Puget Buyout A Turning Point In Banking? -- Keycorp Deal May Have Wide Ramifications

The pending buyout of Puget Sound Bancorp by KeyCorp of Albany, N.Y., could be a turning point for Washington banking.

-- Washington will have one fewer large commercial bank, giving depositors one fewer choice and borrowers one fewer source of loans. And every remaining large commercial bank will be owned by an out-of-state holding company.

-- The move would dash the hopes of U.S. Bancorp of Portland to reach a No. 2 market share in Washington and alter its ability to survive as an independent super-regional bank.

Some analysts say U.S. Bancorp, which declined to outbid KeyCorp for Puget Sound, could become an acquisition target itself. However, U.S. Bancorp strongly disagrees.

-- The KeyCorp-Puget Sound merger suggests a three-way split of the 86 branches to be sold this spring by BankAmerica as it buys Security Pacific Corp. and folds Security Pacific Bank Washington into Seafirst Bank. One scenario suggests KeyCorp will buy the Eastern Washington branches of Security Pacific, U.S. Bancorp will buy Pierce County branches, and another outside bank or a local investor group will buy the branches in King and Snohomish counties.

-- KeyCorp said yesterday it plans to close 17 Key Bank branches and eight Puget Sound branches, though it would not say which ones.

-- About 400 banking jobs in the state will be lost, many of them in Seattle, from the consolidation of branches and other operations and as Key Bank of Washington moves its headquarters from Seattle to Tacoma, where Puget Sound is now headquartered.

If the deal goes through as planned in November, KeyCorp, owner of Key Bank of Washington State, will buy Puget Sound, owner of Puget Sound National Bank and two other banks in Washington, for about $800 million.

The ultimate dollar value of the transaction will depend on the price of KeyCorp stock at the time. Puget Sound shareholders will receive 0.88 shares of keyCorp stock for every Puget Sound share they own.

Puget Sound is the state's fourth-largest commercial bank; Key Bank is the sixth largest. Together they would have about $6.5 billion in assets, making Key Bank of Washington the state's second-largest bank, behind only Seafirst (after Security Pacific's branches are sold).

Three pending bank acquisitions by Puget Sound would bring Key Bank's assets to about $7 billion by the end of this year.

The move alters the outlook for U.S. Bancorp, which entered this state's banking scene in 1988 when it bought Old National Bank of Spokane and Peoples National Bank of Washington and merged them to form U.S. Bank of Washington.

U.S. has said repeatedly it wants to become the state's second-largest bank. With $5.3 billion in assets, it is now third.

"Their strategy is really threatened now," said Val Jensen of Jensen Investment Management in Portland. "This makes U.S. itself a candidate to be acquired."

However, U.S. Bancorp Chairman Roger Breezley said Puget Sound was not a "must-do" deal. "Puget Sound was of great interest to us over a long period of time," he said. "But it was certainly not something that had to be done. We were given an opportunity to look at it at the very last minute, and we declined to play at the prices that were being paid.

"It would have been nice, but in the time constraints available, it was an opportunity that did not fit for us," Breezley said.

Puget Sound said U.S. Bancorp made a proposal last week to acquire Puget Sound but that by Sunday, when final decisions were being made, its proposal had vanished.

By turning down the chance to buy Puget Sound, U.S. "has sealed its position in Washington (as third place in the market) and its shot to become a super-regional banking company is now blown," Jensen said.

But Breezley said U.S. remains committed to the Northwest and its expansion in Washington is far from over.

The Puget buyout may affect the disposition of 86 Security Pacific and Seafirst branches to be sold by BankAmerica by defining which buyers would be able to acquire which branches.

KeyCorp said it remains interested in buying some of those branches, particularly in Eastern Washington.

"I don't think we could pick up the whole deal, but our long-term objective is to eventually be a statewide bank and we see (the Security Pacific branches) as an opportunity" to quickly move outside the Puget Sound region, where Key and Puget Sound banks are now concentrated, said Hans Harjo, president of Key Bank of Washington.

Jay Tejera, an analyst at Dain Bosworth in Seattle, said KeyCorp "will probably have to make a joint bid with somebody else, or maybe a three-way bid," to acquire Security Pacific branches.

He suggested KeyCorp could buy the Eastern Washington branches and U.S. could buy the branches in Pierce County, where U.S. Bank has little market share.

Tejera said another buyer, possibly a local investor group or West One Bancorp of Boise or First Interstate Bancorp of Los Angeles, would buy the Security Pacific-Seafirst branches in King and Snohomish counties.

Other out-of-state companies have been mentioned as possible buyers, but Tejera said, "It makes 10 times more sense for somebody who is already here to take those branches" than for a company not in the state now.

Harjo said KeyCorp expects to avoid layoffs through an immediate partial hiring freeze so that employees whose jobs are lost to consolidation can be given new ones inside the new bank. Scott McAdams, an analyst at Ragen MacKenzie Inc. in Seattle, said KeyCorp will consolidate the two bank's trust, credit card and mortgage departments as well as some administrative functions.

Harjo said six months of normal turnover at Puget Sound and Key Bank could produce 700 to 800 vacancies available for other employees to move into. The two banks now have combined employment of 3,400, he said.