Does Your Bank’s Charter Align With Its Strategy?

As bank leaders revisit their growth aspirations in the lighter touch regulatory environment, more are considering a charter conversion as part of broader discussions about strategic planning, says Mark Kanaly, a partner with Alston & Bird.

It’s not that bankers see one regulator as better or worse than another. In some cases, a bank may want to switch regulators because it’s planning to grow significantly via M&A or expansion into new markets. For example, a bank could gravitate toward the Office of the Comptroller of the Currency for a national charter if it plans to grow across multiple states. A bank may also find a particular agency could be more knowledgeable about a specific business where it wants to grow.

“Bankers are terrific information gatherers. They attend lots of conferences. They hear lots of opinions. They talk to other bank CEOs and other competitors who are with different regulators,” Kanaly says. From his vantage point, those conversations are not centered on any one regulator more than any other. He sees as many state-chartered banks considering a conversion to become national banks as vice versa.

Sometimes, a bank may choose to stick with its current regulator while still opting for a charter conversion. The $3.2 billion Ponce Financial Group in Bronx, New York, has been regulated by the OCC since 2011, and applied in fall 2024 to convert its charter from a thrift to a commercial bank. The change made more sense for its business model, explains CEO Carlos Naudon. In order to participate in the financing of certain city-sponsored affordable housing developments, the bank needs to accept municipal deposits. However, municipalities can’t place deposits with thrift banks in the state of New York, he says. Until its charter conversion, Ponce had to partner with a commercial bank to accept the municipal deposits associated with a project, thus reducing a lot of the project’s profitability, he says. “The business was important enough for us to get a national commercial bank charter.”

A similar story of bureaucratic rules motivating some to weigh a charter conversion is playing out nationwide, with states such as Colorado opting out of a specific provision in the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980. At its core, the rule concerns state-chartered banks’ ability to use the interest rate of their state of domicile when making a loan elsewhere. A 2023 Colorado law, for example, would require state-chartered banks headquartered outside the state to abide by Colorado’s interest rate caps when making loans to the state’s residents. After a circuit court sided with Colorado, a handful of other states followed suit.

“That’s creating a very significant incentive for consumer lending companies to prefer a national bank charter,” says Brian Graham, a partner and cofounder at the consulting firm Klaros Group. A bill passed in Oregon earlier this month would opt Oregon out of DIDMCA as well, requiring state-chartered banks headquartered outside the state to abide by Oregon’s usury laws.

“Federal legislation would probably be the best way to clarify this,” says David Pommerehn, executive vice president and general counsel with the Consumer Bankers Association.

No matter the reason, bank leaders who are considering a charter conversion ought to start from a place of good standing with their current regulator, Kanaly says. Applying for a conversion when the organization is about to be criticized on some matter will look like it’s trying to escape scrutiny.

An applicant will need to first initiate conversations with its new, intended regulator. While those initial discussions may be kept in confidence, at some point, the application will be made public, and the prior regulator will have a chance to object. The new regulator will also want to conduct its own examination and be certain that it understands the bank’s business model.

To get a sense for whether a regulator may actually be a better fit, Graham suggests bankers consider any guidance pertinent to their business that was specifically issued by the regulatory body in question, as opposed to joint guidance. “In some cases, agencies go it alone, and that reflects some difference of opinion or approach,” he says. “If that difference of opinion involves something important to that bank’s business model, you want to know that.”

Kanaly advises a “measure three times, cut once” approach to a charter conversion. “Sometimes, you don’t know how good you’ve got it,” he says. “You want to be careful to make sure that your new regulator isn’t going to have a different view that’s going to be something you dislike.”

While the federal regulatory environment may be friendlier to the industry right now, Naudon believes banks shouldn’t make such an important decision based on short-term factors. Most bankers recognize the pendulum will eventually swing in the other direction. “I don’t think that the regulatory climate has changed enough to say, ‘I’m going to switch from state to federal, because I hear things are better at the federal level,’” he says. “You have to keep your eye on the long term as to what’s good for your institution.”