On November 26, 2008, the Federal Deposit Insurance Corporation (the “FDIC”) issued a press release announcing the expansion of eligible bidders for assets of troubled institutions. The FDIC, in conjunction with other federal banking agencies, implemented a series of actions to allow for interested non-bank bidders currently without a bank charter to obtain a shelf charter, subject to satisfaction of modified bidder qualification requirements, and to participate in the process of purchasing assets and assuming liabilities of failed depository institutions. In anticipation of the FDIC press release, the Office of the Comptroller of the Currency (the “OCC”), issued a letter on November 17, 2008 (the “Ford Group Letter”), announcing the approval of a “shelf charter” for the Ford Group Bank, National Association (the “Ford Group Bank”), establishing a precedent for non-bank bidders to achieve eligibility to bid on purchasing assets and assuming deposit liabilities of failing depository institutions.
The FDIC’s focus to date centers on minimizing the impact of the disposition of assets acquired in receiverships and the subsequent drain on FDIC cash reserves. Under the receivership model employed during the last banking crisis, the FDIC retained acquired assets and transferred deposit liabilities. Currently, the FDIC cannot effect such a plan of disposal of liabilities due to: (i) inordinate pressure on cash reserves of the FDIC; and (ii) the limited number of bidders. The expansion of eligible bidders for purchasing assets and assuming liabilities of troubled institutions allows the FDIC to minimize the drain on cash reserves while increasing the number of eligible potential bidders.
Application to Establish a New National Bank (Ford Group Bank, National Association)
Via the Ford Group Letter, the OCC granted conditional preliminary approval to the application to establish a new national bank, titled Ford Group Bank, National Association (the “Provisional Bank”), organized primarily for the purpose of assuming the liabilities and purchasing assets from the FDIC. Such preliminary, conditional approval imposes certain obligations on the Provisional Bank in order to receive final approval, including, but not limited to: (i) application to the Federal Reserve Board for Federal Reserve Membership; (ii) application to the Federal Reserve Board to become a bank holding company; and (iii) obtaining Deposit Insurance from the FDIC.
The OCC determined that the Ford Group satisfied preliminary requirements for a “shelf” charter including, but not limited to: (i) availability of sufficient capital to be injected into the Provisional Bank to ensure the Provisional Bank is well-capitalized upon opening (approximately $1.38 billion in this instance); and (ii) a management team to which the OCC posed no objection, subject to completion of background checks. However, with regard to the OCC’s requirement of a compliant business plan, the OCC acknowledged that the specifics (size, scope, activities) of the business plan of the Provisional Bank cannot be determined until the initial acquisition is identified. The Provisional Bank’s conditional preliminary approval was thus granted without a detailed comprehensive business plan, subject to the requirement of prior OCC review of a comprehensive operating plan once the Provisional Bank identifies a potential acquisition. The OCC thus retains a veto over the Provisional Bank’s completion of an acquisition.
The OCC’s standard guidance for organizing a bank can be found through the licensing manual, accessible through the following website: http://www.occ.treas.gov/corpbook/group4/public/pdf/charters.pdf. The Ford Group Letter prescribes procedures that deviate from typical licensing procedures insofar as the Ford Group Letter provides for a provisional bank charter without a complete business plan, specific capital requirements, and background checks of management personnel. Instead of a complete business plan submitted prior to OCC approval, the Ford Group Letter substitutes the submission of an “Acquisition Business Plan,” required at the time the Provisional Bank identifies an initial acquisition. Appendix A to the Ford Group Letter sets forth the requirements of the Acquisition Business Plan which the Provisional Bank must submit upon identifying an acquisition. However, the business plan requirements pose a chicken-or-egg dilemma, in that many of the requirements can be satisfied only after conducting due diligence, yet the Ford Group Letter does not expressly contemplate a due diligence period prior to submission of the Acquisition Business Plan. Presumably, so long as interested bidders submit the Acquisition Business Plan in a reasonable period of time, prior to the bid deadline to afford the OCC adequate time for its review, the Ford Group Letter could accommodate a certain prior period of diligence. In other words, the analysis of a potential acquisition is not necessary for purposes of the Ford Group Letter condition equivalent to identifying an acquisition.
As set forth in Appendix A, in addition to basic information, the Acquisition Business Plan must include:
(1) the amount and composition of capital the Investors plan to have in the Provisional Bank if it succeeds in acquiring the institution;
(2) the Provisional Bank’s assessment of management of the acquired institution, in particular identifying whether any senior executive officers will be retained, and whether additional persons will be needed to fill remaining senior officer positions;
(3) the Provisional Bank’s plans to stabilize the acquired institution, in particular mitigating deposit run-off, establishing an adequate allowance for loan losses, and controlling expenses;
(4) the Provisional Bank’s assessment of (i) the acquired institution’s control structures, risk management function, and policies and procedures, technology infrastructure, and vendor relationships; (ii) the degree to which they would need to be developed and improved; and (iii) what the Provisional Bank would put in place to achieve that improvement;
(5) the Provisional Bank’s assessment of the quality of assets and business lines that would be acquired in the acquisition; and
(6) the Provisional Bank’s plans for future operations, including which business lines of the acquired institution it will continue and which it will not, and what the projected size of each business line would be.
The above-required information raises additional questions not addressed in the Ford Group Letter or the FDIC press release. For example, with respect to the amount of required capital, although the Provisional Bank must demonstrate its ability to infuse the necessary amount of capital, there is no guidance as to the actual amount that will be required by the OCC in excess of the standard requirements. It is not unreasonable to expect the OCC to require additional capital on a case by case basis where troubled assets are acquired. In addition, the sensitive nature of much of the required information regarding management of the target institution, assessment of the target institution’s internal control structures, technology infrastructure, and personnel information, will make it difficult for interested bidders to obtain all the information necessary to make a reliable assessment. The reliability of such assessment will depend on the amount of access granted to investigate the target institution prior to identifying a target institution as an “initial acquisition” and triggering the requirement of submission of an Acquisition Business Plan. The OCC has essentially created a “pre-bidding” process regarding failing institutions, while intimating that interested bidding banks cannot wait until the last minute to submit a bid to the FDIC, and expect to satisfy the requirements of the Acquisition Business Plan. While the OCC is attempting to accommodate time sensitive bid package requirements, the question remains as to the ability of interested bidders to satisfy the procedures set forth in the Ford Group Letter prior to submission of a bid package and meet the FDIC bid deadlines. Clearly the FDIC will need to take the above into account when deciding bid deadlines.
FDIC Process For Participation (Interested Parties Without a Bank Charter)
Responsibilities of the FDIC include ensuring failing institutions are resolved in a manner that results in: (i) the least cost to the FDIC; and (ii) minimal disruption to the financial system. To achieve such desired results, the FDIC markets deposits and assets of failing institutions to known, qualified and interested potential bidders. Prior to the modifications set forth in the November 26, 2008 press release, interested investors not affiliated with FDIC insured depository institutions were, as a practical matter, unable to bid to purchase the assets and assume the liabilities of failed institutions. That is, the prevalent bid structure evident in the most recent transactions require the acquiring party to assume liabilities of the failed institution, which necessarily requires the FDIC to convey an equivalent amount of assets in the form of loans and investments in lieu of cash. In an effort to accommodate investors unable to bid on acquisitions structured as purchase and assumption transactions because of their non-affiliation with a bank, the FDIC announced its willingness to consider abbreviated information submissions and applications from interested bidders for deposit insurance for a provisional bank charter, thereby expanding the universe of bidders.
Under the November 26, 2008 press release, the FDIC requires bidders seeking deposit insurance to have conditional approval for a provisional bank charter and meet the bid criteria established by the FDIC. Additionally, the FDIC has stated that basic areas that it considers in reviewing applications for deposit insurance include a business plan compliant with the Community Reinvestment Act http://www.ffiec.gov/cra/; readily available capital; and an identified management team, subject to financial and biographical review. Federal and State agencies are coordinating specific information needs, timing requirements and charter issuances to assist the FDIC in its desire to expand the eligible bidders for troubled institutions.
The OCC and the FDIC, due to time constraints, both acknowledge that certain requirements for final approvals may be combined and further modified. The underlying message in both the Ford Group Letter and FDIC press release is that to be competitive in bidding under a purchase and assumption bid structure, one must operate a bank. In order to facilitate a platform for bidders who are not affiliated with a bank, the Ford Group Letter sets forth the procedure for obtaining a “shelf” charter. As a result, the actions of the OCC and FDIC provide previously excluded bidders such as high net-worth individuals, real estate investors, financial companies and private equity funds, a practical way to participate in the bidding process by obtaining a provisional bank charter. Notwithstanding the foregoing, the requirements to own a bank remain stringent, the granting of “shelf charters” is not automatic, and there is no guaranty of final charter approval. Furthermore, the activity and affiliate restrictions of the Bank Holding Company Act may make using a bank in a bid structure undesirable to certain bidders.