Home > Banking Information & Regulation > Public Meeting Transcripts > PMT - Agendas July 9-10, 1998
Public Meeting Transcripts
Public Meeting Regarding NationsBank and BankAmerica
Friday, July 10, 1998
Transcript of Panel Nineteen
429 19 MS. SMITH: We'll start with Mr. Hewett. 20 MR. HEWETT: Thank you. My name is Conrad W. 21 Hewett. For over the last three years I served as the 22 State Superintendent of Banks and Commissioner of 23 Financial Institutions for the State of California. My 24 term ended this past June 30th. 25 My prior to my position for the State of 26 California, I was a managing partner at Ernst & Young. 430 1 For over 33 years I specialized in financial 2 institutions. Consequently, I have been involved in 3 many mergers and acquisitions of financial institutions. 4 During my past three years in my capacity as 5 State Superintendent of Banks and Commissioner, I have 6 approved a number of bank mergers and acquisitions. The 7 largest acquisition was Wells Fargo Bank acquiring first 8 Interstate Bank. 9 The California laws concerning the sale, 10 merger and conversion of depository corporation are very 11 similar to the federal agency laws such as the Federal 12 Reserve Bank. 13 As a regulator, I had several standards to 14 consider under California banking law before I could 15 approve or deny such a transaction. Some of the 16 elements of the law included: 17 One, the transaction would not result in a 18 monopoly; 19 two, competition would be not lessened or be 20 anti-competitive; 21 three, the convenience and needs of the 22 community will be served; 23 fourth, the shareholders equity will be 24 adequate, and the financial condition of the combined 25 banks will be satisfactory; 26 fifth, directors and executive officers will 431 1 be satisfactory; 2 and, last, the surviving entity will afford 3 reasonable promise of successful operation and operate 4 in a safe and sound manner. 5 In my opinion, this proposed merger meets all 6 the standards to be considered under the Bank Holding 7 Company Act. 8 I note that the proposed transaction does not 9 result in the largest bank in the United States. Also, 10 this merger will operate in only 25 of our 50 states. 11 I publicly stated over three years ago that 12 there would be a large consolidation in the banking 13 industry. I had many reasons for this statement and I 14 believe that this trend will continue. 15 There is too much capacity in the banking 16 industry, too many banks and too much competition from 17 outside the banking industry, thus, the need to 18 consolidate. 19 Even our largest United States banks face 20 tremendous competition from companies such as Merrill 21 Lynch, GE Capital, General Motor Acceptance 22 Corporations, all of the mutual funds, such as Fidelity 23 and T. Rowe Price and the many consumer finance 24 companies such as Household Finance and now the 25 internet. Many of these companies are not subject to 26 the same state and federal regulatory laws such as the 432 1 bank's presently are. 2 Other reasons I see for this merger are: 3 First, the high cost of investment in 4 technology helps drive these mergers and consolidations. 5 The non-bank competitors have invested heavily in 6 technology and banks must invest as heavily, if not 7 more, in order to compete and to survive. This 8 investment requires a very large capital base, and one 9 way to create this base is through consolidation; 10 secondly, our largest U.S. banks are still 11 small compared to the other banks in the world which 12 comprise mainly of the Japanese, German and French 13 banks. 14 as you know, the U.S. is rapidly becoming a 15 globally player and world trader. Our banks must be 16 large enough to provide the financing and capital 17 necessary for our businesses to compete worldwide; 18 third, because there is very little overlap 19 in this merger concerning the consumer, the consumer 20 need and convenience should be satisfied. Branch 21 banking has changed dramatically in the past five years 22 because of ATM usage, banking by phone, computer banking 23 and banking by mail. The consumer has dictated this 24 shift in the delivery system of banks. The consumer has 25 a wide choice in availability of financial institutions 26 from which to choose. As I said earlier, the 433 1 competition is fierce. This transaction should enhance 2 the service and products available to the customers of 3 the new bank. This is truly an interstate bank merger 4 as contemplated by the federal Riegle-Neal Interstate 5 Banking and Branching and Efficiency Act of 1994, which 6 congress passed, and the law became effective September 7 29th, 1994. As I see, as a result, the consumer will be 8 the benefactor of one of the first truly interstate 9 banks in our country. 10 Concerning the other facts of this merger, 11 both companies are financially strong as indicated by 12 their financial statements, capital ratios, operating 13 ratios and market capitalization. 14 If this transaction is approved by the 15 Federal Reserve Board, in my opinion it should be, then 16 a nationwide franchise will be delivered which has the 17 potential to deliver financial service to millions upon 18 millions of families and businesses. 19 Thank you. 20 MS. SMITH: Thank you. Mr. Collette. 21 MR. COLLETTE: Is it on? 22 MS. SMITH: Yes, if you just bring it a 23 little closer. 24 MR. COLLETTE: Thank you. I appreciate the 25 opportunity of expressing -- addressing this very 26 important topic before the Federal Reserve. 434 1 My name is Craig Collette. I am a member of 2 the Board of Directors of the California Independent 3 Bankers and president of a small bank in Southern 4 California called Marathon National Bank, it's a $75 5 million institution. 6 As an independent banker with 33 years of 7 experience, I would like to give you my views on the 8 impact of this gigantic merger between NationsBank and 9 Bank of America. I am speaking this morning also on 10 behalf the California Independent Bankers, which 11 represents some 200 banks throughout our state. 12 Let me first address you, though, as a 13 concerned citizen of the State of California. When 14 legislation was debated in Sacramento three years ago, 15 this legislation enabled this kind of merger, and the 16 California Independent Bankers raised an important 17 issue: What will the tax impact be when we permit out- 18 of-state institutions to own California banks and their 19 headquarters are moved out of state? Little attention 20 was given to this critical question. As a concerned 21 taxpayer in the state, I would like to raise this issue 22 again. 23 I would recommend that those that are 24 reviewing this application for merger derive estimates 25 and projections of what this merger will mean to 26 California taxpayers when the headquarters of the 435 1 combined institutions shift to Charlotte, North 2 Carolina. 3 Matter of fact, all of California's three 4 largest financial institutions are now or about to be 5 moved out of state or the headquarters moved out of 6 state from these entities. 7 Now, as an independent bank president, I have 8 additional views. The United States, with the passage 9 of the Riegle-Neal bill, is moving from a diversified 10 financial system to one characterized by a lopsided 11 barbell with just a very few large banks at one end and 12 a large number of independent banks at the other. 13 To quote Hugh McColl, Chief Executive of 14 NationsBank, U.S. banking will be quote "...a 15 barbell-shaped industry with a dozen or a half dozen 16 very large players at one end and four or five thousand 17 boutiques on the other," unquote. On this issue we 18 agree, but what are the implications of such a 19 structure? I feel strongly that increased financial 20 concentration means less competition. 21 NationsBank and Bank of America's merger at 22 60 billion is the largest between two American banks. 23 The bank created by this merger will have 8.2 percent of 24 the Nations deposits. Dangerously close to the ten 25 percent limit set by the Riegle-Neal bill. 26 Unfortunately, this trend towards 436 1 mega-mergers will probably continue given the overvalued 2 asset base our own stock market has created. The trend 3 toward mega-mergers, this includes this merger, is not 4 healthy for Main Street, where I come from, is very 5 risky for Wall Street and it is bad for the Federal 6 Reserve and other regulators who will have the 7 responsibility to examine and possibly to even bail out 8 these mega-giants when they are mismanaged, over 9 speculate or reach too far in risky ventures. These 10 banks are the new super-sized, too-big-to-fail 11 varieties. 12 The evidence shows that increased the 13 concentration in the banking industry has not benefited 14 bank customers. The economies of scale that supposedly 15 justify large bank mergers either do not materialize or 16 are not passed on to the customers. In addition, large 17 interbank mergers reduce competition in ATM network 18 markets as well as credit card markets. 19 Consider five points: 20 First, larger banks charge higher fees. 21 According to Bank Rate Monitor, none of the top 50 banks 22 in the U.S. offer the least expensive checking accounts. 23 In fact, those offering the most expensive checking 24 accounts are banks involved in the latest mega mergers, 25 Citibank and NationsBank. The best deals are offered by 26 smaller regional and community banks. In a 1997 study 437 1 found a widening gap between large and small bank fees; 2 the Federal Reserve study found the average 3 fees charged by multi-state banks are significantly 4 higher than those charged by single state banks, even 5 accounting for location and other factors that might 6 explain the differences; 7 two, banks mergers have an adverse effect on 8 consumer pricing. A Boston Federal Bank study of 499 9 bank mergers found the combined banks lowered interest 10 rates paid on deposits regardless of the amount of 11 competition in the market; 12 three, economies of scale. It is 13 interesting, the evidence suggests that the optimal size 14 of a bank in terms of economies of scale, profitability 15 and efficiency is between $100 and $1 billion, quite a 16 bit smaller than the 300 to 600 billion loss that will 17 be created from the latest mergers. A Harvard study 18 showed that instances of improved operating results 19 after a merger were due primarily to higher repricing, 20 not economies of scale, suggesting the use of increased 21 market power to raise prices. Given sufficient market 22 power, large banks can price smaller competitors out of 23 the market with below market rate loans or above market 24 rate deposits; 25 four, large interbank mergers also have 26 negative effects on competitive ATM network markets; 438 1 and, five, large bank mergers are creating an 2 oligopoly of credit card issuers led by Citibank, Bank 3 One and NationsBank. 4 It is also indicated by the Rand Research 5 organization that when the pending mergers are 6 consummated the top ten credit card issuers will control 7 72 percent of the credit card market. 8 In conclusion, as an independent bank 9 president, I am fully aware that in the beginning 10 community banks will prosper from the fallout of 11 customers from big bank mergers. After these giants 12 consolidate, however, there will be no longer a fair and 13 equitable competitive environment in independent banks 14 in the areas that I have pointed out in my testimony. 15 Bank customers and small businesses will suffer as a 16 result. 17 Thank you very much. 18 MS. SMITH: Thank you. Kurmel. 19 MR. KURMEL: My name is Larry Kurmel. I am 20 Executive Director of the California Bankers 21 Association. I'll just make a few points. I've offered 22 some testimony on some things that you can have for the 23 records, 24 Much has been made over the increased 25 dominance of the banking marketplace resulting from BofA 26 and NationsBank merger. Our view to the contrary is the 439 1 merger will do no more harm to the banking industry in 2 California, in fact, it will create market 3 opportunities. I base that on statements with 4 interviews with community bankers throughout this state 5 and the western United States. Obviously Craig Collette 6 was not among them. 7 But there is a very different view, as 8 evidence, there were ten new bank charters in California 9 in the last year. In Nevada, which concluded in 1997 10 with 21 community bank charters, now has 31 community 11 bank charters. I understand that's soon to be 32 or 33. 12 Frankly, there is more threat to the 13 community banking business by unrestrained tax-exempt 14 from credit unions than it will from the combined merger 15 of BankAmerica and NationsBank, which has very little 16 overlap in their marketplace, as you are all aware. 17 BankAmerica has long been a leader within the 18 ranks of the industry in California. And the California 19 Banks Association, in particular, a past Chairman or 20 president of our organization is Don Mulane, the current 21 President of the California Bankers Association is Vice 22 Chairman of the Bank of America, Kathy Burke. 23 The question we had is the commitment of 24 NationsBank to the continued leadership role 25 demonstrated by BankAmerica in California. And Hugh 26 McColl was a keynote speaker at our convention in May to 440 1 personally provide that assurance and provide the 2 assurance of his commitment to assuring healthy 3 competition between large banks and community banks in 4 the State of California. 5 Much has been made about combining and what 6 happens with people and that sort of thing. I should 7 note the combined employee base of the two organizations 8 is about 200,000 people. That's larger than the City of 9 Fresno. Out of that they anticipate somewhere around 10 2,000 to 2,500 jobs will actually be lost. In relative 11 terms, according to any business study I've seen, that's 12 a relatively insignificant amount. 13 Let me talk a little bit, there is a lot of 14 speculation about what do the commitments of these banks 15 mean. Let me focus for a moment, if I may, just on the 16 $250 billion commitment. I don't know about you, but 17 that's a big number to me. 18 I started my career as a housing expert in 19 the Department of Housing and Community Development in 20 the State of California. I was a deputy secretary to 21 the Business Transportation Housing Agency in 22 California. 23 MS. SMITH: Would you move your mike a little 24 to the left? 25 MR. KURMEL: Sure. Better? 26 MS. SMITH: Yes. 441 1 MR. KURMEL: I am reluctant to move to the 2 left too much, but I appreciate it. 3 I was a deputy secretary to the Business 4 Housing Transportation Agency under then Governor Jerry 5 Brown and was part of the creation of the California 6 Housing Finance Agency. 7 Bank of America was one of the instrumental 8 entitles in providing a consortium of banks to provide 9 low and very low multi-family housing financing in the 10 State of California. The consortium today, which 11 includes, I believe, over 60 banks, mostly community 12 banks, has opportunities for investment in CRA 13 activities they would not have had on their own. 14 CCRC in California, in its ten years of 15 existence, has done more multi-family, low and very 16 low-income housing financing than has the California 17 Housing Finance Agency in its 20 years of operation. 18 So, when it comes to commitment, you have to look at the 19 record, it seems to me. 20 I testified in this very room about the 21 Security Pacific and BankAmerica merger. At that time a 22 ten-year commitment was made by the bank of the 23 surviving organization to CRA lending. They met that 24 requirement, met that threshold within three years and 25 went on to fully exceed that. Last year they started -- 26 established I believe it was $140 billion target and 442 1 they were moving briskly towards fulfilling that public 2 obligation they had created for themselves, I might add. 3 I would add one note of caution. In my 4 experience in housing and economic development, I am 5 very cautious of throwing too much money at a problem. 6 For one reason, you don't want to throw out or denigrate 7 the experience or exercise of experience of other 8 players in that market. 9 For example, Mayor Corbin might note, that 10 the largest community bank in Richmond is the Mechanics 11 Bank of Richmond, an organization that had been there 12 for over 90 years who had a substantial commitment to 13 financing and improvement in that community. 14 You don't want BankAmerica/NationsBank 15 commitment to go in there and blow through the ability 16 of Mechanics Bank to participate in the restructuring 17 and rebuilding of its communities. 18 So, in my view, you have to be real careful 19 about being too specific with this large batch of 20 dollars for fear of disrupting those processes that are 21 already in place. But, if you are looking at the track 22 record of both NationsBank and BankAmerica as exercised 23 through people like Don Mulane who have chaired the 24 Community Bank of Bank of America, they have met every 25 public goal they have established for themselves and 26 exceeded that performance. The same has been true in 443 1 NationsBank in those market areas where it has been 2 performing. 3 So I would just urge some caution playing 4 with $350 billion dollars. You don't want to end up 5 tantamount to offering a drunk a bottle of Tokay. Thank 6 you. 7 MS. SMITH: Thank you. Mr. Koppe. 8 MR. KOPPE: Thank you, and good morning. My 9 name is Bruce Koppe. I am Executive Director of the 10 Washington Bankers Association, located in Seattle, 11 Washington. 12 The Washington Bankers Association represents 13 substantially all of the commercial banks in our state, 14 almost all of which fit the generally accepted 15 definition of community bank. 16 Prior to assuming my present position, I 17 spent over ten years as General Counsel to Rainier 18 National Bank in Seattle, later Security Pacific Bank 19 Washington. Where my duties included responsibility for 20 community affairs and social policy. 21 My time in Washington includes the period 22 covering Bank of America's acquisition of Sea First Bank 23 in which Bank of America had a significant interest and 24 the relatively recent conversion of Sea First into 25 branches of Bank of America. 26 During all of these periods and events, I 444 1 have had significant contact with the Sea First/Bank of 2 America Corporation in collaborative community affairs 3 projects, as a representative of both donor and donee 4 groups, as a competitor and in promotion of collective 5 efforts on behalf of the banking industry in our state 6 working with and through the bankers association. 7 My purpose today is to support the merger 8 application and record of Bank of America, particularly 9 its Sea First operation in the State of Washington. 10 Sea First has been and continues to be a 11 leader in the community especially in community 12 reinvestment. 13 I don't intend to recite specific 14 accomplishments because those are known to the Federal 15 Reserve through the Sea First/Bank of America CRA exams 16 which for several years have resulted in ratings of 17 outstanding. Rather, I want to emphasize what I believe 18 are important indicators of future conduct. 19 Much of the controversy surrounding mergers 20 of institutions involves an attempt to determine what 21 the future holds for the communities to be served. The 22 best indicators of that are how the institutions have 23 behaved in the past. And, in order to help determine 24 that, my presentation focuses on four specific points. 25 First, when bank of America acquired Sea 26 First Bank in the early 1980s, there was a great deal of 445 1 apprehension in Washington State the control of the 2 entity would shift to San Francisco and that Sea First 3 community involvement would suffer. That did not happen 4 much to the credit of both parent and subsidiary. 5 More recently, when Sea First's operations 6 were converted to branches of Bank of America, albeit 7 operating under the Sea First name, the same 8 apprehensions were expressed. In fact, the apprehension 9 began when the BofA Sea First organization began 10 functionalizing its operation sometime prior to 11 conversion to branches. 12 Again, those apprehensions have proved 13 groundless. In each case we have seen no diminution in 14 the Sea First commitment to all aspects of community 15 affairs and community service. 16 Moreover, I understand that the head of the 17 Bank of America presence in the State of Washington, 18 Mr. John Renlove has been given broad authority and 19 autonomy over community activities. Certainly that's 20 been borne out by the company's performance to date, a 21 continuation of its broad and significant involvement in 22 all aspects of community development, philanthropy and 23 service to its customers. 24 As Sea First/Bank of America has gone through 25 each of these transitions its past performance has 26 accurately predicted its future performance. 446 1 Second, banking customers are extremely 2 sensitive to mergers and acquisitions even among our 3 smaller community banks, but particularly with respect 4 to the large bank mergers. This has been demonstrated 5 most notably in the key bank acquisition of Puget Sound 6 Bank and Wells Fargo's acquisition of First Interstate 7 Bank in our state. Each acquisition has seen some 8 outpouring of customers to local community banks known 9 for excellence of personal service. 10 Sea First has a great reputation for customer 11 service as well as an aware management team. They know 12 as well as anyone that to dilute their community 13 activities and service at this time or any time in the 14 future would be the height of folly. As stated earlier, 15 their record through similar events has demonstrated not 16 only their awareness of that fact but their continued 17 commitment to their customers and their communities 18 generally. 19 Third, I think it's important to know at 20 least in our state that our community banks do not see 21 the merger of BofA and NationsBank as a threat. If 22 anything, it's an opportunity to gain customers. I'm 23 not saying anything that BofA isn't keenly aware of and 24 I don't think Sea First/BofA will let that challenge go 25 unanswered. 26 Finally, I've worked with Sea First on 447 1 community outreach including fairly extensive activity 2 over the past year, much of which was very innovative. 3 The organization has willingly committed its time and 4 resources and continues to do so. I can attest 5 personally to their commitment. 6 In summary, the Sea First/Bank of America 7 record of community support and customer service in the 8 State of Washington has been first rate and has not been 9 diminished through corporate change. 10 We believe their past performance totally 11 supports the presentation application. We also believe 12 that their past performance through periods of 13 significant corporate change is a reliable predictor of 14 what will happen in the future. In our view, 15 speculation and conclusions to the contrary are not only 16 totally unwarranted, but very unfair. 17 Thank you. 18 MS. SMITH: Thank you, questions. 19 MR. FRIERSON: I have two questions. First 20 for Mr. Hewett, as a former state banking supervisor and 21 decision-maker, I would be interested in your views on 22 the comments that we have heard at this public meeting 23 and in the comment period that a bank with a 24 headquarters on the east coast would be less successful 25 in understanding the credit needs of California 26 communities. 448 1 MR. HEWETT: That's a good question. I do 2 believe that California is such a tremendous economic 3 market, not only in the United States but in this world, 4 that if there is any void of consumer availability to do 5 banking of any kind, that the bank from the east coast 6 or from the southeast will come into this state and 7 establish a headquarters if that means that will help 8 that particular institution financially in the future 9 and so forth. 10 I don't see any -- in today's age of 11 technology, wherever it's headquartered, could be 12 headquartered in Hawaii and still operate in California 13 and still provide services to the consumer and still be 14 competitive. I don't see that as a real significant 15 issue in terms of where the headquarters -- the 16 headquarters are usually only made up of a few, in this 17 case probably only a few hundred people. It's not the 18 headquarters, it's the service that's provided to the 19 customer by the representative of that bank, wherever 20 that community may be. 21 MR. FRIERSON: And a question for 22 Mr. Collette. Does your bank operate an ATM network? 23 MR. COLLETTE: We don't have our own ATMs. 24 We utilize networks provided by larger institutions. 25 MR. FRIERSON. Could you give us your bank's 26 experience with the competitive impact of the 449 1 consolidation of ATM networks, specifically how it 2 affects your clients: 3 MR. COLLETTE: Yes. On a pricing basis, we 4 have had experience where we have been -- where our 5 customers have been charged for the use of another 6 institution's ATM, even though we were a member of the 7 network. And that did do some harm to the customer base 8 of our institution. 9 MR. FRIERSON: Thank you. I don't have any 10 more questions. 11 MS. SMITH: There are no other questions, 12 then we thank you very much for coming this morning.
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