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Interstate branch banking: Opt in or opt out?

January 1, 1995


David S. Dahl Regional Economist
Kathy Cobb Associate Editor
Interstate branch banking: Opt in or opt out?

Winona, Minn., residents who bank with Norwest in Winona and work across the river in La Crosse, Wis., cannot deposit their paychecks at a Norwest banking office in La Crosse. They could if Norwest banking offices in Winona and La Crosse were branches of the same Norwest bank, but current banking regulations prohibit Norwest Corp.'s banking affiliates from branching across state lines.

Soon, however, bank customers may be able to bank across state lines and across the country. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allows banks to branch across state borders if states concur. States can "opt out" of the law's provision for national interstate branching, which becomes effective June 1, 1997, or they can "opt in" earlier. Therefore, before this date, Ninth District state legislatures must decide whether to go along with interstate branching.

Nation has been moving to national interstate banking

States began enacting interstate banking laws in 1975 and today all states except Hawaii have enacted some form of interstate banking legislation. These laws enabled bank holding companies (BHCs), the corporations that own commercial banks, to acquire banks, subject to various restrictions, outside their home state.

Minnesota, North Dakota and South Dakota have national reciprocal interstate banking laws. A BHC with headquarters in any other state can acquire banks in these three states if its home state allows acquisition of that state's banks by Minnesota, North Dakota and South Dakota BHCs.

Montana and Wisconsin interstate banking laws also require reciprocity, but in Montana out-of-state acquisitions are restricted to BHCs from seven states and in Wisconsin to BHCs from eight states.

Next fall, however, BHCs from any state will be able to acquire Montana and Wisconsin banks. For as of September 29, 1995, a BHC will be able to acquire a bank in any state, according to Riegle-Neal. Those banks must be at least five years old, unless the host state specifies a shorter time, and the acquisition must not leave the BHC in control of more than 10 percent of nationwide deposits or 30 percent of deposits in the state, unless the state specifies otherwise.

The legislation also topples the last remaining obstacle to interstate banking, the McFadden Act's 67-year-old prohibition to interstate branching. Beginning June 1, 1997, BHCs may consolidate their interstate bank affiliates into branch networks, and free-standing banks may branch interstate by merging with another bank across state lines. State legislatures, however, can opt in to interstate branching before then. They also can decide to opt out. A bank whose home state opts out, however, cannot branch beyond its state's borders.

Compelling arguments for opting in and opting out

"It's (interstate branching) about allowing banks to serve our customers wherever they are, wherever they want to be, and doing it faster, better and at a lower cost. No matter where they live, work, move or travel, consumers will be able to bank there, too," said Richard Kovacevich, president and CEO, Norwest Corp., when he introduced President Clinton at the signing ceremony for Riegle-Neal.

Furthermore, proponents argue, consolidating affiliate banks into branches would provide savings to some BHCs, for only one bank must be examined, one set of regulatory reports filed, and separate boards of directors for each bank would be eliminated.

State legislatures are also hearing that "interstate branching is bad public policy; it provides no benefits for community bankers; and it is little more than special interest legislation to allow our nation's biggest banks to consolidate their empires," according to an Independent Bankers Association of America statement. Consolidation, they claim, would cost communities jobs. Plus, "branching would make it easier to drain funds from deposit-rich states to lend elsewhere."

Montana bankers wrestle with branching issue

Members of the Montana Independent Bankers (MIB) and the Montana Bankers Association (MBA) have taken two different approaches to the issue of interstate branching. As a result, the Legislature had a choice of opting out of interstate branching or making no decision now and studying the impact of the federal legislation. As this fedgazette went to press, a bill to opt out had passed the House, while the study resolution had been killed. Although the Montana Legislature meets only biennially, interstate branching could be easily addressed in 1997 before the federal law goes into effect.

"Support [for opting out] is unanimous," says MIB executive secretary Keith Colbo of his organization's members. "If I had my druthers, I'd opt out of the whole interstate banking law," Colbo says.

On the other hand, when the MBA polled all Montana banks, including branches, the response was two to one to opt in early or wait until 1997, according to John Cadby, MBA executive vice president. Cadby says that while it's possible for the state to opt out now and still study the issue over the next two years, the Legislature would need to address the issue again in 1997 should the state choose to opt in.

Montana's mixed reaction to the new law comes as no surprise since the state was the last to pass a regional interstate banking law in 1993 and has allowed limited intrastate branching only since 1990. "With 28 percent of the state Legislature [occupied as] ranchers or farmers, there's plenty of empathy with community bankers," says Don Hutchinson, state commissioner of banking and financial institutions.

But regardless of interstate branching, national interstate banking becomes law in Montana this September, and Cadby expects to see some new banking activity. "Western Montana has become a hot spot in the nation," Cadby says, referring to an influx of new residents, many from California.

Hutchinson says he's heard rumors about a few large Western banks expressing interest in Montana. But he adds that Montanans have no identity with large metropolitan institutions. "Our whole state isn't even [the equivalent of] a big city."

North Dakota may opt out, then opt in after review

While other states have nearly two years to consider the opt-out provisions of the new interstate banking and branching law, North Dakota must make that decision now.

The state's Legislature, currently in session, doesn't meet again until 1997, and bills from that session won't become law until after the June 1997 deadline. That means if North Dakota wants to make its own decision on the matter, it must do so this year. And, while that decision was still in doubt when this issue of the fedgazette went to press, bank officials say that they expect the state to opt out of interstate branching this year, with the intention of reviewing the matter and possibly reversing that decision in 1997 or beyond.

"Let's help our bankers get ready, then opt in any time," is how Arlene Melarvie, executive director of the Independent Community Banks of North Dakota (ICBND), describes the mood of many bankers.

ICBND and the North Dakota Bankers Association (NDBA) polled their banks on this subject and have been working with the state banking commissioner's office to prepare a bill. That hasn't been easy, considering how fast the bankers have had to work: Bills for the current Legislature had to be introduced by mid-January. The process has proven too hasty for some bankers' tastes, according to Jim Schlosser, executive director of the NDBA. Many bankers would—at the least—like more time to consider all the provisions of the new federal law, and—at the most—would like to address other issues in the state bill, such as intrastate branching. "The problem is time," says Schlosser, who suspects that some bankers are still uncertain about the federal law's many provisions. "We're really at a disadvantage."

If this matter proves difficult for some bankers, it may vex the Legislature even more, Schlosser says. Most legislators are looking to the banking industry for guidance on the issue, and some—who were present for the passage of the state's 1991 reciprocal interstate banking law—will wonder why they must address the issue again so soon. "You talk to 10 legislators, and nine probably couldn't tell you the difference between interstate banking and branching."

To that end, Melarvie and Schlosser say that banks must not only educate the legislators, but they must agree—at least for the most part—on the message. "We have to find a unified voice," Melarvie says.

Minnesota will not address interstate branching in 1995

The state's bankers are taking a deliberate, incremental approach to the legislation, says Truman L. Jeffers, executive vice president, Minnesota Bankers Association (MBA). Immediately following the passage of Riegle- Neal, the MBA and the Independent Community Bankers of Minnesota formed a joint task force to study the issue. It is dealing with the law in stages, says William Wilkening, president, Citizens Independent Bank, St. Louis Park, and task force chair.

For the 1995 legislative session, the task force will have recommendations on the BHC acquisition of banks across state borders which go into effect Sept. 29. Although its recommendations have not been finalized, it will probably go along with the 30 percent deposit cap in the legislation, and ask that out-of-state BHCs be prohibited from acquiring newly chartered banks, but recommend that the age of the charter be less than the five years Riegle-Neal specifies, says Truman Jeffers.

One reason for having the Legislature hold off consideration of interstate branching until 1996 or 1997 is that Minnesota bankers do not see Riegle-Neal having any immediate impact on the state, according to industry officials.

The legislation will have significant long-term effects but it is too early to tell what they will be, says Allen I. Olson, president, Independent Community Bankers of Minnesota. The interstate branching provision could be attractive for Minnesota banks in border counties, Wilkening says. Pierce and St. Croix counties in Wisconsin, for example, are part of the Minneapolis/St. Paul metropolitan statistical area (MSA), and interstate branching would enable Minnesota banks to expand there.

Regardless of whether Minnesota permits interstate branching, bank consolidations will continue in Minnesota. In 1983 Minnesota had 530 state banks with $13 billion in assets, in 1994 the state had 424 state banks with $19 billion assets. The pace of bank mergers has been steady. In the mid-'80s banks merged because of the farm crisis, and more recently with the liberalization of Minnesota's branching law, bank mergers have been prompted by business opportunities, according to James G. Miller, deputy commissioner, Minnesota Department of Commerce.

South Dakota may opt in

The state's bankers have not had enough time to assess the impact of either opting in or opting out of Riegle-Neal's interstate branching provision, says Jeffrey J. Rodman, executive vice president, South Dakota Bankers Association. This year they would oppose legislation that would do either. But in 1996 South Dakota may opt in, or wait until 1997 and let Riegle- Neal's interstate branching provisions kick in, says Richard A. Duncan, director, South Dakota Division of Banking.

South Dakota's population is concentrated along its borders, and interstate branching could provide a business opportunity for banks in those communities, Rodman says. For example, Pipestone Bankshares, Inc., a Minnesota BHC with a bank in Pipestone, recently acquired a bank in neighboring Garretson, S. D.

Moreover, supporting interstate branching is consistent with the state's previous efforts to remove geographic barriers to bank expansion. In 1969 the state permitted statewide branching by merger. Then, in March 1980 Gov. Bill Janklow, who was reelected governor last fall, persuaded the Legislature to pass an interstate banking bill, which allowed out-of-state banks to obtain a charter for a special-purpose bank. The next year Citibank (South Dakota), N.A., a credit card processing center, opened in Sioux Falls.

With regard to BHC acquisition of banks across state borders, this year South Dakota will likely go along with the requirement that a BHC cannot control more than 30 percent of a state's deposits. But it will enact a provision, which Riegle-Neal permits, to waive that on a case-by-case basis, Duncan says. For example, South Dakota has banks processing national credit card transactions, and the deposit increase could come from national credit card transactions.

Wisconsin takes a wait-and-see attitude

"Interstate banking won't change the face of banking in Wisconsin," says Harry Argue, executive director, Wisconsin Bankers Association (WBA).

Argue's views are based on what he hears from WBA members who, he says, have already experienced a lot of change resulting from a 1987 interstate banking law, the ag crisis of the '80s, the fallout from the S & L crisis and the challenges imposed on them by FDICIA (Federal Deposit Insurance Corp. Improvement Act of 1991). After all that, Argue says, "those still in business are survivors and don't see a major impact" from the new legislation.

David Glomp, executive director of the Independent Community Bankers Association of Wisconsin (ICBAW), isn't so sure. "I think it will affect the state; there will be a lot more players," Glomp says. But the ICBAW, like the WBA, is taking a wait-and-see stance on interstate branching. "This is not a simple issue and ought not be decided this year," Glomp says.

The ICBAW scheduled information sessions around the state in January to make sure bankers understand the federal legislation and their options. Glomp expressed concern that some large banking organizations might syphon off business from community banks, leaving them with insufficient deposits with which to provide loans. In addition, "the state isn't ready to deal with the tax implications of branching," Glomp says.

The ICBAW hopes the WBA shares its opposition to early opt-in legislation. While Glomp currently is unaware of any legislative plans, he thinks it's important to use the time that the federal act has built in. "Let's take this one step at a time," Glomp says. "Let's see how going from eight states to 50 works first," he adds, referring to the current interstate banking agreement.

Since that law was enacted, 11 out-of-state bank holding companies have transacted business in Wisconsin, according to Richard Dean, Wisconsin's commissioner of banking, and since statewide branching went into effect in 1989 the number of branch banks has tripled.

Dean sees the new laws merely as part of an evolutionary process in the financial services industry, and he thinks the consumer may be the winner. "If new entities come in, they must find the state attractive and will likely bring new ideas, for example, home banking or new lending products," Dean says.