Consolidation Trend Hits Wallets of State Regulators and Small Banks

A new wave of consolidation is causing budgeting headaches for state banking regulators.

Assessments for state-chartered banks make up a large percentage of revenue at those agencies, many of which do not receive tax revenue from state governments. When a big bank is sold, or consolidated into an out-of-state bank, it can force a commissioner to take a hard look at the costs of overseeing the remaining institutions.

Losing a big bank "does have an impact on us as a state regulator," says Gavin Gee, director of finance in Idaho. The state is set to lose its biggest state-chartered institution, Home Federal Bancorp (HOME) in Nampa, which agreed to sell itself last month to Banner Corp. (BANR) in Walla Walla, Wash.

The $1 billion-asset Home Federal "is significant to our regulatory process," Gee says. "They bring in significant income."

Idaho had already absorbed the loss of several other banks that were rolled up into Glacier Bancorp (GBCI) in Kalispell, Mont., as part of a large bank consolidation last year. The consolidation also included charters in Colorado, Utah, Washington and Wyoming.

Glacier's moves are being watched in Montana, where the $8 billion-asset company contributes about 14% of the state banking commission's annual revenue. The $7.3 billion-asset First Interstate (FIBK) in Billings, Mont., contributes a slightly lower amount.

"We do have some risk on the budgeting side if either of those two larger institutions were to decide to switch to a national charter or to merge and disappear," Melanie Hall, Montana's banking commissioner says. "We have tried to work on balancing our assessments in order to temper that risk."

The problem is longstanding, and a lack of newly chartered banks exacerbates it,

says John Ryan, the president and chief executive of the Conference of State Bank Supervisors. "These challenges are going to be real. But there are threats that turn into challenges that turn into opportunities, and this could be one of those times."

A number of large regional banks — BB&T (BBT), Fifth Third (FTB), Regions Financial (RF) and SunTrust (STI) — still have state charters and account for a large percentage of assets supervised by their state regulators. Fortunately for the banking commissioners in those states, none of those companies have openly expressed an interest in adopting a federal charter.

Several state banking regulators have revamped their fee structures to reduce the assessment rates for bigger banks and, thus, their dependency on a handful of large institutions. The balancing act is to avoid being too top-heavy with fees, while avoiding putting an excessive financial burden on smaller institutions.

Then again, it takes more time and effort to examine a bigger bank. It might take a week or two to look at Montana's smallest bank. In comparison, Hall needs up to three months — and help from the Federal Reserve or the Federal Deposit Insurance Corp. — to look at Glacier or First Interstate. "We do a loan review in their different regions and different markets to try and get an accurate picture of what their portfolios look like," Hall says.

Louisiana increased assessments for smaller institutions about 15 years ago. "Our previous commissioner got calls from smaller banks upset about the increase," says John Ducrest, Louisiana's banking commissioner. "We got no legislative pushback and we were able to make the point [to smaller banks] that we couldn't have the big banks merged out of existence."

That has helped Ducrest accept the fact that his biggest state-chartered bank — Whitney Bank in New Orleans — is owned by Hancock Holding (HBHC) in Gulfport, Miss. Carl Chaney, Hancock's co-CEO, said in June that he has no plans of consolidating Whitney into his company's Hancock Bank. In fact, Chaney moved to New Orleans over the summer.

Also, Louisiana has more state-charted banks than, say, Montana, so it is less reliant on any one institution, Ducrest notes.

In Montana, Hall has taken been making efforts to slightly reduce the regulatory burden on the 56 banks she supervises. For the past two years, her agency has reduced the cost of its assessments by 25%. She says last year's Glacier bank consolidation helped offset some of the revenue the agency lost by cutting the assessment. (The state's assessments are based on the assets of each state-chartered bank.)

Hall has also managed to build a cash balance, partly because her operations that supervise mortgage originators are no longer losing money, which could help the agency absorb the shock of losing Glacier or First Interstate. "We think of it as our allowance or capital buffer … so we wouldn't have to do an immediate reduction in work force," she says.

Louisiana has pared its bank supervisory staff over the years, Ducrest says. Employment is down 22% compared with 1989; it has 116 people who handle five supervisory programs that didn't exist 24 years earlier. "We also handle securities [firms] and nondepository institutions," he said. "We just work smarter and use more technology."

In fact, it helps to have oversight over nonbanks, Gee says. "We have other sources of revenue," he says. "We regulate the securities industry and the mortgage industry. Because we charge licensing fees, those areas tend to generate far more income than the cost of regulating those industries. So they basically subsidize our activities" with banks.

State regulators are also starting to share some resources, Ryan says. For instance, the CSBS created a database that lets mortgage supervisors swap information. "It has been more effective [for regulation] because people are sharing notes, and they're not repeating what others are doing," he says.

Still, Gee says he realizes that more consolidation will happen, which could influence how he runs his department. "It clearly is part of a trend," he says.

"We're going to see more M&A activity around the country," Gee adds. "We'll see it in our state. Last year, two Idaho banks acquired banks in other states, so it cuts both ways."