Charter banks growing into branches

Changes in federal regulations allow easy conversion

Once upon a time, Colorado was home to 450 chartered banks.

Today, they number around 180: The rest fell victim to regulatory changes in the 1990s, when the state became the last in the country to change its branch-banking law.

A bank charter is something like a license, said Bill Farr, president of Centennial Bank Holdings Inc. in Greeley. Centennial is a holding company that encompasses Eaton Bank, Centennial Bank of the West and Farmers Bank.

“You can get a state charter from the state banking commission,” Farr said. “You can also apply to Washington to the Office of the Comptroller of the Currency and get a national charter. There is very little difference except for who you want to regulate you.”

In the 1960s and 1970s, bankers had to prove the need for a bank in order to justify getting a charter. Today, the arena has loosened up considerably: Anyone wanting to start a bank has to raise about $3 million in capital, put together a board of legitimate businesspeople, along with a legitimate president, and presto, you have a bank.

However, though it’s gotten easier to obtain a bank charter, the total number of banks is dropping, Farr said.

“Every year there are fewer banks,” he said.

And this is where the state branch-banking laws come in.

It used to be that banks had to show a need for a branch. After 1991, banks had to complete a six-year phase-in period before they could add a branch. And in July 1997, interstate branching was allowed.

All these changes meant it was easier and easier for banks to merge, said Don Childears, president of the Colorado Banking Association. As a result, the state had numerous charters on record, but many were no longer operational.

“The ones that disappeared were simply converted into branches,” Childears said.

Here’s how it works: Let’s say Bank A forms a holding company and starts buying banks. Over the course of 50 years in business, Bank A grows to the point where it has 25 banks, each with it’s own charter. Then, Bank B comes along and buys the holding company. In the process, Bank B tosses out 24 of the charters and keeps one. Then it converts the other banks into branches.

Why make such a move? It saves time and paperwork.

“Instead of having 25 banks with $100 million in assets, they have one big bank with $3 billion,´ said Farr. “They don’t have to duplicate all the things those other banks did. You have one report, one set of taxes. You eliminate a hell of a lot of banking regs.”

Farr said he likes to compare the process to gasoline stations.

“If you went back about 20 or 30 years ago, you’d be surprised at all the different gas stations in this country,” Farr said. “I mean the independents, the Mom and Pop operations you saw on vacation. Now there are only eight or ten gas-station chains in the country.”

“There are a few Mom and Pop places still left,” Farr said, “but they’re disappearing fast. If they have a problem with their underground tanks, I guarantee they go out of business right now because it’s too expensive to replace them. It’s easier for the bigger guys to survive that kind of thing.”

Though it’s easier for new banks to get charters, Childears said he expects a continuing consolidation in the industry as banks go for bigger market shares.

However, he said, no matter how many banks or charters the state has, the customer’s probably not going to care — “as long as they do business with the bank that meets their needs.”

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