Pros and Cons of Bank Holding Companies:...

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The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. Presenting a live 90-minute webinar with interactive Q&A Pros and Cons of Bank Holding Companies: Determining Whether a Bank Holding Company Structure Makes Sense for Your Bank Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, OCTOBER 12, 2017 Robert D. Klingler, Partner, Bryan Cave, Atlanta Clifford S. Stanford, Partner, Alston & Bird, Atlanta

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  • The audio portion of the conference may be accessed via the telephone or by using your computer's

    speakers. Please refer to the instructions emailed to registrants for additional information. If you

    have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

    Presenting a live 90-minute webinar with interactive Q&A

    Pros and Cons of Bank Holding Companies:

    Determining Whether a Bank Holding

    Company Structure Makes Sense for Your Bank

    Todays faculty features:

    1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

    THURSDAY, OCTOBER 12, 2017

    Robert D. Klingler, Partner, Bryan Cave, Atlanta

    Clifford S. Stanford, Partner, Alston & Bird, Atlanta

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  • Pros & Cons of Bank Holding Companies

    Determining Whether a Bank Holding Company

    Structure Makes Sense for Your Bank

    October 12, 2017

    Robert Klingler, Bryan Cave LLP

    Cliff Stanford, Alston & Bird

  • Why are we discussing this?


  • $20 Billion, NASDAQ Listed, Institution (OZRK)

    Arkansas Chartered, Non-Member, Bank

    Locations in Arkansas, Georgia, Florida, North Carolina and Texas

    National Lending Platform New York City, Los Angeles and San Francisco

    Eight Mergers Completed 2012 - 2016

    Seven Government Assisted Deals 2010 - 2011

    Consistently a Top Performing Bank Since Downturn

    Bank of the Ozarks


  • April 11, 2017 Announced Internal Reorganization

    Merge Bank Holding Company into Bank

    Focus on Efficiency

    May 5, 2017 Proxy Statement Filed

    Rationale Provided

    Simplified Financial Reporting

    Elimination of Regulatory Oversight of BHC Activities

    Decreased SEC Registration Fees

    Consolidation of Governance and Organizational Structure and Elimination of Dual Boards of Directors and Joint Board Meetings

    Bank of the Ozarks Eliminates BHC


  • June 23, 2017 Special Meeting of Shareholders

    121.6 Million Shares Outstanding

    99.8 Million Shares Voted For the Merger

    0.05 Million Shares Voted Against and 0.06 Million Abstained

    June 26, 2017 Bank of the Ozarks, Inc. Merged into Bank of the Ozarks

    Shares Automatically Converted into Shares of the Bank

    Bank Assumed All Holding Company Equity Incentive Plans

    Bank Assumed All Holding Company Subordinated Debt and Trust Preferred Securities

    Same Ticker Symbol and CUSIP

    Bank of the Ozarks Eliminates BHC


  • $15 Billion, NYSE Listed, Institution (BXS)

    Mississippi Chartered, Non-Member Bank

    Locations in Alabama, Arkansas, Florida, Louisiana, Mississippi, Missouri, Tennessee, Texas and Illinois

    Announced Two Acquisitions in January 2014

    Ouachita Bancshares Corp. (Monroe, LA, $650 Million)

    Central Community Corp. (Temple, TX, $1.3 Billion)



  • July 27, 2017

    Announced Corporate Reorganization

    Merge Bank Holding Company into Bank

    August 29, 2017 Proxy Statement Filed

    September 27, 2017 Special Meeting of Shareholders

    91.0 Million Shares Outstanding

    71.5 Million Shares Voted For the Merger

    0.1 Million Shares Voted Against and 0.1 Million Abstained

    Anticipating Regulatory Approval and Closing in Q4

    BancorpSouth Bank Eliminates BHC


  • Framing the Discussion


  • Current Landscape of the Industry


  • Predominant Structure

    Source: Board of Governors of the Federal Reserve System


  • More Data: Nearly all US bank assets

    are controlled by BHCs

    Top ten BHCs control ~60% of total assets

    The percentage of U.S. banks owned by BHCs has more than doubled since 1980

    Note the growth in non-bank assets, particularly after Gramm-Leach-Bliley Act (1999)

    Virtually all large BHCs are registered as FHCs

    Only a handful of banks with more than $10 Billion in assets do not have a holding company

    Source: Federal Reserve Bank of New York (2012)


  • Above $10 Billion

    115 Banks; 4 without a Holding Company

    Above $1 Billion

    Over 93% Have Holding Companies

    Below $1 Billion

    Over 82% Have Holding Companies

    As of June 30, 2017

    562 Independent Banks (

  • 2006

    1,670 Bank Charters

    518 Multi Bank Holding Companies


    632 Charters

    241 Multi Bank Holding Companies

    Overall, Decline of 2,769 Bank Charters in 10 Years

    But around 1,000 charters appear lost to internal reorgs

    Decline in Multi Bank Holding Companies


  • An Accident of History? Bank Holding Company Act of 1956

    Originally: antitrust

    Later: separation of banking and commerce

    Gramm-Leach-Bliley Act of 1999

    Significant changes to mirror European and Asian universal bank model

    Financial holding company designation

    Umbrella supervision and functional regulation

    Home Owners Loan Act 10

    Unique scheme for SLHCs, but similar underlying principles

    Grandfathered unitary thrift holding companies

    Dodd-Frank Act 2010

    Significant increase in burden on holding companies

    Collins Amendment and phase-out of trust preferred securities

    Codification of source of strength doctrine

    Established Fed as umbrella supervisor of SLHCs with convergent approach


  • Challenging Assumptions


  • Name State Exchange Total Assets (1)

    First Republic Bank California NYSE $80.0 Billion

    Signature Bank New York NASDAQ $40.7 Billion

    Bank of the Ozarks Arkansas NASDAQ $20.1 Billion

    BancorpSouth Bank (2) Mississippi NYSE $14.8 Billion

    TowneBank Virginia NASDAQ $8.4 Billion

    Opus Bank California NASDAQ $7.6 Billion

    Carter Bank & Trust Virginia OTC $4.3 Billion

    Community Bank California OTC $3.7 Billion

    Largest Banks Without a Holding Company

    (1) As of June 30, 2017. (2) In process of eliminating Holding Company.


  • A Strategic Choice?


    Fiduciary duty?

    Not regulator-shopping

    Public company considerations

    Capital considerations

    Asset size considerations

    Permissible non-bank activities

    Banks vs. Thrifts

    Choice of Law

    With limited exceptions, there is no

    regulatory requirement for a holding


    Certain non-bank activities

    FBOs with >$50 Billion U.S. assets

    Potential Benefits:

    Simplified financial reporting

    Elimination of supervisory oversight by

    the Fed

    Decreased SEC registration fees

    Consolidation of governance and

    organizational structure


    Policies and procedures

    Risk management

    Relief from Regulation W constraints

    No source of strength obligations to

    bank subs

    Avoid separate DFAST stress testing

    Tax savings


  • Simplified De-BHC Process

    Assess: change in control provisions, impact on compensation and benefit plans, assumption of any holding company debt (including trust preferred), tax obligations, non-bank subsidiaries, open regulatory issues, etc.

    Ensure bank has sufficient authorized stock

    Assess whether merger would violate Regulation W limits

    Arms-length merger agreement

    Typical structure is tax-free merger of holding company into bank

    Board and shareholder approval

    Public securities filings: 8-K(s), proxy statement, de-registration of holdco stock with SEC, registration of bank stock with bank regulator

    Coordination with relevant securities exchange

    File Bank Merger Act application with the FDIC

    Complete merger and notify Fed


  • M&A and Regulatory Impacts


  • Impact on M&A Approvals

    Typical deal structures involving holding companies can be similarly accomplished for regulatory purposes with a stand-alone bank

    Simple example: Step 1: Bank merges with Target BHC (FDIC approval under BMA)

    Step 2: Target Bank merges into Bank (BMA application to primary Federal regulator)

    Federal Reserve still retains approval authority under BHC Act:

    A bank that has control over another bank, even for a moment in time, is technically a BHC

    Fed has indicated that it will grant application waivers as appropriate under 12 CFR 225.12


  • Permissible Non-banking BHC Activities

    consumer finance, credit card, mortgage and commercial

    financial operations

    operating nonbank depository institutions, such as industrial loan companies and trust companies

    financial counseling services

    leasing agencies

    investment in community development corporations

    financial data processing services

    bank-related courier services

    credit life insurance

    money transmittal

    management consulting for other financial institutions

    collection agency services

    tax preparation services

    consumer credit bureau services

    consumer financial counseling

    securities brokerage services for customer investments

    government securities underwriting

    printing and selling checks.


  • Narrowing the Gap

    Very little change in permissible non-banking activities for BHCs since GLBA (1999)

    The gap between permissible BHC and permissible bank activities has narrowed over the past several decades.

    National banks and their operating subsidiaries

    State-chartered banks/subsidiaries via wildcard statutes, subject to FDI Act 24

    Financial subsidiaries (including securities underwriting and dealing, insurance brokerage)

    Depending upon charter, banks can conduct, for example: insurance brokerage, RIAs, securities broker/dealer and underwriting activities, transactional advice, and annuities activities


  • Permissible Investments

    Banks are generally limited by law to investments in high quality U.S. government and agency securities, and state, county, and municipal debt

    BHCs may invest in up to five percent of any class voting securities of any entity (BHC Act, Section 4(c)(6)

    Provide the means to invest in fintech and other companies to leverage for financial and operational purposes.


  • Whats Lost without a BHC?

    Inability to own multiple charters

    Certain FHC activities: insurance underwriting

    merchant banking activities

    complementary activities

    No capital deduction as with financial subsidiaries

    4(c)(6) equity investment authority up to 5% of any class of the voting stock of any company

    Lost freedom from counterparty credit limitations (applicable to banks not BHCs)


  • Savings and Loan Holding Companies

    Unique scheme from BHCs, but convergence under Federal

    Reserve authority

    SLHCs may engage in:

    Generally, anything permitted to a BHC

    Generally, anything permitted to a financial holding company (if so qualified)

    Certain other exempt activities under HOLA

    Grandfathered unitary SLHCs may engage in commercial activities

    Grandfathered multiple SLHCs have additional authority

    Thrifts have distinct non-banking authority

    Federal Savings Associations cannot own financial subsidiaries


  • 23A/23B and Regulation W

    The merger of an affiliate (BHC) into the bank is a purchase of assets (and therefore a covered transaction) if the bank assumes any liabilities of the affiliate or pays any other form of consideration in the transaction.

    Therefore, the merger is subject to the quantitative limits under Regulation W

    Bank subsidiaries are not affiliates, unless financial subsidiaries

    But, 10% quantitative limit does not apply to financial subsidiaries

    Special valuation rules for contribution of financial subs or new investment

    Relief from Regulation W limits on transactions with affiliates can be a material consideration


  • Regulatory Reporting

    Without a BHC, the bank no longer files (as applicable, with frequency depending upon size and other characteristics):

    FR Y-9C, Consolidated Financial Statements of Bank Holding Companies

    FR Y-9LP/SP, Parent Company Only Financial Statements

    FR Y-11/FR Y-11S, Financial Statements of U.S. Nonbank Subsidiaries of U.S. Bank Holding Companies

    FR Y-6, Annual Report of Bank Holding Companies

    FR Y-10, Report of Changes in Organizational Structure (unless a state member bank, or regarding foreign activities of national banks)


  • Capital Flexibility


  • Raise Funds at Holding Company Level

    Preferred Stock

    Subordinated Debt

    Senior Debt (Potentially Secured by Bank Stock)

    Downstream to Bank as Common Equity Tier 1 Capital

    Consolidated vs. Bank-Level Capital Ratios

    PCA Capital Ratios Only at Bank Level

    Bank-Level Enforcement Action Compliance

    Legal Lending Limits

    Expectations and Limitations of Lenders

    Capital Flexibility/Double Leverage


  • 12 CFR Part 225, Appendix C

    Guidance for Applications under BHCA

    Exemption from BASEL III for Qualifying BHCs

    Total Consolidated Assets of < $1 Billion

    Not Engaged in Significant Non-Banking Activities

    Not Conduct Significant Off-Balance Sheet Activities

    No Material Amount of Debt or Equity Registered with SEC

    Regulatory Discretion to Exclude Any BHC

    Small Savings and Loan Holding Companies

    Small BHC Policy Statement


  • Increasing Threshold

    1980 $150 Million

    2006 $500 Million

    2015 $1 Billion

    Financial Choice Act 2.0 $5 Billion


    May Use Debt to Finance Up To 75% of Purchase Price

    Theoretically Permits a 3:1 Debt to Equity Ratio

    Reduction in Leverage

    Retire Debt Within 25 Years

    Achieve Debt to Equity Ratio of 0.3:1 Within 12 Years

    Small BHC Policy Statement


  • Dividend Restrictions

    Not Expected to Pay Corporate Dividends Unless

    Debt to Equity Ratio of 1:1 or Less

    Subsidiary Bank is Well Capitalized

    Subsidiary Bank is Well Managed

    No Formal Enforcement Action

    Making Process to Reducing Debt to Equity Ratio to 0.3:1

    Meeting Requirements of Any Loan Agreement(s)

    Any Dividend Paid are Expected to

    Be Reasonable in Amount

    Not Adversely Affect Ability of BHC to Service its Debt

    Not Impair Ability of Subsidiary Banks to Remain Well Capitalized

    Small BHC Policy Statement


  • Like Real Estate, Theyre Not Making Any More

    Collins Amendment of Dodd-Frank

    Holding Companies $15 Billion

    Grandfathered Legacy and Acquired

    Tier 1 Capital Treatment

    Treated Like Debt for Tax Purposes

    Low Rates LIBOR plus 200 bps

    FDIC Confirmed Tier 2 Treatment for Bank of the Ozarks

    Trust Preferred Securities


  • Prompt Corrective Action Standards

    Zombie Bank Holding Companies

    Bank Holding Companies

    Control of Board of Directors





    FDIC Receivership

    Insolvent Holding Companies vs. Banks


  • Common Activity for Banks of All Sizes Increase Share Liquidity

    Increase Shareholder Return by Purchase of Undervalued Stock

    Tax-Efficient Means of Generating Returns to Shareholders

    Bank Holding Companies Federal Reserve Supervisory Letter SR 09-4

    Consistent with Organizations Capital Needs

    Board of Directors and Management Decision

    Expectation of Limiting Dividends and Repurchases to Net Income for the Past Four Quarters

    Regulation 12 CFR Part 225.4(b)

    Required Notice if Consideration 10% of Consolidated Net Worth

    Unless Well-Capitalized Before and After Redemption

    Capital Flexibility Stock Repurchases


  • National Banks National Bank Act (12 USC 59)

    OCC Approval Prior Approval Required

    2/3 Shareholder Approval Required

    State Banks

    Various State Law Requirements

    FDIC 12 CFR Part 303.241

    Prior Approval to Reduce or Retire any Common or Preferred Stock

    Expedited Processing Can Be Available 20 Days

    Capital Flexibility Stock Repurchases


  • Corporate Governance


  • Modernization of Banking Codes

    Historical Precedents

    Bank of the Ozarks 10 Changes to Arkansas Banking Code

    BancorpSouth No Changes to Mississippi Banking Code

    Highly Variable Between States and Institutions

    Potential Areas of Focus

    Board of Director Composition and Size

    Shareholder Vote and Notice Requirements

    Blank Check Preferred Stock Flexibility

    Share Exchange and Merger Abilities

    Security Issuances and Repurchases

    Corporate Governance


  • Flexibility to Adopt Non-Inconsistent Corporate Governance

    State of Banks Main Office

    State of BHCs Incorporation


    Model Business Corporation Act

    National Bank Act Requirements

    Residency Requirements for Majority of Board (12 USC 72)

    Director Stock Ownership Requirement (12 USC 72)

    President as Director and Chairman of the Board (12 USC 76)

    Merger w/ another National Bank or State Bank (12 USC 215a)

    Shareholder Notification Requirements

    Supermajority (2/3) Vote

    Corp. Governance National Banks


  • Shareholder Regulation


  • Thresholds Unchanged

    10% for Public Banks

    25%, or Largest above 10%, for Private Banks

    Responsible Federal Bank Regulator

    Holding Companies FRB

    Banks Primary Federal Regulator

    OCC 12 CFR Part 5.50

    FDIC 12 CFR Part 303, Subpart E

    FRB 12 CFR Part 225, Subpart E

    Change in Bank Control Act


  • Thresholds Unchanged

    7.5% Investors Passivity Commitments with Fed


    Qualified Family Limited Partnerships

    Testamentary Trusts

    Bank Holding Company Act


  • Voting vs. Non-Voting Stock

    Acting in Concert Presumptions

    Passivity Commitment



    Areas of Differing Interpretations


  • Securities Offerings and

    Securities Reporting


  • Sections 3(a)(2) and 3(a)(5) of the Securities Act of 1933

    Blue Sky Preemption Covered Security

    Federal Bank Regulatory Oversight OCC 12 CFR Part 16

    Effectively Apples SEC Registration and Exemption Rules

    FDIC 12 CFR Part 335 & Statement of Policy

    Use of Offering Circular; Expected Disclosures

    FRB General Safety and Soundness

    FINRA Rule 5110 Applies, Barring Exemption

    Anti-Fraud Provisions of Section 17 Still Applies

    Mergers Too!

    Securities Offerings


  • No Section 15 Reporting Obligations

    Section 12 Reporting Obligations

    2,000 Shareholders of Record

    Listing on a National Securities Exchange (NYSE or NASDAQ)

    Federal Bank Regulatory Oversight

    OCC 12 CFR Part 11

    FDIC 12 CFR Part 335

    FRB 12 CFR Part 208.36

    Reporting Differences

    No EDGAR or XBRL

    Beneficial Ownership Reported Electronically

    Paper or PDF Filings

    Securities Reporting


  • OCC No National Banks or Federal Thrifts

    FDIC As of September 30, 2017 13 Banks

    FRB No State Member Banks Reported

    Comment Letters Not Publicized

    Precedent Non-Existent or Difficult to Find

    Non-Dedicated Examiners

    Different Expectations and Scope of Review

    Substance vs. Disclosure

    Individualized Attention


  • PDF Copies of Reports on Website

    Copies to National Securities Exchange

    Anti-Fraud Provisions of Section 10 and Rule 10(b)(5)

    Disclosure Looks Similar

    Small Sample Size

    No Obvious Liquidity or Disclosure Discount

    Performance Key

    Disclosure to Markets


  • Summary and Conclusion


  • Key Considerations

    How would this change impact our strategic plan?

    Can we quantify the benefits and is the break even point for cost/benefit?

    Market perception?

    Do we lose something by elimination of a regulator?


    Alternatives? (e.g., a state member bank with a BHC)


  • Robert Klingler

    Bryan Cave LLP

    (404) 572-6810

    [email protected]


    The Bank Account

    Cliff Stanford

    Alston & Bird

    [email protected]

    (404) 881-7833



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