National Charter Conversions to State a One-Way Street

Most regulated industries don’t get to choose who regulates them, but, to a limited degree, banks do. And while the door can swing both ways, in reality the traffic has flowed in one direction: converting from national charters to state charters.

You’d better believe Paul Groot is aware of the trend. He’s the assistant deputy comptroller who two weeks ago took charge of the Office of the Comptroller of the Currency in Little Rock.

“As soon as I hear that someone’s even thinking about it, I go out and meet with them and tell them what they do get for their fees,” said Groot, who headed a team of bank examiners in Little Rock from 2007-13 and then led the OCC office in Cincinnati for two years.

Chris Dunn, who had been ADC for the OCC in Little Rock since 1997, resigned last July to become executive vice president for regulatory affairs and risk strategy for the largest Arkansas banking company he regulated, Simmons First National Corp. of Pine Bluff.

Between Dunn’s departure and Groot’s arrival, First National Bank of McGehee applied to convert to a state charter to be called First NaturalState Bank. When that is approved by state regulators — no conversion request has been turned down in the 36 years that Candace Franks has worked for the State Bank Department — the number of national bank charters in Arkansas will fall to 20 while the number of state banks will grow to 83.

(The OCC also regulates the only thrift left in the state: Priority Bank of Fayetteville.)

Stone Bank of Mountain View — formerly Ozark Heritage Bank — switched from a national charter to a state charter in 2015. Two OCC-regulated thrifts, Benefit Bank of Fort Smith and United Bank of Springdale, converted to state bank charters in 2014. First National Banking Co. of Ash Flat became state-chartered FNBC Bank in 2013.

Bank Department Benefits

The beneficiary of the conversion trend has been the Arkansas State Bank Department. It regulates about 78 percent of the $73 billion in assets reported by banks chartered in Arkansas. Nationally, the OCC regulates about 70 percent of bank assets, including the six largest banks in the country — JPMorgan Chase, Bank of America, Wells Fargo, Citibank, U.S. Bank and PNC Bank.

Franks, who has been commissioner of state banks for the past nine years, says her asset base is growing even though the roster of bank charters is shrinking due to acquisitions and reorganizations. (That includes Simmons’ decision to collapse seven state bank charters into its flagship Simmons First National Bank in 2013 and 2014.)

“If they’re interested, we’re happy for them to come and talk to us,” Franks said. The department even has packets made up called “Benefits of Being a State Chartered Bank” that include testimonials from state bank executives — including Martin Carpenter, who recently retired as CEO of FNBC Bank — on the decision to convert.

The State Bank Department, Carpenter said, has “a vested interest in the well being of the communities throughout Arkansas and for us that made them the best partner for us going forward.”

Franks said she couldn’t remember the last Arkansas state bank that converted to a national charter. Occasionally an OCC-regulated thrift will convert to a national bank charter; that’s how the OCC gained seven new banks last year. No state-chartered bank in the country converted to a national charter in 2015.

Why is the trend so one-sided? “There are a lot of reasons for converting,” Groot said. “I expect every board to look at it periodically.”

For one thing, state regulatory fees are somewhat lower — a few thousand dollars a year for small banks like First National of McGehee — although Groot argues that OCC services make up for the difference.

And there have been suggestions that state regulators can be more lenient; a study released by the Federal Reserve Board in 2014 concluded that banks could “arbitrage” their safety and soundness ratings, at least temporarily, by switching regulators.

But Randy Dennis, a bank consultant with DD&F Consulting in Little Rock, dismissed the idea of a less stringent regulator because even state-chartered banks must select a primary federal regulator — either the Federal Reserve Bank or the Federal Deposit Insurance Corp. — and state and federal regulators take turns leading routine examinations every 12 to 18 months.

Marnie Oldner, CEO of Stone Bank, said her board simply wanted a regulator more in touch with Arkansas.

“Sometimes local economies create vulnerabilities that are not as prevalent in other localities,” Oldner said in an email. “What I believe our Arkansas State Bank Department understands is the world Arkansas banks live in. They better address the appropriate regulations to our issues.

“It was our experience that the OCC examination agenda and communications had to come from and go through Washington. I felt we had no voice. Trivial issues were made too big and we paid too much to address them at a time we could little afford to do so.”

Groot points out that OCC regulators are actually on the ground in Arkansas, although his office also regulates some banks in Mississippi, Tennessee and Texas because OCC regions don’t follow state borders.

“State regulators tout that they are local,” he said. “Well, I’m local. I live here in Little Rock.”

State law in Arkansas keeps regulatory actions against state-chartered banks confidential, which might also be an appealing difference. OCC orders are released publicly a few weeks after they are entered.

But Franks discounted that because no state bank escapes federal regulation, and the Fed and the FDIC also make their orders public. “Generally, if we’ve issued an order, there’s also a federal order,” she said.

Getting Out From Under

One thing that seems undisputed: The Arkansas State Bank Department tends to release banks from regulatory orders much faster than the OCC.

Franks said banks that comply with orders are typically released from special oversight after the next regular examination or even earlier. While an order is in place, Franks said, a representative of the State Bank Department attends every meeting of the board of directors — “not to give advice, but to answer questions.”

Dennis, who has consulted with banks in many states, said an OCC order can feel interminable.

“The OCC — and I think statistics would bear this out — it would take you twice as long to get out as it would from the Fed or the FDIC,” Dennis said. “The OCC’s favorite word was ‘seasoning.’

“What does that tell you as a bank? ‘You don’t trust me.’ So you had national banks across the country that found themselves under an order, and they stayed there forever.”

One of those was Oldner’s bank, which slogged through almost five years under an OCC regulatory order. Ozark Heritage was finally released from that OCC order last April — and promptly applied for a state charter and a new name.

The renamed Stone Bank is not typical, Groot said.

“Banks that come out from an order or some sort of enforcement action, our experience is not that they immediately go out and get a state charter,” he said. “Ozark Heritage was an exception.”

And Dennis, an unapologetic fan of Franks and the Arkansas State Bank Department, agreed.

“There’s also a thing called Stockholm syndrome,” he joked. “I’ve seen a few cases of it across the country. I’ve heard directors say, ‘The OCC saved us.’ And in some cases they probably did.”

OCC-regulated Institutions in Arkansas

Ranked by assets (in millions) as of Sept. 30, 2015

^*Only remaining thrift chartered in Arkansas
^**Application for conversion to Arkansas state charter pending

Source: Federal Deposit Insurance Corp.