A small but growing number of Wisconsin banks have converted from a national to a state charter over the past year, a move that bank attorneys say is largely motivated by banks looking for efficiencies.

Three banks in the state have switched to a state charter in the past year, with another two pending – after only two in the previous 10 years.

“For the last decade, their focus was elsewhere – they’ve had a lot of new laws, rules, regulations to focus on. But now, as they get healthier and are looking strategically for ways to make more money or save more money or streamline things, the timing for this is perfect for a lot of national banks,” said John Reichert, a shareholder at Reinhart Boerner Van Duren s.c.

“I’ve been around 35 years and I’ll just say, 35 years ago, there was more prestige in saying you were a national bank. It was seen as being a tougher regulator, and they were more attuned to changes that had occurred, so more apt to be kind of on the forefront – all of that has since changed,” added Jim Sheriff, also a shareholder at Reinhart Boerner Van Duren s.c.

One key benefit of the national charter was pre-emption of state laws for banks operating in multiple states. But the Dodd-Frank Act has diluted pre-emption, and many community banks don’t have an interstate presence, the attorneys said.

At the same time, “the state is picking up and improving the state laws to make them more similar to federal law for national banks. So, by converting over to a state bank, they’ll be able to retain some of those same benefits because state law is changing in a more favorable way,” said John Knight, Boardman & Clark Law Firm and WBA general counsel.

The costs and staff resources involved in converting to a state charter – and the bank name change it requires – are not insignificant. But for the Wisconsin banks that have changed charters this past year, the benefits of working with the state Department of Financial Institutions (DFI) rather than the Office of the Comptroller of the Currency (OCC) – and the reduction in exam fees alone – were enough to make the effort worthwhile. (Click here to read the story.)

“That’s money that they can re-invest in staff, re-invest in their community or shareholders. The margins are thin and when you can find something like this to save, basically it’s found money,” Reichert said.

“DFI’s assessment and exam fee structure is simply less costly than that of the OCC, which makes converting to a state charter a significant savings for banks,” said DFI Secretary Jay Risch. “Accessibility is another way in which DFI provides value. The right person in the Division of Banking is always easily accessible via phone or in person. Also, our examiners are Wisconsinites who understand things like ag cycles and seasonal tourism-based economies in ways an examiner from somewhere else in the country might not.”

Factors to Consider

Perhaps the biggest consideration for any bank considering a charter conversion is a name change, in that the words “national” or “national association” can no longer be part of the name.

“You’re going to come up with a new name and when you go through that process, number one, you’re going to retain someone to do a search for you, certainly within the state and maybe even within the state areas around the state to make sure no one else has that name or one close to it,” Knight said. “Then you’re going to file your new articles of incorporation with the new name, you’re going to communicate with your customers and to the public. So that process does take time.”

“There is a cost in new signs, letterhead, business cards, website and everything with branding. So that’s a piece that the bankers have to deal with. But most have actually seized upon that as an opportunity to have a touchpoint with their customers and their community and roll out a new identity,” Reichert said.

Another consideration is the fact that a state-chartered bank has, in effect, two regulators – both the state and either the Federal Reserve Bank or the Federal Deposit Insurance Corp. (FDIC).

“Just based on the feedback we have received from the banks who have made the switch, any potential ‘negatives’ appear to be outweighed by the positives,” Secretary Risch said.

The Conversion Process

Executive leadership teams and bank boards consider these factors and others in a process that typically begins with a presentation to the bank’s board of directors.

“It’s a big commitment,” Knight said. “The business discussion needs to come first. Why are we doing this? How is it going to be helpful to us, financially and otherwise? And then we’ve got the downside: we’ve got to change our name; everybody knows us by the prior name. Talk it all through. Determine whether it really is the right decision for you.”

Once a decision to convert has been made, the bank notifies regulators at the OCC and DFI before filing an application with the state.

The next step is typically an exam by DFI. “One, they make sure that they agree with the OCC that you’re healthy. Two, it allows them to set their baseline going forward because they’re going to be your new supervisory regulator,” Reichert said.

The Fed or the FDIC will conduct its own examination before the application is approved. “From a legal standpoint, it’s very uneventful. They’ll issue a new charter and then the bank would surrender or return all of its national bank paperwork to the OCC,” Reichert said.

The bank must also consider whether the name change will affect contracts with vendors and other legal documents. “The internal part gets fairly time-consuming. It’s pretty tedious, and you have to really get into the details of these things to make sure that it all gets done correctly and you handle all of your relationships,” Knight said.

The extent to which a law firm is involved throughout the charter conversion process varies, the attorneys said. It may be limited to filing legal documents, or it could involve assistance with details like the name change, depending upon the bank’s internal resources.

The state regulatory agency is a resource throughout the process as well. “DFI has a document where they’ve actually laid out all the steps they expect you to take when converting from a national bank charter to a state bank charter. Any banker involved in the process will want to make sure that the bank gets its hands on that document,” Knight said.

“DFI’s been very responsive to this new trend because they’re interested in a thriving community bank market in Wisconsin,” Reichert said.

Mahan is a freelance writer for the Wisconsin Bankers Association.