FLIPPING CHARTERS

Northwestern Financial Review, Feb 1-Feb 14, 2004 by Dullum, Justin

Banks convert to state charters to save money and work with regulators close to home

The United States' dual banking-system gives bankers the power to choose their regulator as they decide between state and federal charters. And it's a power banks exercise regularly.

About three dozen banks across the country flipped charters in 2003. Through the first 10 months of last year, 19 banks traded in their national charter for a state one, and in all of 2003,18 banks switched to a national charter from a state charter.

A bank typically converts to a national charter for easily identifiable reasons: It is either planning an interstate expansion or its holding company is consolidating charters in various states. For a bank converting in the opposite direction, the reasons can be more complicated.

"A lot of the time a national-to-state conversion has to do with a bank's existing relationship with a regulator," said Steve Johnson, an attorney with the Minneapolis law firm of Lindquist & Vennum. "Sometimes banks and their regulator do not get along very well."

A tepid relationship with the Office of Thrift Supervision was a factor in East Dubuque Savings Bank's decision to convert to a state charter, said Steve Bonnet, the $148 million bank's president. The bank had been an Illinois chartered bank for more than a hundred years when its board decided to convert to a federal thrift charter in 1999. The bank was looking to cross the nearby border into Iowa. This arrangement worked well for a while, until the OTS consolidated several regional offices.

"What we found was the examiners were now coming in from Atlanta and Dallas and they weren't very familiar with the needs of a commercial bank, which is the largest portion of our business," said Bonnet. he said some of the OTS examiners had never worked with the kind of loan documents frequently used by his bank.

The OTS did little to help bridge the communications gap, said Bonnet. To rectify the situation, the bank began exploring another charter conversion.

"When we talked to them about the possibility of changing, they didn't even want to talk to us, which rather surprised me," said Bonnet.

The bank filed to convert to an Iowa charter in 2003. Bonnet said the state's preliminary conversion exam with the Iowa Department of Banking went smoothly.

East Dubuque Savings Bank was the only one of four banks participating in this article that cited differences with their regulator as an important reason for conversion. The three others said their relationship with their federal regulator was satisfactory.

All four banks did, however, report similarities: they all converted in order to decrease exam costs, which ranged from $10,000 and $50,000 a year, depending on asset size. Also, all four opted to become members of the Federal Reserve.

The Fed option

Most state chartered banks are not Fed members, said Johnson. Less than a quarter of the banks that completed a conversion in 2003 opted for Fed membership.

"The major difference between being a Fed member and non-member is whether you're examined by the Fed or by the FDIC," said Johnson. "It comes down to a matter of preference. The main regulators are all very similar."

The less-frequently used Fed option received high marks from recent converts who note the agency's hands-on approach to exams.

"We're really impressed with the Fed," said Bonnet of his bank's preliminary conversion exam. "They took their time and wore very interested in working with us."

"The Fed is a smaller group and that has its advantages and disadvantages," said Johnson. "They may be more like your state examiner and they may be more flexible. The downside is that the Fed might not have as much experience with certain situations."

Peoples Bank of Coldwater, Kan., filed to convert to a state charter in 2003 and opted for Fed membership. "I had gathered from conversations with other bankers that the Fed took a pro-active approach to guidance," said Wynn Alexander, bank president.

Alexander said he has been impressed so far. The Fed's preliminary review of the $35 million bank looked and acted like an exam, he said, but it wasn't.

"They actually came out here and helped us rather than having to work through the phones," said Alexander. "The examiner spent four days with us. Anything he felt needed to be done, we did. It wasn't called an exam, but it helped iron out any issues. Boy, that was really helpful."

The state philosophy

Regulation from an agency that understands a state's idiosyncrasies naturally sits well with most community bankers. Joe Mentink, president of the $110 million First Bank of Baldwin, Wis., was attracted to the brand of regulatory guidance offered by the state. While the bank's top reason for switching concerned exam fees, Mentink said having a state regulator that is sympathetic to the community bank's position is a significant bonus.

"The state examiners were more in tune with Wisconsin community banks than were the national bank examiners," said Mentink. "The national regulators approached their exams from a broader perspective. If they saw a problem in the country's energy sector, then some of those concerns would somehow find their way back to the small Wisconsin banks. Or if the East Coast had real estate concerns, those concerns would be applied to my bank."