Suitors Covet First Interstate’s Low-Cost Deposits

The legendary Willie Sutton robbed banks because, he said, “that’s where the money is.”

First Interstate Bancorp is a takeover target in large part because that’s where the cheap money is.

Analysts say it hasn’t been lost on rival suitors Wells Fargo & Co. and First Bank System Inc. that First Interstate has the lowest deposit costs of any major American bank.

Particularly for First Bank--an aggressive lender hungry for funds--First Interstate’s inexpensive deposits represent a potential gold mine.

By heavily cultivating checking-account customers, and by typically offering lower yields than competitors on regular savings accounts and certificates of deposit, First Interstate has built up a $48-billion deposit base on which it pays relatively little interest.

And its individual depositors, for whatever reason, tend to stay put--even though they obviously could earn higher interest elsewhere.

Consider: Bank research firm Keefe, Bruyette & Woods calculates that First Interstate’s average interest cost on deposits in the first half of 1995 was 2.49% annualized, the lowest of 42 big regional banks.

In contrast, First Bank’s cost of funds was 3.71% in that period; Wells’ was 3.14%.

Walk into a First Interstate branch today to open a money market account--a short-term savings account that is designed to compete with money market mutual funds--and the annualized yield you’ll be quoted for the minimum account balance is 2.02%, according to Bank Rate Monitor newsletter.

That’s far below the national average money market account yield of 2.86%, Bank Rate Monitor says. And it’s less than half the current 5.2% average yield on money market mutual funds.

On six-month CDs, First Interstate now offers a yield of 4.50% for the minimum deposit, compared to a national average of 4.88%.

Such disparities aren’t a new trend. Since bank yields were deregulated in the early 1980s, “California’s biggest banks have paid notoriously low rates on basic savings accounts,” says Bank Rate Monitor Publisher Robert Heady in North Palm Beach, Fla.

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Yet the banks, especially First Interstate, have no trouble luring and keeping deposits. Why? Heady blames inertia: Many people, he says, have banked at the same place for years and simply can’t work up the energy to switch.

First Interstate, however, say its low-cost funds base wouldn’t exist unless it provided other features (in addition to yield) that people want--such as safety and service.

Its overall deposit costs are so minimal because it has a larger portion of its total deposits in no-interest checking accounts than any of its peers, says Ted Craver, executive vice president.

About 35% of First Interstate’s deposits are in checking accounts. No other major bank is above 30%.

Rather than chase CD customers, First Interstate has specifically made checking accounts the focus of its retail business, Craver says. “We’ve made a business out of emphasizing ‘relationship’ banking” centered on checking, he says.

Even so, if most customers kept only the minimum checking and savings balances needed to avoid checking fees at First Interstate, the strategy might not have been very profitable for the bank.

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But the reality is that many individuals, for their own reasons, keep large sums in no-interest checking accounts or in low-paying savings accounts, Craver admits. “You would be surprised how many people keep tens of thousands of dollars sitting in [checking] accounts,” he says.

That has, in effect, turned many of First Interstate’s checking dollars into long-term deposits at minimal cost to the bank, Craver says. So not surprisingly, the bank’s “net interest margin”--the spread between its pays on deposits and what it earns on loans--is among the industry’s widest.

The bank’s net interest margin was 5.41 percentage points in the first nine months of this year, seventh-highest of the 42 big banks in Keefe Bruyette’s survey.

Who are these customers who essentially subsidize First Interstate’s profits at their own expense? Some analysts believe that the bank’s dominance in many small Western towns is the key to the low-cost deposit base.

“More often than not they’re the only game in town,” says Campbell Chaney, analyst at Rodman & Renshaw in San Francisco.

Other analysts say many of California’s immigrants bank primarily for safety and convenience, paying much less attention to yields.

Whoever gets the credit, First Interstate’s cheap deposits are a mother lode that both Wells and First Bank now want to mine. While First Interstate has done a good job collecting the money, many analysts have long argued that the bank has lagged in putting the cash to its best use.

* BANK VALUES: Wells Fargo and First Bank System reflect similar philosophy. D2

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Cheap Money

First Interstate Bancorp has prospered in recent years in part because many of its customers are willing to accept deposit yields below industry averages. Current yields on three accounts:

Money-market account

National average: 2.86%

First Interstate: 2.02%

6-mo. CD

National average: 4.88%

First Interstate: 4.50%

1-year CD

National average: 5.10%

First Interstate: 5.00%

Note: Rates paid on minimum amounts needed to open accounts.

Source: Bank Rate Monitor