Competition fueling growth among
regional, national banks
New government regulations proving costly
by Dana E. Blozis


On almost every busy street corner and neighborhood, Washington residents can find a commercial bank or credit union. Some are national banks like Washington Mutual and KeyBank, while others are locally owned like Skagit State Bank and North Coast Credit Union. Regardless of their ownership, however, the presence of the banking industry seems to grow every year as new banks are formed, existing ones are bought and sold and the latest branches pop up in new locations.
According to several local bank executives, banking is stronger than ever.
“In the state of Washington, banking is extraordinarily healthy,” said Cheryl Bishop, chief executive officer of Skagit State Bank. “This is a very profitable time for banks.”
Eric Sprink, president and chief operating officer of Coastal Community Bank in Everett, agrees.
“Banks are doing quite well,” Sprink said. “And a rising tide raises all boats.”
Executive Vice President and Chief Lending Officer George Bowen of Peoples Bank in Lynden said that banks are “quite strong” and are experiencing good financial performance right now.
“Generally speaking, the banking business is quite healthy,” Bowen said.
This is particularly true because banks are closely tied to the real estate market which remains vital despite a recent cooling.
While the banking industry remains strong and vibrant, it has had to evolve with a rapidly changing economic and political climate. This means keeping pace with the competition, utilizing new technology, offering multiple accessibility options and adhering to an increasingly restrictive regulatory environment.

Competition
With so many banks from which to choose, it is no surprise that the banking industry is highly competitive. The industry trend across the country has been for larger, “mega banks” to purchase smaller, locally owned banks in order to grow assets. On the local front, however, this is not occurring quite as frequently. While such acquisition activity does occur, Bishop said Washington has not experienced a lot of acquisitions because its banks are financially sound. Because of this prosperity, new banks are being formed in Washington on a regular basis.
Specifically, this competitive environment has caused Bowen concern. While he agrees that competition is good for the industry, he is concerned that some banks may be transitioning away from the quality service customers expect in favor of a more efficient transaction-based business.
“We’re not opposed to competition. I think competition is extremely healthy,” Bowen said.
But, he added, that customers should continue to receive personalized products and services that meet their individual needs and that banking should be consultative rather than transaction-based. He cautions banks against shifting to that approach as competition increases.
At Coastal Community Bank, Sprink believes that community banks have a competitive advantage because policy decisions are made locally and on a customer by customer basis. National banks, on the other hand, often make global policy decisions outside the market. As a result, Sprink said “mega banks” are losing the ability to meet the needs of customers at the local level, and those customers are not getting individualized service.
“Our customers are not just shopping for price,” Sprink said.
Because of this highly competitive market where customers seek attractive products and price, Bishop said banks cannot afford to be static.
“Survival isn’t enough,” she said. “We have to be far more proactive.”
To Bishop, this means analyzing a customer’s individual needs and matching those needs with appropriate products and services. It also means being aware of the competitor’s products and style. Product and pricing information are available online, but style is not, so Skagit State Bank visits other financial institutions to see how they measure up.
“We don’t have to be the same,” Bishop said. “We carry the same products and services, but it is how we deliver them that makes us different.”
She also said that banks can’t be complacent with their customers who may not have the same sense of loyalty they did before. To ensure that the customer is not forgotten, Bishop practices the golden rule – treating customers the way she would want to be treated. She imparts this philosophy on her staff.
“At Skagit State Bank, we try not to take ourselves too seriously or to take our customers for granted,” she said.

Technology and accessibility
Like the growing competition, technological advances have also had a significant impact on the banking industry. The industry has gone from a manual, paper-based system to an electronic one with instant access to both money and information.
Online banking, for example, has provided customers and bank staff alike with numerous service advantages. Banks no longer have to return cancelled checks to customers. Instead, they save electronic images of the checks which are downloadable as needed. Skagit State Bank, for example, has approximately 20,000 customers and less than 500 still get copies of their cancelled checks. Washington Mutual includes images of cancelled checks as one of its online banking services. Once checks are cashed, the images are accessible online.
In addition, customers can now pay bills online directly through their bank. They can also check account balances, view cleared checks and deposits, and access other account management features 24 hours a day, 7 days a week, 365 days a year. Years ago ATM machines were the greatest advance in instant banking. Now bank debit and credit cards make accessing cash instantaneous from millions of locations worldwide. Paper checks, while still used, are diminishing in popularity.
Stemming from these technological advances, banks can now offer a multitude of account service options to their customers both online and through personal banking services. Customers have choices as to how they access and manage their money and financial services.
“Customers can have a strictly electronic relationship if that’s what they choose,” Bowen explained.
Greater accessibility to banking services goes hand in hand with the technological advances. In addition to being able to access information online, customers can also access banking services in many locations including stand-alone offices, bank branches in convenience stores and automatic teller machines. In fact, off-site banking has become so popular that commercial lending transactions are most often initiated at a customer’s business instead of at the bank.
“They don’t have to come to our office,” Bowen said. “We’ll go to them.”

Regulatory requirements
While not as noticeable to the customer, the regulatory environment for banks has become significantly more restrictive, particularly following the September 11, 2001 terrorist attacks. As a result, new regulations have been written to deal with privacy, fraud, reporting responsibilities, and customer identification.
The Sarbanes-Oxley Act of 2002 was enacted in reaction to financial scandals like Enron and WorldCom. Triggered by the decline in public trust in accounting and reporting procedures, this legislation created additional reporting responsibilities that public companies, including banks, must adhere to. This includes required certification of financial disclosures by chief executive officers and chief financial officers, negating the “I didn’t know” defense.
The U.S. Patriot Act also regulates the banking industry in new ways. Not only does it address reporting and due diligence, but it also focuses on the importance of properly identifying bank customers to ensure that accounts cannot be opened to provide funds for terrorists.
“We have to be sure customers are who they say they are,” Phyllis Hawkins, head of operations at Whidbey Island Bank, said.
One such change includes new identification procedures, which are now more stringent on the front end than ever before. When a customer applies for a new account, for example, he or she must provide adequate identification. The identification is then run through the Office of Foreign Assets Control (OFAC) database which contains a listing of “blocked persons” or “specially designated nationals.” Banks are required to follow specific procedures if any matches are found. A bank’s compliance with these regulations is regularly audited.
In addition to these two key pieces of legislation, other regulations have been created to define and address financial privacy issues. The Financial Modernization Act of 1999, also called the “Gramm-Leach-Bliley Act,” includes provisions to protect consumers’ personal financial information held by financial institutions. This legislation dictates how information can be collected and used, as well as how it should be safeguarded from inappropriate disclosure and use.
“The regulations are very direct and very thorough,” Bowen said. “We have to follow them to the letter of the law and adopt new rules to remain in compliance.”
“Compliance with these regulations has cost us a lot of money. I’m not sure the customer is gaining anything,” Bowen added.
Despite the industry’s challenges, at the end of the day, tenured banking executives like Bishop continue to enjoy banking and the customer interaction.
“It’s all about people,” she said.

Skagit State Bank CEO Cheryl Bishop says local and regional banks are thriving throughout the Northwest.





Coastal Bank team members (from left) Steven Sterner, Kelli Garber, Sarah Johnson, Jennifer Land, Kay Phinney and Stephani Bufkin.