Tensions over interstate branching have erupted into an all-out brawl in Colorado.

The state's five largest banks are threatening to resign from the Colorado Bankers Association unless the group switches its position and supports the new federal interstate branching law.

The dispute, observers say, could permanently weaken the group. And it may foreshadow similar conflicts around the country as state legislatures take up the law's provisions to "opt in" or "opt out" of interstate branching.

The highly public struggle is providing some high drama for Colorado bankers.

"They have a big split in the seat of their pants and they're on the stage with the spotlight shining right on them," said James Thomas, executive manager of the Independent Bankers of Colorado, a community bank trade group that supports opting out of interstate branching.

The five disgruntled banks are subsidiaries of Keycorp, Norwest Corp., Banc One Corp, First Bank System Inc., and First Interstate Bancorp. Last Wednesday, at an emergency board meeting to address the big banks' concerns, the Colorado Bankers Association reaffirmed its stance on opting out - and the big banks continue to say they'll drop out.

They are upset because the trade group - which represents both big and small banks - sided with the more numerous smaller-bank members. The five contend that their views should carry extra weight because the banks dominate the market and contribute 48% of the trade group's annual dues. The actual number of association members - there are 288 banks in the state - could not be determined.

"We got shoved aside," says a chief executive at one of the five banks.

Executive vice president Don Childears and his staff could not be reached for comment.

Rumblings of the schism first surfaced two months ago, when the association's executive board, made up of bankers from both big and small banks, first told some of the group's members that it would support opting into interstate branching.

The Riegle-Neal Interstate Banking and Branching Act allows national banks to branch across state lines. But the law allows the legislature of each state to pass a law "opting out" of interstate branching.

The state banking trade groups are the front-line lobbyists on the issue, and most of the main trade groups have come out in favor of allowing interstate branching in their states. Most community banking groups have either taken a neutral position or have opposed interstate branching.

But in the Colorado Bankers Association, community bank members, upon learning of the executive board's action, threatened a revolt. The position on interstate branching, they argued, was fundamental policy decision and should, under the group's bylaws, be put to a vote of the members.

As the state's five largest banks, which share 68% of the market in Colorado, account for just 21% of the voting membership, the result was predictable. More than 64% of the votes favored supporting legislation to opt out of interstate branching.

The vote infuriated the chief executives of the five largest banks. They fired off a letter to Kenneth Garton, the trade group's chairman, calling for a change in the voting structure that takes into account their dominance of the banking industry in the state. They also asked for another vote under the new voting rules, all to be taken before the Colorado legislature convenes on Jan. 9.

"It's a voting structure that was put together when this was a unit banking state and worked very well for many years," said Roy Whitehead, who signed the protest letter as president of First Interstate Bank of Denver, along with the chief executives of the other four large banks. "The consolidation of the industry here has left major players in the market with a very small voice on issues of substance."

Mr. Whitehead pointed out that when the five largest banks finish consolidating their former unit banks in Colorado, they will have only 6% of the vote in Colorado Bankers Association policy matters, even though they have almost $20 billion of assets in the state and employ more than 9,800 people there.

"The inequity of the voting system is demonstrated by the fact that as a result of this vote, the CBA will find itself opposing . . . CBA members who have the majority of bank assets in Colorado and who provide the majority of CBA funding," the letter said. "This is intolerable to our banks and should be intolerable to the CBA."

The letter went on that if the voting system isn't changed and a second vote isn't effected, "our organizations will be forced to resign our membership in the CBA."

Mr. Whitehead said he was acting solely in his capacity as head of First Interstate Bank of Denver, not as a representative of First Interstate Bancorp.

With less than a week to go before the Colorado legislature convenes, beginning a debate on a Independent Bankers of Colorado-sponsored opt out bill, the Colorado Bankers' options appear limited. Each of the big banks, according to Mr. Whitehead, has engaged its own lobbyist on opting in.

And a change in the voting rules would require a change in the bylaws, and bylaws can be changed only by a two-thirds vote of the total membership.

"What (community banks) are being asked to do is vote to disenfranchise themselves," said Mr. Thomas of the Independent Bankers of Colorado.

The Texas Bankers Association, the country's biggest state trade group, avoided a similar pitfall when the executive board adopted an opt-in stance without a vote of the membership.

"Most associations operate under a one bank, one vote system," said Robert Harris, president of the Texas group. "But that's usually in the context of the annual convention. On an issue as complex and contentious as this, we take the position that a straight-up poll of our membership is a very poor way to make policy."

The Colorado Bankers Association had a similar revolt in the late 1980s over branch banking in the state. The group took a position supporting branch banking, a stand many unit banks thought was taken over their majority opposition. Many small banks quit the group after that.

"We're just sitting back kind of giggling," said George Rock, president of Bank of Denver, which quit the trade group several years ago. "But it's the same old story. The big banks think that because they pay most of the dues they can control the organization. It doesn't work that way."

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