Financial Update (April-June 2000)


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Structural Changes Leave Mark on Southeast’s Rural Banking Markets

Piggy Bank
During the 1990s, many factors, including mergers and acquisitions and the savings and loan crisis, changed the structure of Southeastern banking markets.

by Lynn Woosley, economist

In the past decade, sweeping structural changes have reshaped the banking industry. The number of commercial banks and thrifts in the United States declined by more than 30 percent during the period from 1991 to 1999. Many factors were responsible for the loss of depository institutions.

In the early part of the decade, many thrifts closed or were acquired as a result of the savings and loan crisis. Other banks and thrifts were acquired through mergers and acquisitions designed to achieve economies of scale or scope or to extend the acquiring bank’s geographic footprint. In addition, many bank holding companies have reduced the number of bank charters they hold since the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act in 1994. Consolidation has, according to many, become a fact of life in the banking industry.

During this period, Southeastern banking markets followed the national trend. Rural markets, which generally had fewer strong competitors, became highly concentrated. (See “Consolidation Concentrates Bank Markets in Sixth District,” Financial Update, Oct.–Dec. 1997, 2–3.)

This development in rural counties prompts several questions. First, what happens once local markets become highly concentrated? Second, is continued consolidation inevitable since the trend has started? And finally, will concentrated markets experience new entry or achieve balance among existing competitors? The experience of Southeastern rural counties, used here to approximate markets, may help answer these questions since several of the factors contributing to the declining number of institutions are still affecting rural banking structure today.

Rural banking markets

By 1996, rural markets throughout the Southeast were generally highly concentrated, based on the Herfindahl-Hirschman Index (HHI), which uses a mathematical formula to determine whether a banking market is unconcentrated (below 1,000 points), moderately concentrated (1,000 to 1,800 points) or highly concentrated (over 1,800 points). In 1996, Southeastern rural markets had an average HHI of 4,075. Over the next three years, an additional 215 Southeastern banks and thrifts have been merger or acquisition targets. The average HHI increased only slightly, to 4,096.

Another concentration measure, the three-firm ratio, remained steady at 89.04 percent, while the average number of competitors increased from 4.2 to 4.5 per rural county. The three-firm ratio is the combined market share of the three largest competitors.

Looking at the states

Examining the changes in concentration in each state provides insight into changing banking structures in the region. Over the period from June 30, 1996, to June 30, 1999, the Southeast generally experienced stable or slightly decreasing levels of concentration.

Florida’s average HHI fell from 4,265 to 3,917, the average number of competitors per county increased from 4.2 to 5.0, and the three-firm ratio fell from 89.92 to 87.85 (see the table). In Louisiana, the typical rural HHI declined from 3,993 to 3,869, the three-firm ratio declined slightly, and the number of competitors increased from 3.1 to 4.9. Mississippi also conformed to this trend. The usual number of competitors was basically stable, at 4.0 per rural county in 1996 and 4.2 in 1999. The HHI fell somewhat, from 4,150 to 4,012, and the three-firm ratio declined slightly, from 92.13 to 91.20. In Tennessee, the average HHI decreased from 3,908 to 3,791 while the three-firm ratio fell from 87.51 to 86.35, and the number of competitors increased slightly, from 4.3 to 4.8. Improvements in all three concentration measures seem to indicate that either the new entrants or existing competitors are effectively gaining market share.

The other states showed mixed results. In Alabama, the average rural county HHI rose from 3,282 to 3,333, and the average three-firm ratio rose from 82.13 percent to 83.02 percent, but the typical number of competitors rose from 5.0 to 5.3.

Finally, in Georgia, although the HHI and three-firm ratio both declined slightly, from 4,849 to 4,752 and from 92.12 to 91.75, respectively, the average number of competitors also fell, from 4.7 to 3.8. Improvements in the HHI and the three-firm ratio while the number of institutions declined could indicate the market shares of remaining competitors are becoming more balanced.

Changes in Southeastern Rural Counties’ Market Structures
  State Average
Deposit HHI
3-Firm Ratio
Average Number
of Competitors
  1996 1999 1996 1999 1996 1999
Alabama 3,282 3,333 82.13 83.02 5.0 5.3
Florida 4,265 3,917 89.92 87.85 4.2 5.0
Georgia 4,849 4,752 92.12 91.75 4.7 3.8
Louisiana 3,993 3,869 90.39 89.55 3.1 4.9
Mississippi 4,150 4,012 92.13 91.20 4.0 4.2
Tennessee 3,908 3,791 87.51 86.35 4.3 4.8
Southeast 4,075 4,096 89.04 89.04 4.2 4.5

Merger and acquisition activity

Relative levels of merger and acquisition activity help to explain these results. Alabama began the consolidation process early and experienced most of its major consolidation before 1996. There were 30 mergers and acquisitions completed in Alabama between June 30, 1996, and June 30, 1999. Louisiana, like Alabama, had weathered the first wave of consolidation by 1996 and experienced only 36 additional mergers over the next three years. In Tennessee, there were 37 mergers between 1996 and 1999. Mississippi, considered to be less attractive because of lower levels of economic activity, had the least merger activity of any Southeastern state between 1996 and 1999, with only 15 mergers. Florida and Georgia, attractive because of strong economies, had 97 and 62 mergers, respectively, during the three-year period.

The numbers tell only part of the story, however. Many other factors can influence the changing structure of local banking markets. These factors include new entries, sometimes prompted by changes in branching laws or merger activity, deposit runoff following an acquisition and changes in market rank because of other factors.

Changes in the types of mergers completed may also change the effect on market structure. For example, if banks are primarily using mergers as a vehicle for geographic expansion and there is little overlap between the buyer’s and seller’s branch locations, there will be little change in local market structure. Similarly, if the average size of the target is smaller, each merger will affect fewer markets. Finally, some of the mergers and acquisitions during this period represented the withdrawal of regional and super-regional competitors from selected rural markets.

Ongoing bank consolidation does not necessarily mean ever-increasing rural market concentration. Although the typical rural market in the Southeast is still highly concentrated, levels of concentration have declined somewhat since their peaks in the mid-’90s. Only time will tell if rural market concentration levels will recede further.