Fed Lets Pennsylvania Bank Underwrite Debt and Equity
A Pennsylvania bank company with $3.4 billion in assets has won approval to underwrite corporate debt and equity, signaling regulators' willingness to expand securities powers for well-capitalized banks of any size.
The Federal Reserve Board has approved the application of Harrisburg-based Dauphin Deposit Corp. to acquire Hopper Soliday & Co., a 118-year-old investment firm in nearby Lancaster, Pa. The decision effectively permits Dauphin to engage in a full range of securities activities.
The only other domestic banking companies to receive such permission are the securities units of Bankers Trust New York Corp. and J.P. Morgan & Co., two money-center behemoths.
Sixth Largest in the State
The acquisition of Hopper Soliday "represents the beginning of our breakout from traditional banking in our markets," said William J. King, Dauphin's chairman and chief executive.
Dauphin may seem an unlikely candidate for plowing new fields. It owns just one bank and is the sixth-largest holding company in Pennsylvania.
But Dauphin had a healthy 1.4% return on assets and 15.6% return owns nonbanking subsidiaries in community development, insurance underwriting, and agency activities. It also is strongly capitalized, with a Tier 1 capital ratio - using 1992 standards - of 12.34% at yearend.
Major Regional Underwriter
Dauphin announced last November that it would pay $2.9 million for Hopper Soliday, which has $2.5 million in assets and about 40 employees.
The firm is a major regional underwriter of municipal bonds, an activity that many banks have used to enter securities underwriting field because it is not prohibited by the Glass-Steagall Act.
Dauphin Deposit said Hopper Soliday will continue to emphasize municipal finance but also plans to offer a full range of investment banking services to small and medium-sized companies in Pennsylvania.
Bigger Brethren in Background
Dauphin's expansion comes as Congress is considering a Bush administration bill to dismantle the Depression-era Glass-Steagall law, which bars banks from most securities underwriting.
Fed officials said the approval for Dauphin sends a clear signal they will extend securities powers to well-capitalized banks regardless of size.
Although the Fed has been gradually opening the securities door during the past three years, few banks have the capital to expand into underwriting debt and equities, an area of increasing profitability to securities firms.
What Others Have Done
Citicorp and Security Pacific Corp. applied more than a year ago for full debt and equity powers for their securities subsidiaries, but did not follow through on their applications.
Citicorp never invited federal regulators to review the adequacy of its securities unit's capitalization and organizational framework. Security Pacific withdrew its request for the long-sought powers, after dramatically narrowing its securities ambitions to municipal bond underwriting.
Banc One Corp. two years ago acquired a small Ohio investment bank - Meuse, Rinker, Chapman, Endres & Brooks - but has not sought to underwrite equity or high-yield debt.
Regulatory sources said the only banks likely to follow in Dauphin Deposit's footsteps are profitable superregionals, such as Norwest Corp., First Union Corp., and NCNB Corp. Each has securities subsidiaries with limited nonbanking powers.
Few banks of Dauphin Deposit's size, however, are expected to expand into underwriting. That is because the Fed has limited to 10% the revenues that securities subsidiaries of banks can derive from new underwriting activities.
Large banks overcome the quota by packing high-volume businesses, such as government securities trading and municipals underwriting, into their securities units. Few small banks have such businesses, meaning that the 10% limitation would be breached before any meaningful profits could be booked.
Executives at Hopper Soliday, Pennsylvania's largest underwriter of general-obligation bonds in 1990, say the firm has a large enough base of revenues to make expansion into the new activities worthwhile.