Texas-Based Frost Bank Switches Charters, Citing Dodd-Frank Act

WASHINGTON — Anticipating higher regulatory burdens from the Dodd-Frank Act, the $20.3 billion-asset Frost National Bank in San Antonio says it is trading its century-old national charter for the more local feel of Texas's state regulator.

The move continues a trend of local institutions with federal licenses opting for a state charter. While assessment fees tend to be higher for the OCC than state regulators, Dodd-Frank may present institutions — particularly midsized banks like Frost — with more reasons to switch.

In an interview, the bank's chief executive says it wanted a supervisor with stronger local ties as its compliance work increases under the reform law.

"That is a dump-truck bill that has significant unintended consequences that are not good for the system," said Richard "Dick" Evans, chairman and chief executive officer of Cullen/Frost Bankers, Inc. and Frost National Bank. "What it does is it complicates the regulatory process to the extent that I want to be closer to my regulator. I believe this move accomplishes that."

Evans did not fault the supervision of the Office of the Comptroller of the Currency, but he said the higher regulatory demands make it more important than ever that Frost's examiners know the bank's market.

"Our bank had a very good relationship all the way to the top of the OCC," he said. "What it really is is we'll have better communications and it will be closer to home and we'll be able to know each other better."

Frost, which has been a national bank since 1899, applied last week for the state charter with the Texas Department of Banking. The new license will also subject the bank to oversight from the Federal Reserve Board, one of two agencies along with the Federal Deposit Insurance Corp. that handle federal supervision for state-chartered depository institutions.

Evans said he expects the new charter to become effective July 1. Reflecting a branding effort that is already apparent to customers, the institution plans officially to be known just as Frost Bank.

Some observers say community banks that held federal charters have switched because, whereas OCC examiners may change after they get relocated to other locations, dealing with a state regulator means more constancy.

Texas state "examiners tend to stay on the job longer, so you could get used to an analyst or examiner who is on the job for 10 years. The examiners at the OCC tend to move around more. … That's just the nature of a national organization versus a state organization," said Daniel Bass, a managing director based in Texas for FBR Capital Markets.

Yet OCC officials argue that is not the case. In Texas, the state houses one of the OCC's four district offices, and the regulator has 207 midsize or community bank examiners currently assigned to the state.

"Ninety-five percent of the 2,000 banks we supervise are midsize or community banks supporting towns and regions throughout this country, and we dedicate more than 75 percent of our examiners and agency resources to performing this critical mission," Jennifer Kelly, the OCC's deputy comptroller for midsize/community bank supervision, said in an email. "Charter choice is something we understand and support and at the end of the day is a business decision by a bank based on its goals and business model."

Kelly said the agency's attention to small bank regulatory issues is even more amplified under Dodd-Frank, which eliminated the Office of Thrift Supervision and transferred oversight of the nation's federally-chartered thrifts to the OCC.

"In the past year the OCC took over supervision of more than 600 savings associations the vast majority of which are community banks, which has made the focus at the OCC even more community bank centric," she said. "We take that mission very seriously."

But other factors tied to Dodd-Frank could explain the temptation for banks in Frost's class to opt for state oversight.

With over $10 billion in assets, the bank will be supervised by the new Consumer Financial Protection Bureau as a result of the law. If Frost keeps the OCC as its primary regulator, that means oversight from three federal regulators. But switching to a state charter drops that number to two. (The Fed already oversees the bank's holding company.)

Frost's announcement came just months after a similarly-sized institution, the $20.5 billion-asset Commerce Bank in Kansas City, said it was opting for state oversight.

"As Dodd-Frank was passed, and the new bureau came in, … we really thought this was in the best interest of simplicity and in the long run our shareholders," Evans said. "One of the driving forces is just simplicity. We're a Texas bank. Our regulators will make decisions in Austin, where our capital is, and in Dallas, where the Federal Reserve bank for this district is. It brings you closer to home."

Bass said the departure of federally-chartered institutions may be independent of the job the OCC is doing.

"I don't think it's a knock on the OCC. I think it's more trying to build relationships with local-level examiners," he said. "They're closer to the situation. These are examiners based in Texas that know about the nuances of the real estate market and the banking market. It just gives them a better knowledge base when they're looking through the loan portfolio."

But others say that with a brighter regulatory spotlight on systemically important institutions after the financial crisis, the OCC is perceived to be focusing more on the largest institutions it supervises.

"They're being viewed as the regulator of B of A, Citi, JPMorgan and Wells Fargo, not the community banks," said Ken Thomas, an independent bank consultant and economist in Miami. "For that reason we're seeing more and more charter changes."