Blessing Or Curse? -- Proposed Bank Merger Raises Debate Over Benefits To Customers
It probably won't be clear for years whether bank customers in Washington will ultimately benefit from the proposed merger of BankAmerica and Security Pacific Corp., owners of the state's two biggest banks.
Evidence from other bank mergers shows that sometimes bigger means better - but not always.
Under the proposed merger, Seafirst Bank, Washington's largest, will be combined with Security Pacific Bank Washington next year under the Seafirst name.
An undetermined number of overlapping branches and some back-office operations will be closed, leaving hundreds, maybe thousands, of bank employees without jobs.
The resulting mega-bank could end up with about 50 percent of the commercial bank deposits and assets in this state, giving it huge market clout and greater ability to call the competitive shots.
Whether this will be a blessing or a curse to bank customers remains to be seen. But the merger is among the first of a wave of deals expected to result in a handful of nationwide banks in the 1990s.
"I know a lot of people in the media don't think so, but you will see that when the big mergers happen, the customers will benefit," said Richard Cooley, retired chairman of Seafirst.
"The big new banks will get their costs down and give their customers more for their money," he said.
That prediction is easy to make but hard to measure. And the evidence is mixed.
Some experts say fewer banks mean less competition. But others say the opposite can be true, and they point to the 3-year-old merger of Old National Bank and Peoples National Bank into U.S. Bank of Washington in this state as evidence that one large bank can go head-to-head with other large banks better than two smaller ones.
Other experts say banks don't really save money and enhance profits through mergers. They say the savings come from layoffs and branch closings, moves the banks could make without merging.
A study published last year by the Federal Reserve Bank of Minneapolis concluded that, despite beliefs popular among bankers, once banks reach a modest size, "there is no cost advantage to further expansion."
The study showed that from 1971 through 1987, the most profitable banks were those with $1 billion to $2.5 billion in assets. Bigger banks, on average, were significantly less profitable.
"Consolidation in banking is not all it seems, and those who have enthusiastically applauded it are likely to be badly disappointed by its results," concluded the study, by Fed economist Stanley Graham and senior research officer John Boyd.
"Nobody knows what the optimum point of scale is in banking," said Ed Jensen, president of U.S. Bancorp, which created U.S. Bank of Washington out of the Old National-Peoples merger in 1988.
"We know scale is important, but when people glibly say that the mid-sized regionals can't compete, they simply don't know what they are talking about," Jensen said.
Several large bank mergers and acquisitions in Washington since 1980 - when only one of the state's large banks had both the same name and the same ownership as it does now - have shown a mixed bag of results.
Three banks that were independent 10 years ago, Seattle-First, Rainier National and Seattle Trust & Savings Bank, have become part of regional chains with out-of-state ownership. (First Interstate, formerly Pacific National Bank, already was owned by a holding company in Los Angeles.)
Before they were acquired, respectively, by BankAmerica and KeyCorp of Albany, N.Y., Seafirst and Seattle Trust were financially weak and in danger of failure. Now both, under their new ownership, are financially sound.
But larger, multistate banking companies do not always result in better deals for local customers.
The 1988 acquisition of Rainier by Security Pacific Corp., hailed at the time as a smart move for both banks, is now regarded by many in banking as the most disappointing of the large Washington mergers.
They say morale suffered from the loss of the Rainier name and the loss of hundreds of jobs as various operations such as credit cards were moved outside the state.
Many also believe that the bank's customer service has deteriorated under Security Pacific ownership, as decision-making authority migrated farther and farther from customers.
A former branch manager said that after the acquisition, changing policies required him last year to tell a longtime customer with impeccable credit that "I'll have to get back to you" on a routine request for a small, short-term loan.
The manager, once named Rainier's "personal banker of the year," previously would have been authorized to make such a loan without question. "That's when I realized it was time for me to leave Security Pacific," said the banker, who now works for a smaller bank in Central Washington.
By contrast, Alan Hess, professor of finance and business economics at the University of Washington, said the Old National-Peoples merger, although it reduced the number of large banks, worked to the benefit of all bank customers by increasing competition in this state.
"I think U.S. Bank provides more competition" to Seafirst and Security Pacific than ONB and Peoples did before the merger, Hess said.
Before they merged, neither Peoples nor Old National was large enough and strong enough to compete directly with Rainier or Seafirst in making large commercial loans, said Ed Jensen, president of U.S. Bancorp. Joshua Green III, former chairman of Peoples and now chairman of U.S. Bank, has said the same thing.
The merged bank "now can compete head-on with the two bigger banks in all services," Jensen said. One example is banking's most basic product, the personal checking account.
For former customers of Old National and Peoples, "We give them more branches that are open for more hours, more ATMs (automatic teller machines), more drive-in branches, and 24-hour telephone service that they never had before, all for the same $3.50-a-month checking account" with no minimum balance, said Chuck Riley, executive vice president of U.S. Bank.
And despite national studies saying mergers do not reduce expenses or increase profits, U.S. Bank has improved on ONB and Peoples in both respects.
In 1986, Peoples' and Old National's overhead expenses were 79.9 percent of their income. In 1987, the ratio was 77.0 percent, according to figures reported to regulators by the two banks, which were separate competitors at the time.
After the two were merged as U.S. Bank, the expense ratio declined to 69.8 percent of income in 1989 and 64.2 percent last year.
Profitability also increased after the merger. The two separate banks reported profits of 28.5 cents per $100 of assets in 1986 and 57.6 cents in 1987. U.S. Bank's comparable profits were 79.4 cents in 1989 and 87.3 cents last year.
Though ONB and Peoples were among the state's largest banks, they were far from first and second place. The Security Pacific-Seafirst merger, because it involves the state's two dominant competitors, raises concerns of size.
Still, Hess believes that even though a merged Seafirst-Security Pacific could control about half the bank deposits in the state, the competitive effect would be relatively slight "because there is so much competition. If Seafirst and Security Pacific cut their services, other banks will step in and offer those services," he said.
Competition, however, seems to vary from region to region.
Last year, a study by two economists at the Federal Reserve Bank in San Francisco found that big California banks paid lower interest rates on two types of checking accounts than the national average for such accounts from 1984 to 1987.
The economists attributed some of the difference to the market clout of the big banks. But they also called the difference in rates a "mystery (that) remains an interesting puzzle.
"We cannot explain why California banks act differently from banks elsewhere," they concluded.
Mark Foster, a policy analyst at Consumer Action, a consumer advocacy group in San Francisco that monitors banking practices, said California's largest banks compete with each other only on image. "They talk in their ads about anything and everything except interest rates and fees. They have an oligarchy, and they do not have to compete on price."
Security Pacific's and BankAmerica's banks in California charge more than their counterparts in this state for the most basic bank product, the checking account.
Security Pacific Bank in California charges $7.50 a month for non-interest checking unless the customer keeps a minimum balance of $750. Here, Security Pacific's comparable account costs $6.50 a month if the balance drops below $400.
At Bank of America in California, a checking account with no minimum balance costs $6 a month. Seafirst's comparable account has the same price.
But Seafirst recently offered a low-price option with no monthly fee, no minimum balance and no bank fees if the customer uses Seafirst's ATMs and its automated telephone customer service for every transaction offered by those services.
Seafirst also is aggressively competing with other banks in a current marketing campaign offering $50 cash to customers of other banks who open Seafirst checking accounts.
"We have nothing like that here, no way," said San Francisco analyst Foster.
Jay Tejera, a banking analyst at Dain Bosworth in Seattle, says California banks must pay significantly more for salaries and land than their counterparts here, and the higher checking charges reflect higher costs of doing business.
He said the big commercial banks in California are comfortable with their higher-than-average checking charges. "They would be cutting their own throats to compete on price," he said.
Few bankers would argue that big banks do everything best.
"Looking at this as a banking consumer, we absolutely need the smaller banks," said Jensen. "We need owner-operated restaurants as well as chains. We need butcher shops as well as Safeway. I may have to pay more for it, but I want the choice of a product from a small bank that is not as standardized as those of a big bank."
The United States has more than 13,000 banks. Jensen expects the number to be between 5,000 and 6,000 by the turn of the century.
That change will come with a heavy cost. Tens of thousands of bankers will be out of work, and thousands of banks will cease to exist as separate entities.
Many customers will find their neighborhood bank branches closed, just as many people now must drive farther to the nearest service station or supermarket.
But most bankers believe that whenever legitimate needs are not met by big banks, small community banks will step in to meet those needs as "niche" players.
Pioneer National Bank in Yakima has done just that by specializing in business loans backed by the Small Business Administration. "We have the expertise, and we can handle those loans faster than the big banks," said Paul Campbell, Pioneer president.
"This is the real focus of our business," he said. "We make more SBA loans than all the other banks in Yakima County combined. The big banks do a few, but we do them all the time."
-------------------------------------
WASHINGTON'S BIG BANKS - THEN AND NOW
-------------------------------------
Washington's big banks have grown in assets and branches in the past 10 years, but only one - Puget Sound National - has the same name and ownership as at the end of 1980. Ten years ago, the public could buy stock in six of these banks; now only Puget Sound retains its public ownership.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1981 1991
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank Seattle-First Seafirst Bank
National Bank Owned by Public BankAmerica Corp.
San Francisco Branches 171 212 Assets $9.6 $12.1 (in billions)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank Rainier National Security Pacific
Bank Bank Washington Owned by Public Security Pacific .
Corp., Los Angeles Branches 134 163 Assets $5.2 $7.7 (in billions)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank Pacific National First Interstate
Bank Bank of Wash. Owned by Western Bancorp., First Interstate
Los Angeles Bancorp.
Los Angeles Branches 83 107 Assets $1.8 $3.5 (in billions)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank Peoples National U.S. Bank of
Bank Washington Owned by Public U.S. Bancorp,
Portland Branches 85 139 Assets $1.5 $5.4 (in billions)
Bank Old National Bank
of Washington Owned by Public Branches 79 Assets $1.5 (in billions)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank Puget Sound Puget Sound
National Bank National Bank Owned by Public Public Branches 44 93 Assets $.793 $4.7 (in billions)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank Seattle Trust & Key Bank of
Savings Bank Puget Sound Owned by Public KeyCorp,
Albany, N.Y. Branches 28 42 Assets $.545 $1.5 (in billions)
Source: Seafirst Bank, Security Pacific Bank, Key Bank of Puget Sound, First Interstate Bank, U.S. Bank, Puget Sound Bank