Many investment management, brokerage, insurance and other firms have recognized the benefits that a banking charter to add to their organization. The charter’s lending, deposit, and trust powers can complement, with financially accretive products, the other activities of the firm. A banking charter also enables an institution to operate more efficiently (e.g., with less licensing for lending than with a nonbank charter), thereby further enhancing its ability to obtain more of the “customer’s wallet.” For example, among other products, a banking institution can offer personal trust services incidental to investment advisory accounts, collective investment trusts for 401(k) plans, deposit products tied to nonbank brokerage, cash management or other cash intensive accounts, and consumer loans. Generally, these arrangements can be structured to leverage heavily off of the existing personnel and facilities of the parent institution, thereby allowing the establishment and operation of a full scale enterprise over a large geographic area with comparatively little incremental cost.
However, for many types of banking charters, this benefit comes with a cost. Even after a revolutionary federal banking law in 1999, acquiring a bank generally imposes activities limitations, capital requirements and Federal Reserve oversight on the holding company. Several institutions, such as Schwab and Countrywide, have determined that the benefits of a bank charter outweigh these burdens. Other institutions, such as Merrill Lynch and Volvo, have instead decided to use a specialty state charter known as an industrial loan company (an “ILC”) to provide their banking services, although these charters have some inherent limitations on the type and geographic reach of products they may offer.
This article focuses on a particular type of institution that has not received the same attention as those described above but which can in fact have the benefit of a strong, national banking platform without the burdens on the holding company commonly associated with such an institution. More specifically, this article focuses on the benefits that entities with a single thrift that were in existence prior to a specific date (discussed below), more commonly referred to as “grandfathered unitary savings and loan holding companies,” can realize from their thrift charter. In summary, because of the unique combination of a very powerful federal charter with very limited impact on the thrift’s affiliates, grandfathered unitary savings and loan holding companies provide opportunities more diverse than anywhere else in the US banking system.
A grandfathered unitary savings and loan holding company is one that owned a single federal savings association, or for which an application to acquire a single federal savings association was pending, on or before May 4, 1999. The Office of Thrift Supervision (the “OTS”), which regulates thrifts, chartered approximately 115 new thrifts between January 1997 and June 2000 alone. Many of the companies that acquired those new thrifts may qualify for grandfathered status. Many of the thrifts at issue were chartered as limited purpose entities, restricting their permissible activities to trust, for example. However, of considerable importance, an institution can expand the offerings of such a thrift to include deposit-taking, lending and other services. This expansion from a limited to a full service charter is more commonly referred to as a charter “conversion,” and the OTS does not consider a conversion to destroy a thrift’s grandfathered status. Indeed, we currently are working on such a conversion, and the OTS is very receptive to expanding out the powers of an institution. A converted thrift can provide virtually the same products and services as any other bank, with substantially less burden on the remainder of its organization than a commercial banking institution. In other words, a grandfathered unitary savings and loan holding company can engage in virtually any activities it desires, with minimal burdens upon its affairs, and have all the benefits that arise from the affiliation with a full service banking institution.
One of the particular benefits a full service federal thrift provides is its broad preemptive authority. The OTS has been very aggressive in preempting state laws, among other things, requiring specific loan documentation, capping loan interest rates, or licensing of personnel selling loan products for the thrift. Thus, a firm with a federal thrift subsidiary could provide deposit, lending and trust products on a nationwide basis to customers on a very cost-efficient, uniform basis. Indeed, we have assisted many thrifts to leverage very heavily off of their affiliates, enabling (through dual employment arrangements and otherwise) affiliates to offer lending and deposit products in their home markets without the licensing that would be required if a thrift were not involved. In comparison, while state-chartered banks, including ILCs, may avoid certain state licensing requirements applicable to nonbank lenders, they generally are subject to a much greater degree to the laws of each state in which they make loans, requiring them to engage in much more of a complex analysis to operate on an interstate basis. Moreover, unlike state chartered banks, federal thrifts can easily branch on a nationwide basis.
To convert a limited purpose thrift, an institution must file a business plan amendment with the OTS. Because the change to the charter is so significant, we have found it helpful to prepare a business plan as if the institution were filing for a new charter. While somewhat more burdensome to prepare initially, we have found that such a filing expedites the process once the submission to the OTS is made. Obviously, any related applications should be filed concurrently, including applications with respect to branching, transactional web sites, establishment of subsidiaries, and trust operations, as appropriate.
In order to maximize the benefits and synergies that a thrift charter is capable of providing, several related issues should be considered prior to the filing. Significant issues generally include tax ramifications, the Community Reinvestment Act (“CRA”), affiliate transaction restrictions and cross-marketing issues, board of director and senior management composition, and director interlocks. Of the foregoing, CRA generally causes the most concern, and requires the greatest evaluation. A converting thrift will need to define its core market(s) to the OTS, and how it will meet the needs of the low- and moderate-income individuals in those markets. A thrift may be evaluated by the OTS for CRA compliance under the standard lending, investment and service tests applicable to most institutions or pursuant to a “strategic plan,” which is basically a contract between the thrift and the OTS as to how it will meet its CRA obligations. As with most issues, pre-filing consultation with the OTS is almost mandatory to resolve these concerns in a satisfactory manner.
Finally, while the focus of the conversion process is on the OTS, the securities law regulators also must be considered, because a thrift (currently) is not treated in exactly the same favorable manner as a bank under federal and certain state securities laws. For example, a limited purpose thrift that is registered as an investment adviser in order to conduct trust operations may also need to consider the impact of a conversion on its Form ADV and other requirements under the Investment Advisers Act of 1940.
Conclusion
In sum, grandfathered unitary savings and loan holding companies enjoy a substantial competitive advantage over other financial services providers because they may engage in a virtually unlimited range of activities and have the benefit of a very powerful bank charter. By efficiently leveraging off of affiliates, the thrift charter can be converted from a limited to full service institution, and provide a wide range of products and services over a broad geographic area, with comparatively little incremental cost. With proper planning and counsel, these institutions can truly provide accretive, profitable complementary products in a manner virtually unmatched in the US financial system.