MetroWest Bank, which maintains a branch at 15 Broad St. in Boston, will retain its brand name but operate under parent Banknorth Group’s single federal charter.

The last strokes of midnight on Dec. 31 will mean more to Banknorth Group than just the start of a new year. The tolling of the clock also will signal the beginning of Banknorth’s single-crowned reign over a considerable multistate footprint.

Instead of multiple state charters, the bank will be housed under one national charter, retaining the branded names of individual banks within its holdings.

The move is the latest in a two-year transition from multiple state and federal charters in Banknorth’s holdings, stemming from the flurry of acquisition activity undertaken by the institution, to multiple national charters all under the auspices of the Office of the Comptroller of the Currency. As of Jan. 1, the bank’s federal charters will be consolidated into one federal charter.

Banknorth operates seven banks in New England and upstate New York and recently received regulatory approval to acquire Andover Bank and MetroWest Bank in Massachusetts.

We actually changed all of our banks to national bank charters – OCC charters – about a year ago, said Brian Arsenault, senior vice president of corporate communications for Banknorth. We were trying to reduce, at least to some degree, the amount of regulatory oversight.

Arsenault described the different charters in the Banknorth Group as a hodgepodge, so much so that seeking consistency formed a secondary motivation for the change, along with the primary goal of reducing the potential for frequent examination by multiple regulators.

The banking industry is heavily regulated by state and federal agencies but, in Banknorth’s case, the weight of a mounting number of state charters was becoming burdensome. Under the current charter format, the Federal Reserve regulated the Banknorth holding company while the OCC was regulating the banks. We won’t have six or seven CRA [Community Reinvestment Act] reviews; we’ll have one. We won’t have to go to several boards of directors to vote affiliate money up to the holding company; we’ll have one bank board of directors to go to, said Arsenault of the benefits being derived by switching to a national charter.

Multiple reviews for compliance with the Community Reinvestment Act is just one downside facing a multistate bank when it has multiple state charters, according to Kevin J. Handly, corporate group director at Goulston & Storrs in Boston.

If you have multiple examinations, you have the possibility of coming out with divergent ratings from each of those exams. This is particularly troublesome in the CRA area because if you have an unsatisfactory CRA rating, you are basically precluded from making new acquisitions until you have cleaned up that unsatisfactory CRA record, said Handly. With strong CRA ratings across the board, however, that potential pitfall is not one with which Banknorth has had problems. However, the scenario remains a potential stumbling block for all multicharter banks.

If you have all of your banking operations consolidated into a single bank, all of your pluses get played against all of your negatives and the rating you end up with is a reflection of your all for all records, said Handly.

There are a number of other factors that contribute to making multiple state charters difficult, said Handly. These include gathering the capital necessary to make a purchase. The boards of directors for each individually chartered bank would have to meet and agree to mete out the profits of the bank for the good of the whole.

Banknorth, however, intends to capitalize on its current system of multiple boards of directors by keeping each in place, said Arsenault, albeit with reduced powers.

Structurally, we’ll have a single charter. But we do want to keep the directors in each of the states because they’re very important from a business development point of view and from an eyes and ears point of view … They won’t have authority such as voting dividends up to the company. So, their role will be much more to help us manage the banks in each of the states and to make sure we don’t lose track of what’s important in that market area.

Keeping the local boards on duty is more than just a good deed; it can pay substantial dividends in the eyes of the public as well, according to Handly. Despite the difficulties facing a growing bank in retaining multiple state charters, there are advantages to doing so, Handly said. It helps authenticate the local identity of the organization, which can be important from marketing purposes. It’s easy for the local bank to compete with the out-of-state or out-of-town bank on a parochial basis, just [by] appealing to the parochial interests of the business community, he said.

Switch Backs
The dual banking system is designed to be flexible. In the last year, Brookline Bancorp and its subsidiary Lighthouse Bank (which has since been folded back into the parent company) switched to a federal charter, according to Steven L. Antonakes, senior deputy commissioner at the state’s Division of Banks.

At the other end of the spectrum, however, First Essex Bancorp found the state system to be more desirable for its strategic goals and switched over from a federal (Office of Thrift Supervision) charter to state charters in March.

Leonard A. Wilson, chairman and chief executive officer of First Essex, said that the decision was simply a matter of which charter best fit the strategic goals of the company.

About five years ago, First Essex had a state charter but changed because the Office of Thrift Supervision was the first to allow interstate banking. This allowed the bank to flow into New Hampshire, a natural evolution considering the proximity to the border and the fluid exchange between Massachusetts’ workers who live in New Hampshire and the Bay State’s residents who often shop there.

We had acquired a small bank in New Hampshire and we had a larger bank in Massachusetts. It was really terribly inefficient to operate a smaller-charter, single-branch bank with deposits and outstanding loans of less than $30 million … We applied for and were granted a charter and were very pleased with the OTS. It was a good regulator; they had high-quality bank examiners, said Wilson. But the regulations crafted by the OTS eventually proved prohibitive to the bank’s goals.

We had refashioned our bank as a community commercial bank with a growing commercial loan/business loan portfolio and we nudged up against the regulatory limits, said Wilson. State laws had since changed and, once again, it made sense to adopt a state charter.

Another advantage of keeping a state charter is that the bank will be dealing with regulators who are intimate with the local economy, said Daniel J. Forte, president of the Massachusetts Bankers Association: The pros to a federal charter are that it’s a simplified system. If you’re going into other states, you avoid the myriad nuances of multiple state law, multiple state regulations. But size doesn’t mean the change to a national charter is automatic. Citizens Bank, for example, still holds state charters where it operates.

National charters have a downside as well, said Forte. You’re with a regulator from Washington [D.C.] that doesn’t know the market and tends to lean towards homogeneity from a regulatory standpoint. In particular, during difficult economic times, some of the subtleties of the local economic market may be missed, he said.

In the banking crises of the late 1980s, there was a perception that the federal regulators were applying standards and procedures they had developed for use in other parts of the country to New England when [they] weren’t wholly applicable, said Handly.

By having a strong dual banking system … The bank gets to shop, so to speak, and weigh the pros, the cons, the benefits and costs of the different regulatory systems and pick something that works for them, added Forte.

And because of the relative ease with which banks may switch charters, the system is balanced not to be too burdensome on either side, lest it trigger a large-scale conversion with banks favoring one over the other.

I think you always have to try to maintain balance and you have to work to ensure that the powers are similar, said Antonakes, commenting on the health of the dual banking system. We have not seen in the last several years a real substansive flip [in charters] from federal to state or state to federal, he said.

But ensuring that regulations on both the state and federal levels present an even playing field is a constant vigil for the industry and associations like the MBA. Forte pointed out the recent legislative victory giving the same insurance sales rights to state banks as federal laws granted to national banks.

There has always been a pull-and-tug between nationalizing the banking industry and state’s rights. I think this is just a continuing evolution of that process, said Forte.

Expanded Banknorth Charting New Course

by Banker & Tradesman time to read: 6 min