Drip Portfolio Report
Wednesday, April 15, 1998
by Dale Wettlaufer (TMFRalegh@aol.com)

ALEXANDRIA, VA (April 15, 1998) -- With the increase in the size of recent bank mergers, especially among companies with large branch banking presences, I thought we could take a brief look at a report that was published in the September 1997 Federal Reserve Board Bulletin. The URL for this particular article is: http://www.bog.frb.fed.us/pubs/bulletin/
and a list of recent Federal Reserve Board Bulletins can be found at: http://www.bog.frb.fed.us/pubs/bulletin/default.htm.

I highly recommend taking a look through the Federal Reserve's website at http://www.bog.frb.fed.us/. I've published some Web links in the past, but we'll go over some more on another day and generate a page with a more organized layout of Web resources for handy reference.

Changes in the Distribution of Banking Offices is a report from Federal Reserve staffers. While some of the reports are somewhat dense, as they are intended for a policy-making and banking audience, the research is excellent and well worth reading. I bring up this particular topic because the proposed NationsBank merger with BankAmerica has definitely fueled the fires of paranoia that banking consolidation increases a company's market power, kills competition, and will ultimately lead to expensive bailouts. Let's talk about the federal deposit insurance system some other time and focus on the first of these two concerns today.

One of the more interesting conclusions in the study of the banking industry between 1975 and 1995 was on bank branches per capita according to customer income: "The data do not show a consistent relationship between changes in neighborhood income and changes in the number of banking offices." This is borne out by the following spread of statistics:

Banking offices per 10,000 residents

Income 1975 1980 1985 1990 1995 (% of national median) More than 120 ........ 2.79 3.27 3.45 3.44 3.18 80 to120 ............. 3.13 3.56 3.76 3.63 3.46 50 to 80 ............. 3.03 3.51 3.73 3.56 3.36 50 or less ........... 3.62 4.04 4.14 3.75 3.39

While it's true that banking and savings & loans offices per capita dropped in areas where income levels are 50% or less of the national median income, per-capita offices in such zip codes are still above the highest per-capita levels. In only the lowest cohort did per-capita branches fall from 1975 to 1995. Not that I want to be a Pollyanna here, because let's face it, zip code composition can be misleading.

Looking at the problem of branches per capita for various income groups on an urban/suburban/rural breakdown, the highest per-capita branch levels were found in rural lower-income areas. For lovers of data, this report is filled with good information.

The conclusions presented in the paper were somewhat ambiguous on certain questions, but two that are germane to the question of economic efficiency and equity are:

1. "Moreover, mergers, acquisitions, and failures have taken place disproportionately in ZIP code areas that had higher numbers of banking offices per capita. On the whole, this evidence is consistent with the view that consolidation has been a response to excess capacity."

2. On balance, there is little evidence to suggest that mergers in general have more strongly affected the number of banking offices in low- and moderate-income areas than in other areas. However, mergers involving institutions operating offices in the same zip code area have been associated with a relatively larger decline in the number of offices per 10,000 residents in low- and moderate-income areas, though these areas also had higher levels of banking offices than other areas at the beginning of the twenty-year sample period.

We might as well condemn the rest of commercial America for fleeing the inner-city. Yes, banks and savings & loans take insured deposits and are thus justifiably regulated, but after 20 years, the data appear to indicate that certain portions of the U.S. were over-banked and that per-capita branch levels have evened out over time though attrition and mergers. Where things go from here is open to question, but the banking industry is very competitive. Abusive market tactics don't last too long in a system where corporations are trolling for every last opportunity to exploit market inefficiencies. I remain skeptical, personally speaking, that the current consolidation in banking will result in concentrated, monopoly-like or oligopoly-like market power for merged banks.

See you tomorrow.


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Stock Close Change INTC 74 7/8 -1 1/8 JNJ 71 9/16 -1
Day Month Year History Drip (1.00%) (2.58%) 4.53% (10.98%) S&P 500 0.32% 1.59% 15.34% 17.66% Nasdaq 1.10% 1.50% 18.65% 16.91% Last Rec'd Total# Security In At Current 04/01/98 9.015 INTC $80.417 $74.875 03/10/98 3.170 JNJ $67.087 $71.563 Last Rec'd Total# Security In At Value Change 04/01/98 9.015 INTC $724.94 $674.98 ($49.96) 03/10/98 3.170 JNJ $212.67 $226.85 $14.19 Base: $1400.00 Cash: $409.76** Total: $1311.59

The Drip Portfolio has been divided into 58.937 shares with an average purchase price of $23.754 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:

03/17/98: Sent $81 to buy/enroll in CPB.
03/17/98: Sent $70 to buy more JNJ.