Multibank Model Falls Out of Favor

Premier Financial Bancorp Inc. has decided that even for community banks that value local identity, bigger might just be better.

The Huntington, W.Va., company announced last week that it was merging five of its eight banks in the Middle-Atlantic states in a move designed to save two of them. Premier hopes to harness the banks' collective capital and reduce the percentage of problem assets by putting them on a bigger balance sheet.

There has long been debate in the industry about the wisdom of bank holding companies having multiple charters. The rationale in their favor is that they promote local autonomy and ease transitions in acquisitions. Yet more than one charter can be tough for the parent company to properly manage.

As those problems were magnified during the economic downturn, some notable multibank holding companies recently have pared their charters.

"In a more difficult environment it is easier to make the point that a company can be better managed under one charter versus 27 charters," said Rex S. Schuette, the chief financial officer of United Community Banks Inc. in Blairsville, Ga. "It is easier to go through one examination than to have go through it with each bank. In this environment, I am surprised we haven't seen more consolidations."

United Community merged its 16 banks, bringing them all under one charter two years ago.

Schuette said such consolidation has placed United Community in a better position to address credit problems than if it had maintained the multicharter structure.

Like Premier and United Community, other community banks are seriously looking to combine their charters, said Walter Moeling 4th, a partner at the Bryan Cave law firm in Atlanta.

"Of the ones we are talking to, most are just waiting for regulatory approval to merge their banks. There are so many benefits, but most of all it lets you have centralized control to make sure the system is running right," he said.

Other notable consolidators include the $32 billion-asset Synovus Financial Corp. in Columbus, Ga., which merged 30 of its charters in June.

Over the past year, the $4.7 billion-asset Capitol Bancorp Ltd., which has headquarters in Lansing, Mich., and Phoenix, has become one of the most notable companies to change its business plan amid the recession.

Once set on having more than 100 charters across the country, Capitol has announced the sale of more than a dozen of its unit banks, and has consolidated banks in Arizona, Southern California, Georgia, Indiana, Michigan, Nevada and the Pacific Northwest.

Meanwhile, for the $1.1 billion-asset Premier, the idea of merging the banks it has acquired into one flagship bank has been on the table for years.

Yet serious credit problems at two of its banks — Adams National Bank in Washington, D.C., and Consolidated Bank and Trust in Richmond, Va., — caused Premier to take action.

Premier acquired Adams National and Consolidated in October 2009 as part of its $10.9 million deal with the troubled Abigail Adams National Bancorp Inc.

"Having two banks on the troubled list for two or three years is not conducive to the overall health of the organization," Robert Walker, the president and chief executive of Premier, said in an interview last week. "If there is some other obvious way to speed up the process in getting them off the troubled list, we should take it."

If the merger is approved, Adams National and Consolidated will be propped up by Premier's three West Virginia banks: Boone County Bank in Madison, First Central Bank in Philippi and Traders Bank in Ravenswood. Combined, the new Premier Bank would have $800 million of assets and a total risk-based capital ratio of 16.18%.

Premier has three other banks in Kentucky and Ohio. Walker said the company has not determined if it should merge those as well.

Combining the two struggling institutions with the stronger banks makes sense, said Eliot Stark, a managing director at Capital Insight Partners, a Chicago investment banking firm.

"If one of your banks gets into trouble it can become very difficult to sort it out," Stark said. "You can't sever that limb to save the rest. The regulators make you stand behind your banks."

Beyond aiding asset quality at struggling banks, a move to consolidate charters can lessen the company's overall regulatory burden. This is an especially important consideration for community bankers these days as they worry that such regulatory requirements will increase with the implementation of the financial regulatory overhaul.

"The Dodd-Frank Act is going to be tough on small banks, even those within a multibank holding company structure," said Bert Ely, a bank consultant in Alexandria, Va. "And I think a lot of companies will find that the cost and risk of having multiple charters will be greater than the benefit of having a local identity."

Walker acknowledged that the impending regulatory reform had some effect on the decision to consolidate charters, but he and other bankers said financial regulation is already onerous for companies that hold numerous charters.

"Now there are one set of numbers," Schuette said. "That makes it so much easier to deal with regulators."

That appears to be the case even for healthy companies like FirstBank Holding Co. in Lakewood, Colo. The $10.3 billion-asset company announced in March that it was merging its more than two dozen banks under one charter. The consolidation is expected to be completed this fall.

"We have 25 different charters. That means 25 call reports, 25 different exams," said Tammy Keffeler, First Bank's senior vice president. "It has always been a challenge because it takes up so much time but it had its advantages to our customers."

The benefit of multiple charters for FirstBank, the second-largest deposit holder in Colorado, was that high net-worth customers could spread their money across the various charters to stay below the $100,000 deposit insurance limit set by the Federal Deposit Insurance Corp.

When the deposit insurance limit was bumped up to $250,000 in late 2008, First Bank began questioning the need for so many charters. "We've known the advantages of a single charter all along, but that was just standing in our way," Keffeler said.

Although all of FirstBank's charters were de novos, the structure also made acquisitions for companies like United Community and Premier easier, Moeling said.

"A seller tells a buyer 'we like our name, we like our local identity, but we want your stock.' The buyer's advisers tell them it is not the best structure, but the buyer still ends up doing it and saying 'we will leave your charter, your board, we just want to own the bank,' " Moeling said. "But the structure has just never really worked very well."