Illinois Suddenly a Hotbed for Crypto Bank M&A
Plus, a bit more info on TIAA's planned bank sale, and Webster Financial discloses a potential material weakness
Big News in Nauvoo
Nauvoo, Illinois is town of 950 people near the Illinois-Iowa border. It is home to The State Bank of Nauvoo, a $37 million asset nonmember bank with one other location in an unincorporated community of 114 people called Niota around 10 miles northeast of Nauvoo.
According to its call report, The State Bank of Nauvoo, pictured here via Google Street View, does not maintain a website.1
In 2022, the bank had net income of sixty thousand dollars.
There is also a company called Metallicus. It does have a website. That website asks you to:
Imagine a future where traditional finance melds seamlessly with the world of blockchain, cryptocurrencies, and DeFi. A world where the technology is designed for everyone, is extraordinarily easy to use, environmentally-friendly and fundamentally secure and compliant. The world’s most customer centric digital asset banking network for retail and corporate clients.
Last week the founders of Metallicus, Marshall Hayner and Irina Berkon, announced that they were creating a separate holding company called FBBT Holdings. The new holding company intends to “provide regulated and compliant banking services to emerging fintechs and their investors, allowing them to focus on growth and development.”
To do so:
FBBT Holdings' plans to acquire the 100-year-old State Bank of Nauvoo, subject to regulatory and shareholder approvals. The bank will continue to serve its community and provide existing and new clients with continued access to traditional banking services, while infusing the bank with new financial and human capital, enhanced compliance practices, broader revenue generating capabilities, and expertise in technology.
“We are thrilled to join forces with FBBT Holdings and look forward to offering new services to our existing customers, while also serving the greater Nauvoo community,” said Ted Reinhardt, President of State Bank of Nauvoo.
Hayner and Berkon intend to “continue their roles at Metallicus, while appointing and retaining experienced leadership to run the bank.”
There are no public details on who that leadership will be yet, but the holding company’s planned board of directors includes several names with which readers may be familiar:
To advise the holding company throughout its operations, the planned Board of Directors for FBBT Holdings is comprised of seasoned professionals including Lee Woolley (Former BNY Mellon), Donald Berk (Former Northern Trust), Lauren Hargraves (Former Federal Reserve Bank of New York), Marc Joseph (Former BNY Mellon), Sergio Rodriguera Jr. (Former Federal Reserve Bank of Boston), Bryan Hubbard (Former Deputy Comptroller of the OCC), and Mark Carawan (Former Citigroup).
Todd Baker is skeptical and I admit to a bit of skepticism as well, but mostly I am just curious to see how this goes.
A few other points of interest:
Past Consent Orders
In December 2015 the State Bank of Nauvoo was subject to a consent order imposed by the FDIC and the IDFPR. The 2015 consent order was terminated in February 2018, but two years later the bank found itself subject to another consent order imposed by the same regulators.
Among other noteworthy provisions of this April 2020 consent order, the bank was required to come up with a profit plan:
Within ninety (90) days from the effective date of this ORDER, the Bank shall develop, adopt, implement and adhere to a written profit plan and a realistic, comprehensive budget for all categories of income and expense for calendar years 2020 and 2021. The plans required by this paragraph shall contain formal goals and strategies, consistent with sound banking practices, to reduce discretionary expenses and to improve the Bank’s overall earnings, and shall contain a description of the operating assumptions that form the basis for major projected income and expense components.
A separate article of the 2020 consent order required the bank to adopt a written strategic plan including “[r]ealistic and reasonable assessments, given the nature of the Bank’s operations and the condition of the Bank, for any growth or expansion.”
This most recent consent order was terminated in May 2021.
How do Illinois Regulators Feel About All This?
There are now two tiny Illinois nonmember banks that are subject to pending acquisitions by crypto or at least crypto-adjacent companies. (The other deal involves LevelField Financial and Burling Bank, discussed previously here.)
It is not clear to me whether this has contributed to making Illinois banks into theoretically attractive targets for acquirers, but Illinois has made a few friendly noises toward crypto over the past few years.
For instance, in 2020 the IDFPR hosted a “FinTech Roundtable on Digital Currency Institutions.” According to the meeting notice, “The Division of Banking and several experts in the field will discuss the Wyoming SPDI legislation and how it would apply if instituted in Illinois. Custodial possession of digital currencies is a new idea and as digital currencies and FinTech continues to grow, the Department is committed to bringing innovative and practical ideas to Illinois.” Of the five panelists invited to participate in the discussion, one was the President and CEO of Burling Bank.
Also, just last month, the IDFPR announced what it called landmark legislation that, in addition to establishing various consumer protections rules relating to digital assets, also would authorize the creation of special purpose trust companies to safeguard customers’ digital assets.
On the other hand, the IDFPR in October 2022 issued a letter to Illinois state-chartered banks about crypto-asset activities. The letter states that “[t]he views of IDFPR’s Division of Banking are in accordance with those of the Federal Reserve and FDIC regarding the potential risk and opportunity of crypto-assets.”
Of course, even if Illinois were more favorable to these acquisitions than the federal regulators, at the end of the day that might not matter. Regardless of how Illinois feels about all this, some sort of federal bank regulatory approval, and perhaps multiple federal bank regulatory approvals, will be required for each transaction.
FBBT Holdings says it hopes to close by the end of 2023.
(A Little Bit) More on TIAA’s Bank Sale
A few months ago we discussed TIAA’s plans to sell nearly all its existing banking operations to various investment funds. In that post I expressed friendly curiosity as to how the investment had been structured to both (1) avoid TIAA being deemed to have divested control of the bank and (2) avoid any new investor itself being deemed to control the bank.
I recently received through a FOIA request a copy of the public portion of the application filed with the Federal Reserve Board in relation to this transaction. To avoid overpromising and underdelivering, I have to be up front that from a bank regulatory perspective the public application was not all that interesting.2 The real substance of the control analysis, including any discussion of what percentages the non-TIAA investors will own, is confined to non-public exhibits.
Even so, the application does provide a few new details.
Individual Investors
In TIAA’s deal announcement press release, it stated that “[t]he new investors that will each own non-controlling interests in the bank after the transaction closes are funds managed by Stone Point Capital, Warburg Pincus, Reverence Capital Partners, Sixth Street and Bayview Asset Management.”
This is still the case but, adding a detail that was not clear to me from the press release, the application says that the owners of the new bank will also include “certain individuals.” These individuals are not identified by name in the public portion of the application.
TIAA Ownership Percentage
As disclosed originally in the press release, TIAA intends to retain a non-controlling stake in the bank that is currently called TIAA, FSB. Back in November, I mentioned that if TIAA wanted immediately to be viewed for bank regulatory purposes as not controlling the bank, TIAA would need to get down to at least below 15% of any class of voting securities, and maybe even lower than that depending on its intended level of business relationships with the bank.
The application notes that TIAA plans to “recapitalize all of the issued and outstanding shares of FSB Holdings common stock into shares of FSB Holdings Class A Common Stock and shares of FSB Holdings Class B Nonvoting Common Stock and sell 90.4% of such shares”.
As a result, following the transaction, TIAA will “retain less than 10% of the then-outstanding shares of FSB Holdings Class A Common Stock (which is voting common stock) and the then-outstanding shares of FSB Holdings Class B Nonvoting Common Stock.”
From this you can see some initial hints as to how the non-control arguments likely look for both TIAA and for the investors. You can also maybe get a sense for how significant TIAA expects its business relationships with the bank to be, but as noted above concrete details with respect to non-control are in a confidential exhibit.
Why Sell?
In the November press release, TIAA described its bank sale as being in keeping with its decision to “refocus on retirement.” While not inconsistent with that explanation, the application provides a bit more gloss:
Between 2018 and 2021, TIAA, FSB made the strategic decision to: (i) exit the residential mortgage lending business as the competitive market landscape shifted towards nonbank lenders; and (ii) begin to pivot towards growing and expanding its commercial business activities once market conditions improved and risk-adjusted returns normalized. However, certain regulatory restrictions specific to Bank's federal thrift charter place limitations on its ability to prudently grow its existing commercial banking business activities and expand into other commercial asset classes, such as the qualified thrift lender test and the lending limit for commercial loans. Bank believes that it offers a competitive and diverse set of commercial lending products supported by sound commercial credit underwriting practices and a strong credit culture. Converting from a federal thrift charter to a national bank charter will allow Bank to better take advantage of these competitive strengths.
In my previous post on this I wondered whether the forthcoming (someday) rule on a building block approach to a capital requirement for insurance SLHCs may also have factored into TIAA’s decision. I still think there might be something to that, but nothing in the public version of the application supports (or undermines) my speculation.
New Management
Finally, the application includes details about the planned senior management of the newly converted bank that, based on light Google searching, I am not sure have yet been widely disclosed.
Upon consummation of the Proposed Transaction, Greg Seibly will serve as the new Chief Executive Officer of FSB Holdings and Bank. Mr. Seibly most recently was the President of Union Bank and Head of Regional Banking. Mr. Seibly has more than 35 years of experience in the financial services industry and more than 15 years in senior leadership roles. As noted above, Steve Fischer, the current President and Chief Executive Officer of Bank, will remain an integral part of executive management in his new role as Vice Chair of FSB Holdings and Bank. In addition, David DePillo will join as President of FSB Holdings and Bank, with a focus on managing loan, deposit, operations and technology strategies. Mr. DePillo has over 30 years of experience in banking and investment management, most recently as President of First Foundation Inc.
Webster Financial Delays 10-K Filing, Citing Potential Material Weakness
It was not the most discussed 10-K delay announcement on Wednesday, but the notification filed by Webster Financial Corporation was notable in its own right.
Webster, which is now a $70 billion asset company following its 2022 merger of equals with Sterling Bancorp, disclosed that its management has identified a potential material weakness:
Webster Financial Corporation (the “Company”) is unable to file its Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”) by the prescribed due date without unreasonable effort or expense because the Company’s management has identified a potential material weakness in the Company’s internal controls related to its information technology general controls in connection with logical access for certain information technology systems. […]
The Company does not currently anticipate that its statements of operations contained in the Form 10-K will differ materially from those reported for its fourth quarter and full year ended December 31, 2022 in the Company’s press release, dated January 26, 2023 (the “Earnings Release”).
Materials released yesterday in connection with the company’s investor day did not say anything more about this, and to this point I have not seen any news coverage of it, so I do not have a great sense of what the underlying issue is. As usual, I mention it not because it is scandalous and certainly not necessarily because it is material, but just because I thought it was interesting.
In that same spirit, I thought this comment from Webster’s Chief Risk Officer during the investor day yesterday was noteworthy too, perhaps more for what it (allegedly) says about other banks than what it says about Webster.3
Webster’s audit and credit risk review functions are very well developed and have longstanding positive reviews from regulators. And those were re-affirmed after the merger. In fact, we’re told that Webster is one of the very few mid-size banks with such a high rating across both of those functions.
Thanks for reading! Thoughts, challenges, criticisms are always welcome at bankregblog@gmail.com
This is Schedule RC-M, Item 8.
In an only partially grudging sense, I mean this as a compliment to the lawyers who drafted it.