Radius Bank is reversing course on a prior decision to switch charters.

The bank has withdrawn its application to convert from a federal to a state-chartered trust company, according to the Massachusetts Division of Banks. Radius Bank currently operates as a federal savings association, meaning it is regulated by the U.S. Office of the Comptroller of the Currency. If it had switched to a state-chartered bank, the DOB would have become its regulator.

The bank first filed for a state charter in November, a seemingly peculiar move because Radius Bank is an almost entirely digital bank that seeks to build a national presence. But according to application documents that Banker & Tradesman previously obtained from the DOB, the move was largely driven by the fact that Radius was looking to escape the qualified thrift lender test, which it has now failed to pass since the last quarter of 2016.

The qualified thrift lender test is a legal – although somewhat outdated – requirement that separates federal savings, or thrift, institutions from national banks. In order to pass the test, financial institutions must maintain 65 percent of their portfolio’s assets in qualified investments, or residential mortgages, in at least nine months out of each one-year period. In addition, the bank is subject to a consumer loan lending limit of 35 percent of total assets and a lending limit of 20 percent of assets for commercial loans, at least 10 percent of which must be in small business loans.

Considering Radius Bank’s model over the past few years, it’s no surprise the bank failed to pass the test.

The bank was acquired in 2016 by four private equity funds and bank executives embarked on a national campaign to pursue consumer deposits with a virtual banking platform. Radius is now comprised of four main lines of business: Commercial lending in the Boston market and three national lending groups including high net worth marine lending, equipment finance and U.S. Small Business Administration loans.

Radius’ residential loan volume was just over $186 million out of its more than $880 million loan book as of June 30, according to the FDIC.

While it did make sense for Radius to abandon its current charter, it was still unclear why the bank chose to pursue a state charter instead of a national bank charter.

The bank declined to speak with Banker & Tradesman about this matter, but the U.S. Office of the Comptroller of the Currency recently found a way to make it easier for federal savings banks to escape the qualified lender test without switching charters because Radius Bank is not the first financial institution to run into the qualified lender test issue. In the modern era, most banks are focusing more of their efforts on commercial business and less on the residential mortgage side of things – the OCC has been losing federal thrifts under its jurisdiction due this growing trend.

Baked into the Dodd-Frank rollback bill is a provision that will allow federal savings banks with less than $20 billion in assets to operate as a covered savings association. These associations would have the same rights and privileges as national banks and therefore be able to avoid the qualified lender test.

The process of changing to a state charter would be much more expensive and laborious than if the bank were to become a covered savings association.