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What Recession? Banks
Talk About Earnings, Not Cutbacks and Layoffs
By Donna Gordon Blankinship
It’s all smiles in Washington banks this year — at
least for the bankers and their shareholders.
“Bank earnings are terrific,” says Jay Tejera, a banking
analyst with Dain Bosworth in Seattle. Washington banks saw
their earnings jump 30 percent in the first six months of 1993.
They reported net income of $135 million through March 31, according
to the most recent figures available from the Federal Reserve
Bank of San Francisco. Net income for Washington banks in 1992
was $472 million. Tejera and bank officials said strong performances
continued through the second quarter of 1993 and beyond.
So what are banks doing with their profits this year? They’re
putting most of the money into — you guessed it —
the bank. New federal regulations created by Congress in the
1989 Financial Institutions Reform Act require banks to have
much stronger levels of reserves.
“The banks have spent the last couple of years rebuilding
their balance sheets,” Tejera said. “The folks that
were already there, were buying the banks that were never going
to make it.”
Some institutions have gone one step further and chosen to build
larger reserves than the federal government requires. Phyllis
Campbell, president and CEO of US Bank of Washington, said her
bank decided to go well beyond the 4 percent federally-required,
capital-to-asset ratio and now has a 8.25 percent reserve.
Campbell says many banks across the country have decided to
build a better-than-required “cushion for depositors.”
Washington Mutual is another bank with larger than required
reserves — over 9 percent in some categories — and
also falls into the category of institutions that are buying
out other banks, according to Scott Selby, assistant vice president
and manager of corporate relations.
“We continue to have a very active expansion policy,”
Selby said, noting the purchases of Pioneer Savings and Pacific
First during the past year. Another way Washington Mutual has
been building up its financial standing is by redeeming two
capital notes with a total value of approximately $100 million.
The second way banks are using their profits in 1993 is for
building new branches, upgrading old branches and building bank
infrastructures by improving such elements as computer hardware
and software.
Tejera said the biggest trend in bank building involves small
branches in grocery or variety stores like Fred Meyer. A grocery
store branch costs about a quarter million dollars to remodel
and set up, as compared to a free-standing location which costs
about a million to build, he said.
In-store banks also have more traffic flow than stand-alone
banks. Washington Mutual is the nation’s No. 1 in-store
banker, with more than 60 such banks in Washington and Oregon.
Selby said Washington Mutual can offer full-service branches
on a small scale inside stores because of advanced technology
and by having employees who are “very energetic” and
perform more than one job at a time. Washington Mutual has built
nine new branches in 1993 and acquired 145 others through acquisition.
US Bank is doing some of both kinds of building — in store
and stand-alone branches.
“We are heavily investing in building branches and building
our facilities and reinvesting in our computer system,”
Campbell said. “This year in Washington, we will probably
see ourselves in about 20 new locations. That’s a major
new expansion for us.”
In the past, the largest expansion for US Bank was five new
locations in a year. The bulk of their expansions will be in
the Puget Sound area, with eight new branches in Pierce County
alone.
US Bank also is moving its Washington headquarters across the
street into a new downtown Seattle location. The City Center
Building will be renamed the US Bank Center in January.
Some Washington banks are expanding in a less visual way, further
into high tech banking. Both Seafirst and US Bank have invested
heavily into their telephone banking and ATM systems. US Bank
has the second largest ATM network in the country, according
to Tejera.
Campbell said some of this expansion money goes into researching
and developing new products. Tejera said an important area he
expects banks to jump into heavily is the financial management
field, with a concentration on giving investment advice to customers
and then selling them shares in bank-run mutual funds.
“The Fed (Federal Reserve) has now made it easier for banks
to market their own family of mutual funds,” he said, adding
that Key Bank and Washington Mutual both have their own families
of funds.
The banks are not selling funds for another agency, he emphasized,
but are selling the work of their own investment advisers who
work as a subsidiary of the bank.
Customer preference for mutual funds has led banks to move in
this direction, but they work in a small, yet very profitable,
segment of the total mutual fund market. High-end customers
gravitate toward brokerage firms which can offer more personalized
investment advice, according to Tejera.
Customers who have $14,000 or less to invest are starting to
buy into mutual funds through banks, he said. Mutual funds are
nothing new to Washington Mutual, which has operated its Composite
Group of Funds through subsidiary Composite Research & Management
Co. since 1944. Selby said the company’s Composite Northwest
50 was one of the first regional funds and Composite was the
first Northwest mutual fund company.
Fee business, such as selling shares in mutual funds, now makes
up about 10 percent of total bank income. Tejera said he expects
that figure to continue to grow.
Banks earn most of their income from what is called spread income,
which represents the spread between the interest banks pay on
deposits and the interest they earn by loaning money out.
Tejera said there are nine banks in the country who now earn
more fee income than spread income. Fee income also includes
checking account fees, ATM fees, mortgage service charges, fees
for managing trust accounts and credit card fees.
Because of this movement into new earning areas, banks are spending
more money on employee training and education.
Campbell said US Bank is training groups of employees to become
financial planners. She said the bank is starting to sell mutual
funds and annuities in some areas.
“We want to make sure we have employees who are trained
to look out after our customers interests first,” she said.
Reinvesting in the community through loans and charitable contributions
is another way Washington banks are spending their profits.
According to Seafirst spokesperson Sheri Pollock, building up
capital reserves, making loans and sharing the wealth with parent
company BankAmerica are the three major ways Seafirst is using
its earnings.
What doesn’t show up in that equation is charitable contributions
because Seafirst lists such giving as an expense item. Pollock
said Seafirst’s charitable contributions add up to about
$3 million a year.
In addition to charity, banks focus on loans as a way to reinvest
in the community. Campbell said the US Bank loan-to-deposit
ratio in Washington is more than 90 percent, which means 90
percent of customer deposits are loaned out.
“We were the lead lender by a long shot in small business”
in 1992, she said. US Bank handed out $21.3 million in total
Small Business Administration loans last year and expects similar
numbers this year.
First Interstate is focusing on small business through a combination
of more loans and more convenient locations for business owners
to seek those loans. The bank is opening a new community lending
office in the Rainier Valley, which is part of a new network
of commercial loan and business loan centers around Puget Sound,
according to Gary Severson, area president of First Interstate
Bank of Washington.
“A lot of banks didn’t have earnings two years ago.
It’s a much different and much welcome alternative,”
he said. “We’re putting it (earnings) right back into
the community.”
The last, but not least, recipient of increased bank profits
has been bank shareholders. Although Tejera said he has not
seen an across-the-industry increase in dividends to match the
increase in earnings, the bank officials interviewed said they’re
keeping their shareholders happy.
In its July 20 earnings report, Washington Mutual announced
a 50 percent stock dividend — 3 shares for 2 — and
a cash dividend of 14 cents a share. Selby said the cash dividend
represented a 31 percent increase over the dividend given during
the first quarter of 1993.
The July cash dividend was the 11th consecutive increase in
quarterly cash dividends for Washington Mutual.
US Bank tells a similar story.
“We have to make sure we take care of our shareholders,”
Campbell said. “We have paid off consecutive and increasing
dividends uninterrupted since 1899.”
Severson of First Interstate said the fact that banks are able
to offer increased dividends to their shareholders in addition
to building up reserves and presenting a more stable financial
picture shows how much the banking industry has improved its
health in the past two years.
First Interstate has increased its dividends, but Severson said
that isn’t the whole story the institution’s shareholders
are hearing. Shareholders have seen their shares increase in
value by about 75 percent in the past year.
He said stock prices have gone up because the bank is using
its increased earnings to create a stronger, more solid institution.
“We’re operating on eight cylinders again.”
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