L I BR AR Y o A 8: N! I COLLEGE- E-15-532-7500-Ll80 TEXASSAGRICULTURAL EXPERIMENT STATIUN A. B. CONNER, DIRECTOR COLLEGE STATION, BRAZOS COUNTY, TEXAS ‘BULLETIN NO. 450 MAY, 1932 DIVISION OF FARM AND RANCH ECONOMICS ECONOMIC EFFICIENCY olgjnixg COUNTRY BANKS I; 1 2/ ' 4 _,. ‘ j a \ u) l A’ AGRICULTURAL AND MECHANICAL COLLEGE OF TEXAS T. O. WALTON, President Administration: A. B. Conner, M. S., Director R. E. Karper, M. S., Vice-Director Clarice Mixson, B. A., Secretary M. P. Holleman, Jr., Chief Clerk J. K. Francklow. Asst. Chief Clerk Chester Higgs, Executive Assistant Howard Berry, B. S., Technical Asst. Chemistry: G. S. Fraps, Ph. D., Chief; State Chemist S. E. Asbury, M. S., Chemist J. F. Fudge, Ph. D., Chemist E. C. Carlyle, M. S., Asst. Chemist T. L. Ogier, B. S., Asst. Chemist A. J. Sterges, M. S., Asst. Chemist Ray Treichler, M. S., Asst. Chemist W. H. Walker, Asst. Chemist Velma Graham, Asst. Chemist _ Jeanne F. DeMottier, Asst. Chemist R. L. Schwartz, B. S., Asst. Chemist C. M. Pounders, B. S., Asst. Chemist Horticulture: S. H. Yarnell, Sc. D., Chief **L. R. Hawthorn, M. S., Horticulturist H. M. Reed, B. S., Horticulturist J. F. Wood, B. S., Horticulturist L. E. Brooks, B. S., Horticulturist Range Animal Husbandry: J. M. Jones, A. M., Chief B. L. Warwick, Ph. D., Breeding Investiga. S. P. Davis, Wool Grader Entomology: F. L. Thomas, Ph. D., Chief; State Entomologist _ H. J. Reinhard, B. S., Entomologist . K. Fletcher, Ph. D., Entomologist . L. Owen, Jr., M. S., Entomologist J. N. Roney, M. S., Entomologist J. C. Gaines, Jr., M. S., Entomologist S. E. Jones, M. S., Entomologist F. F. Bibby, B.~S., Entomologist S. W. Clark, B. S., Entomologist awE **R Q51?! . W. Dunnam, Ph. D., Entomologist . W. Moreland, B. S., Asst. Entomologist C. E. Heard, B. S-., Chief Inspector C. Siddall, B. S., Foulbrood Inspector S. E. McGregor, B. S., Foulbrood Inspector Agronomy: ' S. D. Pearce, Secretary E. B. Reynolds, Ph. D., Chief J. H. Rogers, Feed Inspector R. E. Karper, M. S., Agronomist K. L. Kirkland, B. S., Feed Inspector P. C. Mangelsdorf, Sc. D., Agronomist S. D. Reynolds, Jr., Feed Inspector D. T. Killough, M. S., Agronomist P. A. Moore, Feed Inspector H. E. Rea, B. S., Agronomist E. J. Wilson, B. S., Feed Inspector B. C. Langley, M. S., Agronomist H. G. Wickes, B. S., Feed Inspector Publications: A. D. Jackson, Chief SUBSTATIONS l No. 1, Beeville, Bee County: R. A. Hall, B. S., Superintendent No. 2, Lindale, Smith County: P. R. Johnson, M. S., Superintendent **B. H. Hendrickson, B. S., Sci. in Soil Erosion **R. W. Baird, B. S., Assoc. Agr. Engineer No. 3, Angleton, Brazoria County: R. H. Stansel, M. S., Superntendent H. M. Reed, M. S., Horticulturist No. 4, Beaumont, Jefferson County: R. H. Wyche, B. S., Superintendent **H. M. Beachell, B. S., Jr., Agronomist No. 5, Temple, Bell County: Henry Dunlavy, M. S., Superintendent C. H. Rogers, Ph. D., Plant Pathologist H. E. Rea, B. S., Agronomist S. E. Wolff, M. S., Botanist **H. V. Geib, M. S., Sci. in Soil Erosion **H. O. Hill, B. S., Jr. Civil Engineer No. 6, Denton, Denton County: P. B. Dunkle, B. S., Superintendent **I. M. Atkins, B. S., Jr. Agronomist No. 7, Spur, Dickens County: R. E. Dickson, B. S., Superintendent B. C. Langley, M. S., Agronomist N0. 8, Lubbock, Lubbock County: D. L. Jones, Superintendent Frank Gaines, Irrig. and Forest Nurs. STATION STAFF? 5 Veterinary Science: *M. Francis, D. V. M., Chief H. Schmidt, D. V. M., Veterinarian _ I. B. Boughton, D. V. M., Veterinarian V3,, **F. P. Mathews, D.V.M., M.S., Veteril W. T. Hardy, D. V. M., Veterinarian; ~~——, Veterinarian i‘ Plant Pathology and Physiology: J. J. Taubenhaus, Ph. D., Chief W. N. Ezekiel, Ph. D., Plant Patholl \V. J. Bach, M. S., Plant Pathologist C. H. Rogers, Ph. D., Plant Patholo \_ Farm and Ranch Economics: F‘ L. P. Gabbard, M. S., Chief W. E. Paulson, Ph. D., Marketing __ C. A. Bonnen, M. S., Farm Manage **W. R. Nisbet, B. S., Ranch Managem **A. C. Magee, M. S., Farm Manageme Rural Home Research: ' g Jessie Whitacre, Ph. D., Chief Mary Anna Grimes, M. S., Textiles Elizabeth D. Terrill, M. A., Nutrition 1 Soil Survey: T. Carter, B. S., Chief E. H. Templin, B. S., Soil Surveyor A. H. Bean, B. S., Soil Surveyor R. M. Marshall, B. S., Soil Surveyor Botany: V. L. Cory, M. S., Acting Chief S. E. Wolff, M. S., Botanist Swine Husbandry: Fred Hale, M. S., Chief Dairy Husbandry: O. C. Copeland, M. S., Dairy Husban Poultry Husbandry: - _ R. M. Sherwood, M. S., Chief J. R. Couch, B. S., Asst. Poultry Hs ~ _‘ Agricultural Engineering: 1 H. P. Smith, M. S., Chief Main Station Farm: G. T. McNess, Superintendent Apiculture (San Antonio): H. B. Parks, B. S., Chief A. H. Alex, B. S., Queen Breeder Feed Control Service: F. D. Fuller, M. S., Chief James Sullivan, Asst. Chief N0. 9, Balmorhea, Reeves County: J. J. Bayles, B. S., Superintendent No. 10, College Station, Brazos County: R. M. Sherwood, M. S., In Charge L. J. McCall, Farm Superintendent No. 11, Nacogdoches, Nacogdoches Count? H. F. Morris, M. S., Superintendent **No. 12, Chillicothe, Hardeman County: J. R. Quinby, B. S., Superintendent. **J. C. Stephens, M. A., Asst. Agronomist No. 14, Sonora, Sutton-Edwards Counties: W. H. Dameron, B. S., Superintendent ' I. B. Boughton, D. V. M., Veterinarian W. T. Hardy, D. V. M., Veterinarian O. L. Carpenter, Shepherd **O. G. Babcock, B. S., Asst. Entomologist, No. 15, Weslaco, Hidalgo County: W. H. Friend, B. S., Superintendent S. W. Clark, B. S., Entomologist W. J. Bach, M. S., Plant Pathologist y J. F. Wood, B. S., Horticulturist No. 16, Iowa Park, Wichita County: C. H. McDowell, B. S., Superintendent L. E. Brooks, B. S., Horticulturist No. 19, Winterhaven, Dimmit County: E. Mortensen, B. S., Superintendent ”‘*L. R. Hawthorn, M. S., Horticulturist Teachers in the School of Agriculture Carrying Cooperative Projects on the Station: G. W. Adriance, Ph. D., Horticulture S. W. Bilsing, Ph. D., Entomology V. P. Lee, Ph. D., Marketing and Finance D. Scoates, A. E., Agricultural Engineering A. K. Mackey, M. S., Animal Husbandry, *Dean School of Veterinary Medicine. iAs of March 1, 1932. **In cooperation with U. S. Department of Agriculture. J. S. Mogford, M. S., Agronomy F. R. Brison, B. S., Horticulture W. R. Horlacher, Ph. D., Genetics J. H. Knox, M. S., Animal Husbandry A. L. Darnell, M. A., Dairy Husbandry "wwvzvflr ‘="~\‘W'='v<"m=v<.i'~"mwrvr\ < , This study shows that most Texas country banks with less than $300,000 to $400,000 in earning assets have comparatively low earn- ings, pay very little interest to depositors, and charge compara- tively high rates on loans. Also, the figures indicate that such banks are much more subject to failure or voluntary liquidation dur- ing periods of depression than are the larger banks. The net earnings (before losses) for 62 banks with less than $400,- 000 in earning assets averaged 9.08 per cent on the bank investment as compared with 11.26 per cent for 56 banks with $400,000 to $1,- 000,000 and 13.65 per cent for 26 banks with $1,000,000 to $4,000,000 in earning assets. The poor showing of the smaller banks is due largely to high expenses per unit of business and a low ratio of earning assets to the bank investment. Total expenses, exclusive of interest on deposits and borrowed money and taxes, averaged 4.23 cents per dollar of earning assets for banks with less than $400,000 in earning assets as compared with 2.96 cents for banks with $400,000 to $1,000,000 and 2.64 cents for banks with $1,000,000 to $4,000,000 in earning assets. The average ratios of earning assets to the bank investment for these three groups of banks were 3.49, 4.43, and 5.96, respectively. Banks with less than $400,000 in earning assets paid an amount equivalent to an average of 0.78 per cent on all deposits as compared with 1.43 per cent paid by banks with $400,000 to $1,- 000,000 and 1.87 for banks with $1,000,000 to $4,000,000 in earning assets. The group of banks with less than $400,000 in earning assets charged an average of 9.36 per cent on loans as compared with an average of 8.61 per cent for the banks with $400,000 to $1,000,000 and 8.13 per cent for banks with $1,000,000 to $4,000,000. Analysis of the 151 banks which were discontinued in Texas during 1929 and 1930 indicates that the rate of liquidations and absorptions was three times as great among banks with less than $300,000 de- posits as among banks with more than $300,000. More than 17 per cent of all the banks in the State with less than $300,000 deposits in January, 1929, were discontinued before January, 1931, as com- pared with 5 per cent of the banks with more than $300,000. This analysis indicates that Texas country banks have higher ex- penses, pay less on deposits, and charge more for loans than do banks of the same size in the Chicago and Philadelphia Reserve Dis- tricts. Expenses among Texas banks ranged from 6.64 cents (small banks) to 4.92 cents (large banks) per dollar of loans and invest- ments, as compared with a range of 5.65 to 4.79 among member country banks of the Chicago District and 4.48 to 4.08 in the Philadel- phia District. The average amount paid on deposits per dollar of loans and investments among Texas banks ranged from 0.64 to 2.07 cents, as compared with a range of 1.89 to 2.42 in the Chicago Dis- trict and 1.76 to 2.14 in the Philadelphia District. The average rate charged on loans among Texas banks ranged from 9.51 to 6.81 per cent, as compared with a range of 7.36 to 6.05 per cent in the Chicago District. CONTENTS Introduction Classification of Texas banks * Volume of deposits Ratio of deposits to capital and surplus Volume of capital Sizeiand number of banks per town Texas banks liquidated and absorbed from January 1929 to January 1931' Capital stock of liquidated and absorbed banks ...................................... Legal minimum capital requirements Deposits of liquidated and absorbed banks Ratio of deposits to capital and surplus Bank liquidations according to the number of banks per town .......... --Q i Bank failures in Texas, 1911-1930 State bank failures Volume of deposits Volume of capital stock National bank failures .... __ Volume of deposits Volume of capital stock A Analysis of the operation of 154 Texas national banks ..................... _; ....... -- i Gross earnings Expenses =4 Net earnings to earning assets Ratio of earning assets to bank investment Comparison of Texas bank ratios with those of other regions .................. -- Summary and conclusions ULLETIN N0. 450 MAY, 1932 i ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS* By VIRGIL P. LEE . Thousands of country banks throughout the United States have operated nder a severe strain since 1920, even during the comparatively prosperous ears, 1925 to 1929. The total number of commercial banks in the country as declined more than 25 per cent during the last eleven years. Many were losed by government supervising bodies, many were liquidated voluntarily cause of the inability to earn dividends, and many were absorbed by ‘Vrger and stronger banks. More than one thousand country banks were ‘osed by the federal and state supervisors in 1930, and a considerably _rger number in 1931. The unprecedented difficulties of country banks since 1920 may be cribed to three rather distinct groups of factors: 1) low prices of farm p oducts and declining real estate and security values, resulting in bank sses; 2) high operating expenses and declining gross earnings, resulting v low earnings before losses; and 3) too many banks-—preventing the in- ,' ease in volume of business which is necessary if bankers are to operate on e narrower margin of earnings. T Losses are inevitable during periods of poor economic conditions, and is the business of bankers and bank supervisors to develop banks strong ough to absorb them. Bankers have three lines of attack in developing a grong financial position: 1) they can reduce expenses through internal iterating economies and through increased volume of business, 2) they can ‘crease gross earnings per unit of business by better distribution of earning isets, and 3) they can increase the ratio of earning assets to the bank vestment by increasing the volume of business. Most country gynks have been lamentably weak on all these points since 1920. Bank “penses have been very high and gross earnings have been low, resulting " a very narrow margin of earnings. Also, the extremely liberal policy bank supervisors in granting new charters from 1900 to 1920 has created ich an over-banked condition in agricultural communities that the banks “yve been unable to secure the necessary volume of business. Narrow crating margins and the distribution of the business among too many =' its have resulted in a debilitated condition which makes many banks tremely susceptible to collapse under the pressure of poor general ‘ onomic conditions. ' Q That an increase in banking expenses and a decline in gross earnings ‘jer unit of earning assets have occurred since pre-war days is indicated by j. operating figures for all country national banks during the period 14-1916 as compared with the period 1926-1928. For all country national a nks in the United States average expenses per dollar of loans and in- ; n cooperation with the College of Agriculture, A. arrd M. College of Texas. 6 BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION vestments increased from 4.52 to 4.99 cents; for Texas country nat" banks, 5.60 to 6.77 cents. Average gross earnings per dollar of loans _ investments for the country decreased from 7.44 to 6.93 cents; for T from 10.49 t0 8.46 cents. The average margin of earnings (before lo for the country decreased from 2.92 to 1.94 cents per dollar of loans " investments, a decline of about 33 per cent, while in Texas the margin clined from 4.89 to 2.69 cents, or about 45 per cent. _ But as a result of a more rapid increase in the volume of loans and’ vestments than in the bank investment, the average net earnings to ca i for all country national banks was approximately the same in 1926-1928 _ was in 1914-1916, while Texas bank earnings were about 33 per cent J than in the pre-war period. The average ratio of loans and investm to capital, surplus, and undivided profits for all country national b increased from 3.53 in 1914-1916 to 5.77 in 1926-1928, while the ratio* a Texas banks increased from 2.36 to 4.12. To put it another way, for; country national banks a net-earnings margin of 1.38 cents per dolla loans and investments was sufficient to yield 8 per cent on the bank. vestment in 1926-1928 as compared with a requirement of 2.27 cents 1914-1916; for Texas banks the figures are 1.95 and 3.40 cents, respectiv, Thus, for all country national banks combined the increase in the of loans and investments to the bank investment approximately coun, acted the narrowed margin of earnings, while for Texas banks the vol- increase was insufficient to counteract a 45 per cent decline in the earni margin, leaving average earnings to capital only about two-thirds of)’, pre-war figure. Hundreds of individual banks, however, have not fared ‘ well. They have been unable to obtain the indispensible volume of busing‘ which is required under conditions which have prevailed since 1920. A study indicates that a large share of the current poor earnings, volun liquidations, and failures have occurred among the banks which have " been able to keep step with the inevitable trend toward a larger absol volume of business and a larger ratio of volume to the bank investm“ The purpose of this study is to show the relation between volume ,1 business and the economic efficiency of Texas country banks. Econo efficiency is based on service to the community, as well as to bank s I holders, and it is revealed largely in 1) the rate of earnings to the bank f’ vestment, 2) the rate charged on loans, 3) the amount paid on deposits, the frequency of voluntary liquidations, and 5) the frequency of failu The relation of the size of banks to the rate of liquidation and abso _i tion is revealed in a study of the capital and deposits of 151 state r national banks which were discontinued during the trying years 1929 r 1930. The relative efficiency of banks of various sizes as indicated earnings, the rate charged on loans, and the amount paid to depositors " . shown in a detailed study of the operating statements and statements . condition of 154 national banks. " Information on banks liquidated and absorbed, during 1929 and 1930 w secured from the Texas Bank Directory published by the Union Natio' Bank of Houston. Data on bank failures were compiled from the recor of the State Department of‘ Banking and the Annual Reports of t, ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS '7 Comptroller of the Currency. Earnings, expenses, losses, and various operating ratios were compiled from detailed statements supplied directly by 154 national banks. CLASSIFICATION OF TEXAS BANKS Most Texas banks are “country banks” according to the definition of the term in the National Banking Act as banks located outside central reserve cities and reserve cities. The State has no central reserve cities. Dallas, El Paso, Fort Worth, Galveston, Houston, San Antonio, and Waco are reserve cities. They had 40 of the 626 national banks in the State in January, 1929, and 10 of the 660 state banks. For the purpose of this study, banks in Beaumont, Austin, Wichita Falls, and a few other smaller cities might be considered city banks. There are probably 100 banks of a total of nearly 1,300 which are really city banks. Although no clear line of distinction can be made, practically all banks used in this study with less than $5,000,000 deposits are country banks in the sense that a very large portion of their business is derived from farmers and ranch- men.’ This is the sense in which the term is used in this study. Many of ' the tables include the larger city banks for purposes of comparison. As a background for the later discussion of voluntary liquidations and failures, all state and national banks are classified below according to volume of deposits, the amount "of capital stock, and the ratios of deposits to capital and surplus as of January, 1929. Also, all Texas towns are classi- 5 fied according to the number and size of banks. 'rw'fl~v<"r w» ~ Volume of Deposits In January, 1929, there were 660 state and 626 national banks operating in Texas. All state banks and 605 of the national banks had less than $10,000,000 deposits. Approximately 19 per cent of the 641 state banks reporting their deposits and 3 per cent of the 605 national banks had less than $100,000 deposits; 50 per cent of the state banks had less than $200,000, while 18 per cent of the national banks had less than $200,000 deposits. Only 17 per cent of the state banks and 45 per cent of the national banks had deposits of $500,000 or more. When it is considered that in January, 1929, the country was at the height of a period of general prosperity, the volume of business of a majority of the Texas country banks was sur- prisingly small (Table 1 and Figure 1). In addition to the necessity of a reasonable volume of business, the suc- cessful operation of small country banks is dependent upon a satisfactory ratio of the volume of business to the money invested by the owners of the bank. Many banks with a small volume of business also have a very low ratio of volume to the bank investment. This makes it doubly hard to earn a fair dividend. The volume of deposits of a small country bank is a fairly accurate in- dicator of its volume of earning assets. Loans and investments can be made 1) from funds left by depositors, 2) from funds borrowed from other 8 BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION banks, and 3) from capital, surplus, and undivided profits of the itself. But since bankers usually borrow from other banks only in gencies and since a large portion of the bank’s own funds are invested the bank building, deposits are the chief source of lending power. Anal v of the statements of 12 r l Z5 . . - g resentative banks with l \ . . ‘ \ . s - ~ Z0 g - 1929 _"*_""— June 29, 1929, indicates t_ f; g the average bank in this sf 5'5 g group has total earning vi v E g sets about 25 per cent grea ' O _ g g than its total deposits. Va ‘* o- g g § - - EIO g g g g ation from this depen u g g g g largely upon the amount w g 5 ‘ g g g g ‘ capital, surplus, and g g g g g g g divided profits of the ba g g g g g g g and upon the size of the i‘; 0 a g § g S g g vestment in the bank buil 0 9 ing. Among banks with mo ‘ - than $200,000 the tenden DEPQSlTS (000 ommco) is for deposits to be mo Figure 1. Distribution of Texas banks according to - volume of deposits in January, 1929, and the same nearly equal to total earmn~ time in 1931. This chart shows the concentration assets_ In many cages b3 of country banks in size groups from $50,000 to . $400,000 deposits and the decline in deposits during Wlth $800,000 t0 $2,000,‘) 1929 and 193°‘ deposits have less earning a sets than their total deposits. S0, in connection with the present dlSCIISSiOI; it should be remembered that among the smaller banks the deposits figu is commonly equivalent to 75 to 85 per cent of total earning assets, and, that among larger country banks deposits approach and often exceed tota f earning assets. ' Ratio of Deposits to Capital and Surplus The 38 Texas banks which had less than $50,000 deposits in January 1929, had an average ratio of deposits to capital and surplus of only 2.2 (Table 2). Since their earning assets were somewhat greater than their d posits and since undivided profits are not included here, the indications arei that these banks had an average of about $2.50 in earning assets for each“; dollar of the bank investment. Putting it in another way, these banks»; would have to earn a net of four cents on each dollar of their earning assets in order to be able to pay a 10 per cent dividend on the bank investmen _ With an average return of 8 per cent on their loans and investments, losses": and expenses of operation must be restricted to half of the gross earnings; or four cents per dollar of earning assets. The difficulties involved in do " ing this are obvious when it is considered that the average earning asset . were probably slightly less than $50,000. At $50,000, total gross earnings‘ would be only $4,000, and losses and expenses must be restricted to $2,000"(l% in order to pay 10 per cent on the bank investment. If losses and expenses ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 9 Table 1. Distribution of Texas Banks According to Volume of Deposits, January, 1929 Total Per Cent Number Per Cent Number Per Cent Deposits Number o of State o of o of Total Banks Total National Total Banks Banks Under $50,000 ...... _. 38 3.05 36 5.62 2 0.33 50,000- 99,999 ...... .. 103 8.27 86 13.42 17 2.81 100,000- 199,999 ...... _. 283 22.71 196 30.57 87 14.38 200,000- 299,999 ...... _. 192 15.41 97 15.13 95 15.70 300,000- 399,999 ...... .. 145 11.64 68 10.61 77 12.73 400,000- 499,999 ...... .. 92 7.38 46 7.18 46 7.60 500,000‘ 599,999 ...... _. 80 6.42 34 5.30 46 7.60 600,000- 799,999 ______ ._ 108 8.67 35 5.46 73 12.07 ' 800,000- 999,999 ...... .. 49 3.93 18 2.81 31 5.12 ’ 1,000,000-9,999,999 ______ .. 156 12.52 25 3.90 131 21.66 TOTAL ........ ..| 1,246 | 100.00 | 641* | 100.00 | 005'; 100.00 *Nineteen small state banks among the total of 660 banks did not report their deposits. TTwenty-one large city banks with $10,000,000 or more are omitted here. 0 should reach $3,000, the return on the investment would be cut to 5 per cent. ; With total losses and expenses restricted to $4,000 in order to come out f even, a raise in the salary of the manager from $1,500 a year to $2,000, or » the loss of $1,000 would be a serious set back to the normal operations of . the bank. ‘ Table 2 also shows that in practically all cases state banks have a con- , siderably larger ratio of deposits to capital and surplus than do national v banks. The lower ratio for national banks is due in part to the fact K. that the minimum capital requirement is greater for national banks. ‘ National banks may not be organized with less than $25,000 capital, while a state banks in towns of less than 800 population may organize with $17,500, V and prior to the last decade many state banks were established with only ' °- 510,000 capital. Many of these banks with very small capi- 7- tal are still operating. Para- Lrfif-‘Nv . doxically, the higher mini- seza — . 6- |93[ mum requirement of the national banks seems to put many of them at a disadvan- tage in competing with state banks. Of course it was pre- sumed that the higher mini- mum of the National Bank- ing Act would tend to pre- vent the organization and operation of ruinously small banking units. Yet many national banks do not get the anticipated volume of busi- 300- 300- 400- 500 000- 000- ness, or they lose business to 9 VI/I/I/l/Il/l/l VII/ll/I/l/l/I/ll/I/l/l/l. ‘Il/l/l/I/I/l/II/I/ll/l/II/I/l/I/l. '/////////////////////////////////////1 V///////////////////////////////////////////. '/001%fll/flfl/I/lflflflfl/I/l/flfl/I/fifl V/Y/l/l/l/l/I/l/l/l/l/l/l/l/I/l/l/ll/l/l/Il/I/l. V/l/l/l/I/I/l/l/I/I/l/I/I/I/l/I/l/I/Il/l/I/I/l/l/II/ '/////////////////////////////////////////// VIJ/II/l/l/lflfll/l/I/I/l/fifl/Ifl/lfll/l/l/fl/l/l/I/l/fifi/flfl/l/fl/l/fl Z z t r-n :5 v..r\ S I 6 Z 50 99 I99 299 199 499 599 799 999 999 competitors and are left with 0EP0$|TS(00ooM\T1£o) a 10W Patio 0f dQPQSitS t0 Figure 2. Average ratio of deposits to capital and the bank investment (Figu- ilgggilllgnétlJatillfialYfirlfglgl.SIZE groups for January, “res 2 and 450, TEXAS AGRICULTURAL EXPERIMENT STATIONA-g; 10 BULLETIN NO. Table 2. Ratio of Deposits to Capital and Surplus, 1929 Ratio of Deposits Kati,” of Dem. Number of to Capital and Capltal and s ;,~ Deposits All Surplus, state and Na, Banks All Banks Ban“ State l Under $50,000 38 2.23 2.30 50,000- 99,999 103 3.12 3.28 100,000- 199,999 2S3 3.99 4.55 200,000- 299,999 192 4.58 5.40 300,000- 399,999 145 5.19 5.96 400,000- 499,999 92 5.67 6.49 500,000- 599,999 80 5.56 7.72 600,000- 799,999 108 5.88 7.00 800,000- 999,999 49 6.05 8.17 1,000,000-9,999,999 156 7.23 8.81 TOTAL ________________________________ __ 1,246 Volume of Capital In January, 1929, 158 N) U! 8 PER c5111 arenas: U‘ Q ‘J! O DEPOSITS (000 0111mm Figure 3. to capital percentage decrease and surplus, 1929 to 1931. Percentage decrease in ratio of deposits This chart indicates that the smaller banks suffer a greater in the ratio of deposits to capital and surplus in a period of declining de- posits. Table 3. Distribution of All Texas Banks According to Amount of Capital, 1929»: or about one-eighth o banks in the State, had. than $20,000 capital. of these had $10,000 tof 500 capital, and the capital for the 158 banks" _, only $13,508. All these state banks, since $25, the minimum for ~_ banks. The average w for this group was $101 and the average ratio of? posits to capital and plus was 5.02 (Table 3 Average Average Average Number Per Cent Capital Combined Deposits Capital of of per Capital per Banks Total Bank and Bank Surplus $10,000-19,999 ........ ._ 158 12.49 $ 13,508 $ 20,528 $ 102,968 20,000-29,999 386 30.51 24,07 36,653 212,454 30,000-49,999 _ _ . . 1 143 11.31 34,091 52,974 284,525 50,000-99,999 ....... __ 338 26.72 54,414 87,351 507,009 100,000 and over 240* 18.97 164,396 280,479 1,778,538 I l l l TOTAL ......... | 1,265 100.00 l 1 I ‘Twenty-one large city banks with more than $10,000,000 deposits are not included h In contrast with the rapid increase of the ratio of deposits to capital 1 surplus shown in Table 2 from banks with smallest deposits to the lar banks, there is not a very Wide difference between the small and large ba 1 a ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 11 here. This means that many banks with very small capital have a high ratio of deposits to the bank investment, whereas many of the banks with very small deposits have a relatively large bank investment. This would in- dicate that so far as the ratio of volume of business to the bank investment is an indicator of the efficiency of the bank, volume of deposits is a better indicator than volume of capital and surplus. Size and Number of Banks per Town The large percentage of very small banks in the State is due 1) to the limited amount of business in towns with only one bank and 2) to the over- banked condition of towns with more than one bank. In January, 1929, there were 512 towns and villages that had only one bank. Of the 424 banks with less than $200,000 deposits in 1929, 322 were in these one-bank towns (Table 4). In these cases the only alternatives to operating what seems definitely to be an uneconomic banking unit are for the banker to increase his business within the community, to broaden his territory, or for the bank to liquidate. Of the 322 Texas villages and towns which had one bank with less than $200,000 deposits in 1929, 56, or more than one-sixth, were with- out banks in January, 1931. Undoubtedly the figures for January, 1932, will show a further large decrease in the number of such banks which were in operation in 1929 (Table 4). Table 4. Distribution of Texas Banks According to Size and the Number of Banks per Town, 1929 Number Number Number Number Number of Banks of Banks of Banks of Banks of Banks in Deposits in in in in Towns One-Bank Two-Bank Three-Bank Four-Bank with Five Towns Towns Towns Towns Banks or more Under $50,000 ............................. a 38 50,000- 99,999 __ 86 16 1 100,000-199,999 198 67 16 2 200,000-299,999 85 80 25 2 300,000-399,999 49 67 23 2 4 400,000-499,999 23 51 16 2 500,000 and over ............................. .. 33 154 114* 36 561' l TOTAL ................................. 1 512 435i 195 40 6431 *Two city banks with $10,000,000 or more deposits are not included. tNineteen large city banks with $10,000,000 or more deposits are not included. illPrivate banks are included in arriving at the number of banks in a town, but only state and national banks are listed here.’ A large number of the very small banks in towns with two or more banks were liquidated or absorbed during 1929 and 1930. Of the 102 such banks with less than $200,000 deposits in January, 1929, 83 were in two-bank towns, 17 were in three-bank towns, and 2 were in cities with 5 or more banks. By January, 1931, 19, or about 23 per cent, of 83 such banks in two-bank towns had ceased to operate; 7, or 41 per cent, of such banks in three-bank towns had ceased to operate. The responsibility for the over-banked situation seems to be about equally 12 BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION divided between state and national banks, although 45 national banks in two-bank towns had less than $200,000 deposits as compared with 38 state banks. There were 69 two-bank towns with one or both of its banks falling under the $200,000 mark. In 33 of these, a national bank was organized more recently, while in 32 a state bank was organized more recently. Fifteen of the 69 towns had their second bank organized from 1900 to 1909, 22 got their second bank from 1910 to 1919, and 32 got their second bank from 1920 to 1928. Of course this does not indicate that government supervisors have been more lax in permitting the organization of new banks since 1920. Many such mistakes prior to 1920 have probably been corrected through liquidation or absorption of one of the banks. But it is a rather serious state of affairs when 32 of the 220 two-bank towns in the state are loaded down with a second bank within a period of nine years, 1920-1928, and one or both of the banks has less than $200,000. TEXAS BANKS LIQUIDATED AND ABSORBED FROM JANUARY 1929 TO JANUARY 1931 At the beginning of 1929 there were 1,286 ordinary commercial banks operating in Texas—626 national banks and 660 state banks. During 1929 and 1930, 151 of these were liquidated or absorbed—72 national banks and 79 state banks—and were not replaced by newly chartered banks. Nineteen state banks were closed and liquidated by the State Banking Department and about an equal number of national banks were closed and liquidated by the Comptroller of the Currency. A large percentage of the remainder voluntarily liquidated and ceased to operate, while the others were bought and absorbed by other banks in the same or in neighboring towns. The assumption is made that a very large percentage of banks liqui- dated were in a very serious condition, although there were probably a few strong banks in the list which gave up their names and were absorbed by other banks. Capital Stock of Liquidated and Absorbed Banks Analysis of the banks which ceased to operate during this two-year period reveals some interesting facts about the sort of bank which passes out of the picture during such strenuous times. In the first place, the heaviest casualties were among the banks with $25,000 or less capital stock. Approximately 50 per cent of the banks that ceased to operate during this period had capital of $25,000 or less, while only about 40 per cent of the total number of banks operating in January, 1929, were in this class. Casualties were also proportionately heavy among banks with $30,000 to $50,000 capital—13.61 per cent of the total liquidated banks fell in this class, while 11.31 per cent of the total banks operating in January, 1929, were in this class (Table 5). It is interesting to note also that the banks liquidated (and absorbed) had a smaller ratio of deposits to capital and of deposits to capital and surplus than did all the banks operating in January, 1929. All banks with $10,000 to $20,000 capital had an average ratio of 7.63 of deposits to capi- 1. wasps-ram. w. “wk-w- _ . lVV‘7A‘ H“, ,. .._ . ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 13 tal, while the banks that were liquidated during the period had an average ratio of onlyi4.67. The ratios of deposits to capital and surplus were 5.02 and 8.93 respectively (Table 6). Table 5. Capital Stock of Banks Liquidated and Absorbed from January, 1929, to January, 1931* Cumula- Number Number Per Cent Cumula- tive Per Cent Capital Oper- Per Cent Liqui- of tive Per Cent of Banks Stock ating of dated Total Per Cent of Liqui- Liquidated January Total 1929- Liquidated of All dated 1929-1931 1929 1931 Banks Banks $10,000-19,999 158 12.49 30 20.41 12.49 20.41 18.99 20,000-29,999 386 30.51 48 32.65 43.00 53.06 12.44 30,000-49,999 143 11.31 20 13.61 54.31 66.67 13.99 50,000-99,999 338 26.72 27 18.36 81.03 85.03 7.99 100,000 and over 2401' 18.97 22 14.97 100.00 100.00 9.17 'lOTAL .... .. 1,265 100.00 147i 100.00 ‘January, 1929, figures used for banks that were liquidated as well as for all other banks. TTwenty-one big city national banks with more than $10,000,000 each in deposits are not included here. IFour banks did not report their capital. Table 6. Ratio of Deposits to _Capital and to Capital and Surplus for All Banks and for Liquldated and Absorbed Banks o c, o a o o Q 8 o 6, o a, o g o g g > . °.o<== °.oc> Qoa» ‘Rec: - ° Capital era‘ era" e"..- era" 8'0 a - s; ~ a a :2 == a g Average capital, all banks $ 54,414 $ 164,396 Average capital, liquidated banks . 12,917 24, 19 33,875 55,000 206,818 Average surplus, all banks ........... .. 7,020 12,578 18,883 32,937 116,083 Average surplus, liquidated banks .- 2,437 6,666 11,292 14,869 103,898 Average deposits, all banks ........... _. 102,968 212,454 284,525 507,009 1,778,538 Average deposits, liquidated banks ................ .. 60,341 136,742 212,112 283,847 1,960,666 Ratio of deposits to capital, all banks ............... .. 7.63 8.82 8.35 9.32 10.82 Ratio of deposits to capital, liquidated banks .... .. 4.67 5.65 6.26 5.16 9.48 i Ratio of deposits to capital and surplus, all banks 5.02 5.80 5.37 5.80 6.34 Ratio of deposits to capital and surplus, liqui- _ dated banks 3.93 4.43 4.70 4.06 6.31 L1qu1dat1ons and absorptions were almost as extenslve among national banks as among state banks. Of a total of 605* national banks, 68, or 11.24 per cent, ceased to operate, and of the 660 state banks, 79, or 11.97 per cent, ceased to operate. Heaviest liquidation among national banks occurred among banks with $30,000 to $50,000 capital, with 22.22 per cent discontinued, while the greatest percentage liquidation of state banks was among those with capital of less than $20,000, 18.99 per cent of these having been discontinued (Table 7). Legal Minimum Capital Requirements From the above figures it is clear that liquidations are more common among banks with less than $50,000 capital stock than among banks with more than $50,000. State bank supervisors seem to have realized the _weakness of small banks and during the past ten years many state govern- I ‘Twenty-one of the 626 national banks were city banks with $10,000,000 or more in de- posits and are not included here. 14 BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION ments have raised the minimum capital requirements. In fact, there to be a definite tendency to place the minimum for state banks at which is the requirement for national banks. Early in 1930, 29f ' required a minimum of $25,000, 4 required $10,000, 6 required $15, required $20,000, 4 required $50,000, and in the other two states ( a Island and Vermont) no minimum is specified. In 1909, 20 states; mitted banks to operate with $10,000 or less. _ ' Table 7. Liquidations and Absorptions of State and National Banks i State Banks I National Banks Percentage Percen: ; Distribution Distri l 0f State of Nat’ _ Banks Ba p Ca-Dltal Num- Num- Per Nun“ Num- Per iii i ber ber Cent ber ber Cent Per stock Janu- Liqui- Liqui- Janu- Liqui Liqui- Per Cent Per ary dated dated ary dated dated Cent of Cent 1929 1929 of Those of Total Liqui- Total ~ dated l $10,0o0-19,999 15s 30 18.99 ______ .. 23.94 37.98 ...... .. 20,000-29,999 246 28 11.38 140 20 14.29 37.28 35.44 23.13 30,000-49,999 89 8 8.99 54 12 22.22 13.48 10.13 8.93 1 50,000-99,999 126 9 7.14 212 18 8.49 19.09 11.39 35.04 100,000 and over . 41 4 9.76 199 18 9.05 6.21 5.06 32.90 2 _ l . I l T.» TOTAL ________ .. 660 2 79 [a 11.97 l 605 1 681‘ 11.24 100.00 100.00 100.00 1__' . I I ~ “ *Legal minimum capital for national banks is $25,000. TFour banks had more than $10,000,000 in deposits and are not included. Presumably legislative bodies and their advisers have assumed that} increase in the minimum capital requirements would force the banking _ ness into larger and more economic units so that bankers would havfi better chance to earn fair dividends and assure the community contin‘ and efficient banking service. In the main, these objects were attaij prior to 1920, but the current situation among the country banks s" g to indicate that minimum capital requirements are a poor guarantees, adequate-sized banking units. ' f National and state banking laws have emphasized minimum capital ' surplus requirements and have neglected requirements as to volume '1, business. The result is that frequently banks have an adequate volume business to sustain a $20,000 investment, but they are forced by lawi maintain capital and surplus of $30,000. On the other hand, many ba‘ hold to the minimum of‘ $30,000 and build up a business of $400,000 $500,000, leaving little protection for depositors. , During the, past decade, however, the government regulatory bodies h _ a: been placing more emphasis upon the ability of the banks to acquire adequate volume of business. Applicants for bank charters have called upon to show that they would be able to get a reasonable amo i, of business. It is probable that more and more emphasis will be pl on the prospective business of the bank and less emphasis on the amo'_ of capital. That is, first, an adequate volume of deposits must be assu ‘ ‘and, second, the capital requirement will be set at an amount which isle; ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 15 reasonable safeguard for depositors. As to this ratio of deposits to capital, some few states are now requiring a maximum ratio of 5 or 6 to 1 for country banks. That is, when the business grows to a certain point the banker is required to increase his capital. Analysis of the banks liquidated and absorbed in Texas from January, 1929, to January, 1931, shows a remarkable correlation between liquida- tions and small volume of deposits. It indicates that volume of deposits and the ratio of deposits to capital are much better measures of the strength of a bank than is the amount of capital. Deposits of Liquidated and Absorbed Banks Approximately 5O per cent of the total number of banks in the State inJanuary, 1929, had less than $300,000 deposits, while 75 per cent of the g banks liquidated and absorbed during 1929 and 1930 were in this class. That is, the average rate of liquidation was just three times as great for the smaller banks (Table 8). Ratio of Deposits to Capital 50- and Surplus 45 Banks with a very small 4O volume of deposits are under a a severe handicap in two distinct ways: 1) they must carry a heavy overhead ex- pense per dollar of earning assets and 2) they almost in- variably have a low ratio of earning assets to the bank investment. If we take total deposits as a rough measure of earning assets, the aver- age ratio of earning assets to capital and surplus among the banks with less than $50, 000 deposits in 1929 was 2.23 as compared with 5.19 for banks with $300,000 to $399, DEPOSHS i929 (000 OMWTED) 999 deposits. The ratio is still S.» fill ‘8 N) KJI G PER CEPQ’ UQUIDATED OR ADSORDE s’ <> 8 O . Figure 4. Percentage of liquidations and absorptions, greater for larger banks 1929-1931, in each size class. (Table 9) It will be observed that surplus is a much larger item in the ratios among i the larger banks. Among the 141 banks with less than $100,000 deposits the total surplus was only 28 per cent of the total capital as compared with a 50 per cent for banks with $300,000 to $399,999 deposits. Ordinarily, even if earnings were ample, there would be little inducement to accumulate sur- i plus in a bank which already has a large investment in relation to its de- posits. There is a notable tendency among banks with a small volume of 16 BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION deposits to restrict their surplus, and also their capital, where possible; the bare legal minimum. Table 8. Percentage of All Texas Banks Liquidated and Absorbed January, 1929, to January, 1931 Cumulative Number Number Per Cent Per Cent Deposits in Liqui- Liqui- of All 1929 dated dated Banks Under $ 50,000 38 19 50.00 305 50,000- 99,999 103 17 16.51 1132 100,000- 199,999 283 44 15.55 34 03 200,000- 299,999 192 25 13.02 49.44 300,000- 399,999 , 145 7 4.83 61.08 400,000- 499,999 92 4 4-85 68-46 500,000- 599.999 80 4 5 00 74-88 600,0o0- 799,999 108 6 5 56 83-65 800,000- 999,999 49 1 2 04 37-48 1,000,000-9,999,999 156 13 3 33 100-00 TOTAL ___________________________ __ 1,246* 1401- 11.24 ‘Nineteen of the 1,265 banks, chiefly small ones, did not report their deposits. TEleven small banks among the 151 liquidated did not report their deposits. Table 9. Ratio of Deposits to Capital and to Capital and Surplus for all Banks and Liquidated and Absorbed Banks Ratio of Deposits to Ratio of Deposits m. _ _ Capital Stock Capital and Surp Deposits ' For Banks | For Ba ~~ All in 1929 Liquidated All in 1929 l Liquida _ Under $50,000 _________________________________________ 2.67 2.51 2.23 2.21 ' 5o,o0o- 99,999 . 4.09 9.92 3.12 9.30 - 1o0,000- 199,999 5 46 4.59 a 99 ° 9.68 200,000- 299,999 6 76 5.76 4 58 4.67’ s00,000- 399,999 7 7s 6.04 s 19 4.74- 400,000- 499,999 8 78 9.88 5 67 6.83 500,000- 599,999 9 64 8.82 5 56 6.1L 4 600,000- 799,999 9 69 6.84 5 88 5.26 800,000- 999,999 9 69 5.46 6 05 5.32 1,000,0o0-9,999,999 13 1s 10.66 7 2a 6.61 TOTAL ___________________________________ .- 9.95 7 79 6 05 5 54 It should be noted also that the ratio of deposits to capital in most casf is considerably lower for the liquidated and absorbed banks than for : ‘ banks, while the ratio of deposits to combined capital and surplus is mu‘ nearer that for all banks. Obviously the banks discontinued during t v period either had never accumulated much surplus or they had used muc’ of it to cover losses or to pay dividends. At least, these banks maintain a ratio of deposits to combined capital and surplus approximately the sa 1 as that for all banks, and the ratio was maintained by reducing surpl I On first thought it might be assumed that only banks with very sm capital stock have less than $300,000, but as a matter of fact 403, or abos-l, 65 per cent, of the 616 banks in this class had $25,000 or more capita 1 These figures indicate that a $25,000 minimum capital falls far short assurance of an adequate volume of business. That is, at the end of t ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 1"! comparatively prosperous year of 1928, a very large percentage of Texas country banks had What is generally assumed to be the desirable minimum capital of $25,000 and still many of these had an inadequate volume of business for economic operation. Not only are there many banks with what is generally considered adequate capital found among the banks with a slender volume of deposits, but also these banks on the whole had a greater percentage of liquidations than did the banks with smaller capital. More than one-sixth of the banks with $25,000 to $49,000 capital and less than $300,000 deposits were liquidated as compared with one-eighth of those with less than $25,000 capital (Table 10). Bank Liquidations According to the Number of Banks per Town More than 40 per cent of the total liquidations and absorptions occurred in towns which had only one bank. But since approximately 40 per cent of the total number of banks in the State in 1929 were in one-bank towns, the percentage of liquidations was about the same as for 30 all banks. In fact the high- est percentage of liquidations and absorptions yccurred in towns with three banks and '5 the next highest in towns with five banks (Table 12), although it is probable that a larger percentage of the banks in the large towns were absorbed by other banks and that actual liquidations were heavier in the smaller towns 5 (Figure s). In the smaller towns bank PER CENT LIQUIDATED AND ABSORBED 6 were restricted largely to U banks with very low volume UNDER Z5000] 2500040909 50000 AND OVER 3f deposits and with compara_ CAPYTAL tively low ratios of deposits Figure 5. Percentage of liquidations among 616 to the bank investment' Thus banks with less_than $300,000 deposits with various the average deposits of 370 amounts of capital stock. , state banks 1n one-bank towns in January, 1929, was $169,689, while the average for the 42 banks that reported deposits and were discontinued during 1929 and 1930 was only $79,398. The average deposits for all national banks in one-bank towns was $281,345, as compared with $132,444 for banks that were discontinued. Similarly the discontinued banks in two- bank and three-bank towns had an average of about half as large deposits as the average for all banks in these towns. But in towns with liquidations and absorptions 1s BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION four or five banks many liquidations and absorptions occurred among larger banks (Tables 14 and 15). Table 10. Capital Stock of all Banks and of Liquidated or Absorbed Banks with Va i - Amounts of Deposits Banks with less Banks with Banks with than $100,000 Deposits of Deposits of Deposits $100,000 to $199,999 $200,000 to $299, Capital Stock Num- Per Num- Per Num- All ber Cent All ber Cent All ber Banks Liqui~ Liqui- Banks Liqui- Liqui- Banks Liqui- dated dated dated dated dated Less than $25,000 . 100 25 25.00 98 7 7.14 15 25,000-49,999 ........... .. 40 11 27.50 162 30 18.52 117 14 50,000 and over 1 ...... ._ 23 7 30.43 60 11 TQTAL _. 141 36 25.71 283 44 15.55 192 25 Table 11. Ratio of Deposits to Capital Stock of Liquidated and Absorbed Banks with than $300,000 Deposits* Banks with less than Banks with Deposits Banks with Deposits: $100,000 Deposits of $100,000 to $199,999 of $200,000 to $299,999, i, Aver- Aver- Ratio Aver- Aver- Ratio Aver- Aver- CHDitB-l Stock age age of ag_e age of age age Capital De- De- Camtal DQ- De- Capital De- Stock posits posits Stock POBItS posits Stock posits to to I Capital Capital Under $25,000 $13,600 $50,355 25,000-49,999 . 26,136 71,342 50,000 and over I ________ __ | _________ _. 3.70 $17,857 $121,857 6.82 ____________________ .. 2.73 27,233 137,515 5.05 $28,607 $233,781 ____ _. 53,571 151,887 2.84 54,545 239,474 *The difficulties of the banks with relatively large capital are revealed in their small ra of deposits to capital. Table 12. Percentage of Banks Liquidated and Absorbed According to Number of Ba per Town Number of Banks Total Number of Number of Banks Per Cent of Banks - Per Town Banks, 1929 Liquidated, p Liquidated 1929-1931 "r 1 530 64 12.08 2 436 42 9.63 3 195 29 14.87 4 40 3 7.50 5 64 9 14.06 Total ................ "l 1,265 l 147 l Table 13. Percentage of State and National Banks Liquidated and Absorbed According I, Number of Banks per Town* ‘ dumber of Total Number Banks, Number of Banks Per Cent of Banks Banks per 1929 Liquidated, 1929-1931 Liquidated ‘ Town _ State I National State National State I National“ I»; _ 1 389 141 48 16 12.34 11.35 2 177 259 14 28 7.91 10.81 3 62 1331"’ 13 16 20.97 12.03 4 11 29 1 2 9.09 6.90 5 21 431' 3 6i 14.29 13.96 __ _ TOTAL 660 605 79 68 I ‘ *State and national banks fared about the same in towns with the same number of ban except that state bank liquidations were higher in three-bank towns. " **Two banks with more than $10,000,000 deposits not included. iNineteen banks with more than $10,000,000 deposits not included. iFour large city banks not included. - "*‘"¥'~'1l,fl“""~"wfm,1 w *‘-'1/'-".',I' ewrtxww- ECONOMIC EFFICIENCY’ OF TEXAS COUNTRY BANKS 19 0000 An ruovl 4on0 o 4 - u l I n A ¢ 0 u q u ~ - o ~- Iv,’ IIII I, 0 q . ~ ~ n . l , _ , , , . , .. --~Qc nnnn u: o: u n w-uu ---- nu 4 n v v Q 4 ~ m uuuuuu vv n - n Q >i uuuuu n nnnnn v ~ n FlVfl“"- - n : a n. nnnnnnn ‘ ' LEGEND - couuucm sums, ms o was n: out-um: towns LIGUIOATCD on Absoauo, nae-mu o ma: m TWO-BANK TOWNS o an: m ‘Will-BANK towns |||| ~ v ‘nan Figure 6. Number of commercial banks located in the various counties in January, 1929. The map indicates the counties with banks that were liquidated and ab- sorbed during 1929 and 1930. Also, the map shows the number of banks per town where liquidations or absorptions occurred. Table 14. Comparison of Liquidated and Absorbed State Banks with All State Banks in 1929 Average Deposits per | Ratio Deposits to Ratio Deposits to _ Bank Capital Stock Capital and Surplus Banks Per Town All Banks Liquidated All Banks Liquidated All Banks Liquidated __ Banks I Banks Banks 1 l$ 169,689 $ 79,398 l 7.66 4.56 5.25 3.88 2 l 418,493 206,323 - 9.85 5.92 6.74 4.54 3 476,961 282,697 8.78 6.15 6.15 5.18 4 l 732,748 819,000 8.96 5.46 6.15 5.32 5 l 1,166,342 2,735,664 11.13 13.13 8.09 8.10 Table 15. 'Comparison of Liquidated and Absorbed National Banks and All National Banks i ‘ 929 , 1n Ratio Deposits to Capital and Surplus Average Deposits per Bank Capital Stock l Ratio Deposits to I Banks per TOW" All Banks Liquidated ‘ All Banks Liquidated l All Banks Liquidated Banks Banks Banks 1 I $ 281,345 $ 132,444 7.66 4.94 4.92 3.80 2 537,457 283,056 9.09 5.78 5.41 4.52 3 I 1,125,333 766,157 10.34 7.73 5.90 4.98 4 1,750,219 710,084 10.80 9.47 5.49 5.42 5 l 9,851,380 3,362,103 14.16 9.84 8.18 6.73 *National bank figures are not available for the last two months of 1930. 20 BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION BANK FAILURES IN TEXAS, 1911-1930 During the twenty years 1911 to 1930, inclusive, 174 state banks ‘ closed and liquidated by the State Department of Banking, and 56 natio” banks were closed and liquidated by the Comptroller of the Currency. L 21 of the state and natio bank failures occurred du ' the nine years prior to 19 Failures were heaviest 1921, when 10 national -; 27 state banks were clo! The next largest number ~_ failures occurred in 1926 a‘ 1930*, when 26 banks clo (Table 16). . During the ten years, 192 m, to 1930*, 19.47 per cent ‘a F_ 7 s d _ I b k f _1 the average number of staf ‘fiiiiitig, yteitti, 111cm ngtfintzlhrouzrh ietioiures m“ banks in the State failed ~< compared with 8.50 per cen of the national banks. ’ Table 16. State and National Bank Failures, 1911-1930 Number of Year Number of National Year Number of State Banks Banks State Banks 1911 u 2 1921 27 1912 1 1922 14 1 1913 I 1 1923 10 2 1914 4 1924 15 5 1915 2 3 1925 20 4 1916 2 1 1926 22 4 1917 1 1927 10 6 1918 __ 1928 12 . 5 1919 4 ._ 1929 6 1 1920 8 1 1930 13 13 ‘National bank figures not available for last two months of 1930. State Bank Failures Of the 174 state bank failures from 1911 to 1930, 62, or about 36 per cent, were in operation five years or less. Approximately 10 per cent were ’ operated one year or less (Table 17). Three banks that were organized in 1920 failed in 1921; three that were organized in 1925 failed in 1926; four banks organized in 1927 failed in 1928; and two that were organized in 1928 failed in 1929. Of the 25 banks that lasted only two to three years, nine were organized at the height of the post-war boom in 1919; two in 1918; and five in 1927. Dates of organization of the other nine banks were well scattered through the period. Thirty-seven of the 211 state banks organized in the prosperous period 1918 to 1920 were doomed to failure before the end of 1930; 12 were closed before the end of 1921, and 25 were closed before the end of 1925. Twelve ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 21 a of the 82 state banks organized in the prosperous years of 1927 and 1928 failed before, the end of 1930; eight of these failed before the depression started in 1929. ,.--n c : 0 n Q ~ n - =1 rrrr u null v-un ¢¢¢¢¢¢ =- Lcscud I NATIONAL UANKS (56) O STAY! UIIKS (I14) j Figure 8. This map shows the number of state and national bank failures by counties “ from 1911 through 1930. * Table 17. Period of Operation of Failed State Banks Number of Years Operated Number of Banks Per Cent of Total l 1 or less 15 8.61 2- 3 25 14.40 4- 5 22 12.65 6- 7 18 » 10.35 8- 9 19 10.92 10-11 19 10.92 12-13 15 8.61 14-15 11 6.31 16-17 16 9.19 18-19 5 2.88 20-21 8 4.59 - 22 1 0.57 TOTAL 174 100.00 22 BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION Volume of Deposits Approximately 78 per cent of the banks that failed during the peri 1911-1930 had less than $300,000 deposits, 65 per cent had less than $200,0 f and 42 per cent had less than $100,000 (Table 18). Banks with a small ab lute volume of deposits were further handicapped with a low ratio of volume 7?” the bank investment. The 134 banks with less than $300,000 had an ave age ratio of deposits to capital and surplus of 3.41, while the 72 banks wi less than $200,000 deposits had an average ratio of only 2.66. 4' Table 18. Distribution of State Bank Failures, 1911-1930, and Ratios of Deposits to Bank Investment, According to Volume of Deposits‘ Ratio of Ratio of Number Per Cent Average Deposits Deposits Deposits of o Deposits to Capital to Capital Banks Total Per Bank Stock and Surplus Under$ 50,000 . 28 16.36 $ 34,425 4 2.46 2.24 ’ 50,000- 99,999 . 44 25.74 70,315 3.23 2.93 100,000- 199,999 . 39 22.82 141,733 4.89 4.37 200,000- 299,999 _ 23 13.44 243,136 4.63 4.13 300,000- 399,999 . 7 4.10 336,724 8.27 6.83 400,000- 499,999 . 8 4.67 448,526 5.61 5.47 , 500,000- 599,999 . 6 3.51 543,856 9.89 8.44 600,000- 799,999 _ 4 2.34 723,565 8.27 5.95 800,000- 999,999 . 3 1.75 870,812 - 6.15 5.25 1,000,000 and over , 9 5.27 , 1,606,996 13.52 10.23 TOTAL | 171i‘ l 100.00 | 259,389 ] 6.53 l 5.62 *Deposits as of 1 to 2 years prior to liquidation. tNo record of deposits for three banks. Volume of Capital Stock More than 58 per cent of the state banks that failed during the period 1911-1930 had less than $30,000 capital stock. 0f the 174 banks that failed 49 had less than $20,000 capital stock, or an average of only $12,367 (Table 19). Table 19. Classification of Failed State Banks and All State Banks According to Amount of Capital Stock Average Capital Number of Per Cent of Stock per Q Capital Stock Failed Banks Total Bank at Date _. of Suspension _ $10,000-19,999 49 28.16 $ 12,367 20,000-29,999 .... .. 52 29.90 23,654 30,000-49.999 ____ __ 20 11.50 33,125 50,000-99,999 .... .. 31 17.82 55,323 100,000 and over 1 22 12.62 119,091 TOTAL ......................................... 1| 174 100.00 National Bank Failures Most of the national banks that failed from 1911 to 1930 had been in? operation much longer than the state banks. Only 10 national banks failed within five years of their date of organization. This is about 18 per cent of the total number of failures as compared with 36 per cent for sta i banks. Twenty-eight, or 50 per cent of the 56 national banks, had been i. operation more than 20 years, and 42 had been in operation more that 10 years (Table 20). ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 23 Only 4 of the failed national banks were organized during the prosperous years of 1918, 1919, and 1920, in contrast with 37 of the failed state banks. Also, only 6 of the national banks were organized after 1920, as i compared with 31 state banks. That is, about 10 per cent of the failed national banks were organized after 1920 as compared with 18 per cent of state banks. Table 20. Period of Operation of Failed National Banks Number of Years Operated ‘ Number of Banks \ Per Cent of Total I 2 ~ 3.57 a 3.93 3 1 5.30 4 7.14 14 25.00 17 30.30 5 8.93 s 10.71 56 a 100.00 Volume of Deposits l As in the case of the state banks, the heaviest failures were among the , banks with a small volume of deposits. About two-thirds of the national '_ banks suspended had less than $300,000 deposits and about one-third had _ less than $200,000 (Table 21). Table 21. Deposits of National ‘Banks which Failed, 1911 to 1930* Deposits l Number of Banks Per Cent 0f Total A Under s 50,000.. A - 2.38 i-l 50,000. 99,999 13 30.96 100,000-199,999 9 21.42 200,000-299,999 5 11-91 300,000-399,999 ....... ._ 0 ...... .. 400,000-499,999 5 11.91 500,000-599,999 2 4.76 _ 600,000-799,099 3 7.14 » 800,000-999,999 _____________________________________ __ ,_ 2 4.76 ‘ 1,000,000 and Qver _____ Z 4.76 ~' TOTAL ............................................. _. 1 42% ‘Deposits at date of suspension. 7N0 report on deposits of 14 banks. Table 22. Capital Stock of National Banks which Failed from 1911 to 1930 Capital Stock ‘ i Number of Banks Per Cent of Total $ 25,000-29,999 14 25-00 30,000-49,999 10 17-86 50,000-99,999 . .. 15 _ 26-73 100,000 and over ............................................... 17 l 30-36 ! TOTAL ............................................... 56 100.00 24 BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION Volume of Capital Stock Approximately 43 per cent of the national banks that failed during t: 20-year period had less than $50,000 capital stock, and 25 per cent of q banks had less than $30,000 (Table 22) . » ANALYSIS OF THE OPERATIONS OF 154 TEXAS NATIONAL BANK The comparative economic efficiency of banks of various sizes is indica I in a study of the operations of 154 national banks. This is approximate]. one-fourth of all national banks in the State and the banks are sufficiently scattered to be representative. Each of these banks supplied an itemized l statement of its resources and liabilities. Also, gross earnings, expenses, and losses for the previous year were reported in detail. Analysis of these statements reveals 1) the rate of earnings on the bank investment, 2) the rate charged on loans, and 3) the amount paid on de- posits. That is, it shows the economy of banks of various sizes from the _ standpoint of the banker, the borrower, and the depositor. Size here is de- i termined by the volume of earning assets, a more accurate measure than volume of deposits. Earning assets include interest-bearing deposits in Table 23. Average Gross Earnings, Expenses, and Net Earnings (before losses)"' of 154 National Banks by Size Groups > Gross Net Net Earnings Expenses Earnings Ratio Earnings Earning Assets? Number Per Dollar Per Dollar Per Dollar of Earning Per Dollar (000 omitted) of of Earning of Earning of Earning Assets of Bank Banks Assets Assets Assets to Bank Investmentf (in Cents) (in Cents) (in Cents) Investment}: (in Cents) Less than $200 23 l 8.31 6.02 2.29 3.10 7.10 200- 399 ........ .. 39 l 7.99 5.14 2.85 3.88 11.07 400- 599 ........ .. 30 7.22 4.54 2.68 4.18 11.20 600- 999 ........ _. 26 7.20 4.78 2.42 4.69 _ 11.32 1,000-3,999 26 7.14 4.85 2.29 5.96 13.65 4,000 and over 10 } 6 29 4.32 1.97 7.52 14.81 *Losses are not deducted in this phase of the study because of the irregularity of the banks in writing off losses. That is, the figures cover only one year of the bank's operation and in the case of some banks extremely heavy losses are deducted, while in other cases many doubtful notes are carried over with hopes of collection during the next year. "FAverage of June 30 and December 31 reports. IIncludes capital, surplus, and undivided profits. other banks and real estate that is earning money for the bank, as well as all loans and security investments. The “total earning assets” figure used is an average of the June 30 and December 31 reports, as are the figures on deposits and other liabilities. The study shows that there is a fairly steady increase in the net returns on bank capital from small banks with less than $200,000 in earning assets to the large banks with $4,000,000 or more.* The average net return on the bank investment (capital, surplus, and undivided profits) for the 23 small *Of the 154 banks, 43 reported for the year ending June 30, 1928; 19 reported for the year ending June, 1929; and 92 reported for the year ending June, 1930. Although there was some change in general business conditions during these three years, the figures for banks reporting in all three of the years do not indicate vital changes in expenses and gross earnings. ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 25 banks was 7.10 per cent as compared with 14.81 per cent for the 10 banks with more than $4,000,000 in earning assets. Gross earnings per dollar of earning assets, however, decline from 8.31 cents in the smallest banks to 6.29 in the largest banks. Expenses per dollar of earning assets are gm only about two-thirds as g much in the largest banks u as in the smallest banks. In g 5 Table 23 the 154 banks are a divided into groups according m to the amount of their earn- a‘ ing assets, or their volume of business, and the gross earn- 400' 600" 1000- 4000MB ings, expenses, net earnings, 200 999 3999 OVER and the ratio of earning as- EARNING ASSETS coooommtu) sets t‘) capital 9m given f“ each group (Figure 9). O Figure 9. Average earnings on the bank invest- ment (capital, surplus,_ and undivided profits) for groups of banks of various sizes. Gross Earnings That gross earnings per dollar of earning assets are larger for the small i banks seems to be due largely to 1) the fact that the smaller banks have a larger percentage of their assets in the form of local loans, which bear a ' higher rate than do bonds, acceptances, or deposits in other banks (Table 24 and Fig. 10), and 2) higher rates on loans because of ineffective com- petition in the smaller towns. The percentage of total in- come of the smaller banks which is derived from loans is of course greater than the figures in Table 24 would in- dicate, since loans yield a larger return than do invest- ments or deposits. Thus, banks in the first group had an average of 72 per cent 2 .- O u n- '2 2 O 5 ID l- MJ 1D V‘! < zo .0 of their earning assets in PER CENT . —LOAN$ gunman ozumo uuosns loans; whlle Per cent of @'"""”‘"" wm“ “"'""° “m” their total income was de- ' Figure 10. Percentage distribution of earning assets TiVed fTQm lQans- Table 25 among groups of banks with various amounts of earning assets. It will be noted that there is little shows thp: perceptage of variation in the per cent of total earning assets g-I-Qgs earnnqgg deyqved fI-Qm which is in loans and investments combined. . the various sources. The aver- ages are for the 111 banks 26 BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION which reported sources of earnings in. detail, and they were calculated i.’- dividing the total income in the various classifications by the num of banks. ' Table 24. Percentage Distribution of Earning Assets Earning Assets Loans and Bonds‘, Stocks, Interest-Bearing Other Earning (000 omitted) Discounts and Mortgages Deposits in Assets? 5f: Other Banks I Less than 9200 _________ 1 72.05 I 8.02 l 17.2.4 1 9s 200- 399 ______ ._ 70.47 f 12.30 15.85 1 as 400- 599 70.45 11.70 10.25 1 00 000- 999 05.42 18.00 14.02 2 50 1,000-9,999 _________ _. 05.12 20.01 12.53 1 74 4,000 and over 64.78 18.23 ‘ 14.94 2 5 .......... w *Bonds to secure circulation are not included, since the return on these bonds is very small; after deducting taxes and expenses of note issue. iIncludes real estate other than the bank building which is yielding a return and a ca1cu-;1 lated portion of the bank building which is rented. Table 25. Percentage Distribution of Gross Earnings Num- Domes- ber Interest Interest Rent Rent tic Earning Assets of Interest on on on on Exchan- Other (000 omitted) Banks on Invest- De- Bank Other ge Earn- Total Re- Loans ments* posits Build- Real and ings port- ing Estate Collect- ing ions I l I i l l Less than $200] 18 | 84.31 I 2.86 I 5.51 | 0.46 1.35 4.04 1.47 100.00 200- 99 30 81.10 6.50 4.34 1.60 0.27 4.11 2.08 100.00 400- 599 18 80.40 9.24 4.02 1.48 0.25 2.79 1.82 100.00 F,‘ 600- 999 _.. 18 73.34 14.89 4.06 1.51 0.99 2.57 2.64 100.00 1,000-3,999 18 68.45 15.82 3.84 2.22 0.86 3.60 5.21 100.00 4,000 and over 9 l 70.04 I 17.20 3.33 3.811‘ 0.42 1.93 3.27 100.00 ‘ilncludes acceptances and commercial paper. iMore than half in one bank. < Gross earnings declined from the first through the third group in almost the same proportion that the percentage of loans to total earning assets de- clined. The definitely lower level of gross earnings in the banks of the last g group is probably due chiefly to the lower interest rates on loans in the larger towns and cities. Most of these banks are located in cities of 50,000 population or more, where the prevailing rates are 6 to 8 per cent iii’. as compared with rates of 8 to 10 per cent in the smaller towns. Most of I the banks in the fifth group are in towns of 5,000 to 30,000, while most of those of the fourth group are in towns of 2,000 to 7,500, and most of those in the third group are in towns of 1,500 to 3,500. Those in the first and second groups are in most cases in towns and villages of 300 to 2,000 population, about one-third of which have only one bank. a Ninety-two of the 154 banks reported their earnings on loans and dis- ‘I counts as distinct from bonds, acceptances, or other securities. The average rate of returns on loans and discounts varies from 9.37 per cent in the first group to 6.90 per cent in the last group. It will be observed in Table 26 that the decline is fairly regular from the second to the fifth group and abrupt from the fifth to the sixth group. The banks in the first four groups ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 2'1 3 are in smaller towns and may be considered purely country banks, while those of the last two groups, particularly the last group, have many of the characteristics of large city banks. Rates among the latter two groups a are set under different competitive conditions and there is probably better diversification of loans and less risk. Table 26. Average Interest on Loans and Discounts for 92 Banks Which Reported This ’ Item Separately Average Interest on Earning Assets l Number of Banks Loans and Discounts* (000 omitted) l l Less than $200 ...................................................... "1 15 | 9.37 200- 399 . _ . ' 26 [ 9.36 400- 599 ._ __ l 14 i 8.77 l 1.3031323? ...i| lg 1 gig I‘ 6.90 _ 4,000 and over ..................................................... 8 *Average of percentages. Expenses y Analysis of the operating expenses of the 154 banks reveals a wide t variation between the smallest and the largest banks. The five groups of larger banks operate with 70 to 85 per cent of the expenses per unit of busi- _ ness that the smallest banks have. To put it in another way, if the banks with less than $200,000 in earning assets did not charge higher rates on loans or in some way maintain higher gross earnings per unit of business than the largest banks do, their average return on capital would be almost nothing. The average expense of the smallest banks is 6.02 cents per dollar of earning assets while the ‘gross earnings of the largest banks i amount to only 6.29. The average expense ranges from 6.02 cents for the smallest banks to a 4.32 for the largest banks. From the standpoint of the community the dif- ference in efficiency is greater than these figures would indicate, since the A small banks charge more for loans and pay less for deposits. If the interest which is paid out to depositors is deducted from total expenses, the range is from 5.51 cents in the smallest banks to 2.50 in the largest banks (Table 27 and Fig. 11). The difference is approximately two cents between the first and fourth groups. Table 27. Total Expenses and Interest 0n Deposits, in Cents Per Dollar of Earning Assets Total Expenses Earning Assets Total Expenses‘ Interest on Deposits Less Interest to (000 omitted) Depositors I I Less than $200 ._ I 6.02 ) 0.51 ! 5.51 200- 399 ____ 5.14 0.64 , 4.50 400- 599 .. 4.54 l 0.80 I 3.74 600- 999 4.78 I 1.24 ‘ 3.54 1.000-3,999 ______________________________ __ 4.85 1.61 3.24 4.32 a 1.82 1 2.50 4,000 and over .......................... .. I ‘Losses not included. 2S BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION Table 28. Interest Payments on Deposits Number of Per Cent of Per Cent of Average Earning Assets Banks Banks Time Deposits Interest per (000 omitted) Reporting Having Time to To_tal Dollar of Total Deposits Deposits‘ Eepos1ts* (June 30) (June 30) (in Cents) Less than $200 .......................... ..] 18 44.4 5.0 0.70 200- 399 ................................ .. 30 70.0 9.6 0.86 400- 599 ________________________________ .. 18 61.1 11.7 1.24 600- 999 ..... -_ _. 18 77.7 18.5 1.62 1,000-3,999 _________________ _. 18 83.3 31.9 l 1.87 4,000 and over 9 100.00 31.1 2.08 *Does not include money due to other banks. Of the 18 banks in the first group which classified their deposits, 10 did not carry time deposits in any form. Of 30 banks in the second group which reported types of deposits, 9 carried no time deposits. Table 28 shows the extent to which the 111 banks which classified their de- posits pay interest to de- positors. It should be noted that the largest banks pay approximately three times as much per dollar of total de- -a ->(J\O\ L») B) CENTS PER DOLLAR 0F EARNING ASSETS C .- EARNING ASSETS cooo ommo; posits as do the smallest ALL gxpmggg QNTEDREEEQSGFQD banks and that among the purely country banks de- Figure 11. Variation in total expenses per unit of - - business among groups of banks of various sizes. posltors receive more than This chart indicates, also, the wide variation in twice as much from banks payments to depositors and in total expenses ex- clusive of payments to depositors. Of the fourth group 3S from those of the first group. There were 33 among the 111 banks which did not carry time deposits. It might be expected that this was due to the absence of competitor banks, but 15 of these banks were in two-bank towns, and 7 were in three-bank towns. It was observed in some of the towns with two or more banks that none of the banks carried time deposits. Another interesting comparison is that of the total paid for salaries and “other expenses” among the different classes of banks. These items are by far the greatest burdens to the small bank, although of course salaries are usually not very high per employee. The “other expenses” item includes such items as light, heat, stationery, stamps, telephone, janitor’s supplies, insurance, surety bonds, and in case the bank does not own the building it includes rent. These items and salaries amount to 4.68 cents per dollar of earning assets for the smallest banks, 2.92 for banks in the fourth group, and 1.85 cents for the largest banks (Table 29). “£151.... ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 29 Table 29. Expenses Other Than Taxes and Interest Earning Assets Salaries and Wages “Other Expenses" Combined (000 omitted) Less than $200 __________________ __ 3.18 1.50 4.68 200- 399 ..... ._ 2.53 1.25 3.78 400- 599 2.06 0.94 3.00 600- 999 ._. ...... ._ 1.99 0-93 2-92 1,000-seas _ . . . . . . . . . . . . ._ 1.75 0.89 2-64 4,000 and over ..................... .. 1.17 0-63 1-35 While the salaries-and-wages item in the first group amounts to more than half the total expenses, the average total salary-and-wage bill for these banks was only $4,560 per bank. This item was almost half of the total expenses for the banks in the second group, yet the average amount paid in wages and salaries per bank was only $6,788. Table 30 and Fig. 12 show the various items of expens- UNOUI 100 E» “H” es reduced to cents per dollar 3 .0...” of earning assets and Table g Mm 31 shows the percentage dis- ‘i’ tribution of expenses among §'°°°'°”’ the various items. The latter §~°;,<;;~" table emphasizes the decline of ordinary operating expens- es among the larger banks and the increase in payments to depositors. 4 CENTS PER DOLLAR OF EARNING ASSETS — sum u. mo s fir?" m1 mm _ i mvznisr on waltz-us g uizs m w“ “w, ?::€:SES Figure 12. Distribution of expenses for groups of banks of various sizes. Table 30. Itemized Expenses Per Dollar of Earning Assets, in Cents Earning Total Salaries Interest on Interest on Other Assets Expenses and Wages Deposits Borrowed Taxes Expenses (000 omitted) Money Less than $200 . 6.02 3.18 0.51 0.16 0.67 1.50 200- 399 ........ _. 5.14 2.53 0.64 0.12 0.60 1.25 400- 599 ....... ._ 4.54 2.06 0.80 0.11 0.63 0.94 600- 999 ....... __ 4.78 1.99 1.24 0.08 0.54 0.93 1,000-3,999 ........ .. 4.85 1.75 1.61 0.12 0.48 0.89 4,000 and over 4.32 1.17 ‘ 1.82 0.21 0.44 0.68 The figures on gross earnings and expenses indicate that on the average the smaller banks charge more for loans and pay much less for deposits. In many cases these banks are located in one-bank towns and the com- munities might be content to carry the burden of an inefficient banking unit in order to have banking facilities nearby. But unfortunately many of them are located in towns with two or more banks. The total banking business is barely adequate for one bank, yet two or three uneconomic banking units are eking out an existence at the expense of the community. Of the 62 banks with less than $400,000 in earning assets, for instance, 22 are in one-bank towns, 34 are in two-bank towns, and 6 are in three- bank towns. Of the 34 two-bank towns, 11 have a population of 1,000 or 30 BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION less, 14 have between 1,000 and 2,000, and 8 of the remaining 9 towns between 2,000 and 3,000. One of the three-bank towns has a population less than 1,000 and another has 1,500. The combined population of the 6 three-bank towns is 15,693, or an average of 2,615. -‘ Figures presented by the banks show some of the disadvantages of Table 31. Percentage Distribution of Expenses Earning Assets Salaries Interest Interest on Other (000 omitted) and on Borrowed Taxes Expenses Total Wages Depnsi ‘cs Money Less than $200 . 52.94 8.40 2.64 11.13 24.89 100.00 200- 399 ...... .. 49.23 12.42 2.26 11.81 24.28 100.00 400- 599 ...... .. 45.28 17.51 2.49 13.94 20.78 100.00 ‘ l‘ 600- 999 ...... .. 41.69 25.78 1.70 11.37 19.46 100.00 Q 1,000-3,999 ..... .. 36.00 33.20 2.39 9.99 18.42 100.00 _? 4,000 and over 27.10 42.32 4.77 10.08 15.73 100.00 g many banks. Seventeen communities, six with one bank and eleven with two banks, were selected to illustrate this point. All towns have less than 2,500 population and all are located in similar agricultural areas. The 1' total bank deposits per town range from $225,000 to $850,000. The banks < in the one-bank towns paid an average of 1.1 per cent on total deposits 7; and charged an average of 7.4 per cent on loans, while the figures for one bank in each of the 11 two-bank towns show an average of 0.7 per cent paid on deposits and 9.8 per cent charged on loans. Average net earnings (before losses) to the bank investment were approximately 9.1 per cent for each of the groups. Net Earnings to Earning Assets If the 62 banks in the first two groups had exceptionally heavy burdens in paying salaries and other ordinary running expenses, they recouped 1) by paying very little on deposits, 2) by having a larger percentage of their funds in local loans (although such investments probably carry greater risks than do bonds, acceptances, etc.), and 3) by charging higher rates on loans. The average net returns for each dollar of earning assets is about the same as that of the larger banks, except those with earning assets of more than $4,000,000 (Table 23). Ratio of Earning Assets to Bank Investment* The struggles of the small banks do not end, however, with their fair showing in net returns per dollar of earning assets. If they did, the chief inadequacies of the small banking units would consist in the higher rates charged customers for loans and the smaller amounts paid to customers for deposits. But most of the smaller banks find themselves with a low ratio of earning assets to capital invested by the bank itself, which makes it very difficult to earn an adequate return for the stockholders. One illustration should make this point clear. The 23 banks in the first group had an *Consists of capital, surplus, and undivided profits. ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 31 average of only 3.10 times as much earning assets as they had in capital, surplus, and undivided profits. The net returns for each dollar of earning ‘ assets was 2.29 cents, which when multiplied by the ratio of earning assets to bank investment gives a return of only 7.10 per cent on the investment J (Table 23). In contrast, the 26 banks in the fifth group had a net return of 13.65 per cent to the investment, although they had exactly thesame net ~z earnings per dollar of earning assets. The difference lies in the fact that these banks had an'average of 5.96 times as much earning assets as they had capital invested in the business. In this connection it might be noted that there has been a pronounced trend among country banks since pre-war years toward higher ratios of earning assets to bank investment. Banking expenses have increased very noticeably without a similar increase in the interest rate on loans. The result is that most banks which have been able to maintain reasonable dividends have done it largely by increasing the volume of business in a relation to the bank investment. Thus, with a smaller net return per dollar E of earning assets they have been able to maintain fair dividends to capital. h All the country national banks in the United States had an average ratio of loans and investments? to capital (including surplus and undivided pro- fits) of 3.53 during the years 1914-1916 as compared to 5.77 during the years 1926-1928I. That is, for instance, an average net return of 2.27 cents per A dollar of loans and investments was required to pay 8 per cent on the invest- “ment in the pre-war years, while 1.38 cents would pay 8 per cent during 1926- i 1928. The figures for Texas country national banks are similiar to those for the country as a whole, except that the ratio was lower in Texas. The Texas banks had an average ratio of 2.36 in 1914-1916 and 4.09 in 1926-1928. - That is, in order to earn 8 per cent on the investment the average country » national bank had to earn a net of 3.40 cents per dollar of loans and in- I vestments in the pre-war years, while a net of 1.95 cents would suffice in f 1926-1928. The figures in Table 23 indicate that the first two groups of banks used in the present study have an average ratio of earning assets to investment considerably below the 1926-1928 average for the State. But the ratios in T Table 23 should be reduced still lower to be comparable with the above , ratios because in this study interest-bearing deposits and miscellaneous earning assets are included, whereas in the averages above only loans and investments were included. Table 32 shows the average ratios of total Table 32. Ratio of Total Earning Assets and Loans and Investments to Bank Investment Ratio of Total Earning Ratio of Loans and Q , Earning Assets Assets to Bank Investments to Bank (000 omitted) Investment Investment Less than $200 3.10 2.51 200- 399 3.88 3.22 400- 599 4.18 * 3.44 600- 999 .......................................................... .. 4.69 _ 3.91 1,000-3,999 5.96 5.12 4,000 and over ................................................. .. 7.52 6.24 flnterest-bearing deposits and miscellaneous earning assets are not included here. iCompiled from reports of the Comptroller of the Currency. 32 BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION earning assets to bank investment and the ratios of loans and invest’ to bank investment for the 154 banks used in this study. Ratios for; first four groups are below the average for the State. A ~ ' That capital funds are depended upon much more in the smaller ba i: shown also by comparison of the relation of bank investment to de i; Since bankers’ funds and deposits are the chief sources of lending pow the bank, a comparison of these should give some indication of the e a to which the various groups of banks depend upon their own funds. b bank investment is equivalent to an average of 38 per cent of total ,7 posits in the first group of banks and the percentage decreases steadil; 23 per cent in the fourth group and 14 per cent in the last group (T _ 33). It is obvious that the net return on the investment will be affected; the extent to which a bank depends upon its capital as a source of ~13 and investments. Thus, if capital were the sole source of loans and. vestments in the first group of banks the net return to capital would’? only 2.29 per cent—-gross earnings of 8.31 per cent less expeases of i}, per cent (Table 23). ‘ i Table 33. Percentage of Bank Investment to Deposits and of Deposits to Earning 111 Banks a, Percentage of Percentage . Earning Assets Number of Banks Bank Investment Deposits I‘; (000 omitted) to Total Deposits Earning - .: J Less than $200 --.--..--. --_--_..---..----------..-.---.-.__.. 18 38.47 ' 200- 399 30 27.82 400- 599 18 26.69 600- 999 _ 18 23.21 1,000-3,999 ' 18 17.05 4,000 and over ............................................. __ 9 14.33 COMPARISON OF TEXAS BANK RATIOS WITH THOSE OF OTHER REGIONS The various ratios for Texas banks differ widely from those of banks A similar size in other sections of the country. Comparable figures have w?‘ compiled by the Federal Reserve Banks of Chicago and Philadelphia f’ their member banks. The “Banking Analysis Committee” of the Io ‘i Bankers’ Association has compiled similar ratios for all incorporated -»_ Table 34. Comparison of Gross Earnings in Various Regions Gross Earnings per Dollar of Loans and Investments v°lume °f Loans Texas Chicago District‘ Phila. District Iowa and Investments (in Thousands of Earn- Earn- ' Earn- Dollars) Number ings Number ings Number ings Number of (in of (in of (in 0 Banks Cents) Banks Cents) Banks Cents) Banks Less than 250 ----...___. 39 9.82 134 7.15 37 6.11 567 250- 500 23 8.82 271 6.85 81 6.39 393 500- 750 18 7.70 176 6.62 85 6.44 160 750- 1,000 ......... .. 8 8.82 124 6.47 70 6.43 66 1,000- 3,000 .. _______ -. 11 8.16 294 6.52 259 6.23 F" 3,000-15,000 __________ __ 121' 7.18 133 6.49 8711 6.17 "w *Chicago banks are excluded. TOne bank had more than $15,000,000 in loans and investments. IThese banks had loans and investments of $3,000,000 to $10,000,000. ***Not given according to this classification. ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 33 in Iowa. Banks are classified according to volume of loans and investments, gdisregarding interest-bearing deposits in other banks and miscellaneous earning assets. Table 34 gives a comparison of the gross earnings per i dollar of loans and investments in the four regions. . Figures for banks of the Chicago District are for 1928, those for the = Philadelphia District are for 1927, and those for Iowa banks are for 1927. Z About half of the reports for Texas banks are for the year ending June 30, I 1930, and about one-fourth are for the year ending June 30, 1929, and the other one-fourth for the year ending June 30, 1928. ‘ Table 35. Average Returns on Loans and Discounts for Texas Banks and Members of the Chicago Reserve District Texas I Chicago District E Volume of Loans and Interest Per Interest Per ‘ Investments (in Thousands Number of Dollar of Loans Number of Dollar of Loans = of Dollars) Banks and Discounts Banks and Discounts 1 Reporting (in Cents) Reporting (in Cents) . Less than 250 34 9.51 134 7.36 250- 500 19 8.78 271 7.21 500- 750 12 8.19 176 7.08 750- 1,000 8 8.66 124 6.78 ,7 1,000- 3,000 9 8.18 294 6.77 ‘ 3,000-15,000 10* 6.81 152 6.05 i ‘One bank had more than $15,000,000 in loans and investments. With the exception of banks of the Philadelphia District, gross earnings per unit of business were decidedly higher among the smaller banks. It will be observed also that gross earnings among the smaller Texas banks were 25 to 50 per cent higher than in the banks of the other regions, and they were 10 to 15 per cent higher in the largest banks. The difference in gross earnings is due largely to the different rates charged on loans. Thus, the average income on loans and discounts for the group of smallest banks was 9.51 per cent for Texas banks and 7.36 for member banks of the Chicago Reserve District, excluding the City of Chicago (Table 35). Table 36. Comparison of Expenses in Various Regions Expenses Per Dollar of Loans and Investments volume of Loans Texas I Chicago District I Phila. District I Iowa and Investments Per Per Per Per (in Thousands of Expenses Cent of Expenses Cent of Expenses Cent of Expenses Cent of ollars) (in Texas (in Texas ( in Texas (in Texas Cents) Bank Cents) Bank Cents) Bank Cents) Bank Expenses Expenses Expenses Expenses Less than 250 ______ .. 6.64 100 5.65 85 4.48 67 6.49 98 250- 500 .......... .. 5.63 100 5.26 93 4.39 78 5.90 105 500- 750 .. 5.20 100 5.02 97 4.25 82 5.89 113 750- 1,000 6.44 100 4.94 77 4.23 66 5.22 81 1,000- 3,000 5.58 100 4.83 87 4.14 74 *< * 3,000-15,000 4.92 100 4.79 97 4.08 83 * "‘ ‘Not given according to this classification. Expenses of bank operation in these four regions varied in about the same proportions as gross earnings. In general, expenses were highest among the Texas banks, next highest among Iowa banks, and lowest among Phila- delphia member banks. There seems to be a causal relation between high gross earnings and high expenses. Whether expenses are high among country banks because they have been able to maintain high rates on their 34 BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION loans or whether they have been compelled to charge high rates because _ unavoidably high expenses is a question. The indications are that custo has fixed the higher rates on loans and that bankers have permitted if penses to pile up accordingly. Table 36 gives comparisons of bankin expenses in the different regions. A The comparison of bank expenses in the various regions is far m f significant when distinction is made between payments to depositors and th ordinary operating expenses of the banks. Payments on deposits are muc less in the smaller Texas banks than in those of the other sections, an ordinary operating expenses are much more. Texas banks with'$250,000 - less in loans and investments paid depositors an average of only 0.64 cents, per dollar of loans and investments, while Chicago member banks paid 1.89,?” Philadelphia 1.76, and Iowa 2.96. On the other hand, salaries and other; operating expenses in the Texas banks averaged 6.00 cents per dollar of? business, while those of Chicago members were 3.76, Philadelphia 2.72, and? Iowa 3.63. Thus, so far as that portion of the bank expenses which doesi} not represent payments to the community is concerned, the small Texas“; banks have an expense almost double that of banks in the other sectionsa. Such expenses are also considerably higher in the larger Texas banks thani. in banks of similar size in the other regions (Table 37). Table 37. Comparison of Interest Paid on Deposits and All Other Expenses in Various Regions Expenses Per Dollar of Loans and Investments (in Cents) I Volume of Loans Texas l Chicago District l Phila. District I Iowa and Investments - (in Thousands of Dollars) Interest All Interest All Interest All Interest All on O the-r on Other on Oth er on Other Deposits Expenses Deposits Expenses Deposits Expenses Deposits Expenses" l Less than 250 l 0.64 6.00 1.89 3 76 1.76 2 72 2.86 3.63 250- 500 ______ .. 1.06 4.57 2.26 3 00 2.04 2 35 2.96 2.94 500- 750 ..... .. 1.17. 4.03 2.35 2 67 1.98 2 27 3.33 2.56 750- 1,000 _____ .. 2.06 4.38 2.42 2 52 2.06 2 17 3.06 2.16 1,000- 3,000 _____ _. 1.53 4.05 2.27 2 56 2.14 2 00 * * 3,000-15,000 ..... _. 2.07 2.85 I 2.17 I 2 62 l 2.01 07 * * *Not given according to this classification. Net earnings (before depreciation and losses) per dollar of loans and investments among the smaller banks were about three times as great in A the Texas banks as in the Iowa banks, about twice as great as the Chicago member banks, and 50 per cent greater than the Philadelphia member banks. The smaller Texas banks, however, have a much smaller ratio of loans and investments to the bank investment. The net result is that the Texas banks got just a slightly higher return on their investment than did the Chicago and Philadelphia banks and about 50 per cent more than the Iowa banks. Table 38 shows these comparisons. It will be observed that the net return to loans and investments among Texas banks declines rather sharply from the smallest to the largest banks, while the net return increases slightly in all of the other regions. This is attributable in large part to the fact that interest payments on deposits almost vanish among the small Texas banks. Also, it should be noted that there is a more extreme variation in ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 35 i- the ratio of loans and investments to the bank investment among the Texas banks. The ratio more than doubles from the smallest to the largest Texas banks. i The general average net return to bank investment after deducting net losses and depreciation was highest among Philadelphia banks, followed by Texas, Chicago, and Iowa banks, respectively. Invariably the smallest banks made the poorest showing in net returns to the investment. Texas banks and Chicago member banks with less than $250,000 in loans and invest- ments had a net return to bank investment considerably less than half as much as banks with $1,000,000 to $3,000,000 in loans and investments. Table 39 shows net losses and net addition to profits per dollar of business and net addition to profits per dollar of bank investment. Here again the influence of a large ratio of loans and investments to bank investment shows up in the return to the latter. Thus, the first group of Texas banks had an average net return to loans and investments of 1.30 and a return of 3.89 to the bank investment, while the Philadelphia member banks of the same class had a net return of 5.48 on their investment with a margin of only 1.24 on loans and investments. In the above comparisons it will be noted that economic efficiency in- creases with volume of business in other regions as it does among Texas banks, although the variation is not as great. That is, the main conclusions reached in the study of 154 Texas banks as to variation in gross earnings, expenses, net earnings, and ratios of volume of business to the bank invest- ment seem to be applicable to country member banks of the Chicago and Philadelphia Districts and to Iowa banks. Small banks pay less on deposits, charge more on loans, and earn less on capital. These comparisons by regions, however, are made primarily to show con- trasts in efficiency of banks of similar size. The figures presented show wide differences in payments on deposits, charges on loans, and returns to bank investment. A full explanation of the cause for these differences is impossible because of lack of information. Are the differences in efficiency between Texas banks with $500,000 in earning assets and country banks of similar size in the other regions attributable to the banks themselves, or are they due to prevailing differences in economic conditions which are beyond the control of the banking system? An answer to this question is basic to the solution of the problem. If the deficiencies of the Texas banks are due primarily to the banks themselves, a solution must be reached through improved banking practices of individual banks and the develop- ment of a more efficient banking system through legislation and govern- mental supervision. On the other hand, if the deficiencies are based largely upon prevailing economic conditions beyond the control of bankers and bank supervisors, other solutions must be sought. As compared with banks of similar size in the other regions, Texas banks have: 1) heavy expenditures for salaries and other ordinary ‘operating ex- penses; 2) heavy losses; and 3) low ratios of loans and investments to the bank investment. To what extent is each of these conditions beyond control of the banking system? 36 BULLETIN N0. 45o, TEXAS AGRICULTURAL EXPERIMENT STATION we fiaa 3a memmew aw oawwoow aswawwa awnwsa s 30am we wwweémasae Erso: fioaaoawae we wmasewn maaeam maewwuwm aoawe on» we mxasn ma» wmmau Maoaas mwmmow Eewmmeaaww we ass» s ms? 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ABA was was ma.” s . 3N E2: mwwq iwamaa awawaa awaoaa nwavaa twmo>aw |umw>aw |uwe>aw |wmw>aw swasaa Masm fiaoaa iwawaa xasm mwaoaa uwaoaa vwasm Baoaa uwaoaa Masmw spam-a vanes/aw ea awmo>aw xwmwiaw ea |uwo>aw awmobaw ow vomw>aw uwmw>aw ea uumoavaw vwasfl maaeaa was masenw xasm mwaoaa was mased Masm mwaoaa was masefl xasm maasaa was mased AwasIeQ S. peZ Lmw>aw ow ueZ ow weZ bmo>aw ea woZ o» wwZ Lweaaaw e» awZ 3 uwz $mo>aw ow wsz we mwasmaeam. a3 was maseQ was maseww was saseww was maseww wwaeafimgaw was we ewwsmw we ewwsm we ewwsmw we ewwsvw maseww we waaawe> sBow “$52G suiwésmaa 352a Cassie wsxwb Améwo a3 wmawaasmw woZ maewmwfi waewasaw aw Awomwow eaewenw mmawaasmw woZ we aowwasaEeO .wm swash. ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 37 Since interest payments on deposits are extremely low among the small l Texas banks and since the difference in expenditures for taxes and interest on borrowed money is not significant, the bulk of the difference in ex- penses consists in salaries and outlay for supplies, light, heat, insurance, and other ordinary operating expenses. Do Texas country banks pay l higher individual salaries? Possibly employees themselves are less efficient, or the work may be so organized that the labor of the bank is done less ef- ficiently. Texas banks may have more to do in handling a certain volume of business on account of smaller deposit accounts, smaller checks, or smaller loans. Finally, it is possible that the prices of supplies and various services are higher for Texas banks. Although positive facts are not available, it is very doubtful that the ordinary employees in Texas banks receive higher wages than do similar employees in the other regions discussed. But there is some indication that in a number of banks the cashier and other officers who own considerable stock are paid liberal salaries in lieu of more liberal dividends. The in- dications are, however, that this practice is not generally prevalent. It might be maintained that the higher expenses of Texas banks is due in part to a wider variation in the volume of loans through the year. That is, the average of loans and investments for the two reports*, June 3O and December 31, used here may be higher than the monthly average through the year on account of the predominance of a one-crop system of farming. It is doubtful whether there is any significance to this point, since the June 3O report is made at the height of the production season for most of the State and December 31 is at the end of the liquidating season for » the cotton crop. Some information is available on the comparative losses of country national banks in Texas, Iowa, and Illinois. Data covering the period 1914 to 1926, with the exception of 1920, indicate that the average losses for all Texas country national banks were 0.63 cents higher per dollar of loans and investments than were losses among Iowa country national banksi Texas bank losses were 0.89 cents higher than Illinois bank losses. These figures indicate an average difference in losses of approximately three-fourths of I one cent per dollar of loans and investments for Texas banks and the country banks of the Chicago District. Higher expenses and lower ratios of earning assets to bank capital seem to be much more significant factors than the excess losses of the Texas banks. Also, in accounting for higher rates on loans and lower payments on deposits on the basis of heavier losses, it must be remembered that responsibility for losses rests in part ’ with the bank management. While some of the excess losses in Texas may A be due to the greater uncertainties of agricultural production and to a one-crop farming system, they may be due in part to poor methods of credit analysis preliminary to loan extensions. Responsibility forthe low ratios of loans and investments to bank capital among Texas banks seems to lie wholly with the banks and the supervisors *Loans and investments in the other regions are averages of the figures given in the regular reports of condition, i.e., two to five reports. tCompiled from Annual Reports of the Comptroller of the Currency. 38 BULLETIN NO. 450, TEXAS AGRICULTURAL EXPERIMENT STATION of the banking system. All of the Texas banks considered here and practically all of the members of the Philadelphia and Chicago Reserve Banks are national banks, under the same general supervision. Legal minimum capital and surplus requirements are uniform. It is possible that the Comptroller of the Currency and the Federal Reserve Bank serving Texas discourage higher ratios. That the average ratio for all Texas country national banks increased from 2.41 in 1914 to 4.31 in 1928 indicates, how- ever, that Texas banks may ultimately have similar ratios to those in the North and East. SUMMARY AND CONCLUSIONS First: The figures on bank failures, voluntary liquidations, and cone, solidations, and on banks that are in normal operation indicate a definite relation between volume of business and efficiency. In general, the smaller the bank the higher are its expenses per dollar of earning assets, the less it pays on deposits, the more it charges for loans, and the less it earns on its investment. There are rather abrupt declines in efficiency from banks with $10,000,000 to $15,000,000 in earning assets to banks with $1,000,000 to $4,000,000; another abrupt break comes when the volume falls noticeably below $1,000,000; another comes when the volume falls below $300,000 $400,000; and, finally, the greatest break of all comes when the volume falls below the $100,000 mark. Stockholders in the smaller banking units earn a lower average return on their investment, and the risk of failure is greater. Borrowers pay a higher rate on .loans. The average rate on loans for country banks with ‘$1,000,000 to $4,000,000 in earning assets was 8.13 per cent, as compared‘ with 9.37 per cent for banks with less than $400,000. Banks with $600,000 to $1,000,000 earning assets charged an average of 8.45 per cent as com-ii pared with 9.36 per cent for banks with $200,000 to $400,000. Less interest is paid on deposits among the smaller banks. Banks with less than $200,000 in earning assets paid an average of only 51 cents per hundred dollars of earning assets as compared with $1.61 for banks with $1,000,000 w, $4,000,000 in earning assets. The data on failures and voluntary liquidai tions indicate that depositors in the smaller banks take greater risks than do depositors in larger banks, in spite of the fact that the latter have much higher ratios of deposits to the bank investment. I Second: Larger banks as a general rule are more efficient from the standpoint of stockholders and the community because 1) they have suf-i ficient business to justify the greater expense necessary in getting more efficient management, fewer losses through greater skill in placing loans, better distribution of earning assets, and greater efficiency in clerical work, because 2) their volume enables them to reduce fixed or overhead ex- penses per unit of business to a minimum, and because 3) they can-safely maintain a higher ratio of earning assets to the bank investment. Third: The existence of a large number of banks in Texas which are de- finitely too small to operate with a high degree of economic efficiency is due 1) to the actual lack of business in many small, one-bank communities on * k““'"r~.»| ECONOMIC EFFICIENCY OF TEXAS COUNTRY BANKS 39 account of the physical size of the community, 0n account of its 10w pro- ductivity, or on account of loss of business to larger towns which can be reached easily by automobile, and 2) to the slack methods on the part of government supervising agencies in granting charters for banks in towns which already have one or more banks, or unforeseen declines in the bank- ing business in communities that were thriving when the second, third, or fourth bank was chartered. Fourth: Texas country banks seem to be less efficient than are country banks of similar size in the Chicago and Philadelphia Reserve Districts. At least, they have greater losses and greater expenses per dollar of busi- ness, and they charge higher rates on loans and pay less on deposits. The years for which figures were taken indicate losses per dollar of loans and investments for Texas banks ranging from 1.88 cents among banks with less than $250,000 in" loans and investments to 1.18 cents among banks with $750,000 to $1,000,000, while similar figures for Chicago member banks range from 1.42 to .70 and for Phildelphia member banks, .39 to .55. Some of this disparity in losses, however, is undoubtedly due to economic conditions beyond the control of bankers, such as poor diversification of farm production in Texas. Expenses of operation among Texas banks ranged from 6.64 to 4.92 cents per dollar of loans and investments, as com- pared with 5.65 to 4.79 in the Chicago District and 4.48 to 4.08 in the Philadelphia District. The average rate charged on loans among Texas banks ranged from 9.51 to 6.81 per cent as compared with 7.36 to 6.05 per cent in the Chicago District. The average amount paid on deposits among Texas banks ranged from .64 to 2.07 cents per dollar of loans and investments as compared with 1.89 to 2.42 cents in the Chicago District, 1.76 to 2.14 cents in the Philadelphia District, and 2.86 to more than 3 cents among Iowa banks. Texas banks had a higher average net return to the bank investment than did the member banks of the Chicago District—from 3.89 to 9.74 per cent as compared with .32 to 8.19 per cent. This is attributable only to higher charges on loans and smaller payments on deposits by Texas banks. Net earnings to the bank investment among Philadelphia member banks ranged from 5.48 to 9.49 per cent. Fifth: In view of the foregoing, the following adjustments seem to be desirable: 1) voluntary liquidation or absorption of a large number of the smaller banking units operating in towns with two or more banks and, in some cases, such banks in very small, one-bank towns which are near larger trading centers; 2) prevention by government supervising bodies of the establishment of new banks in communities which cannot adequately sup- port them; and 3) provisions in state and national banking laws establish- ing more adequate protection to depositors, borrowers, “nd to the stock- holders themselves. x’ u