More banks seeking change

Institutions make switch to state charters to reduce costs, increase profit

Longtime banker Jerry O’Connor said there used to be something special, a kind of prestige, about having the term national in the name of a bank.

“There was a certain pride that went with national banks,” said O’Connor, president and chief executive of NBW Bank, which was formerly known as The National Bank of Waupun.

But over the years, as the broader powers of federally chartered banks have become diluted — and as the cost of being supervised by the main national regulator has exceeded the price of regulation by the state — the term national has become easier to give up, he said.

O’Connor expects NBW Bank’s recent conversion to a state-issued charter from a national charter to save about $500,000 over 10 years in bank examination expenses alone. It also should allow the bank to earn more because the state has higher lending limits, he said.

“When you look at the dollar benefit, it really becomes a no-brainer,” O’Connor said.

NBW Bank, which changed to a state charter from a national one in August, appears to be at the front of a trend of Wisconsin community banks choosing the state, instead of the U.S. Office of the Comptroller of the Currency, as a supervisor.

Three other community banks — The Baraboo National Bank, The First National Bank of Berlin and West Bend’s Westbury Bank — have applied to the Wisconsin Department of Financial Institutions to switch from a national to a state charter. In the previous decade, only two national banks in Wisconsin had changed to state oversight.

Another application to convert is on the way and “probably two more are in the pipelines,” said John Reichert, a financial institutions attorney with the firm Reinhart Boerner Van Deuren in Milwaukee.

“I think that constitutes a trend for sure,” he said.

Wisconsin’s top financial regulator, Jay Risch, welcomes the new business.

“Competition is a good thing,” said Risch, who is secretary of the Wisconsin Department of Financial Institutions. “It forces us to provide good value.”

Reducing regulatory costs is by far the main reason some banks are switching to state charters in Wisconsin. But Risch said several other possible advantages may be prompting banks to consider converting.

One is accessibility to regulators if

there is an issue.

“I think it’s maybe a little easier for folks to get ahold of someone here in Madison,” Risch said. Reichert agreed. “They can pick up the phone and call DFI and request a meeting. You can’t do that with the OCC. You can’t pick up a phone and say, ‘Well, hey, Comptroller of the Currency in D.C., I have a small bank in Wisconsin. Can you help me with my issues?’ ” he said.

Risch also suggested the examiners from the state are more familiar with local banks and their borrowers.

“We’ve just got some real excellent examiners, both seasoned and new,” Risch said. “They’re Wisconsinites who understand, say, ag cycles, better than maybe an examiner who might be coming from another state.”

Because banks are crucial to the U.S. financial system, the records of financial institutions are examined every 18 months or so by regulators who look for risky lending practices, compliance with banking laws and other concerns.

The OCC examines federally chartered banks, while the state Department of Financial Institutions conducts exams in tandem with the Federal Deposit Insurance Corp. or Federal Reserve Bank. Since state-chartered banks must carry deposit insurance through the FDIC, the FDIC or Fed keep watch on state banks along with the DFI.

The procedures OCC and DFI use the to

charge banks for oversight aren’t identical, but when all is considered, having the state agency as the main supervisor is significantly less costly, Reichert said. He said, for example, that a bank with assets of $200 million — generally considered a small bank — could save between $50,000 and $60,000 a year in expenses with a state charter.

“Plus, there are other added benefits, such as an increased lending limit,” Reichert said, noting that the state’s higher lending limits mean a bank could increase its earnings.

The OCC supervises more than 1,300 financial institutions in the United States. In a nine-month period ended June 30, the OCC saw 38 banks convert to state charters, but the OCC also added 28 charters during the same span.

An OCC spokesman stressed it’s a bank’s right to choose a state or federal charter, and when a switch to a charter change occurs, it’s typically for business reasons.

Reichert acknowledged that an article he and Reinhart colleague Jim Sheriff wrote for the December issue of the publication Wisconsin Banker about the potential benefits of converting to a state charter might have inspired more bankers to look into it.

There are 40 federally chartered banks headquartered in Wisconsin. NBW Bank’s O’Connor said some have contacted him to ask about his experience in switching to a state charter.

“Federal chartered banks in Wisconsin are taking notice and voting with their feet,” Risch said.