Done Deal -- Puget Sound Bancorp's $800 Million Buyout Ends Era Of Major Local Banks

Washington's banking industry has gone through radical changes in the past dozen years, and the future is so uncertain that it's impossible to know who the state's three or four biggest banks will be a year from now.

The unprecedented turmoil has made an uncertain future for thousands of jobs and hundreds of bank branches.

Almost surely the state's largest bank next year will be what is now Seafirst, plus about 75 branches of Security Pacific Bank Washington, the state's second largest bank.

But many experts expect Seafirst to be re-named Bank of America, reflecting its California-based ownership.

And the majority of what is now Security Pacific - 86 branches - will apparently be sold to one or more buyers whose identities are the subject of much speculation. The sale will be part of the massive acquisition of Security Pacific Corp. by BankAmerica Corp.

What happens to those 86 branches could determine the No. 2 and No. 3 rankings a year from now. At the moment, Key Bank of Washington, owned by KeyCorp of Albany, N.Y., looks like it will be No. 2, after it buys Puget Sound Bancorp late this year.

U.S. Bank of Washington, owned by U.S. Bancorp of Portland, currently stands to keep its third-place ranking.

But those positions could change, as both U.S. and KeyCorp are potential buyers for the Security Pacific branches, along with several other out-of-state banking companies and a local investor group.

The future also is uncertain for First Interstate Bank of Washington, which at the moment stands to be in fourth place next year.

Some bankers expect First Interstate's Washington bank to be sold by its parent company in Los Angeles. Others say the bank could become a much bigger player by buying some Security Pacific branches.

All this uncertainty caps a dozen years in which the industry has already gone through such radical changes that most of its current players would be unrecognizable to anyone who left the state in 1980.

Only one major Washington bank - Puget Sound National - still uses the same name it did in 1980.

And Puget Sound will be history by the end of this year under the $800 million buyout announced last week by KeyCorp. That will leave only First Interstate Bank with the same ownership as in 1980.

After Puget sound becomes part of KeyCorp, Washington Mutual Savings Bank and Washington Federal Savings and Loan Association will be the only major financial institutions still based in this state.

The changes in banking go much deeper than names and ownership. They are part of an evolving revolution in banking that started with partial bank deregulation about a dozen years ago.

In 1980, the federal government dictated the interest rates banks could pay on savings accounts and prohibited interest payments on checking accounts.

With few exceptions, banks and bank ownership could not cross state lines, just as in many states, including Washington, banks once could not cross county lines.

In the early 1980s, the government deregulated interest rates, introducing price competition for the first time in a business that had competed for deposits with toasters and electric blankets.

In the mid 1980s, interstate banking barriers started breaking down, and large regional bank companies like Security Pacific Corp. and KeyCorp began to emerge.

Many bankers, knowing different regions of the country go through economic ups and downs at different times, saw geographical diversification as a way to balance their risks. KeyCorp, exclusively in upstate New York and Maine until 1987, is a prime example. Now the company is widely diversified, with banks in Washington, Oregon, Idaho, Utah, Wyoming and Alaska.

"They have their eggs in a lot of different baskets," said Jay Tejera, an analyst at Dain Bosworth in Seattle.

"The Pacific Northwest has proven to be a pretty strong market compared to the rest of the country, and if there is an economic boom in one area and another area is slowing down, it equals out," said Gale Ansell, assistant vice president of the Seattle branch of the Federal Reserve Bank of San Francisco.

Tejera says consolidation is one of the few business strategies open to big banks, because of federal restrictions on what banking companies may do.

Twenty years ago, 65 percent of all the loans made in this country were made by banks. But competition from securities firms, AT&T, Sears, General Electric and other non-banking companies have reduced that to 35 percent, Tejera said.

"The non-banks are encroaching on the banks' business, and banks are limited in their ability to compete because they are heavily regulated," Tejera said.

Unable to sell insurance, securities and other financial products, banks "are responding to the competition in the only way they can, by trying to streamline their cost structure," Tejera said. "There are 12,000 banks in this country and 12,000 sets of overhead, and that is not the most efficient way to distribute products and services."

In the food chain, it's relatively easy to tell which animals are predators and which are prey. In banking consolidation, it's not always that simple.

Among Northwest commercial banking companies, only Portland's U.S. Bancorp and West One Bancorp in Boise have remained independent giants. U.S. Bancorp, with assets of $18.9 billion, is too big to be prey for all but the biggest banking predators.

U.S. has spread aggressively into Northern California and is buying 29 BankAmerica and Security Pacific branches in Nevada.

West One, at $5.4 billion, could be either prey or predator. Roughly the size of Puget Sound Bancorp, West One would make a logical acquisition target for KeyCorp or U.S., giving either one a dominant presence in Idaho and some branches in three other states.

But West One, which has said for years it wants a meaningful presence in the Puget Sound area, also is a potential buyer for some Security Pacific branches up for sale in Washington.

U.S. remained independent through the 1980s because it was strong financially (unlike Seafirst) and because it had a solid succession plan for top management and "a very fierce will to survive as an independent," said Kerry Killinger, chairman of Washington Mutual Savings Bank.

Rainier Bancorp, which was bought for $1.1 billion in 1987 by Security Pacific Corp., and Puget Sound both wanted to remain independent. But neither had a strong succession plan when attractive offers came from out-of-state companies.

Financial weakness and relatively small size led to the demise of Peoples National Bank and Old National Bank, both bought by U.S. in 1987, and of Seattle Trust and Savings Bank, bought the same year by KeyCorp.

"The primary reason for the mergers today is that a lot of banks have essentially gone broke," said Tom Cleveland, a former BankAmerica executive and now chairman of Enterprise Bank of Bellevue. "Most of the big mergers are caused by one partner being unhealthy. That is clearly the case with Security Pacific Corp."

Cleveland said First Interstate's Washington bank, though it is profitable, "is on everybody's list" of acquisition targets. "The trade press seems to be saying it is just a matter of time until they are picked up."

Last year, First Interstate in Washington was rated less than satisfactory in meeting its Community Reinvestment Act obligations, and that rating has stymied the bank's plans to open new branches it had already built.

"They have moved their regional officers to Portland, and in Washington, they are silent," Cleveland said. "When was the last time you heard any First Interstate marketing?"

The revolution in banking has also changed the way most people use banks. Ten years ago, most employees had to stand in bank teller lines every payday to cash their paychecks during "bankers' hours" that were extended to 6 p.m. only on Fridays. Saturday banking was virtually unheard of in 1982, and customers with cash cards could use them only at their own bank's branches or, in the case of some thrifts and credit unions, at teller machines that were part of The Exchange.

If you wanted to know your balance, transfer money or find out if a check had cleared your account, you had to wait until the next business day and hope to get a bank employee on the phone.

Now most bank customers have teller-machine and telephone access to their checking accounts 24 hours a day.

Virtually all cash machines in Washington accept cards from all banks in the state, and most bank cash cards are linked with international systems that dispense cash at tens of thousands of locations.

Tejera says consumer banking has evolved "from a customized service base to a mass market base. The banks used to compete by giving away toasters and the Federal Reserve set the rates they could pay.

"Now, you get a much better deal on price and convenience, but the service levels are down," he said.

"This seems to be what the public wants, and it's the same thing you see happening in retailing," Tejera said. "People are very interested in price," and don't want to pay for lavish - but expensive - personal service.