Thrift Charter-Flipping Just One More Strain for OTS

A growing number of institutions worried about the Office of Thrift Supervision's future may switch to a national bank charter, putting even greater pressure on the agency's budget.

Hudson City Savings Bank, a $60 billion-asset thrift in Paramus, N.J., last week became the latest to announce a charter change amid concern about its regulator. Hudson City said rapid growth and asset size also factored into the decision to switch regulators, as most banks of similar size are regulated by the Office of the Comptroller of the Currency.

But for the OTS, the loss of fees from Hudson City will leave a hole that is likely to grow larger as other thrifts convert, analysts said. Large companies in a good position with regulators and with sufficient capital are most apt to jump to the OCC "sooner rather than later," eating away at the OTS' asset base, said Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners LP.

For publicly traded companies like Hudson City, flipping charters now removes uncertainty connected to proposed financial regulatory overhaul legislation, said Jaret Seiberg, an analyst with the Washington research group division of Concept Capital. "You don't want investors to be questioning what the elimination of OTS means for you," Seiberg said. "You want to be able to say that our regulatory structure is not going to be impacted by this reform bill."

Fitzgibbon said, "I think the institutions that are in a position of strength are going to look hard at this decision soon, because they don't want somebody telling them where they have to go, or doing it when everyone is trying to get through the gate at one time."

The OTS denies that such conversions would hurt its base, which it said is about $900 billion of assets. "The OTS budget is cyclical. In some years, the agency runs a surplus; in other years, there is a deficit," OTS spokesman William Ruberry said in a statement, without providing specific numbers. "Over time, there is a balance."

Ruberry also dismissed suggestions that the potential for a regulatory overhaul is hurting the agency. "Naysayers have been predicting the demise of the OTS for 20 years and, despite those predictions, the OTS continues to fulfill its mission," he said.

Ronald E. Hermance Jr., Hudson City's chairman and chief executive, said in a press release last week that although a bill has yet to emerge in the Senate, a House-passed regulatory overhaul would eliminate the OTS, and President Obama's proposed budget would not fund the agency in fiscal year 2011. In light of that, "we believe that change in this industry is inevitable," he said.

"We believe it is important to stay ahead of any legal and regulatory changes implemented with regard to federal financial oversight," Hermance said in the release. "In order to accomplish this, we believe that it is necessary to take affirmative action by converting to a national bank charter now."

Yet the move to the OCC will not necessarily be easy for thrifts. OCC-regulated institutions could pay up to 15% more than they would if they were a state-regulated bank, Fitzgibbon said. The OCC also is perceived to be a tougher regulator than the OTS and state regulators from a safety and soundness standpoint.

There are advantages, however. Banks healthy enough to withstand the more stringent OCC exams benefit from the agency's seal of approval, said Brian Gardner, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc.

"It's not like you are trying to escape a tougher regulator; in fact you are going to a tougher regulator," he said. "It's a branding issue and getting to know the folks who are going to be running the place a little ahead of everybody else."

After the savings and loan crisis, a number of thrifts switched charters because they were concerned about the perception that potential investors might have, said Tom Vartanian, a partner at Fried, Frank, Harris, Shriver & Jacobson LLP.

Thrifts have typically converted in recent years because national banks have traded at higher multiples than thrifts, and a conversion is viewed in some cases as a "shareholder-friendly" action. Also, thrifts may want to provide offerings more in keeping with the portfolio of a commercial bank.

Thrifts are required to meet the qualified thrift lender test, which restricts commercial lending by requiring 65% of assets to be in mortgage and consumer-related assets. Rebel Cole, a professor of finance at DePaul University in Chicago, said the bank charter allows an institution more freedom in allocating its portfolio.

Diversification was the main reason First Niagara Bank, a $14.4 billion-asset thrift, cited in announcing its intention in December to become a federally chartered commercial bank. In a statement then, First Niagara, of Buffalo, said the new charter would allow it to acquire other commercial banks — something it was prevented from doing under the thrift charter — and give it more flexibility in executing transactions.

Still, the possibility of being required to change regulators has been the chief concern that the American Bankers Association has heard from thrift members lately, said Diane Casey-Landry, the ABA's chief operating officer.

Kip Weissman, a partner at Luse Gorman Pomerenk & Schick, said he's skeptical that a number of thrifts will follow Hudson City's lead. He thinks many are waiting to see what happens with regulatory overhaul legislation.

"There clearly is a large group of institutions that are actually thinking about it and are on hold pending the clarification of the legislation," he said. "That could change in six weeks when things become more clear, but now there are still a lot of issues with what your charter will look like."