Banks find market for excess state charters

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Sale of two local charters to out-of-state banks nets $750,000 |ret||ret||tab|

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by Eric Olson|ret||ret||tab|

SBJ Reporter|ret||ret||tab|

eolson@sbj.net|ret||ret||tab|

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Missouri's Division of Finance has a message for consolidating state banks: Those excess bank charters may actually be worth something.|ret||ret||tab|

Though the state doesn't promote the sale of bank charters, two southwest Missouri bank holding companies have picked up on it, reaching deals to sell their state charters to out-of-state banks for a combined $750,000. City Bancorp Holding Co. has signed a contract to sell its excess charter from the planned Signature Bank and The Bank merger to an Illinois-based bank for $400,000. Marshfield Investment Co., holding company of the merging Metropolitan National Bank and Bank of Kimberling City, is selling Bank of Kimberling City's charter for $350,000 to Peoples National Bank of McLeansboro, Ill. Both charter transactions are pending regulatory approval, and are expected to close in July.|ret||ret||tab|

"There is value to these charters," said D. Eric McClure, Missouri's Commissioner of Finance. "We do not promote (selling them), but we believe it is legal."|ret||ret||tab|

Existing Missouri bank charters are worth big bucks to out-of-state financial institutions because those charters are the only way they can legally cross Missouri's borders. Both Illinois-based banks have plans to penetrate the St. Louis market, according to bank officials.|ret||ret||tab|

"In Missouri, we have never allowed banks to branch into our state," McClure said. "The only way to come into the state is to buy an existing bank that's been in existence for more than five years."|ret||ret||tab|

The banks involved see it as a trade-off.|ret||ret||tab|

"In doing so, it allows our holding company, Marshfield Investment Co., to be compensated for that charter," said John VanDiggelen, Marshfield Investment Co.'s chief operating officer. "This lets (Peoples National Bank of McLeansboro, Ill.) enter the Missouri market in a more expeditious manner."|ret||ret||tab|

VanDiggelen said Peoples National Bank intends to open a full-service branch in the St. Louis area. Based on state laws, banks would have to start a whole new Missouri holding company, sometimes a year-long process, before entering the market.|ret||ret||tab|

"That's pretty cumbersome if you just want to drop a branch across the state line," McClure added. "That is why banks try to buy other banks in Missouri."|ret||ret||tab|

McClure said two or three state charters sell each year. Missouri's Division of Finance began approving charter transactions in late 1998.|ret||ret||tab|

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How it works|ret||ret||tab|

Peoples National Bank of McLeansboro, Ill., is actually buying Bank of Kimberling City's charter, assets and liabilities in a complex transaction spread over two days this July. The next day, Peoples National Bank will sell Bank of Kimberling City's assets and liabilities back to Marshfield Investment Co., and can have legal authority to begin banking in Missouri.|ret||ret||tab|

"The Missouri bank is dissolved by the merger (with the Illinois bank) and that charter goes away and that out of state bank has effectively entered Missouri," McClure said. "But on day two, they did not want the assets and liabilities of the bank they acquired, so they sell them back to the bank that they originally merged with."|ret||ret||tab|

In City Bancorp's case, The Bank is selling its charter and assets 4 p.m. July 29, with an asset buyback scheduled for 8 a.m. July 30. "We have an agreement with (an Illinois bank) to repurchase all the assets except the charter the next morning," said David Kunze, Signature Bank president. Kunze would not disclose the bank.|ret||ret||tab|

"Our reasoning is, let's sell it because it's valuable and we don't need it," Kunze said.|ret||ret||tab|

The sale more than offsets the holding company's merger costs, which Kunze said are estimated to be $250,000.|ret||ret||tab|

Though the practice is generating more and more interest, McClure is quick to point out that charters are not for sale in the state. "That implies that shelf charters' are legal in Missouri and they are not," McClure said. "Shelf charters" refers to those that are put on the shelf during a merger, McClure added. State law requires charters to be tied to a functioning bank with a current book of business at all times.|ret||ret||tab|

"It's easy for people to speak about selling charters, but that's not what is happening," McClure said. "The end result is that there are some banks that have entered the state by acquiring a Missouri bank. They don't really want the book of business of the bank they're acquiring, they just want to have the legal entry into the state."|ret||ret||tab|

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What it's worth|ret||ret||tab|

Bank officials say there is no scientific formula to determine the value of a bank charter. Some variables are state banking laws and a bank's determination to enter a new state.|ret||ret||tab|

"It is market driven," Kunze said, and decided in private negotiations.|ret||ret||tab|

"It depends on the dynamics of the situation and maybe the state branching laws across the country as to what the value is," VanDiggelen added. "There is not, at least that I've been able to find, a place like the Wall Street Journal to see what these charters are worth."|ret||ret||tab|

And though the process may delay merger plans due to an extensive FDIC approval process with a 60-day market comment period, Kunze recommends the process. Signature Bank and The Bank were to have merged in the first quarter of the year. That has been pushed back until July.|ret||ret||tab|

"For $400,000, it was well worth waiting," Kunze said.|ret||ret||tab|

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Restrictions|ret||ret||tab|

Because the practice is relatively new locally, these bankers said they've learned that transaction documents should have agreements to protect their banks.|ret||ret||tab|

"I did not know until this whole process started with us that this was a transaction that could be done," VanDiggelen said. "Yes, we want to recognize that value, but we want to make sure that that Bank of Kimberling City name cannot be used again, and that the people we're selling this charter to will not become our competitors. We've done that in our agreement."|ret||ret||tab|

According to the legal documents, Bank of Kimberling City retires at the time of closing, and Peoples National Bank cannot open a banking facility within 50 miles of existing Marshfield Investment Co. banks.|ret||ret||tab|

"We're assured that they can't use our name and they can't enter our market," he said.|ret||ret||tab|

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