some unhappiness be­

cause of clearing delays and problems of getting acquainted
with the computerized system methods.
The representative citizen responded that immedi­
ately after the ownership change the community impression
toward the new ownership was unfavorable.

However, by the

time of the study the feeling was favorable.

He stated

that the current bank ownership was pushing commerical and

139
industrial loans, consumer loans, and real estate loans more
than the past ownership.

He thought people of the community

were much more aware of the range of services available now
than before, and he attributed this to heavy radio and news­
paper advertising.

His personal feeling was that the change

was good because of the additional bank services available.
He thought these additional services were due to the larger
financial base.

He also reported the bank was involved in

more community activities.

The only negative response the

representative citizen noted was that the bookkeeping was
done at the main office.

This practice prevented deposits

from being immediately credited to the accounts; rather,
this was not done until the day after deposit.

He also

said many of the people in the community found it difficult
to understand the new computerized bookkeeping system.
A performance summary of Case Analysis 4.5.11 is
presented in Table 4.11.
4.5.12

A Bank in a General
Farming Area
The subject bank office was merged into a nearby

city bank two years after the death of the former owner.
For those two years the former owner's widow acted as the
Chief Executive Officer.

Because she was having serious

problems with the management of the firm, she effected a
merger with the city bank.

Prior to the merger there were

many inter-bank dealings and relationships between the two
banks.

Merger conditions included that the widow would be

i4a

TABLE 4.11.— Performance Summary of Case Analysis 4.5.11,
A Bank Located in a Crop Farming Area.
Acquired Bank
Control Bank

PreMerger

PostMerger

1965

1970

1965

1970

Target Loan/Oeposit Ratio

60

72

70

70

Loan
a)
b)
c)

XXX
XXX
XXX

8
8
6

XXX
XXX
XXX

Maximum per cent of value
loaned for conventional
real estate loans:

60

75

70

Are low down payment real
estate loan plans
available?

XXX

Yes

XXX

Yes

How have credit requirements
changed from five years
ago?*

XXX

S

XXX

C

What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX

N.A.
300

XXX
XXX

N.A.
90

Are maximum Regulation Q
rates paid on savings
accounts?

Yes

Yes

Yes

Yes

How do your checking
charges compare to
your competitors?2

XXX

C

XXX

L

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

Yes
Yes
Yes
Yes
Yes

XXX
XXX
XXX
XXX
XXX

Yes
Yes
No
Yes
Yes

Performance Variable

Interest Rates:
Real estate (%)
Farm operating (%)
Consumer (add-on %)

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours
N.A. - Not Available

for same, L for more liberal, C for more
conservative.
2

C for comparable, H for higher, L for lower.

8.
8
5-1/2

70

141
employed as a Vice President of the bank until she retired
and that she would be elected to the board of directors.
A new manager for the country branch was hired, so the
widow was relieved of active managment duties.
The general loan criteria of the subject bank did
not change under new ownership.

Current conventional real

estate loan policy at the time of the study was to make
loans of up to 75 per cent of the value of the property.
A 10 per cent down payment was available for real estate
loans.

Real estate loan policies from 1965 were not known.

Target loan/deposit ratio of the subject bank after merger
was 50 per cent.

This is lower than most other large banks

in the study but was kept this low because the bank had
three or four very large commerical accounts that frequently
withdrew $8 to $10 million in one week.

The bank invested

in a large amount of government securities to protect its
liquidity.
The control bank was an extremely conservatively
managed bank.

It offered few services and did not really

try to provide modern banking services to its community.
The management of the control bank was proud that they were
one of the few banks conservative enough to survive the
Depression.

Since then, they have kept their banking

practices very similar to those prior to the Depression.
The control bank responded that its conventional real
estate lending policy five years ago was to loan a maximum
of 55 per cent of the value of the property.

This had

142
remained the same up to the time of the study.
down payment plan was not available.

A low

Target loan/deposit

ratios for the control bank were not established; however#
the Chief Executive Officer made it clear they do not
encourage customers to borrow money.
Five years ago the subject bank did not pay maximum
Regulation Q interest rates, but it did pay maximum interest
rates in 1970.

The control did not at the time of the study

and did not in 1965 pay maximum interest rates.

Full trust

services are available from the subject bank, whereas only
limited trust services are available from the control bank.
Floor planning, credit cards, and computerized accounts
are available from the subject bank, but these are not
available from the control bank.
The subject bank responded that consumer loans

had

been the most rapidly growing loan service demanded by its
customers the last five years.

The President of the subject

bank said they did not have exact records on the number of
customers for the other types of loans serviced, but they
thought they remained steady.

The control bank did not have

monthly payment consumer loan service available.

It did

have records of numbers of customers for different types
of loans.
Interest rates from the subject bank for real estate
loans were 7-3/4 per cent; farm loans, 7 per cent; and
commercial and industrial loans, 7 per cent.

The control

bank charged 7 per cent interest for all types of loans.

143

Consumer loans and residential improvement loans were 6 per
cent add-on from the subject bank.

The control bank did not

make monthly payment consumer and residential improvement
loans.
The subject bank was open thirty-six hours per week
compared to thirty hours for the control bank.
were open on Saturday.

Both banks

Evening hours were kept by the

subject bank, whereas the control bank was not open in the
evening.
Three competitors of the subject bank were inter­
viewed.

The Production Credit Association representative

said that under previous ownership the bank was a "farmers'
bank" and had lost this orientation under current ownership.
He thought the bank had done a better job of financing
farmers under past ownership.

The Federal Land Bank repre­

sentative responded that the subject bank made larger farm
real estate mortgages under new ownership than they did
under past ownership.

The thought the bank had improved in

making farm operating loans.

He stated that his customers

were quite happy with the services available from the bank
under new ownership.

A bank officer in a firm located six

miles away reported he had not noticed any change in customer
patterns between the two banks since the ownership change.
He stated that at the time of the merger their bank did pick
up a few customers; however, most of these had returned to
their original banking office.

144
Community acceptance of the new bank ownership was
very good.

The president of the bank said the community

seemed quite happy with the new ownership, and he had heard
no complaints.

He thought the people of the local community

were glad to get a branch of a larger bank in the community
so they could have more services available.

He said that

there had been no major change in operating procedures after
the ownership change, and that no major personnel changes
were made.

The representative citizen stated that he thought

the people of the community were highly favorable to the
change both immediately after the ownership change and at the
time of the study.

He reported the new bank ownership was

pushing commercial loans and consumer loans more than the
prior management.

He thought the community was much more

aware of the range of services from the bank now than in the
past.

He noted bank advertising was stressing home improve­

ment loans.

As a businessman, he was quite pleased with the

increased communication between the bank and the business
community.

He felt the change had been a big help to the

community, was well accepted, and gave better service.
A performance summary of Case Analysis 4.5.12 is
presented in Table 4.12.
4.5.13

A Bank in a Crop/
Livestock Area
The merger was effected because the past owner of

the subject bank wanted to change jobs and still remain in
the banking business.

He negotiated a merger of his bank

145
TABLE 4.12.— Performance Summary of Case Analysis 4.5.12,
A Bank Located in a General Farming Area.
Acquired Bank
Performance Variable

PreMerger

PostMerger

1965

1970

Control Bank

1965

1970

Target Loan/Deposit Ratio

N.A.

50

N.A.

N.A.

Loan
a)
b)
c)

XXX
XXX
XXX

7-3/4
7
6

XXX
XXX
XXX

7
x3

Maximum per cent of value
loaned for conventional
real estate loans:

N.A.

75

55

55

Are low down payment real
estate loan plans
available?

XXX

Yes

XXX

No

How have credit requirements
changed from five years
ago?i

XXX

S

XXX

S

What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX

N.A.
320

XXX
XXX

N.A.
33

No

Yes

No

No

How do your checking
charges compare to
your competitors?2

XXX

L

XXX

N.A.

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

Yes
Yes
Yes
Yes
Yes

XXX
XXX
XXX
XXX
XXX

Yes
No
No
No
Yes

Interest Rates:
Real estate (ft)
Farm operating (%)
Consumer (add-on %)

Are maximum Regulation Q
rates paid on savings
accounts?

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours
N.A. - Not Available

for same, L for more liberal, C for more
conservative.
2
C for comparable, H for higher, L for lower.
3
This type of loan was not available

146
with a very large nearby city bank and took a position with
the large bank.

His new position was supervising eight

rural branches and three other rural banks owned by the
acquiring bank officers.

He also had responsibility for

developing new rural branches# purchasing other country
banks for the bank officers, and negotiating mergers with
other rural banks.

Although the former owner of the subject

bank was on the board of directors of the acquiring bank
and lived in the subject community# he had very little con­
tact with the banking operation in his former community.
Management continuity was provided because all the other
executive personnel from the subject bank had remained with
the bank after merger.
Loan granting criteria of the subject bank had been
liberalized somewhat since 1965.

Conventional real estate

loans from the subject bank had increased from 60 per cent
of the value of the property in 1965 to 75 per cent in 1970.
It also now had a low down payment real estate loan plan
available.
The subject bank faced a large loan demand in 1965
and set its target loan/deposit ratio at 70 per cent.

Since

it had merged with a larger bank# the target loan/deposit
ratio of the combined operation had been reduced to 65 per
cent.
The officer being interviewed responded that over
the last five years consumer loans were the fastest growing
loan category followed closely by real estate loans.

He

147
also responded that farm loans decreased in numbers, and
commercial and industrial loans remained constant.
The control bank was informally affiliated with a
larger city bank also.

The owner, a former employee of the

city bank, was listed as a vice president and a director of
the city bank.

He utilized the control bank to provide a

financial base for another business operation he was running.
Because of the fact that the control bank's primary function
(as implicitly defined by the owner) was to provide a finan­
cial base for his other business interests, the data may
not be a measure of the community service.

The target loan/

deposit ratio of the control bank was at 60 per cent in
1965.
study.

This had increased to 70 per cent at the time of the
The control bank made conventional real estate loans

up to a maximum of 70 per cent of the value of the property
in 1970, an increase from 65 per cent in 1965.
There was a greater range of services available
from the subject bank.

It offered trust services, credit

cards, and computerized accounts.
planning.

It did not do floor

In contrast, the control bank provided floor

planning service for its retail customers, but it did not
have a trust department, credit card service, nor computer­
ized accounting.

The subject bank was open forty hours per

week, including Saturday; the control bank was only open
thirty-three hours per week, including Saturday.

Neither

of the banks paid maximum Regulation Q interest rates on

148
savings in 1965.

But in 1970 both banks paid the maximum

amount allowed by law.
Interest charges on various types of loans were
generally higher from the control bank than the subject
bank.

The subject bank charged 7-3/4 per cent for real

estate loans, the control bank 8-1/2 per cent.

For farm

operating loans the subject bank charged 7-3/4 per cent;
the control bank charged 8 per cent.

Consumer loan cus­

tomers were charged 6-1/2 per cent add-on from the subject
bank and 6 per cent add-on from the control bank.

Commer­

cial and industrial loans were written at 7-1/2 per cent
by the subject bank and at 8-1/2 per cent by the control
bank.

Residential improvement loans were at 6 and 7 per

cent add-on from the subject and control banks, respectively.
A Production Credit Association representative
from the area stated that he noticed very little difference
in the subject bank's farm operating loan policies since
the ownership change.

His association had not taken

customers away from nor lost any customers to the subject
bank.

The Federal Land Bank representative reported the

bank made larger real estate loans than before.

He said

that previously the bank was strapped for funds and was
unable to make and service large farm real estate loans.
He also stated that the subject bank had a specialized
farm service representative available to help the local
branch managers analyze farm loans.

A rural branch manager

149
of a competing city bank was interviewed.

He said he

noticed a significant improvement in the services available
from the subject bank since the merger.

Before the merger

his banking office had been drawing a lot of customers from
the subject bank's service area.

However, since the merger

his bank had lost several customers from the subject bank's
service area.
The former Chief Executive Officer of the subject
bank stated that he felt community acceptance of the merger
was positive.

He thought many people in the community were

happy because the banker-customer relationship was now a
"business" rather than a "personal" relationship.

He said

he had been the town banker for twenty years and many people
in the community became antagonistic toward him because of
the way he operated the bank.

Now that he was no longer

there, he felt that the antagonism toward the bank because
of the local manager had diminished.

He also believed the

community was happy because the banking operation was larger
and was able to provide a wider range of services.
A representative citizen responded that immediately
after the ownership change community response to the merger
was unfavorable.

He also stated that at first the community

mistrusted the new personnel.

However, this feeling changed,

and the community has accepted the ownership change.

He

reported the bank ownership was doing a better job of servicing consumer lonas than had been done before.

Although

150

the new organization was using substantially more television
and radio advertising, the representative citizen thought
there was no change in the awareness of the community about
services available from-the bank.

For loan services, he

noted, net worth statements were more important than "who
you are."

He was quite satisfied with the present banking

arrangement and reported he had been well served on small
loan needs.

He stated that he would not prefer a locally

owned bank.
A performance summary of Case Analysis 4.5.13 is
presented in Table 4.13.
4.5.14

A Bank in a General
Farming Area
The reason given for the merger of the subject bank

office into a nearby city bank was a lack of upcoming
management talent in the bank.

When this became critical,

the owners decided to sell their stock rather than restaff
the bank.

The best offer was from a nearby banking company.

There were no management personnel that stayed with the
bank after merger, and no directors from the previous or­
ganization were elected to the board of the acquiring bank.
Service changes at the bank included a liberalized
lending policy after merger.

It was not known what the

conventional real estate loan policy had been in 1965, but
in 1970 loans of up to 75 per cent of the property value
were written.

Also, a 10 per cent down payment plan was

151
TABLE 4.13.— Performance Summary of Case Analysis 4.5.13, A
Bank Located in a General Farming/Livestock Area.
Acquired Bank
Control Bank

PreMerger

PostMerger

1965

1970

1965

1970

Target Loan/Deposit Ratio

70

65

60

70

Loan
a)
b)
c)

XXX
XXX
XXX

Performance Variable

Interest Rates:
Real estate (ft)
Farm operating (ft)
Consumer (add-on %)

7-3/4
7-3/4
6-1/2

XXX
XXX
XXX

8-1/2
8
6

Maximum per cent of value
loaned for conventional
real estate loans:

60

Are low down payment real
estate loan plans
available?

XXX

Yes

XXX

Yes

How have credit requirements
changed from five years
ago?*

XXX

L

XXX

C

What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX

5
1200

XXX
XXX

60
120

Are maximum Regulation Q
rates paid on savings
accounts?

No

No

Yes

How do your checking
charges compare to
your competitors?2

XXX

C

XXX

C

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

Yes
Yes
Yes
No
Yes

XXX
XXX
XXX
XXX
XXX

No
No
No
Yes
Yes

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours

75

Yes

65

N.A. - Not Available
for same, L for more liberal, C for more
conservative.
2

C for comparable, H for higher, L for lower.

70

152
available.

The target loan/deposit ratio of the subject

bank was 70 per cent in 1970; the 1965 target was not known.
The control bank had not changed its lending poli­
cies in the last five years.

Its conventional real estate

loan of up to 65 per cent of the value of the property was
the only real estate mortgage service available.

Target

loan/deposit ratio of the control bank was 70 per cent#
which was an increase from 65 per cent in 1965.
Loans serviced by both banks had a similar pattern.
Consumer loans had been the most rapidly growing loan ser­
vice for both banks in the past five years, and real estate
loans were the second most rapidly growing loan service.
Both banks had a decrease in farm loan business.

The

subject bank also had a decrease in commercial loan business,
but the control bank had a steady demand for commercial
loans.
A broader range of services was available from the
subject bank.

It had trust department services, floor

planning for retail customers, credit cards, and computer­
ized accounts.
these services.

The control bank did not provide any of
In 1965 neither the subject nor the con­

trol bank paid maximum Regulation Q interest rates on
deposits.
did not.

In 1970 the subject did, but the control bank
Checking account charges from the subject bank

were reported comparable to those of other area banks, but
the control bank had decidedly lower checking account

153

charges than other area banks.

The subject bank was open

thirty-three hours per week in comparison to twenty-four
hours for the control bank.

Both banks were open on Satur­

day mornings, but neither was open during an evening.
Interest rates were somewhat higher from the control
bank.

The subject bank charged 8 per cent for farm oper­

ating loans, whereas the control bank only charged 7 per
cent.

Commerical and industrial loans were written at 8

per cent annual interest from the subject bank, whereas the
control bank charged 6 per cent add-on interest for this
type of loan.

The two banks charged the same rates for

residential improvement loans, 6 per cent; the same for
consumer loans, 6 per cent; and the same for real estate
mortgages, 8 per cent.
Competitors of the subject bank included a Production
Credit Association representative and an Federal Land Bank
fieldman.

The Production Credit Association representative

stated he noticed no major change in the farm lending
policies of the subject bank after the mangement change.
He did say the subject bank was able to do a better job
financing some farmers after the merger because of the
larger loan size available.

The Federal Land Bank Associ­

ation representative stated he had not noticed any sub­
stantial change in the farm loan activities of the subject
bank.
The subject bank branch manager reported community
acceptance was poor at first but had improved by the time

154
of the study.

He said most of the people were quite happy

because of the broader range of services available.

He

stated that current management gave harsh credit checks
and used credit rating services prior to granting loans#
whereas past ownership did not use credit checks.

He

thought there was some community unhappiness because the
local manager had changed three times in the four years
since the merger.
The representative citizen said current community
feelings regarding the ownership change were favorable#
and the feeling immediately after the ownership change had
also been favorable.

He observed that the current bank

ownership pushed all types of loans more than past owner­
ship, with special emphasis on consumer and commerical
loans.

He thought the community was more aware of the

range of services available in the bank now than prior
to the ownership change# and he attributed this to an in­
crease in the bank’s advertising.

The advertising# he

reported, usually features the home office, even in the
subject community.

Since the ownership change he had

noticed a higher proportion of the checks his business
received were drawn on the local bank.

His personal feel­

ing was "economically it should help the community.
will be more money available; for this I like it.

There
There

is a feeling in the community (which I share) that it is
no longer a local bank and that anything good in the

155
development o£ the community will be channeled to the
home office.

The first manager was not a local man and

was not active in local community affiars.

We now have a

1native' as a manager so this should improve things.
personnel are local and efficient.

Other

I have the feeling that

on a given day a decision could be made to close the local
branch and that would be it.

If a locally owned bank could

find a way to offer the same services, I would prefer it."
A performance summary of Case Analysis 4.5.14 is
presented in Table 4.14.
4.6

Summary of Case Analyses
The case summaries presented indicate how the

different banks in the survey have changed over the fiveyear period from 1965 to 1970.

There are two elements

lacking in the case summaries which would have been de­
sirable but were not available.
the position

They are:

of the former country bank owners with

respect to the measures of progressiveness
Chapter III)?

(1) What was

{as defined in

(2) What are the individual goals of the

people who control the banks in the survey?
The case summaries do give a view of some of the
individual bank situations and how management/ownership
has changed over the five year period.

Responses from

competitors and citizens in the community indicate how
the changes were perceived by community members.

When

adverse feelings or responses were made by the competitors

156
TABLE 4.14.— Performance Summary of Case Analysis 4.5.14, A
Bank Located in a General Farming Area.
Acquired Bank
Performance Variable

Control Bank

PreMerger

PostMerger

1965

1970

1965

1970

Target Loan/Deposit Ratio

N.A.

70

65

70

Loan
a)
b)
c)

XXX
XXX
XXX

8
8
6

XXX
XXX
XXX

8
7
6

Maximum per cent of value
loaned for conventional
real estate loans:

N.A.

75

65

65

Are low down payment real
estate loan plans
available?

XXX

Yes

XXX

No

How have credit requirements
changed from five years
ago?*

XXX

L

XXX

S

What are the loan limits of
a) Bank office manager
b) Bank (legal limit)

XXX
XXX

20
320

XXX
XXX

20
40

Are maximum Regulation Q
rates paid on savings
accounts?

No

Yes

No

No

How do your checking
charges compare to
your competitors?2

XXX

C

XXX

L

Does
a)
b)
c)
d)
e)

XXX
XXX
XXX
XXX
XXX

Yes
Yes
Yes
Yes
Yes

XXX
XXX
XXX
XXX
XXX

No
No
No
No
YeB

Interest Rates:
Real estate (%)
Farm operating (%)
Consumer (add-on %)

the bank offer
Trust department
Credit cards
Computerized accounts
Floor planning
Saturday or evening
hours
N.A. - Not Available

*S for same, L for more liberal, C for more
conservative.
2

C for comparable, H for higher, L for lower.

157

or community memberst the reasons that precipitated the
' adverse comments were presented.

CHAPTER V
THE FIELD STUDY - SUMMARY OF FINDINGS
5.1

Introduction
This chapter will summarize (1) the differences

between the merged and independent banks,

(2) the responses

of the competitors of the merged banks, and (3) the re­
sponses of the representative citizens from the merged
bank communities.

The summaries will be presented using

the framework of the Bain-Caves performance criteria of
equity, progressivenss, and resource use efficiency.
Before looking at the summary of the field studies
it is useful to consider major differences in the two types
of banks.

The fourteen banks in the survey that had ac-

•a

quired a rural branch were much larger than the fourteen
independent banks.

After merger, as of December 31, 1970,

total assets for the merged banks averaged $54.5 million;
the range was from $18 million to $183 million.

Ten of

the merged banks were in the range of $30 to $70 million
in assets.

The fourteen independent banks averaged $7.3

million in assets with a range from $3 to $15 million.

Ten

of the independent banks were in the $5 to $9 million total
asset range.

158

159
It is also help£ul to have a feeling for the type
of management in the acquired banks prior to merger.

Most

of the banks were family-owned and were managed by an indi­
vidual who was near retirement age.

The reason cited for

ten of the fourteen bank mergers was the lack of upcoming
management potential in the bank.

Also given as reasons

for merger were a shortage of capital and the need to
attract outside deposits to serve the community.

Two of

the rural bank offices became branches of larger banks
because of a normal sale of controlling interest to a
nearby bank.

One bank was merged into a larger banking

firm when the owner-manager became a senior executive
with the larger bank.
5.2

Theoretical Framework Review
The Bain-Caves structure-conduct-performance

theoretical framework is structured around the following
definitions.

Structure denotes all predetermined charac­

teristics of the industry and the rules that constrain the
player's choices.

Conduct denotes all strategies that the

players adopt, and performance denotes all consequences of
the players that are, to. them or to others, pay-offs of the
game.
The four performance goals suggested by this frame­
work provided the criteria on which the performance of
Michigan banking was evaluated for rural residents.
four performance criteria are (1) full employment of

The

160
resources,
ciency.

(2) progressiveness,

(3) equity, and (4) effi­

In this study full employment of resources was

primarily concerned with the rural banks' utilization of
deposits.

Progressivenss was concerned with the rural

banks offering auxiliary banking services such as trust
departments, credit card service, and computerized account­
ing which helps facilitate the financial transfer function
in the rural areas.

Equity considerations are changes in

banking services or requirements that make banking services
more accessible to the community.

Efficiency is most often

thought of as the profitability measure of the firms in the
industry, or as providing a product or service to the con­
sumer in an accurate reflection of consumer preferences and
real costs.

These measures of efficiency were beyond the

scope of this study, but inferences about market efficiency
can be made.
Several of the variables selected have implications
for more than one of the performance criteria.

For example,

interest rate levels have implications for both equity and
efficiency.

And credit card availability has implications

for progressiveness

(as an element of innovation) and for

static efficiency (given that someone has introduced them,
it is desirable that consumer demand for them be reflected
in making the service available).
This chapter contains three sections with major
headings of equity, progressivesness, and resource use
efficiency.

The findings about efficiency will be

161
discussed under the major heading most applicable.

Although

some findings are applicable to more than one performance
criterion, they will be discussed only once.
5.3

Equity Considerations of
Bank Mergers
The first performance criterion discussed will be

equity.

Equity considerations are changes that make banking

services more accessible to a larger segment of the rural
community.

Discussed here will be changes in the criteria

to qualify for loan service, real estate loan services
available, interest rates on loan types, loan size limits,
interest rates paid on savings accounts, and growth rates
of different types of loans.

Some of these criteria, such

as real estate loan services available, are also a measure
of progressivenss, and interest charges for loans and inter­
est paid on savings are also measures of resource use
efficiency.
5.3.1

Loan Service Criteria
Each interviewee was asked how the criteria to

qualify for loan service at
1970.
credit:

his bank changed from 1965 to

The criteria in question were the three "c's" of
repayment capacity, collateral, and character.

Since it was not easy to specify measurements of these
criteria, the question asked was, "Have your loan criteria
become more 'liberal' or more 'conservative' in the past
five years?"

162
For the fourteen merged banks, nine responded that
criteria to qualify for loan service had been liberalized
since the merger.
change.

Four banks reported there had been no

Only one bank reported that loan criteria were

more conservative in 1970 than in 1965.

This was the bank

that merged because it had many "bad" loans in its portfolio.
Of the fourteen independent

banks, ten reported

that loan service criteria had remained the same.

Of the

remaining four banks, two reported their terms were cur­
rently more liberal, and two reported that their terms were
more conservative.
5.3.2

Real Estate Loan Service
Available
Prior to merger, conventional real estate loan

policies from the two groups of banks were somewhat differ­
ent.

The banks that merged had more conservative policies

than the banks that remained independent.

As seen in

Table 5.1, the banks that merged made, on an average, real
estate loans of 62 per cent of the value of the property.
This compares to an average of 64.6 per cent for the banks
that remained independent.
However, this trend has since reversed.

As of 1970,

as seen in Table 5.2, the merged banks were more liberal in
granting funds for conventional real estate loans.

The

merged banks granted loans up to 75.5 per cent of the value
of the property, whereas the independent banks only granted
loans to 67.9 per cent of the value of the property.

163

TABLE 5.1.— Number of Banks, by Type, Reporting Conventional
Real Estate Loan Policy as a Maximum Per Cent of
Value of Property, 1965.
Maximum Per Cent of
Value of Property9
Type of Bank

55

60

65

70

75

80

(Number of Banks)
Independent

1

3

6

2

Merged

2

3

4

1

"Average"
Policy
(%)

1

64.6
62.0

aRounded to nearest 5%.
Many of the tables in this chapter contain
"average" figures. These "averages" use original data, but
are not weighted by volume of activity in the service
analyzed from each bank in each category. Nonetheless,
these figures should be helpful in conveying differences
between types of banks.

TABLE 5.2.— Number of Banks, by Type, Reporting Conventional
Real Estate Loan Policy as a Maximum Per Cent of
Value of Property, 1970.
Maximum Per Cent of
Value of Property
Type of Bank

55

60

65

70

75

(Number of Banks)

80

"Average"
Policy
(%)

Independent

5

3

4

67.9

Merged

1

2

7

75.5

Rounded to nearest 5%.

164
In addition to the conventional real estate loan
service, by 1970 twelve of the fourteen merged banks had
low down payment real estate loan plans, such as the FHA
or MGIC plan, available for their customers.

This compares

with three of the fourteen independent banks that had low
down payment plans.
Interest charges for conventional real estate loans
for the two types of banks were shown in Table 5.3.

The

independent banks showed a greater disparity in rates
charged because one bank had an unusually low interest
charge of 7 per cent for all loans.

Excluding this bank,

there was little difference in the rate charged for real
estate mortgage loans.

The average rate charged by inde­

pendent banks was 8.00 per cent; for merged banks the
average charge was 7.98 per cent.

TABLE 5.3.— Interest Rates Charged on Conventional Real
Estate Loans by Type of Banks, 1970.
Interest Rate (Per Cent)
Type of Bank

7.0

7.75

8.0

8.5

(Number of Banks)
Independent
Merged

1

2
5

"Average"
Charge

(%)

8

3

8.00

7

2

7.98

165
5.3.3

Interest Rates on Farm
and Business Loans
Independent banks charged lower rates for farm

operating loans than the merged banks.

As seen from

Table 5.4, the independent banks charged an average 7.29
per cent, whereas the merged banks charged an average of
7.80 per cent.

Nine of the fourteen independent banks

reported charging only 7 per cent for farm operating loans
which contrasts to nine of the merged banks charging 8 per
cent.

One other independent bank charged 7.5 per cent,

and four charged 8 per cent.

The other merged banks

charged the following rates for farm operating loans:

one

each charged 7.75 per cent and 8.5 per cent, and three
charged 7 per cent.
Managers of some of the acquired banks stated that
they transferred some farm operating loans from conventional
7.5

or 8.0 per cent annual interest loans to 5 or 6 per cent

add-on interest type monthly payment loans.

Monthly payment

loans were issued for small trucks, dairy equipment, and
other types of products used in enterprises where income
was generated monthly.

The practice, which increases the

annual interest rate, appears to be more prevalent in merged
banks than

independent banks.

So, the cost of farm oper­

ating loans from merged banks may be even greater than
the table indicates.
The average charge for other business loans was
8.24 per cent from the independent banks and 8.04 per cent

TABLE 5.4.— Number of Banks, by Type, Reporting Various Interest Charges for Farm
Operating and Commercial and Industrial Loans, 1970.
Interest Rate (Per Cent)
A v m aye

Type of Bank

7.0

7.5

7.75

8.0

8.25

8.5

9.5

Other

(Number of Banks)

Charge
(%)

Farm Operating Loans
Independent banks

9

Merged banks

3

1

4
1

7.29
1

9

7.80

Commercial and Industrial Loans
Independent banks

2

Merged banks

1

1
1

6

1
8

2
4

1

la

8.24
8.04

a

This one bank charged 6 per cent add-on interest, which is approximately
11.1 per cent for a 36-month loan.

167
from the merged banks.
banks

Six of the fourteen independent

and eight of the fourteen merged banks charged 8 per

cent for commerical and industrial loans.

Four merged banks

charged 8.5 per cent, and one each had rates of 7.0 and 7.5
per cent.

Of the remaining eight independent banks, two

charged 7 per cent, one charged 7.75 per cent, one charged
8.25 per cent, and two charged 8.5 per cent.

One inde­

pendent bank charged 6 per cent add-on interest, which is
equivalent to 11.1 per cent for a 36-month loan.
An interesting finding is the number of banks having
the same or different rates for farm loans than for business
loans.

Table 5.5 shows the number of banks by type charging

more, the same, or less for farm operating loans than, for
commercial and business loans.

TABLE 5.5.— Number of Banks, by Type, Charging Higher, the
Same, or Lower Interest Operating Loans than for
Commercial and Industrial Loans.

Type of Bank

More
Same
Less
----------------------------(Number of Banks)

Merged

1

Independent

0

9

4
5

9

Nine of the fourteen independent banks reported
charging farmers lower rates than they did for other business
loans.

The other five independent banks reported similar

charges for farm loans and business loans.

This differs

168

substantially from the practices of the merged banks.

Nine

of the fourteen independent banks charged farmers comparable
rates, one bank charged more, and four reported charging
farmers less than other businessmen.

The merged banks

charging farmers lower rates were among the smallest in
the merged group.
By charging farmers "market" interest rates, larger
banks appear to impose fewer institutional constraints on
local loan market activity.

Because of this, the local

financial market may be regarded as more efficient; i.e.,
borrowers face the same resource (capital) prices, regard­
less of their use of loan proceeds.
5.3.4

Interest Rates on
Consumer Loans
Interest charges for new automobile consumer loans

were similar from both types of banks.

Eleven of thirteen

independent banks and twelve of the fourteen merged banks
charged 5.5 per cent or 6.0 per cent add-on interest for
new automobile loans, as indicated in Table 5.6.

In both

categories, one bank reported 5.0 per cent and another 6.5
or 7.0 per cent.

One independent bank did not offer monthly

payment loans.
Residential improvement loans were also at basically
the same rates.

Six of the thirteen independent banks and

eight of the fourteen merged banks reporting charged 6 per
cent add-on rates.

Three merged banks reported interest

169
TABLE 5.6.— •Number of Banks, by Type, Reporting Various
Interest Charges on Types of Consumer Loans,
1970.
Interest Rate (Per Cent)
Type of Bank

5.0

5.5

6.0

6.5

7.0

Other

"Average"
Charge

(Number of Banks)

(%)

New Automobile Loans
Independent

1

Merged

1

4

7
2

1

5.85

10

5.89

Residential Improvement Loans
Independent

1

Merged

1

6
2

8

1

3

la

6.43
6.07

3

This bank charged 8.5 per cent nominal interest,
which is approximately 4.8 per cent add-on interest for a
60-month loan.

rates below 6 per cent and three reported charges of more
than 6 per cent.

Two of the independent banks reported

rates below and four reported rates above the modal 6 per
cent rate.
5.3.5

Loan Service Growth
The banks were asked which loan service grew most

rapidly in terms of customer numbers from 1965 to 1970.
Twelve of the thirteen responding banks reported consumer
loans were the fastest growing loan category in terms of
customer numbers.

Nine of these banks had real estate loans

as the second most rapidly growing category.

Only one

170
independent bank had an increase in farm loan customers,
and it was attributed to a management change in a nearby
bank that had formerly serviced many farm loans but had
since reduced its farm loan portfolio.
Merged banks had an almost equal increase in real
estate loans and consumer loans.

One merged bank also re­

ported farm loans as its second most rapidly growing cate­
gory.

The reason given for this was that prior to merger

the bank had a policy of making a maximum loan of $10,000,
which was too small to serve commercial farmers.

After

merger the policy to limit individual customers to $10,000
was discontinued.

Commercial and industrial loan customers

increased at three of the merged banks.

The reason given

for this increase was that the previous ownership did not
service this type of loan.
The representative citizens noticed an increase in
loan services from the acquired banks.

Eleven of the

twelve respondents reported that the new ownership groups
were "pushing" some types of loans more than past ownership.
All types of loans received some mention as increasing.
Most often mentioned were consumer loans; then came
mortgage loans.

Only one person responded that his local

bank was withdrawing any loan service since being acquired,
and this was mortgage loan service.

171
5.3.6

Farm Loan Service Effects
Changing the structure of rural banks may affect

the business volume and customer structure of other rural
financial institutions.

The nature of the farmer coopera­

tive lending agencies, the Production Credit Association and
Federal Land Bank Associations, make these agencies well
suited to indicate how the structure of farm loan business
was affected by the merger of a rural bank.

In each instance

where a rural bank was acquired by a larger city bank, a
Production Credit Association representative was asked about
changes in the merged bank's farm operating loan activities,
and a Federal Land Bank Association representative was
asked about changes in the merged bank's farm real estate
lending activity.

Table 5.7 lists the four types of

responses received and the frequency of each response.

TABLE 5.7.— Farmer Cooperative Credit Agency Responses on
the Activity of Merged Banks in the Farm Credit
Market.

Response
1.
2.

3.
4.

Respondent
---------PCA
FLBA

The merged banks had no noticeable change in
farm lending activity.

8

8

The merged banks are not as interested in
acquiring new farm business, but serve "good"
customers well.

2

1

The farmer cooperative agencies lost customers
to the merged banks.

2

3

The farmer cooperative agencies gained
customers from the banks.

2

2

172
Eight Production Credit Association representatives
and eight Federal Land Bank representatives reported that
the merger of the subject bank had no noticeable effects
on its farm loan activity.

Representatives from two PCA's

and one FLBA responded that the new bank ownership group
served "good" customers well, but did not appear to be
interested in acquiring new farm business or serving all
farm business that they had previously.

About an equal

number of the farmer cooperative associations "gained
customers" as well as "lost customers to" the merged banks.
The Production Credit Association representatives reported
two banks extended more farm operating loans and gained
customers from the local association, and two PCA repre­
sentatives responded that they gained customers from the
merged banks.

Two Federal Land Bank Association repre­

sentatives reported gaining customers from the banks,
whereas three FLBA representatives reported losing customers
to the newly merged banks.

In summary, there appears to be

little change on the competitive effects for farm loans
after rural banks merge.
5.3.7

Maximum Loan Limits
A frequent complaint heard about the branch banking

system is that a branch manager's loan granting authority
is lower than an independent bank manager's.
data support this complaint.

The survey

The chief executive officers

of the independent banks were, on an average, able to

173
authorize loans of $27,000.

The merged bank branch managers

had, on an average, authority to grant $18,000 in loans.
However, a large range exists in each category.

For the

independent banks the range in loan granting authority was
from $1,500 to $60,000; for the merged banks it was from
$2,000 to $100,000.
Because the branch manager of an acquired bank has
a lower lending authority than the chief executive officer
of his independent counterpart, one might superficially
conclude that bank acquisitions resulted in lower credit
availability.

However, this is not the case.

For the banks

in total, maximum loan size limits per customer is decidedly
higher for the merged banks.

The upper limit ranged from

$240,000 to $1,500,000 for merged banks, as contrasted to
maximum limits of $20,000 to $110,000 for independent banks.
So, once credit had been granted by the head office, the
acquired banks could make larger loans than the independent
banks.
This comparison may overstate the advantage of
dealing with a merged bank.

All of the independent banks

had arrangements with city correspondent banks to assist
in servicing loan requests which exceeded its legal limit.
However, correspondent bank arrangements to service large
loan requests were seldom used.

Only nine of the fourteen

independent banks reported loan requests above their lending
limit, and these banks together reported thirty-five re­
quests in the previous year.

It is possible that the small

174

banks discouraged customers £rom requesting loans larger
than the bank's lending limit.
This leaves almost no significant difference in
servicing large loans.

Moreover, the arragnements for loan

service above the independent bank's loan limit were fairly
prompt.

Typically it took less than two weeks for a corre­

spondent bank to act on a loan request from one of its
country bank customers.
5.3.8

Interest Rates Paid on Savings
and Charges on Checking
Accounts
Maximum interest rates that banks can pay on savings

deposits are set by Regulation Q, which is established by
the Comptroller of the Currency and the Federal Reserve
System.

In 1965 there was little difference in the number

of banks of each category paying maximum Regulation Q rates.
Six of the fourteen independent banks did not and eight did
pay maximum Regulation Q rates.
At the end of 1970 there was more difference.
Thirteen of the fourteen merged banks paid maximum Regu­
lation Q rates, whereas only ten of the independent banks
paid the maximum rates. . At the time of the interviews
(November and December 1971) when interest rates were
declining several merged banks were planning to reduce
interest rates paid on savings accounts.
At the time of the interviews, interest rates were
starting to decline after having stabilized at a higher

175
plateau for the previous six months.

The finding that more

of the merged banks than independent banks had paid maximum
rates on savings accounts during the time of high interest
rates, and the finding that some of the merged banks were
planning to reduce savings account interest rates during a
period of declining interest rates suggests that the merged
banks were more aligned with money market conditions than
independent banks.

These findings have implications for

the equity consideration because factor prices are more in
line with factor productivity.

Also this finding has im­

plications for the efficiency criterion because savings
draw the same rate at all institutions.
5.3.9

Summary of Equity
Considerations
It appears that the accessibility of banking services

for members of rural communities was increased after the
local bank was acquired by a larger bank.

The criteria to

qualify for loan service were generally more liberal.

Real

estate loans could be obtained for a higher proportion of
the value of property.

More of the acquired banks had low

down payment real estate loan plans available.
Interest charges for consumer loans were similar at
both types of banks with the exception of one independent
bank that did not offer monthly payment consumer loans.

In­

terest charges for commerical and industrial loans were also
similar.

Farm operating loan interest rates were markedly

lower at the independent banks

(and smaller merged banks).

176
Checking account charges appeared to be comparable
for both types of banks.

The merged banks paid higher in­

terest rates for savings at the time of the survey.

It

appears that the merged banks were more "market" oriented.
They did not appear to offer subsidized loan notes to any
particular type of loan customer, and it appeared that the
interest rates paid on savings accounts followed the money
market interest rates more closely.
Numbers of real estate loans and consumer loans
increased for both types of banks.

Numbers of farm oper­

ating loans increased for only one bank in each category,
which was the result of the merger of the bank or of a
primary competitor.

Commerical and industrial loans in­

creased more in the banks that had been acquired.
Loan limits per customer were higher at the merged
banks, but the independent banks reported mechanisms which
kept a small loan limit from being a problem.
These are the findings which emerged from the
survey.

There are, of course, many other questions that

would have uncovered other interesting facts regarding
equity considerations of bank mergers.
tions is:

One of these ques­

How many people in the local community who did

not do business with the local bank prior to merger are
now doing business with the merged bank?

Conversely, how

many local customers of the prior ownership do not do
business with the new ownership?

During some interviews

177
comments were heard that certain new ownership groups asked
for more records and justification for some business loans,
causing some prior customers to do business elsewhere.

On

the other hand, some representative citizens reported that
the new ownership groups loaned money for many more purposes
than former management.
The merged banks paid higher rates on savings
accounts than independent banks.
observation would be:

A question to follow this

Did paying the higher savings account

rates give the local bank a higher proportion of the com­
munity deposits than local banks obtained in other communi­
ties which did not pay maximum Regulation Q interest rates?
Answers to the types of questions posed here would facilitate
further observations on the equity of the rural banking
system after small banks merged.
5.4

Progressiveness Considerations
of Bank Mergers
Progressiveness is a second performance criterion.

Rural bank progressiveness is defined as offering more
services than absolutely necessary to provide the financial
transfer function in rural areas.

Many of the measures

of "progressiveness" defined here are subject to question.
Some people may consider certain of them essential, others
may consider them unnecessary.
The elements discussed in this section are the
auxiliary services of bank credit cards, inventory financing,

178
trust services, and having computerized accounts.

Also

mentioned will be the banks* facilities and operating hours.
Other evidence includes a section on criticism received by
the local banker and a section on representative citizen
attitudes toward bank management.

These pieces of evidence

relate to the accessibility of rural people to services
from rural financial organizations.
5.4.1

Auxiliary Services
The number of auxiliary services available from

the merged banks is substantially greater than those avail­
able from the independent banks.

Thirteen of the merged

banking offices made trust services available/ whereas
only two independent banks offered trust services.
Floor planning/ the service of financing inventories
on a continuous basis for retail merchants, was available
from thirteen of the fourteen merged offices.

This service

was available from only eight of the fourteen independent
banking offices.
The question on the availability of bank credit
cards brought a wide variety of responses.

Thirteen of

the fourteen merged banks were affiliated with credit card
services

(Master Charge or BankAmericard), whereas only two

of the independent banks were allied with one of these
services.

The banks not associated with these services

volunteered several reasons for their positions.

Frequently

they reported that profit potentials for small banks are

179
too low to justify the costs of offering the service, e.g.,
risk acceptance, advertising expense, personnel, and book­
keeping.

But most often the bankers that did not offer

credit card services gave moralistic reasons to justify
their position.

Responses such as "I don't believe in

credit cards,’1 "they lead to reckless spending," and "people
don't use them with prudence" were received.
Thirteen of the fourteen merged banks offered com­
puterized bookkeeping services for customer accounts.

Only

three of the independent banking offices had computerized
the customer accounts.

Whether or not computerized accounts

are a service to customers or not depends upon one's point
of view.

Arguments for this service include:

cheaper if enough

(1) it is

accounts can be processed, (2) it is

more accurate, and (3) more changes and charges can be taken
into consideration.
include:

Arguments against computerized accounts

(1) the change from hand posting to the computers

leads to errors,

(2) customers are slow to understand the

requirements imposed upon them (using pre-encoded checks,
deposit slips, etc.) and make errors,

(3) there is a longer

time lag in posting of deposits to accounts (computerized
accounts usually record deposits and withdrawals one day
later than manual accounting), and (4) less personal
attention is given to customers.

The majority of the

criticisms received from both the merged and independent
banks who were using computerized services stemmed from
the transfer from manual to computerized records.

This

180
criticism, however, subsided somewhat after the people
became adapted to the computerized system.
The representative citizens were asked if the people
in the community were aware of the banking service changes.
Nine respondents reported that their community members were
much more aware of the availability of bank services after
merger than previously.

Two reported no change, and one

thought the community was less aware of services currently
available.

This awareness of services probably stemmed

from an increase in advertising.

Ten of the twelve repre­

sentative citizens reported noticing an increase in adver­
tising; the other two reported no change.
5.4.2

Operating Hours and
Facilities
There was little variation in operating hours be­

tween the different types of banks.

In eight of fourteen

bank pairings, merged banks had longer hours, although by
an average of only 2.8 hours more per week.

Seven of the

merged banks and eight of the independent banks were open
on Saturday.

Nine merged banks and eight independent banks

were open after 6:00 p.m. one evening per week.

All of the

banks in the survey were open either during an evening or
on Saturday.
In general the physical bank office facilities were
most comfortable at the acquired banks.

Only ten of the

offices were visited, but all of them were either recently

181
built or remodeled.
independent offices.

This differs significantly from the
Of the fourteen independent offices

visited, nine were newly constructed or recently remodeled,
but five were old, unattractive offices.
5.4.3

Serving Community Needs
Some respondents believed that a positive correla­

tion existed between where a bank manager lived and the
responsiveness with which he tried to serve the community.
If this is true, it appears that the local independent banks
should give their communities better service than branch
offices of larger banks.

More of the independent bank

officers and directors were ’'local" people than were the
officers, including the branch manager and directors, of the
acquired banks.
However, the evidence from this study does not bear
out the assertion.

Most of the acquired operations had

management whose primary interest was to have a sound,
growing banking operation.

They realized that this required

that they serve the community's needs and establish long­
term local business relationships.
Independent banks are often— just as the name of
the category implies— independent.

Several of the independ­

ent banks were closely held, or owned by an individual.
objectives of these owners ranged from providing the best
community service possible to providing a financial base
for the owners' other business interests.

This latter

The

182
reason was evident for at least three of the fourteen inde­
pendent banks surveyed.

It was also evident in the cases

of three of the pre-merger owners of the banks that had
been acquired.

On the other hand, many of the independent

bank managers were extremely interested in community affairs
and community development.

Given their limited resources

and the restrictions imposed upon them by law, it appeared
they were trying to do the best they could for community
development.
5.4.4

Criticism Received and
Changes Planned
To obtain a feeling of progressiveness and to find

out how bank management reacted to the feelings of the
community, each respondent was asked to identify an area
in which his bank had received criticism from the *local
community in the past two years.

Only one of the independ­

ent bankers reported any criticism.

That was because the

office was not open on Saturday morning, whereas some
nearby banks were.
The officers of the merged banks seemed to be more
abreast of community feelings toward their operations.
Eight of them reported criticism.

Common grounds for

criticism came from the "lack of individuality" of banking
services and problems stemming from the transfer to computer
records.

This criticism was reported by four of the eight

bankers listing criticism.

Another common area of criticism

183
involved changes in requirements for loan service.

After

merger the banks required more extensive records or had
more conservative credit terms than before.

One acquired

bank also reported some criticism of banking hours.

The

specific criticism was that after the merger took place,
the bank was closed on Saturday whereas under previous
ownership it had been open on Saturday.
Much of the criticism that merged banks received
may be relevant for the independent banks.

The changes

planned by independent banks include computerizing accounts
(mentioned by three out

of nine banks) and adding a branch

office or drive-in service window (mentioned by five of
nine banks).
An interesting, but difficult to explain, finding
is that the number of window customers for the independent
banks has grown more than twice as fast as for merged banks.
Data were obtained from thirteen independent banks and five
merged banks on the numbers of checking account customers,
passbook savings account customers, and time certificate
holders.^

The rate of growth in time certificate holders

was unusable because (1) many banks did not offer time
certificates in 1965,

(2) some banks changed accounting

methods, and (3) some customers transferred some funds
from a passbook account, which is still maintained, to a

^Because of management changes and unavailability
of records, some of the responses were "best estimates" by
respondents.

184

certificate of deposit.

The rate of growth indicated by

independent banks for passbook savings and checking accounts
was substantially faster than it was for merged banks.

Data

for checking account growth in merged banks showed one bank
lost 25 per cent of its 1965 accounts while the other four
gained between 15 and 25 per cent.

Of the independent

banks, four banks reported customer increases between 20
and 35 per cent, four reported customer increases between
40 and 50 per cent, and four reported customer increases
between 85 and 100 per cent.

Data for passbook savings

accounts showed only three merged banks having substantial
growth in this area.

These rates were 20 per cent, 25 per

cent, and 100 per cent.

Two others reported increases of

less than ten per cent.

Of the eleven independent banks with

data available, five had growth rates of 15 to 30 per cent,
four banks had customer increases of 45 to 65 per cent and
two banks had 90 per cent growth rates.
This large increase in window customers for inde­
pendent banks over merged banks is hard to explain.

As

measured, services available from merged banks were greater,
interest paid on savings accounts was greater, and charges
for services were generally comparable.

It appears, too,

as though the merged banks advertised their services more
and attempted to grow rapidly.
results include:

Possible reasons for the

(1) rural people have less "trust" for

bankers who are not local people,

(2) the data received may

185
be incorrect,

(3) the previous owners of the merged banks

increased customer numbers as much as possible before they
sold,

(4) a locally owned business may mean a lot to rural

people, and (5) the base period may have given an incorrect
impression.
Competitors of eight of the merged banks were sur­
veyed to see what affect the bank merger had had on customer
structure between the organizations.

Two of these banks

reported gaining window customers after their competitor’s
merger.

The reasons cited for this included the merged

bank's delay in crediting funds to accounts and the merged
bank's "unsatisfactory" hours of operation.

One competitor

responded that his bank lost customers to the merged bank.
He attributed this to an increase in services available
from his competitor after the merger.

Two competitors

reported no change.
Three banks reported that immediately after the
merger they had gained business from their newly merged
competitor.

However, this increase was short-lived.

They

noticed that most of the new customers were again doing
business with the bank they originally used.

The competitors

in this situation all mentioned that "convenience" seemed
to be the main factor in customer attraction.

Personal

feelings for or against an institution were usually not
long lasting.

An interesting example comes from a situation

where a competing bank made a concentrated effort to attract
customers when its competitor was acquired (see Case 4.5.6).

186
They obtained "commitments" to change banks after the
merger from 60 to 70 per cent of the acquired bank's
customers.

About 20 per cent of the customers did change

banks after the merger, but three years later most customers
were doing business with their former bank.
5.4.5

Management Attitudes
and Factors
Management teams of the banks that had purchased

rural banks to be branch offices were very aware than an
ownership change can create much animosity in the community.
As a result, most of these teams took great pain to lessen
the impact of the ownership change.

Four of the new owner­

ship groups established "advistory boards" for the new
branches.

These boards usually included people from the

former board of directors, who were asked to serve in an
unofficial capacity to "advise" and "consult" with the new
management team on bank business.

They had no legal obli­

gations but were helpful to management because they acted
as a sounding board for community opinion and advised the
new management team on loan experiences with local borrowers.
Management of acquired rural banks often stressed
the "independence" of the branch office.

If the branch did

its accounting internally, or had its own credit files, this
was frequently pointed out in the interview.

One ownership

group charged less for services at the acquired office than
they charged at their other offices.

In another instance,

187
one newly acquired branch office paid higher interest rates
on savings accounts than were paid at the main office.
Management changes in the rural offices were kept
to a

minimum.

Several of the banks were purchased because

the previous chief executive was retiring or had died, so
the new ownership had no alternative but to hire a new
manager.

But where this was not the case, past management

personnel were retained even if a new manager was hired and
the former manager "retired on the job."
One vice president of a city bank stated that he
was not happy with the rural branch they acquired.

He

said that it had not yet made a profit or shown any growth
in the first three years of operation and had not met any
of the original goals that had been set for the office.
Nonetheless, he said the bank was going to keep the branch
open because it was expected the subject community would
change from rural to suburban in ten or fifteen years,
so the long run potential was favorable.
In another instance, one of the independent banks
was in the process of taking over a rural branch from a
larger city bank.

The city bank had several community

relations problems in the rural community, and as a result
the rural branch performance was unacceptable to them.
The city bank's solution to this problem was to sell the
office to another "country bank" that would not have the
"big city image."

The prospective purchaser did not

188

anticipate any community relations problems and was certain
deposit levels would increase rapidly after the take-over.
5.4.6

Representative Citizen
Attitudes
At the time of merger of their independent banks

into large banking firms, the representative citizens stated
that the community members were, in general, unhappy with
the change.

These results are summarized in Table 5.8.

TABLE 5.8.— Representative Citizen Assessment of Community
Attitudes toward Bank Mergers.
Number of Responses
Attitude

Immediately
After Merger

Currently
(Dec. 1971)

Highly favorable

2

4

Favorable

3

5

Unchanged from previous ownership

1

2

Unfavorable

5

1

Highly unfavorable

1

0

One respondent stated that community feeling was
highly unfavorable, five stated unfavorable feelings toward
the merger, one reported no change, three reported favorable
reactions, and two stated highly favorable reactions.

The

representative citizens did report that the current feeling
toward the bank was much better than the feeling at the

189

time of the merger.

Currently four reported highly

favorable community feelings, five reported favorable re­
sponses , and two reported no change in attitude toward the
current ownership compared with past bank ownership.

Only

one community representative responded that the community
currently viewed the change as unfavorable.

(This was the

bank where prior management granted many "questionable"
loans which were recalled by the new management team.)

Of

the twelve respondents, seven stated that their current
opinion of the new ownership was improved over their
impression at the time of merger.
Each representative citizen was asked:

What is

your personal feeling toward the bank ownership change?
Do you like it?

Did it benefit the community?

Would you

like to see the bank go back to a locally owned bank?
What other comments would you like to make about this bank
ownership change?

(It was stressed that this survey was

confidential and comments would be held in confidence.)
Eight of the individuals thought the change would benefit
members of the community.
not comment.

Three of twelve respondents did

Only one stated he did not like the change,

his reason being that the bank management was twenty-two
miles away and unresponsive to local community needs.
5.4.7

Summary of Progressiveness
Cons iderations
Given the responses to the field survey it appeared

that the acquired banks were more progressive than the

190
independent banks.

More auxiliary services— trust services,

credit card services, inventory financing, and computerized
accounts— were available from the merged banks.
The management of the merged banks was more aware
of criticism than were the independent bankers.

It appeared

as though the management of the acquired banks took great
pains to lessen the impact of ownership change by permitting
the acquired office to be autonomous, keeping former bank
directors on advisory committees, and retaining former
management when possible.
However, the study indicated that the independent
banks were gaining customers at a faster rate than the
acquired banks.

Also, it appeared that some large city

bank management practices cause community relations problems
in rural areas and that some rural branches fell short of
the expectations the city bank held at the time of acqui­
sition.
These findings lead to the question of what rural
people deem to be desirable from their local bank.

Perhaps

they do not want a progressive banker as defined in this
section, but prefer "old fashioned" service.

Perhaps many

people in a rural community prefer to have loan service
granted on a "who you are" basis rather than on the basis
of the individual's repayment capacity.

Some farmers may

feel that the need to justify a farm operating loan with
financial statements and budgets is an insult when new

191
bank management requests it, because it was never required
under past management.
Research to determine what rural residents do desire
from their local bank might give insight into other pro­
gressiveness criteria.

There would be problems with this

type of study because of a lack of understanding on the
part of the respondents.

Rural residents may not be aware

of the alternatives available and the trade-offs between
local friendly service and other effects.

One problem is

that merger may change the service mix in ways that benefit
some people and make others worse off.

Ultimately, it is

a problem of the relative weights assigned (say) farmers
who now have to present pro forma cash flow forecasts versus
the local TV repairman whose family savings now earn a
higher interest rate.
5.5

Resource Use Efficiency
Considerations of
Bank Mergers
The third performance criterion is resource use

efficiency.

The primary resource that a rural bank controls

is the deposits it holds for the community members.

It can

invest these deposits in a number of alternatives— government
securities, municipal bonds, loans— or it can hold them in
cash.

Assuming most loans made by rural banks are issued

locally, the loan/deposit ratio is an important measure of
bank performance for the local community since it reflects
the proportion of deposits going to customers and businesses

192
as loans.

Investments in rural communities may stimulate

employment and future economic growth.

This section will

summarize the changes in target loan/deposit ratios in
both the independent and acquired banks between 1965 and
1970.
5.5.1

Target Loan/Deposit
Ratios - 1965
Target 1965 loan/deposit ratios were not much

different by type of bank, acquired or independent.

How­

ever, there were some interesting situations in individual
banks.

The loan demand appeared to vary tremendously.

Some

banks reported a loan/deposit ratio of more than 80 per cent.
Others reported a loan/deposit ratio of less than 40 per
cent.

The banks with the highest loan/deposit ratios were

located in the sparsely populated, generally lower income,
northern part of the state.

The high loan/deposit ratios

here may reflect a small deposit base upon which to draw
for loan sources and/or the unavailability of other loan
sources in the community.
The local bank manager in a small community may
affect loan demand greatly.

If the local banker is eager

to serve and does not refuse loan requests of, say, third
quality loans, he may get a substantial loan demand for
these third quality loans.

But if he routinely refuses

third quality loans and makes only higher quality loans,
he may be, in effect, turning away potential loan customers

193
just by the imposition of these quality standards.

Thus,

the bank manager could have a great effect on loan demand.
Two of the banks that merged had loan/deposit ratios
of 70 per cent or more in 1965.

Both of these bankers re­

ported that the loan demand was higher than they could
adequately serve and stated the loan/deposit ratio was un­
comfortably high.

A£ter merger, both of these banks had

reduced their loan/deposit ratio to 65 per cent.

They

reported that, on a larger deposit base, this was a more
comfortable portfolio position for them.
Three of the banks that remained independent reported
1965 loan/deposit ratios of 70 per cent or more.

By 1970

two of these banks lowered their target loan/deposit ratio
to 65 per cent, which they considered a more workable level.
One other bank reported a 70 per cent target loan/deposit
ratio in both years.

Its manager stated it was the bank's

policy to carry a loan portfolio of this size.
At the low end of the target loan/deposit ratio
spectrum were five banks reporting target loan/deposit ratios
of 55 per cent or less in 1965.

Of these five banks, three

were acquired during the next five years, and two remained
independent.

The three acquired banks each increased their

loan/deposit ratios

by 15 per cent after merger.

The

reasons given for these low 1965 loan/deposit ratios were:
(1) one bank had an ex-manager/owner who was "not at all
aggressive,"

(2) one bank faced an extremely heavy consumer

194
loan demand and wanted to remain liquid to serve these
customers, and (3) one bank was extremely cautious about
taking any loans with any degree of risk.
One of the two independent banks with low loan/
deposit ratios in 1965 increased its target loan/deposit
ratio 20 per cent.

The primary reason for this was a change

in the Chief Executive Officer and in the philosophy of the
bank.

The other bank increased its target loan/deposit

ratio from 55 per cent to 60 per cent over the five-year
interval.

It stated that it was still a "conservative"

bank in its lending policies but was forced to increase
its loan/deposit ratio to serve its customers.

Another

independent bank did not urge customers to borrow and risk
financial security.

That bank's December, 1965, loan/
2
deposit ratio was 39.4 per cent.
5.5.2

Target Loan/Deposit
Ratios - 1970
The target loan/deposit ratios reported for 1970

are as shown in Table 5.9.
In the aggregate, the merged banks had slightly
higher target loan/deposit ratios.
wider range of target ratios.

But they also had a

The merged bank with 50 per

cent target loan/deposit ratio had four extremely large

One of the reasons for such a low ratio was that
the bank had a $1,000,000 deposit from a local school bond
issue. Excluding this deposit, which was invested in
Treasury bills, its loan/deposit ratio would have been
70.1 per cent.

195
TABLE 5.9.— Number of Banks, by Type, Reporting Selected
Target Loan/Deposit Ratios, 1970.
*

Type of Bank

Loan/Deposit Ratio %
-------------------------------50
55
60
65
70
75

"Average"
Policy

(Number of Banks)
Independent
Merged

1
1

3
1

5

4

6

5

(%)
64.6
1

65.7

*

Rounded to nearest 5 per cent.

commercial deposits that fluctuated widely.

So, in the

event of large withdrawals from these firms, it was forced
to keep an unusually large portfolio of short term govern­
ments , and thus had a smaller loan portfolio than many
banks of comparable size.
One thing of interest was the change in target loan/
deposit ratios of the two types of banks.

As seen in Table

5.10 the banks that were acquired had a larger increase in
target loan/deposit ratios than the banks that remained
independent.
This finding may reflect that managers of larger
banks are willing to take slightly larger risks with a
loan portfolio than are smaller bank managers.

Also, with

a larger portfolio there is a lesser chance of liquidity
problems resulting from deposit withdrawals or bad loans,
so a higher loan/deposit ratio can be maintained with
greater ease.

The banker that reported the highest target

196

TABLE 5.10.— Number of Banks, by T y p e , Reporting Per Cent
Change in Target Loan/Deposit Ratios, 1965 to
1970.
% Change in Loan/Deposit Ratio
Type of Bank

-15

-10

-5

0

+5

+10

+15

*

+20

"Average"
Change

(Number of Banks)
Independent

2

Merged

1 5
1

1

1

3
3

(%)

1

1

1

4

1

+2.0
+5.5

Rounded to nearest 5 per cent.

loan/deposit ratio, which was 74 per cent, reported his
bank was able to do this by using the federal funds market
extensively.

He state, "At times federal funds are ex­

pensive money, but over the long run we consider using
federal funds a profitable strategy."

This bank was one

of the largest in the survey and had easy access to the
federal funds market.

Also, this bank acted as a clearing

correspondent for many of the smaller area banks so it could
tap the excess cash positions

(which most of them had) of

the small area banks for low cost overnight loans.
5.5.3

Summary of Resource Use Efficiency
Considerations
The rural banks that were acquired had higher target

loan/deposit ratios than the banks that remained independent.
This may be explained by the fact that the acquired banks
controlled more assets and had more accounts and thus could

197
keep a larger portfolio without experiencing liquidity
problems.

It may also be because the acquired banks made

loans to a wider spectrum of the community members.

Or it

could be a function of more aggressive management or higher
skilled management.
The basic assumption of resource use efficiency for
rural communities is that the local bank makes local loans.
From the field survey it was evident that this is not always
the case.

Although data as to where loan funds were used

was not available, it appeared that in three instances the
independent bank owner/manager used the bank's deposit base
to further his personal business interests outside the com­
munity.

This same factor was also evident from three of

the prior ownerships of banks that had been acquired.

A

common statement heard about management practices of city
banks that have rural branches is that they actively seek
deposits in the rural area, but make the loans to the city
customers.

This was not evident from the survey, but again,

data as to where the deposits are acquired and where loan
funds are utilized were not kept by most banks.
5.6

Summary of the Field Study
The field study results were analyzed using the

Bain-Caves framework of structure, conduct, and performance.
The performance criteria of equity, progressiveness, re­
source use efficiency, and efficiency were the main com­
ponents of the analysis of rural bank performance to rural

198
communities.

It appeared bank mergers enhanced the equity

in obtaining banking services because of liberalized credit
standards and a broader range of loan services.

The merged

banks also were more progressive as evidenced by offering
more auxiliary services and a wider range of loan service
plans.

The resource use efficiency of the acquired banks

was increased because of the higher target loan/deposit
ratios.

Market efficiency or awareness was also enhanced

by bank mergers.

It appeared that merged banks brought

savers and borrowers "closer together."

It also appeared

that merged banks are more aligned with money market con­
ditions than independent banks.

Granted that these criteria

of equity, progressivenss, and resource use efficiency are
subject to interpretation.

Several of the performance

variables are subjective, based upon the feelings of the
people involved in the study.
There was no attempt in this study to investigate
the financial or economic efficiency associated with ac­
quiring a rural bank to operate as a branch.

Two of the

common financial efficiency concepts, rate of return on
investment from banks of different sizes and problems in
evaluating economics of size are covered in sections 2.4
and 2.6.4,

Measures of economic efficiency— the accurate

reflection of consumer wants and preferences for the least
real cost— were also beyond the scope of this study.

Both

studies of financial efficiency and economic efficiency

199
would be interesting and helpful in evaluating the per­
formance of the rural banking industry.

CHAPTER VI
SUMMARY, MAJOR FINDINGS AND
IMPLICATIONS
6.1

Introduction
There have been many bank mergers in Michigan in

the past several years.

Many citizens and several research"

ers commented on this situation and have suggested the
question:

How do bank mergers and consolidations affect

the banking services available to rural residents?

To

answer this question the following specific objectives for
the study were formulated:

(1) to determine how bank owner**

ship changes affect lending, savings, and other banking
services to rural residents;

(2) to investigate changes in

the competitive position of rural banks after merger relative
to other institutions that provide farm credit;

(3) to obtain

a feeling of how rural residents view bank mergers in their
communities;

(4) to suggest appropriate changes in bank

structure legislation.
6.2

Review of Method and
Procedure
To accomplish the objectives the study was divided

into three main parts.

First, twenty-eight Michigan bank

200

201

offices were surveyed during November and December, 1971.
Fourteen interviews were held with city banks that acquired
a rural bank between June, 1966, and January, 1970.

The

remaining fourteen interviews were with rural unit banks,
each of which had been selected as a counterpart to one of
the acquired rural branches.

Questions asked in these

interviews determined how the services presently available
from the rural branch or independent bank differed from
what was available in 1966.
The banks that acquired a rural branch were asked
to name their primary competitors.

The second part of the

study was to poll the competitors and ask how the competi­
tive relationship between the acquired bank and their or­
ganization had changed after the merger.
Many rural communities only have one bank, so it
was deemed necessary to have an indication from the com­
munity of how the community members liked the bank owner­
ship change and if any bank service changes occurred.

In

order to obtain such an indication, the third part of the
study involved a mail survey of a knowledgeable representa­
tive from each community where the local bank had been
acquired.

This representative was selected after consul­

tation with the county

extension agent who was asked to

nominate "a person knowledgeable about the local banks
changing structure and services, and the community's
reaction to the changes."

Questions to this representative

included his impressions of the community feeling toward

202

the bank ownership change, how he thought the bank was
serving the community after merger as compared to before
it was acquired, and his feelings on the effects of the
local bank's merger.
6.3

Summary of Findings— Overview
The primary reason for bank mergers waB a lack of

upcoming management talent in the banks that were acquired,
in general, the acquired banks were small, family owned and
operated institutions.

As the bank manager reached retire­

ment age, the bank owners decided to sell the bank rather
than hire new management.

(See section 2.6 for further

discussion of reasons for bank mergers.)
The fourteen banks that had acquired a rural bank
were much larger than the fourteen independent banks.

After

merger, as of December 31, 1970, total assets for the merged
banks averaged $54.5 million; the range was from $18 to $183
million.

Ten of the merged banks were in the range of $30

to $70 million in total assets.

The fourteen independent

banks averaged $7.3 million in assets, ranging from $3 to
$15 million.

Ten of the independent banks were in the range

of $5 to $9 million in total assets.
An overview of each bank pairing
presented in Chapter IV.

(case summary) is

Each case analysis compared ser­

vices and the change in services between the acquired or
merged bank and a control located in the community with
similar population and economic base.

Repeating the details

203
of each case analysis here would be repetitious.

But, the

aggregate findings presented in Chapter V will be summarized
in this chapter.
6.3.1

Services Available
Bank services available to rural residents were

enhanced when the rural banks were acquired by larger city
banks.

The merged banks had liberalized their credit

arrangements more in the past five years than the independ­
ent banks.

Specifically, merged banks required a lower down

payment for conventional real estate loans and more of the
merged banks were affiliated with a low-down-payment real
estate loan program.

However, interest charges for real

estate loans were comparable from both groups of banks.
The acquired banks offered more auxiliary services,
such as credit cards, trust department services, and inven­
tory retail financing.

More of the merged banks also used

computers to record transactions for the customers' accounts.
As expected, the size of loan available to a single
customer was larger from the merged banks.

However, to

compete on loan size, all the independent banks in the
survey had established relationships with city correspondent
banks to assist in servicing large loans.

Chief executive

officers of independent banks could authorize and grant
larger loans than the branch managers of the acquired banks,
but there was a broad range of loan granting authority for
managers of both categories of bank offices.

2Q4
6.3.2

Resource Use and
Service Costs
In terms of resource use, the merged banks reported

having higher target loan/deposit ratios than did the in­
dependent banks.

Also, the banks that merged increased

their target loan/deposit ratios from 1965 to 1970 more
than the banks that remained independent.
Both groups of banks indicated that in the past
five years consumer loans and real estate loans were the
most rapidly growing loan services.

A major difference

in loan service was that some of the independent banks
did not offer a full range of loan services.

Short term,

monthly payment, consumer loans were not offered by some
independent banks.
Interest charges on loan types were similar except
for farm operating loans.

For farm operating loans the

merged banks charged higher rates.

Nine of the fourteen

merged banks reported charging 8 per cent interest, whereas
nine of the fourteen independent banks charged farmer
borrowers only 7 per cent interest.

Also, more of the

merged banks set some farm operating loans up on higher
cost monthly payment plans.
There was little difference reported by the merged
banks between the interest charged for farm operating loans
and other types of business loans.

Frequently independent

banks charged farmers less than other business customers.
Larger banks may be more in tune with money markets

205

and may place fewer institutional constraints on
market activity.
Increased market awareness and efficiency is
indicated because more of the merged banks reported paying
maximum regulation interest rates on savings accounts than
the independent banks during periods of "high" interest
rates.
6.3.3

Competitive Effect
of Mergers
A major objective was to evaluate the change in

the structure of rural banks with respect to changes in
competitition between them and other rural lending agencies.
It was found that bank mergers had little effect on com­
petition between agencies offering farm loan service.

The

Production Credit Association and Federal Land Bank Associ­
ation representatives who were surveyed reported little
change in the acquired bank's farm lending activity after
merger.
Banking competitors of eight merged banks were also
contacted.

Overall, these representatives reported no sig­

nificant change in the competitive relationship after the
merger of the subject banks.

They reported the most

important factor in establishing customer relationships
was the convenience of the bank office to the people
instead of services available and service costs.

2Q6

6.3.4

Community Feelings
Community members were often unhappy with the bank

ownership change at the time of merger of the local bank
into larger banking firms.

However, by the time of the

survey the disappointment had lessened and most communities
viewed the bank mergers favorably.

The representative

citizens reported an increase in the community’s awareness
of services available and noticed an increase in the avail­
ability of loan funds after merger.
As a measure of responsiveness to local problems
on the part of bank management, information was gathered
indicating where the officers lived.

It was found that

independent banks had a higher proportion of their officers
and directors from the local community.

However, as a

measure of community responsiveness this proxy variable
has major shortcomings.

In several cases it appeared that

the independent bank owner's primary goal, even though he
lived in the community, was not related to local community
development.

On the other hand, some of the non-resident

managers of merged branches seemed to be especailly con­
cerned with community development.
There were other minor differences between merged
and independent banks.

The merged operations had somewhat

more modern and comfortable physical facilities.

Service

charges on checking accounts were reported to be similar
for both groups of banks.

Managers of the merged banks

207
reported criticism of "impersonal" services and of the
change in bookkeeping techniques from a manual to a com­
puterized system.

The independent bank managers did not

report any substantial criticism.

Hours of operation varied

little between the two types of banks.
There was no attempt in this study to measure
either financial or economic efficiency as they relate to
bank mergers.

Most of the managers of the acquired*banks

were "satisfied" with the results of the newly acquired
office, but some of the city banks indicated their acquired
country branches had not lived up to "expectations."
6.4

Major Findings
A major finding with respect to Michigan agriculture

is that farm operating loans are often available at lower
interest rates from independent banks than from rural
branches of larger banks.

Also, independent banks fre­

quently charge farmers less for loan funds than they charge
for other business loans.

In contrast, the merged banks

typically charge the same rate for farm loans as other
business loans.
There may be several reasons for this.

One may be

an attitude among some country bankers that "farmers can't
afford high interest rates."

Another reason country banks

may charge less for farm loans is to increase the size of
their loan portfolio.

In order to stimulate loan demand,

independent banks, which may have few loan investment

208
alternatives, may offer more favorable rates to farm
borrowers than merged banks which have more loan investment
alternatives.

In any event, market efficiency is enhanced

because all resource demanders face more similar resource
costs regardless of the planned use of the resources.

An

important finding for consumers is that merged banks granted
more types of loans to a broader class of people.

Interest

Charges for consumer loan service were comparable at both
types of banks.

In serving a broader population a bank

makes loans to some poorer risk customers and on some loans
has a larger risk of not being repaid.

But because his

loss from one given bad loan may be less disastrous for
a large bank than it is for a small bank, large banks may
accept this risk more readily than would a small bank.
Merged banks paid higher interest rates on savings
accounts than the independent banks.

In this sense, savers

are brought closer to money market rates of interest.

This

may have implications for community development also because
it may enable the local bank to attract more local deposits.
These deposits, if used locally, may further stimulate local
economic growth.
Records which show where loan proceeds are used were
not available.

It was found that some of the independent

banks had substantial amounts of loan funds outstanding to
customers who lived outside the bank's primary service area.
The reason for this was that some independent bank owners

209
use the bank's deposit base to facilitate personal business
interests.

This action drains off loanable funds from the

local community and may affect community development.
6.5.1

Implications for Customers
The major implication of the merger of rural banks

for bank customers is that more services become available
to more people because of the merger.

Credit standards

tend to become more liberal and more objective after merger.
Real estate loan down-payment terms are liberalized, and
more people can qualify for real estate loan services.
Loans are written for more purposes.

However, the costs

of loan service are similar except

independent banks

charge lower rates for farm operating loans than for other
business loans.

This contrasts to merged banks which charge

the same rates for farm operating loans and other business
loans.

Higher interest rates are likely to be paid on

savings deposits.

More auxiliary services are available.

Merged banks are also likely to have higher loan/deposit
ratios.
These additional services are not available without
"cost," even though the charges for the services may be
similar.

One cost of merger may be the loss of "personal­

ized" service that is often associated with a small firm.
Larger banks commonly use electronic data processing rather
than hand posting.

There may be less time for friendly

chatter while using a drive-in window than going into the

210

bank lobby to transact business.

The "decision makers" of

a merged bank may be less well known or even totally un­
known to the resident of a small town.
A second cost may be that people will have fewer
bank firms with which to conduct business.

Under the

Michigan banking rules, the merger of a small town bank
into another banking firm forecloses one alternative source
of bank service each time a merger is consumated.
A major implication for agriculture is that the
merger of a small town bank into a larger banking firm may
affect farmers with different sizes of businesses differ­
ently.

Larger banks typically put more emphasis on financial

statements in evaluating credit worthiness of loan applicants,
whereas small banks look more at personal and family charac­
teristics of the loan applicant.

So merger of a small town

bank into a larger firm may require farmers to supply de­
tailed records and budgets to support loan applications.
Some smaller farmers may find it difficult to supply this
type information.

Also, larger banks may have a minimum

size farm business loan.

This minimum size may be larger

than some small farmers would need.

Therefore, smaller

farmers may be forced to use higher cost consumer types
loans to finance their businesses.

If sufficient (or

potential) farm loan business exists, a large bank may
hire a farm loan specialist to give financial counsel to
farmer borrowers.

The specialist may segment the farm loan

211
market and limit his services to borrowers that need large
lines of credit, thus making the merged bank a more aggres­
sive competitor for prime farm accounts.

Because of these

practices, large banks may serve only larger farmers and
issue fewer farm loans than independent banks.
6.5.2

Implications for Other
Credit Agencies
A major effect of bank mergers on other credit

agencies is that a larger bank can, if its management
desires, enter a market with a greater resource base and
drive than a smaller bank.

It is a common allegation that

a large merged bank, having a footing in many business
areas, can subsidize its efforts in one market area from
earnings in other market areas.

Moreover, their competitors

are likely to be restricted-line institutions such as savings
and loan associations, Production Credit Associations, and
similar agencies.

However, this allegation is inconsistent

with profit-seeking behavior.

If management of a larger

bank sees an unexploited area or an unusually profitable
market, the bank can be expected to enter that market.
Conversely, the pressure of severe competititon or low
profits in a given market will cause the bank to withdraw
resources from that market.

Since cross-subsidization

implies the acceptance of unusually low {or negative) re­
turns in a particular market, it is at odds with profit
maximization and requires alternative managerial goals and

212
sufficient insulation from competition to pursue them.
A more reasonable expectation is that banks will be active
in the markets of the specialized agencies only when they
have surplus funds— if rates of return are lower for urban
than for rural customers— and that the intensity of compe­
tition the specialized loan agencies will feel and the
demand they will enjoy will be much more unstable when
their principal competitors are acquired branches than
when they are independent banks.
Evidence of this was seen between 1965 and 1970
when merged banks became more active in real estate and
consumer loan markets and gave less emphasis to the farm
loan market.

Real estate loans and consumer loans are

generally thought of as profitable loans, and farm loans
are often characterized as being specialized and risky.
These trends were noted in a period when monetary condi­
tions were increasingly "tight."
6.5.3

Implications for Regulatory
Agencies
As the regulations are currently written and in­

terpreted, once mergers are effected there are no major
changes for the regulatory agencies.

There may be some

effects in that there will be fewer banks to examine and
they will need to explain new rule changes and forms to
fewer people.

So more mergers mean less work for the

regulators after the mergers are consumated.

4

213
Before merger applications are approved, though,
the regulatory agencies must do a thorough, review of the
competitive effects of the proposed merger.

As more mergers

are consumated and fewer banking firms result, the analysis
of the competitive effects will become more difficult.
After time, competition for certain types of business may
be lessened.
markets.)

(See section 2.1.2 for discussion of bank

If this happens, new regulations may be necessary

to insure that the resulting banking firms serve all the
citizens' needs.

Institution and enforcement of new rules

may be difficult and may require increasing the depth and
quality of regulatory agencies.
A disturbing aspect is that we know very little
about the power structure in the state banking industry.
One respondent told the interviewer that the major Michigan
bank law changes since 1930 came as a result of two indi­
viduals :

Howard Stoddard and Donald Parsons.

The Stoddard

interests pushed for the branch banking law changes, and
they were made.

The Parsons group was involved in a banking

operation which almost caused insolvency of several banks.
This latter situation spurred the Bank Holding Company Act
of 1970, an act which allowed some other banking interests
to "bail the banks out of the situation."

Both of these

bank law changes were used by some banking groups for
financial gains.

These allegations should force us to ask

a question about the future:

Will a few large financial

214

concerns be able to have undue influence over the Michigan
financial markets and operating rules?

Because of economies

of size and power, a few powerful interest groups may be
able to gain special privileges by obtaining passage of
regulations which are not in the best interests of the
states' citizens.
6.6

Suggestions for Further
Research
This study looked at the effects of bank mergers on

financial services available to rural Michigan residents.
Equity, progressiveness, and resource use efficiency from
the point of view of the rural citizens and community were
the primary criteria used in the evaluation.

There are

several additional questions for further study suggested
in Chapter V at the conclusion of the discussion of each
criterion.

(See sections 5.3.9, 5.4.7, and 5.5.3.)

This

section will suggest four additional areas of research.
A logical extension of this research would be to
take an indepth look at the economic and allocative effi­
ciency aspects of bank mergers.

Questions here include:

What is the optimum size of rural banks and what criteria
should be used' to measure this size?

Do bank service

prices accurately reflect the cost of providing the ser­
vices?

How do bank mergers affect the customer structure

of banks?

215

A second area of further research is in the area of
"market" research.
that is desired?

Are rural banks providing the service
If local banking service is "unsatisfac­

tory" how far will people travel to find "satisfactory"
service?

How extensive is the rural community's knowledge

of capital markets and the alternatives available to them?
Market research in the area of "quality" of banking
services is also needed.

In this study there was no measure

of the quality of service available from the different bank­
ing firms.

Of what value are six checking account plans

from which to choose if accounting errors are commonplace?
Of what value is a trust department if the trust officers
are incompetent?

Of what value are low interest charges

on loans if the bank makes very few loans?

Research

quantifying the quality of service available from banks
is needed.

Only then can one assess the overall service

of one bank compared to another.
A third research need concerns investigating the
extent to which local banks serve the community's needs.
Some imaginative research to develop a "community services
index" may be necessary before attacking this problem area.
This index should include items relating to what the com­
munity wants and needs, where loan proceeds are used,
interest rates paid on savings accounts, charges on loans,
which segments of the community are and are not served,
returns to stockholders, etc.

This index should be

216

weighted to show the bank's performance for all classes of
people that it is chartered to serve.
If it is found that some banks do not serve their
communities well, research might examine ways to make banks
more responsive to serving community needs.

Suggestions of

possibilities to investigate here include having some pub­
licly elected members on the Board of Directors of the bank.
Publishing information from the "community service index"
may give banks an incentive to give better local service.
If some people are denied banking services, perhaps an
appeal board could be established to review the bank
officers' decisions.

Another possibility to investigate

would be the effects of allowing another bank office to be
operated in the same community as the unresponsive bank.
The threat of additional competition may have positive
effects on a bank's community service.
New developments in the rural financial markets
suggest the fourth research area.

What will be the impact

of other financial institutions providing demand deposit
services?

How will this affect the flows of funds into

various uses?

What will be the effects on the bank's

ability to attract funds?

Bank holding company legislation

has recently been passed in Michigan.

What will be the

impact on rural areas of a bank holding company owning
several financial institutions?

These and other questions

need to be answered so policies can be developed to meet
financial service needs of rural people.

217
6.7

Suggestions for Legislative
Consideration
This study revealed that rural bank offices that

are branches of larger banking firms offer more banking
services, have more liberal credit requirements, and
reduce some loan requirements.

Also, the branch offices

of larger banks pay higher interest rates for savings
deposits and have higher target loan/deposit ratios.

If

these results are desirable, legislative action to en­
courage rural bank mergers and consolidations should be
enacted.
Increasing the minimum capital requirements of
banks would be a passive means of requiring consolidation
of banks.

Even if rural banks did not consolidate to

meet the minimum capital requirements, the additional
capital may help the bank attract more customers.

By

serving a larger customer base, a bank should be able to
afford to offer additional services.
As the bank merger rules are currently written,
before a merger can be consumated it must be shown that
the merger will not lessen competition.

But as it is

currently practiced, all bank merger applications show
enhanced competition by defining a geographical market *
with the primary competition being larger banks.

Elimi­

nating this "lessened competition" requirement may also
pave the way for additional consolidations of rural banks.

218

Rules that would act to protect bank loan customers
and potential loan customers should also be considered.
Banking laws are currently written to give a large amount
of protection to depositors, but there are few regulations
to give any protection or service to other groups using
bank loan service.

It was found that some banks did not

provide some of the desirable types of loan service to the
local community.

Perhaps legislative consideration should

aim to protect people living in communities from bank
managements that do not give adequate local service.

But,

before specific suggestions can be made in this area, further
research would be necessary to define where legislation is
needed and the limits of the legislation.

BIBLIOGRAPHY

BIBLIOGRAPHY

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"An Investigation Into The Effects of
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1964.
Bain, Joe. Industrial Organization. 2nd ed.
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New York:

Benson, Richard A.
"A Comparative Analysis of Financing
Requirements of Selected Types of Farm Operations
in the Eastern Corn Belt for 1980." Unpublished
Ph.D. dissertation, Michigan State University, 1970.
Black, Graeme M., Deputy Commissioner of Banking (Lansing),
Financial Institutions Bureau, Michigan Department
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Brake, John R.
"Financing Michigan Farms - Now and In 1980."
Research report 46. East Lansing: Michigan State
University Agricultural Experiment Station.
Brown, William J.
"The Dual Banking System in the United
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Caves, Richard. American Industry: Structure, Conduct,
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Edwards, Franklin R.
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FRB of Boston, No. 26 (1964), also Ph.D. thesis,
Harvard University.
Emery, John Thomas.
"Risk, Return fi the Competitive
Structure of Commercial Banking." Ph.D. thesis,
University of Washington, Department of Business
Finance & Quantitative Methods, 1969.

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220
Federal Reserve Bank of Atlanta.
"Banking Structure and
Agricultural Finance in a Southeastern Region."
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tition: Proceedings of a Conference. May 19 and
20, 1969.
Fischer, Gerald C. Bank Holding Companies.
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New York:

Flechsig, Theodore G.
"Banking Market Structure & Per­
formance in Metropolitan Areas." Board of Governors
of the Federal Reserve System, May, 1965.
Gramley, Lyle E.
"Scale Economies in Banking." Federal
Reserve Bank of Kansas City, November, 1962.
Griffiths, Brian.
"Competition in Banking."
Hobart Paper
#51. London: The Institute of Economic Affairs,
1970.
Guttentag, Jack M . , and Edward, Herman S.
"Do Large Banks
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(September, 1966}, 535-538.
________ . "Banking Structure fi Performance." The Bulletin
- NY University Grad School of Bus. Ad. Inst, of
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"The Impact of Branch
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________ . "Report on the Michigan Banking Structure."
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January 10, 1969.
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"Customers View a
Bank Merger." Federal Reserve Bank of Chicago,
October, 1969.
Kaufman, George G.
"Bank Market Structure and Performance:
The Evidence from Iowa."
Kaufman, George G.
"Business Firms and Households View
Commercial Banks." Federal Reserve Bank of Chicago,
September, 1967.
Kohn, Earnest.
"The Future of Small Banks."
Banking Department, December, 1966.

New York State

221
Kohn# Earnest/ and Carlo# Carmen J. "The Competitive Impact
of New Branches." New York State Banking Department#
December# 1969.
________ . "Potential Competition: Unfounded Faith or
Pragmatic Foresight." New York State Banking
Department# March# 1970.
Kreps# Clifton H.
Banking."
1964.

"Character and Competitiveness of Local
Federal Reserve Bank of Richmond, October,

Jessup, Paul F. "Changes in Bank Ownership: The Impact on
Operating Performance." Board of Governors of the
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Lawrence# Robert J.
"The Performance of Bank Holding
Companies." Board of Governors of the Federal
Reserve System# Washington, D.C.# June# 1967.
Mayne, Lucille Stringer.
"The Effect of Federal Reserve
System Membership On the Profitability of Illinois
Banks# 1961-1963." Center for Research of the
College of Business Administration# The Pennsylvania
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McCall# Alan S. "A Statistical Study of Market Structure
and Performance: Small and Medium Sized Commercial
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of Kentucky# 1969.
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"Salary Survey# 1971." Bank
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"Commercial Banking: Structure# Competition and
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August, 1967.
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Mergers and the Public Interest." A Summary Report#
1964.
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June, 1967# pp. 916-926.

222
"Recent Changes in the Structure of Commercial Banking."
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"Characteristics of Merging Banks." Board
of Governors of the Federal Reserve System, April,
1969.
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"The Performance of Merging Banks." Journal
Business of the University of Chicago, XLIV, No. 2
(April, 1971), 184-192.
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"Research on Banking Structure and Perform­
ance." Federal Reserve Bulletin, April, 1966, pp.
488-498.
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"Toward a Concrete Concept of Effective
Competition." American Journal of Agricultural
Economics, L, No. 4 (1968).
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"Businesses View Banking Services,"
Reserve Bank of Chicago, March, 1967.

Federal

Swackhamer, Gene L . , and Doll, Raymond J.
"Financing Modern
Agriculture:
Bankings Problems and Challenges."
Research Department, Federal Reserve Bank of K.C.,
1969.
Taylor, Robert L., Vice President, Bank of Alma.
interview, September 8, 1971.

Personal

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1971.
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"Banking Structure and Bank
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Areas." Unpublished Ph.D. dissertation, University
of Virginia, 1965.

APPENDICES

APPENDIX A

QUESTIONNAIRE USED FOR BANK INTERVIEWS

APPENDIX A

QUESTIONNAIRE USED FOR BANK INTERVIEWS

Name of Bank: _____________________________

Branch:

Officer Interviewed: ______________________ Date:
Information from December 31, 1970, Call Report:
Assets
1.
2.
3.
4.
5.
7.

Cash and due from banks
U.S. Treasury securities
Securities of other U.S. Government agencies
Obligations of States and political
subdivisions
Other securities
Federal funds sold

Liabilities
22.

TOTAL DEPOSITS
(a) Total demand deposits
(b) Total time and savings deposits

Capital
34.
35.
36.
37.
38.
39.
40.
41.
42.

Capital notes and debentures
Equity capital, total
Preferred stock-total par value
Common stock-total par value
Surplus
Undivided profits
Reserve for contingencies and other
capital reserves
TOTAL CAPITAL ACCOUNTS
TOTAL LIABILITIES, RESERVES, AND CAPITAL
ACCOUNTS

223

224
Schedule A
1.

2.

4.
5.
6.

8.

Real estate loans:
(a) Secured by farmland
(b) Secured by 1-4 family residential
properties
(1) Insured by FHA
(2) Guaranteed by VA
(3) Not insured or guaranteed by FHA
or VA
(c) Secured by multi-family residential
properties
(d) Secured by nonfarm nonresidential
properties
Loans to financial institutions:
(a) To domestic commercial and foreign
banks
(b) To other financial institutions
Loans to farmers
Commercial and industrial loans
Loans to individuals for household, family
and other personal expenditures:
(a) To purchase private passenger
automobiles on installment basis
(b) Credit cards and related plans:
(1) Retail (charge account) credit
card plans
(2) Check credit and revolving credit
plans
(c) To purchase other retail consumer goods
on installment basis
(d) Installment loans to repair and
modernize residential property
(e) Other installment loans for household,
family, and other personal expend.
(f) Single-payment loans for household,
family, and other personal expenditures
TOTAL LOANS, GROSS

Information from December 31, 1965, Call Report:
Assets
1.
2.
3.
4.
5.
6.

Cash, balances with other banks
United States Government obligations
Obligations of States and political
subdivisions
Securities of Federal agencies and
corporations
Other securities
Federal funds sold

225
Liabilities
20.

TOTAL DEPOSITS
(a) Total demand deposits
(b) Total time and savings deposits

Capital Accounts
26.
27.
28.
29.
30.
31.

(a) Capital notes and debentures
(b) Preferred stock— total par value
(c) Common stock— total par value
Surplus
Undivided profits
Reserve for contingencies and other
capital reserves
TOTAL CAPITAL ACCOUNTS
TOTAL LIABILITIES AND CAPITAL ACCOUNTS

Schedule A
1.

2.
4.

5.
6.

Real Estate Loans
(a) Secured by farmland
(b) Secured by residential properties
(c) Secured by residential properties (other
than farm) and guaranteed by Veterans
Administration
(d) Secured by residential properties (other
than farm) and not insured or guaranteed
by FHA or VA
(e) Secured by nonfarm nonresidential
properties
Loans to financial institutions:
(a) To domestic commercial and foreign banks
(b) To other financial institutions
Loans to farmers (include secured and
unsecured loans to farmers, except loans
secured by real estate above):
(a) Loans directly guaranteed by the
Commodity Credit Corp. and certificates
of interest
(b) Other loans to farmers
Commercial and industrial loans
Loans to individuals for household, family,
and other personal expenditures:
(a) To purchase private passenger auto­
mobiles on installment basis
(b) To purchase other retail consumer goods
on installment basis
(c) Installment loans to repair and
modernize residential property
(d) Other installment loans for household,
family, and other personal expenditures

226

8.

(e) Single-payment loans for household,
family, and other personal expenditures
LOAMS AMD DISCOUNTS, GROSS

Interest Rates
What is your basic interest rate for the following types
of loans?
Real Estate
Farmland
Residential
Other
Farm Loans
Commercial &
Industrial Loans

Consumer Loans
Auto (new)
Credit Card
Residential
Improvements
Single Payment

Competition on Loan Service
1.

How large is your primary service area?
(i.e., radius
in miles that represents 80 per cent of your customers)
________ miles

2.

In this area who are your primary competitors for the
following types of loans?
Where is
Type of Loan
Competitor
his office?
Real Estate Mortgages
a. Farmland___________ _____________________
b. Residential
__________________

___________
___________

Farm Loans
Commercial &
Industrial Loans
Consumer Loans
a. Auto
b. Credit Cards
c. Residential
Improvements
d. Single Payment

_____________________

___________
___________

_____________________
_____________________

___________
___________

Which competitor's operations have changed substantially
in the last five years?

227

Have their changes made your lending policies:
Much more liberal ______
Some more liberal ______
Not much change
•

Some more conservative ______
Much more conservative ______

Have these changes affected the total availability of the
following types of loans to the community?

Loan Type

Increased
Substantially

Increased
Somewhat

No
Change

Decreased
Somewhat

Decreased
Substantially

_________
_________

______
______

_________
_________

_________
_________

Real Estate _________
Farm
_________
Consumer
■Loan Limits

Type of Loan
Nominal ($)

1965

1970

________

________

Practiced Limits,
Conventional Loans
1965

1970

Practiced Limits
(if different from legal)
1965
1970
_____

____

___________

Limit Under Special
Arrangements
1965

1970

Real Estate
(% of Value)
Number of loan requests over nominal legal limits:
1965

1970

How are nominal and secured loan requests over these limits
serviced?
(% of requests)
% a. Correspondent
% b. Referred to other bank

% c. Handled by board
members or other
community members
% d. Refused

228
How are real estate loan requests over your ability to serve
handled? (ft of requests)
ft a. Correspondent Bank
ft b. Life Insurance
Company

____ % c. Savings and Loan Assn.
ft d. Federal Land Bank
Assn.

Time involved in servicing loan requests:
If this office is a branch
1.
2.
3.

What is the loan limit of the branch manager? $_________
What is the loan limit of the branch loan committee?
$___________
If this loan request is referred to the main office, how
long does it take for approval of various size loans?
Approving Officer
Days Necessary
or Body__________
Loan Limits ($ 000) For Approval
Senior Officer
Loan Committee
Board Committee
Board of Directors

4.

____________________
____________________
____________________

_______________
_______________
_______________

How long does it take to obtain approval for a loan
request from your correspondent bank? ___________ days

Loan/Deposit Ratios
What is your bank's 'target* loan/deposit ratio? __________ ft
Does your bank have 'target' loan/deposit ratios for each of
the various types of loans?
No
Yes
If y e s , what are they?
Type of Loan

Target Loan/Deposit Ratio

Real Estate__________________ ___________________________
Farm Loans
___________________________
Commercial & Industrial
__________________________
Consumer Loans
___________________________
All Other
____
_____
Has your target loan/deposit ratio changed the last five
years?
Yes
No
If yes, from _____ % to______ ft.

Reason for change: _____

229

Deposit Services
Were Regulation Q rates paid in:
Time Certificates
Passbook

1965

1970

Yes

No

___
___

__
__

What was the number of depositors in: 1965
Checking Accounts
Passbook Savings
Time Certificate Depositors

____
____
____

Yes

No

1970
____
____
____

Competitors
Checking Accounts
Passbook Accounts

(1) _____________________________________
(2)
(1)

Time Certificate
Depositors

(1) _____________________________________
(2)_____________________________________

(2 )

~~

Are your checking account charges
lower than your competitors?

higher,

comparable,

If your bank has not paid maximum Regulation Q rates on
deposits the last five years, when and why not? ___________
How has competition for deposits changed the last five years?
Increased Substantially
Increased Somewhat
Remained the Same
Decreased Somewhat
Decreased Substantially
Which competitors changed?

How? ____________________________

Municipal Services
1.

What per cent of the total amount of services to local
governmental units that are demanded does your bank
provide?
ftof short term operating loans
% of municipal bonds purchased
% of checking and other banking services
If a branch office, does the branch have facilities to
serve these needs, or are they referred to the main
office?
Main office
Branch

230
Other Services
1.
2.
3*
4.

Do you have a trust department?
Do you do 'floor planning* for your retail
customers?
Do you offer your customers credit cards?
Are your accounts computerized?
If yes, do you have your own computer?
If not, where do you rent computer time?

Yes
_____

No
___

_____
_____
_____
_____
_____

___
___
___
___
___

Customer Structure
How many customers from each type of loan category have
increased or decreased the last five years (net)?
Type of Loan
Real Estate
Farm
Commercial &
Industrial
Consumer

No. of Customers
Amount of Change

Reasons for Major Change

+_
+‘
+_
+"

If your capital expanded, did this change help attract
significantly more customers?
Yes
No
If yes, which of your loans services gained most? _________
Did competitors changes in the last five years cause you to
gain or lose loan customers?
Yes
No
Why? For
which services?
_______ _____________ ___
_____
Service Changes
1.
2.
3.

4.
5.
6.

What has been the fastest growing loan service the last
five years? _______________________________________________
What has been the second fastest growing loan service
the last five years? _______ __
What bank operations or services do you expect to change
in the next two years in response to expected community
changes? ____________ ;
_____________________________________
Is your bank affiliated with a bank credit card service?
Yes
No
If not, do you expect to be in the
next year?
Yes
No
Which of your bank operations have received criticism
from the community in the last year? ____________________
What actions have you taken, do you intend to take, or
can you take to alleviate this? _________________________

231
7.

8.
9.
10.

What are your hours of operation? ____________________
In the last five years have these expanded? ___ Yes
No Change
Were Shortened
Are you open on Saturday?
Yes
No
Are you open any evenings?
Yes
No
What was your advertising budget in 1965? $
in 1970? $______
Did the type of your advertising change between these
two periods? __________________________________________
Do you think people are more aware of the range of
services that your bank office offers now than they
were five years ago? _________ ________________________
Why? ___________________________________________________

Ownership and Management
1.

What was the last ownership control change of this
bank (or branch office)?

2.

Is ownership control of the bank local? ___ Yes
___No
If not, how far away of where is the controlling group
located?
How many directors does the bank have?
Of these, hoW many work in the bank?
What afe the primary occupations of the rest?

3.

How many of the directors live in the local community?

For Branches of Larger Banks
1.

2.
3.
4.
5.

What was
a. _____
b. _____
c. _____

the primary reason for merger?
Lack of upcoming management talent
Need for additional capital
Normal sale of bank stock which other bank
purchased
d. _____ Need to offer additional services tothe
community which old bank was unable to do
because of small size
How many of the 'old', bank directors are on the 'new'
bank board? ________ ________________________
How many of the 'old' bank executives are with the 'new'
bank?
How many of the 'old' bank executives left of their
choice? ________________________________ __________________
What is your feeling of how the community views the
change from a unit bank to a bank that is a branch of
a larger organization? __________________________________

APPENDIX B

QUESTIONNAIRE SENT TO COMMUNITY
REPRESENTATIVES

APPENDIX B

QUESTIONNAIRE SENT TO COMMUNITY
REPRESENTATIVES

Name of Bank:

Reference Number:

Branch Location:

What is your impression of the
current community feeling toward
the bank since the ownership
change? (Please check one answer.)

_Highly favorable
_Favorable
"No change
"Unfavorable
_Highly unfavorable

What was your impression of the
_____ Highly favorable
community feeling toward the bank
Favorable
immediately after the ownership_____ _____ No change
change? (Please check one answer.)
Unfavorable
Highly unfavorable
Is the current bank ownership
'pushing1 some types of loans more
than the past ownership did?
If yes, which
of increasing

loans? (Rankin order
emphasis.)

Is the current bank ownership
'holding back' on writing some loans
that the past ownership serviced?

232

Yes
No
Farm Loans
_____ Real Estate Loans
Consumer Loans
Commercial Loans
Other
_Yes
No

233
If yes, which loans? (Rank in________ _____ Farm Loans
order of decreasing emphasis.)_______ _____ Real Estate Loans
Consumer Loans
Commercial Loans
Other
Are the people of the community______ _____ Much more aware
more aware of the range of services
Some more aware
available from the bank now than
No change
they were five years ago? (Please
Slightly less aware
check one.)____________________________ _____Less aware
Has the current bank ownership
improved service to any group of
customers that the past bank
ownership did not service well?
(Please check one.)

Yes
No

If yes, what type of customers?______ ________
(Please fill in.)

Have you noticed any change in the
bank's advertising the past five
years?

Yes
No

If yes, what changed?_________________________

What is your personal feeling toward the bank ownership
change? Do you like it? Did it benefit the community?
Would you like to see the bank go back to a locally owned
bank? What other comments would you like to make about this
bank ownership change?
(Remember, this is confidential.)

THANK YOU I