A Pennsylvania bank under orders from the Office of the Comptroller of the Currency to restrict its insider dealings is trying to dump its national charter in favor of a state charter.
After 14 years as a national bank, the $2 billion-asset Commerce Bank/Harrisburg filed an application in early June to switch charters, according to a notice from the Pennsylvania Department of Banking.
Commerce executives did not return phone calls. In an e-mail Friday, its chairman and chief executive, Gary L. Nalbandian, would only say that the bank's board had "determined that transitioning from a national bank charter to a Pennsylvania state bank charter is simply appropriate at this time."
Industry observers said the Pennsylvania bank's likely motivation for switching charters is reducing its compliance costs.
They also said it could be trying to take advantage of a new compact between regulators in Pennsylvania, New York, and New Jersey that lets banks with branches in the three states be regulated in only their home state. Commerce, a unit of Pennsylvania Commerce Bancorp Inc., has no branches outside Pennsylvania, but Mr. Nalbandian has set a goal of increasing its assets by about $1 billion over the next four years.
Since February, Commerce has been operating under a consent order with the OCC that required it to give the agency quarterly reports about transactions between the company, its directors, officers, and other related parties.
Last summer a similar — but far stricter — order was issued against a company that had been closely associated with Pennsylvania Commerce, the $49 billion-asset Commerce Bancorp Inc. in Cherry Hill, N.J., and its then-chairman and CEO, Vernon W. Hill 2nd. The OCC ordered the New Jersey company, which owned a 10% stake in Pennsylvania Commerce at the time, to terminate various real estate and branch design contracts it had with Mr. Hill's relatives, including his wife, brother, and son. Mr. Hill was forced out and has been a vocal critic of the OCC since. (The New Jersey company has since been sold to TD Banknorth Inc. of Portland, Maine, Toronto-Dominion Bank's U.S. subsidiary.)
The OCC order would be terminated if Commerce were allowed to switch regulators. Dan Egan, a spokesman for the Pennsylvania Department of Banking, said Commerce's new regulators could impose a similar order. In general with applicants for charter conversions, the state regulator decides "on a case-by-case basis" whether to continue enforcement actions made by previous regulators, he said.
The agency should make a preliminary evaluation on the bank's application within the next few weeks, Mr. Egan said.
Gil Schwartz, a partner at Schwartz & Ballen LLP in Washington, said that after weighing a number of pros and cons, Commerce likely decided that it and the OCC were no longer "compatible."
State-chartered banks generally pay lower examination fees, and "a lot of institutions that switch say it's just not worth spending the money being an OCC bank," Mr. Schwartz said. Such banks also believe that "they may not be getting that many benefits from preemption" of state laws, and that "the OCC isn't being user-friendly, so they think they will get a better deal from the state and the" Federal Deposit Insurance Corp.
Of course, that can go both ways — many state-chartered banks switch to a national charter, Mr. Schwartz said.
Bert Ely, a banking consultant in Alexandria, Va., said "a lot of" the decision "has to do with the regulator that the bank personally has to deal with. If they think that person is a jerk, then they're more likely to switch."
Commerce Bank/Harrisburg had a state charter when it was founded in 1985 but converted to a federal one in 1994.
Commerce could be following the advice of Mr. Hill, who has publicly expressed his view that federally chartered banks operating in Pennsylvania, New York, and New Jersey should switch to state charters to avoid the OCC's "aggressive regulatory approach."
Under the Tri-State Compact, a bank that is chartered in one state but has branches in the other two will be supervised only by its home-state regulator. The compact is expected to be expanded to other states this year.
Because of this compact, Mr. Hill wrote, banks in those states no longer need the "chief benefit" of the OCC charter: the ability of a multistate bank to operate under a uniform set of rules.
"For years, banks that operate in multiple states had little choice but to operate under federal charter, and were stuck with regulation by the OCC no matter how matter how hard-nosed the agency became," Mr. Hill wrote. "No longer. Now they have some options. I wouldn't be surprised if a lot of institutions make the switch."
Mr. Schwartz disagreed that the compact would lead to a "rush" of banks switching charters. It may spur some to convert to state charters — particularly if their relationship with the OCC is strained — but it would likely be just one factor they would consider in making such a move, he said.
Kevin Mukri, an OCC spokesman, said the agency could not comment specifically on Commerce's pending application. "National banks frequently change to state charters, just as state banks change to national charters," he said. "They do it for all kinds of reasons. Ultimately, their decision" rests on "which charter best fits their business plan."