PicoBlog

I realize this post is very ill timed, what with the highly anticipated reports on SVB and Signature Bank expected to be released later today. Nonetheless, I thought I would send it out now for those interested. For those not interested or at least not interested today, there is nothing time-sensitive in here, so feel free to return to this later. Look out for posts later today or tomorrow on the actual news of the day.

It has now been eclipsed by more exciting U.S. bank regulatory developments, but prior to the SVB and Signature Bank failures, a theme this blog had covered earlier this year was acquisitions of small U.S. banks by crypto-friendly companies seeking access to a bank charter.

The first such acquisition discussed on these pages was LevelField Financial’s announcement on February 1, 2023 that it had reached an agreement to acquire Burling Bank, a Chicago-based nonmember bank. According to the press release the acquisition, if and when completed, is intended to make the bank the “first full-service bank to offer fully compliant traditional banking and digital asset services.”

Yesterday, via a FOIA request made to the Illinois Department of Financial and Professional Regulation, I received a copy of the Section 3 application LevelField submitted to the Federal Reserve Board in relation to the proposed acquisition.

This blog looks at a few things from the Section 3 application I thought were interesting. Note that the application was filed in late January, so there is a possibility that some of the plans described in the application have now changed, either because of recent events or otherwise.

Post-acquisition, the bank would have four primary business lines, three of them related to “crypto-commodities”

LevelField describes the purpose of the acquisition as to better serve the clients and communities of Burling Bank (and beyond) by: “(a) enhancing the operations of the existing community banking business, (b) enhancing the operations of the existing virtual currency company business, (c) improving risk controls by introducing custody operations, and (d) improving the post-acquisition Bank's business prospects with commission revenue from customer execution services.”

The bank, which will be renamed LevelField Bank, would have four primary lines of business: community banking, crypto-commodity banking, trust services and customer execution services.

The community banking business will build upon the existing Burling Bank operations and includes loans and deposits made through its existing branch plus three new branches. The crypto-commodity banking business will include deposits and loan activities that are originated via mobile and/or online applications and target customers with interest in crypto-commodities. The trust services business will provide custody for crypto-commodities. The customer execution services business will enable customers to purchase or sell crypto-commodities.

The bank plans to exit its current business of lending to virtual currency companies

Burling Bank currently lends to certain virtual currency companies but post-closing the bank intends to cease this institutional-facing area of its lending business and instead pivot to lending to crypto-curious consumers.

LevelField Financial plans to continue all services, products and other activities performed by Burling Bank except for lending to virtual currency companies ("VCC"). All of Burling Bank's existing VCC borrowers are outside of its local community. LevelField plans to replace VCC lending with lending to consumers interested in the crypto-asset class.

The bank would open new branches in Houston, Austin and Miami

The application explains that “LevelField expects to open new branches in Houston, Austin and Miami within a year of closing the acquisition of Burling Bank.” Two of these branches (the public version of the application does not specify which) would be opened in the quarter following the acquisition, and the other would be opened in the quarter after that.

To fund the acquisition, LevelField plans a private stock sale in 2023

LevelField plans a private placement of common stock in 2023 in which the current shareholders of Burling Bancorp will be invited to participate at a discount, including by reinvesting some of the acquisition proceeds.

LevelField plans to execute a private placement of common stock in 2023 to fund the acquisition and growth capital. The current shareholders of Burling Bancorp, Inc. (Burling Bank's existing bank holding company) have the option to participate in the equity offering at a 20% discount to the price paid by other investors; current shareholders have the option to reinvest approximately half ($26 million) of the purchase price in this equity offering. LevelField will obtain a firm commitment, contingent only upon regulatory approval, for $25 million prior to final approval of this Application FR Y-3.

The official acquisition announcement did not give a purchase price, but MarketWatch reported at the time that the deal was valued at “about $50 million.” The statement above that $26 million equals “approximately half of the purchase price” is consistent with that.

LevelField says elsewhere in the materials submitted to Illinois that it expects “the percentage ownership of each of the current shareholders will be diluted by 30-40% as a result of the private placement.”

The bank’s business plan envisions a $19 million capital contribution

The business plan for the post-closing company is in a confidential exhibit, but the application does say that the bank’s pro forma financials for purposes of the business plan assume “a $19 million capital contribution.”

LevelField proposes to elect FHC status and carry out nonbanking activities through a broker-dealer and an investment advisor

Burling Bancorp is currently not a financial holding company, but LevelField has included with its application a declaration of intent to elect FHC status.

LevelField plans to maintain at least two nonbanking subsidiaries following closing: (1) LevelField Capital, Inc., a registered broker-dealer and (2) LevelField Wealth, Inc., a registered investment advisor. LevelField describes the intended activities of these subsidiaries as follows:

LevelField Capital will be a registered broker-dealer that currently does not engage in any business activities. LevelField Financial proposes that LevelField Capital will (i) provide investment banking advisory services related to mergers and acquisitions and (ii) act as agent for the private placement of securities. LevelField Capital's proposed merger and acquisition advisory services are authorized for bank holding companies under 12 C.F.R § 225.28(b)(6)(iii), and its proposed private placement agent services are authorized under 12 C.F.R § 225.28(b)(7)(iii).

LevelField Wealth will be a registered investment advisor that will provide wealth management services to customers, including traditional and digital asset management and philanthropic advisory services. LevelField Wealth's proposed investment advisory activities are authorized for bank holding companies under 12 C.F.R § 225.28(b)(6) and for financial holding companies under 12 U.S.C. § 1843(k)(4)(C).

It is not clear from the application what LevelField’s plans are for its currently existing subsidiaries. For example, LevelField’s user agreement refers to current subsidiaries named “LevelField Digital, LLC, LevelField Trading, LLC, LevelField Treasury, LLC, and LevelField Safe, LLC,” none of which are mentioned in the public portions of the application.

Other required approvals

The Section 3 application states that, other than Board approval of the application, the only other required regulatory approval is the approval by the IDFPR of the change in control of Burling Bank.

In addition, LevelField commits to submitting to the FDIC, and sharing with the IDFPR, a notification that the bank intends to engage in crypto-related activities, as required by FDIC and IDFPR policy.

The agreement was signed December 30, 2022 and the outside date is March 31, 2024

Per the application, the acquisition agreement was signed December 30, 2022. The application itself was filed January 31, 2023, just before the public announcement of the deal.

LevelField has stated it hopes to close by later in 2023, but they have a bit more time if they need it: “The Stock Purchase Agreement provides that closing must occur by March 31, 2024.”

Thanks for reading! Thoughts, challenges, criticisms are always welcome at bankregblog@gmail.com

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