Pros and Cons of Bank Holding Companies:...

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Transcript of Pros and Cons of Bank Holding Companies:...

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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


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 (<$0.2 Trillion)

– 3,847 One Bank Holding Companies ($5.9 Trillion)

– 602 Banks / 231 Multi Bank Holding Companies ($9.9 Trillion)

– 776 Federal and State Savings Associations ($1.2 Trillion)

Bank Holding Companies Remain Common


• 2006

– 1,670 Bank Charters

– 518 Multi Bank Holding Companies

• 2016

– 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

• Boards

• 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.


What’s 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 BHC’s

• 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

• Acquisitions

– 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, They’re 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

– Restructurings

– Bankruptcy

– Recapitalizations

• Banks

– 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 Organization’s 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 Bank’s Main Office

– State of BHC’s Incorporation

– Delaware

– 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

– <5% Presumption of Non-Control

– ≥10% Rebuttable Presumption of Control

– ≥25% Statutory Control

• Always the Federal Reserve – 12 CFR Part 225

• >7.5% Investors Passivity Commitments with Fed

• Exemptions

– Qualified Family Limited Partnerships

– Testamentary Trusts

Bank Holding Company Act


• Voting vs. Non-Voting Stock

• Acting in Concert Presumptions

• Passivity Commitment

– Language

– Expectations

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


– 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?

• Timing?

• 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