A recent shelf charter application filed with the Federal Deposit Insurance Corp. thinly veils the identity of a target for a possible failed-bank acquisition.
S&P Global Market Intelligence requested and received from the FDIC Aspira Bank's June 22 application seeking deposit insurance to establish a bank holding company and acquire all or parts of a bank referred to as "Bank A" in the document. While the application redacts the name of Bank A and some other information, several notable details were left unredacted and made the identity of the target easily identifiable.
The application lists information such as the bank's headquarters city, ZIP code, total assets, total deposits, and a breakdown of non-interest-bearing and brokered deposits. It also includes discussion about the bank's branch footprint and loan portfolio concentrations. While the street address is redacted, the top of it is still visible and able to be read. Taken altogether, only one bank fits the profile.
Bank advisers and lawyers told Market Intelligence the targeted application and lack of redactions are unusual and shocking, and put the institution at risk of a run that could raise the cost to the Deposit Insurance Fund if a government-assisted sale took place.
The FDIC marketing process is "very, very tightly controlled. So the fact that this wasn't is a real black eye," a senior investment banker told Market Intelligence. "It's just sloppy."
The FDIC did not provide a comment for this story.
If the bank's identity leaks to the public, it could cause panic among its customers and lead them to simultaneously withdraw funds, a scenario that would make the target less appealing to bidders and lead to a more costly resolution for the FDIC, industry experts told Market Intelligence. Sources said the FDIC usually begins marketing a bank weeks in advance, giving itself time to find the least costly resolution and the bank time to find a solution to avoid failure.
It is possible the bank is working on a capital raise or sale to avoid resolution, and might never fail, advisers said. But if the bank is rumored to fail, it would complicate a capital raise or live sale, raising the risk of a failure and possibly accelerating the FDIC's timing of a resolution, the senior investment banker said.
"The reason that bank failures are treated so confidentially is because there's a whole process and you want an orderly wind down of a bank in a way that protects depositors as opposed to a run on the bank where a bank fails suddenly and depositors may end up not being protected," said James Stevens, partner and co-leader of Troutman Pepper Locke's financial services industry group. "That's the real risk here, is that if this was to be picked up by the customer base that they could potentially create a run on the bank."
Redaction responsibility
Both regulators and applicants have a responsibility to protect confidential information and can pursue several avenues to do so, lawyers said.
When an applicant submits an application, it can request for certain information to be confidential. This is done through submitting confidential exhibits, which are excluded from the public portion of the application. An applicant should not file an application and rely solely on redactions to protect confidential and sensitive information, Stevens said.
Aspira should have asked for the information about the target "to be treated as confidential information at the application stage so that you didn't even have to get into redaction" in the event of a public information request, Stevens said.
Aspira did not respond to a request for comment before publication.
While the applicant can and should request confidential treatment for certain information, the receiving agencies also bear responsibility for protecting confidential supervisory information, a bank lawyer with over 30 years of experience told Market Intelligence.
The FDIC could have been more diligent in this process, lawyers said. When the agency first received the application that included identifying details about the target in the public portion and not in a confidential exhibit, it should have sent it back to the organizers to redo, Stevens said. The agency should have also reviewed the application more closely and properly redacted it before making it publicly available, he said.
This "represents a failure on the part of the applicant. But also, again, the regulators reviewed that before it went out," Stevens said.
Shelf charter history
The application itself is unusual too, both advisers and a person familiar with the application told Market Intelligence. Typically, nonbank groups targeting failed bank acquisitions set up a general purpose shelf charter so the bank holding company can wait to bid on a failed bank when they are being marketed, they said.
"You don't see these targeted applications. Typically, someone files a shelf charter that says 'I want to be available to buy anything over a period of time.' And when the regulators approve them, then they become a bank that could be contacted by the FDIC to be a potential bidder on that," Stevens said. "That is strange here because [of] the fact that they are filing one for a targeted specific bank."
Even though the group's application is tailored for Bank A, it could still bid on other potential failed bank acquisitions if its shelf charter is approved by the FDIC and they are eligible bidders, the person familiar with the application said. The group has expressed interest in other failed bank acquisitions, the person added.
Bidding process
The FDIC maintains a pool of interested failed bank bidders, so it has quick access to potential buyers if a failure seems likely. The pool consists of both banks and approved shelf charter holding companies, who provide information on general sizes and geographies that interest them. The agency will also reach out to banks outside the pool that it views as strategic buyers, lawyers said.
At first, the agency sends out broad information to members of the pool interested in that specific asset range and geography. Once it has a smaller list of interested buyers, those parties sign confidentiality agreements and then gain access to a data room to perform due diligence. This is when interested parties learned the identity of the troubled bank.
Currently, there is no way a nonbank could be in the potential pool of bidders to receive potential acquisitions unless it has an approved shelf charter, the bank lawyer with over 30 years' experience said.
But Aspira organizers were aware of Bank A's situation because of the organizer's first-hand experience with and knowledge of Bank A, the person familiar with the application said. The FDIC did not reach out to the organizers or facilitate their involvement, the person said.
Private equity players
The application from Aspira comes as the FDIC has been making moves to open up the failed bank bidding pool to more applicants, such as nonbanks and private equity. It is likely more nonbank bidders like Aspira will be involved in failed bank bidding processes because of recent changes, Stevens said, but as the agency increasingly evaluates those applications, it is important to avoid situations like this happening again.
"It's incumbent upon [nonbanks] to make sure they have appropriate legal and financial advisers that know how to operate, how to do this process and how to do it in a way that maintains the integrity of the bidding process," he said. It is also "incumbent upon the regulators to make sure that as they're interacting with these nontraditional or nonbank groups to make these acquisitions that they're being thoughtful about what's being submitted."
