Federal Reserve Bank of San Francisco

FRBSF Economic Letter

1997-12 | April 25, 1997

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Getting the Jump on Interstate Branching

Fred Furlong

Western Banking Quarterly is a review of banking developments in the Twelfth Federal Reserve District, and includes FRBSF’s Regional Banking Tables. It is published in the Economic Letter on the fourth Friday of January, April, July, and October.

Although the federal trigger date for allowing interstate branching is June 1, 1997, about half the states, including eight of the nine in the Twelfth District, already have gotten a jump on interstate branching. These states took advantage of a provision in the federal law that allows states to opt in early, so that banking organizations can operate interstate through branches of a single bank, and not just through separately chartered banks. With the two largest California banks taking the branching option, almost half of the banking offices operated by interstate organizations in the West already have been converted to branches. This Economic Letter looks at interstate branching along with interstate banking more generally in the West.

A little legislative background

The push for interstate banking came from the states beginning in the 1980s. Through that decade and into the 1990s, state after state passed legislation allowing entry by out-of-state bank holding companies (BHCs). In general, the state laws were restrictive in that out-of-state BHCs could enter not by establishing branches, but rather by operating separately chartered commercial banks. Despite these restrictions, the prospect of interstate banking was attractive to several of the larger banking organizations in the West. Indeed, by the time the U.S. Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act (Interstate Act) and it was signed in September 1994, out-of-state organizations accounted for the bulk of the banking activity in most western states.

The federal legislation, however, does more than just ratify the state initiatives. For one thing, it allows an affiliated bank of a BHC to provide deposit and credit services to customers of other banks in the holding company that are operating in other states, making the offices of affiliated banks virtual interstate branches. Going even further, the federal law opens the way for a banking organization to operate actual branches of a single bank in more than one state.

So far, only Texas and Montana have passed legislation to opt out of interstate branching. In this District, Alaska gets credit for being the earliest to make the jump, adopting interstate branching in January 1994, well before the federal legislation. California, Idaho, Nevada, Oregon, and Utah opted in during 1995, followed by Arizona and Washington in 1996. Even Hawaii, which previously did not allow interstate banking, has decided to opt in, but not until the June 1997 trigger date.

Interstate banking and branching activity is strong in the West

In the West, about one-third of the approximately 8,200 commercial banking offices in the Twelfth District are operated by out-of-state banking organizations: roughly 1,500 are offices of separately chartered banks controlled by out-of-state BHCs and about 1,300 are interstate branches. When thrifts (savings banks and savings and loans) are added in, the total number of offices in the District rises to about 11,000, with 1,800 interstate offices of separately chartered institutions and 1,500 interstate branches.

While notable, these numbers actually understate the extent of interstate banking in the West, as the figure illustrates. It graphs the share of total deposits and the share of total offices both for separately chartered banks and for branches of out-of-state BHCs for the Twelfth District states (excluding Hawaii, since it has only a thrift controlled by an out-of-state BHC). The total height of the bar indicates the overall extent of interstate banking.

The figure shows that in several western states the great bulk of banking is accounted for by out-of-state organizations. For example, interstate banking clearly dominates in Arizona, Idaho, Nevada, and Washington, and in each state, interstate branching also is a significant share of overall interstate banking. The relatively small shares for Alaska suggest that its distance from other states and the unique aspects of its economy may make it a less attractive target for out-of-state entrants; in addition, banks in Alaska have not made out-of-state acquisitions.

For the other states in the District, the shares do not reflect the fact that the large banks headquartered there are important players in the expansion across state borders. For example, among banks in Utah, First Security and Zions operate in other western states. Even from Hawaii, First Hawaiian and Bancorp Hawaii have ventured onto the mainland. From its base in Oregon, U.S. Bancorp has expanded into Washington, Idaho, Utah, Nevada, and California. (The recently announced acquisition of US Bancorp by First Bank Systems, however, would change the picture for Oregon and raise the state’s deposit and office shares in the figure to about 88% and 79%, respectively.)

The most striking story in the District, of course, is California. While there has been some entry from other states, very small shares of the deposits and offices are accounted for by out-of-state organizations. Even adding in the thrifts operated by notable organizations like Citicorp (New York) and Washington Mutual (Washington State), the interstate shares in California remain below 10%.

From another perspective, however, California is the major interstate banking force in the District. These two largest banking organizations in the state, BankAmerica and Wells Fargo, account for around 47% of total interstate banking deposits and a bit more than 43% of the interstate offices in the West. The two large California banks are even more prominent when looking at just interstate branching. Together they account for about 90% of the deposits in interstate branches and the same share of branch offices.

More interstate branching to come?

In a real sense, interstate branching in the West so far has been driven from California. However, with the conversion to branches by the large California banks virtually completed, the next push toward interstate branching will have to come from elsewhere. It is possible that some of the other interstate organizations operating in the West will stay with separately chartered banks for a while. As indicated earlier, under the Interstate Act, offices of affiliated banks can serve as virtual interstate branches. Given that flexibility, concerns of some organizations over the potential loss of local identity may slow the conversion to interstate branches. However, the prevailing view seems to be that separate bank charters bring higher costs associated with regulatory issues, general bookkeeping, coordinating among offices, and maintaining separate boards of directors. Moreover, even with interstate branch networks, banks may be able to maintain an identity with communities through arrangements like regional advisory boards, management, and branding. That suggests that, with interstate banking already dominating in the West, the dominance of interstate branching is probably just a matter of time.

Fred Furlong
Vice President
Banking, Finance, and Regional Studies

Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System. This publication is edited by Sam Zuckerman and Anita Todd. Permission to reprint must be obtained in writing.

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