OCC Approves First "Shelf Charter" Designed to Give Investors a Platform to Participate in Auctions of Troubled Institutions
November 24, 2008
On Friday, the Office of the Comptroller of the Currency (the “OCC”), the primary regulator of national banks, issued a potentially significant “preliminary approval” order that may be of interest to PE investors. The order marks the OCC’s first approval of a so-called “shelf charter,” designed to give investors a platform to acquire troubled institutions, including from the Federal Deposit Insurance Corporation (the “FDIC”) in its capacity as receiver. Ordinarily, a successful bidder to assume deposit liabilities of an institution in receivership must be or must control a federally chartered depository institution. This requirement has disadvantaged certain PE investors that do not currently control a bank or thrift because, unlike a banking organization, they generally must file an application to establish a charter with one of the federal banking agencies during or before what is often an abbreviated FDIC bidding process. The shelf charter is designed to enable a PE investor to be “pre-cleared” to assume the deposit liabilities and purchase the assets of a failed bank.
Friday’s order granted conditional preliminary approval for investors led by Hilltop Holdings to establish a new national bank for the purpose of assuming deposit liabilities and purchasing certain assets of one or more identified failed banks. The OCC made its determination after reviewing information provided by the organizers related to the capital available to fund the acquisition, the proposed ownership structure for the investment, the proposed directors and executive officers, and the investors’ preliminary business plan.
The preliminary approval is subject to significant conditions. Updated information must be provided to the OCC once a potential acquisition transaction is identified, and a final approval order will not be granted until certain pre-opening conditions are met, including adherence to a Operating Agreement with the OCC that will require the bank to submit a comprehensive business plan acceptable to the OCC detailing the proposed business and operations of the bank. In addition, the OCC must approve the bank’s initial board and management and any proposed changes to either in its first two years of operation. A copy of the approval order is attached below. It is also important to keep in mind that this preliminary approval does not obviate the need for filings with other regulators, such as the Federal Reserve, if the acquisition involves the establishment of a bank holding company.
The OCC’s formal approval of a shelf charter is a positive development for investors looking to position themselves to acquire troubled institutions. The OCC’s order provides important guidance for investors interested in pursuing a shelf charter, including the importance of having experienced bank management and directors and a general business plan lined up in advance. The conditions in the order also highlight some of the uncertainties associated with a shelf charter approach. Substantial additional OCC approvals and consents will be required before the bank is operational following an acquisition (and thereafter), separate FDIC approval of deposit insurance is required, and Federal Reserve approval may be required for the investors if any are companies that will become bank holding companies.
As a result, it remains unclear just how much a shelf charter will streamline the federal approval process for PE investors interested in participating in the FDIC’s bidding process for failed banks. However, this preliminary approval order signals that the OCC is interested in easing the bidding process for nonbank investors and may allow PE investors that may be interested in acquiring a bank to begin the charter approval process well before they have identified a target. Investors can also expect that other bank and thrift chartering authorities, such as the Office of Thrift Supervision (for federal thrifts) and some state banking departments would be prepared to approve comparable shelf charters or make other “pre-clearance” accommodations by initiating background checks for proposed directors and management, which can be time consuming, before a target is identified.
Please feel free to contact any of your regular contacts in the firm’s Financial Institutions Group with any questions or to discuss these developments further.
Friday’s order granted conditional preliminary approval for investors led by Hilltop Holdings to establish a new national bank for the purpose of assuming deposit liabilities and purchasing certain assets of one or more identified failed banks. The OCC made its determination after reviewing information provided by the organizers related to the capital available to fund the acquisition, the proposed ownership structure for the investment, the proposed directors and executive officers, and the investors’ preliminary business plan.
The preliminary approval is subject to significant conditions. Updated information must be provided to the OCC once a potential acquisition transaction is identified, and a final approval order will not be granted until certain pre-opening conditions are met, including adherence to a Operating Agreement with the OCC that will require the bank to submit a comprehensive business plan acceptable to the OCC detailing the proposed business and operations of the bank. In addition, the OCC must approve the bank’s initial board and management and any proposed changes to either in its first two years of operation. A copy of the approval order is attached below. It is also important to keep in mind that this preliminary approval does not obviate the need for filings with other regulators, such as the Federal Reserve, if the acquisition involves the establishment of a bank holding company.
The OCC’s formal approval of a shelf charter is a positive development for investors looking to position themselves to acquire troubled institutions. The OCC’s order provides important guidance for investors interested in pursuing a shelf charter, including the importance of having experienced bank management and directors and a general business plan lined up in advance. The conditions in the order also highlight some of the uncertainties associated with a shelf charter approach. Substantial additional OCC approvals and consents will be required before the bank is operational following an acquisition (and thereafter), separate FDIC approval of deposit insurance is required, and Federal Reserve approval may be required for the investors if any are companies that will become bank holding companies.
As a result, it remains unclear just how much a shelf charter will streamline the federal approval process for PE investors interested in participating in the FDIC’s bidding process for failed banks. However, this preliminary approval order signals that the OCC is interested in easing the bidding process for nonbank investors and may allow PE investors that may be interested in acquiring a bank to begin the charter approval process well before they have identified a target. Investors can also expect that other bank and thrift chartering authorities, such as the Office of Thrift Supervision (for federal thrifts) and some state banking departments would be prepared to approve comparable shelf charters or make other “pre-clearance” accommodations by initiating background checks for proposed directors and management, which can be time consuming, before a target is identified.
Please feel free to contact any of your regular contacts in the firm’s Financial Institutions Group with any questions or to discuss these developments further.