Some banks happier with N.J. charters than with U.S. ones

Jan. 30--1stBank of Sea Isle City in Cape May County used to be regulated by the U.S. Office of Thrift Supervision. As part of the Dodd-Frank financial industry reforms, however, that office was merged into the U.S. Office of the Comptroller of the Currency in 2011. According to the bank's president, the OCC was harder to please.

"We went through a couple of exam cycles, and what we found is that the OCC seemed to paint 1st Bank with the same regulatory brush as the big banks," Larry C. Schmidt, the bank's president and chief executive officer, said in a recent phone interview. "They expected us to have the same systems as if we were doing more complicated lending.

"The procedures they wanted would make sense if we made large industrial loans ... but we do mostly mortgages on second homes."

Partly because of what Schmidt described as "burdensome" requirements of federal examiners, the bank, which has roots dating from 1888, switched in December to a state charter, and Schmidt expects that its next exam, to be conducted by state examiners, won't be as difficult.

1st Bank of Sea Isle City is not alone. Other New Jersey banks that have flipped charters since Dodd-Frank include Crest Savings Bank in Wildwood, which converted to a state charter in 2011, and Lusitania Savings Bank in Newark and 1st Colonial Community Bank in Collingswood in Camden County, which both switched late in 2012.

(Colonial American Bank in Middletown switched last year from a Pennsylvania state charter to a New Jersey charter, after Monmouth County-area investors recapitalized and relocated that institution.)

No New Jersey-based banks have switched from a state charter to a federal charter in at least six years.

"There is a perception in the industry that the OCC is a tougher regulator than the state regulators," said bank consultant Robert E. Kafafian of the Kafafian Group in Parsippany.

According to Kafafian, banks were more inclined to switch from a state to a federal charter 20 to 30 years ago, often so they could open branches across state and county lines. But restrictions on cross-border branching have been relaxed over the years for state banks, making state charters more appealing. And since Dodd-Frank made federal regulations stricter, state charters have become more attractive to bankers.

New Jersey Department of Banking and Insurance Commissioner Ken Kobylowski often talks about the benefits of a state charter when speaking to banker groups, and he openly urges federally chartered banks to switch.

"As state regulators we are more accessible to our banks, have a greater knowledge of their market and local issues and are more cost-effective than our federal counterparts," Kobylowski said earlier this month in a statement touting the conversion of 1st Bank of Sea Isle City.

The department relies on fees assessed on the institutions it oversees to offset its operating costs. The number of state-chartered banks has fallen to 75 from 80 in the past five years as mergers and bank failures outnumbered the charter flips.

John McWeeney, president of the New Jersey Bankers Association, whose membership includes federal- and state-chartered banks, says he is "neutral" on the relative merits of state and federal regulators.

The state regulator is seen by some as "more in tune with what's going on locally," and "more sensitive to the trends going on in the local economy, and in real estate values," he said.

"What's important is safety and soundness," McWeeney said. "They [the regulators] all do a good job, and banks have the discretion to choose which one is best for them."

Schmidt said higher fees charged by the OCC were also a consideration.

For 1st Bank of Sea Isle City, the savings in annual exam fees was "in the neighborhood of $50,000," a significant sum for an institution with four offices and $240 million in assets.

"That's enough to purchase new technology or hire another employee," Schmidt said.

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