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Pros and Cons of Bank Holding Companies: Determining Whether a Bank Holding Company Structure Makes Sense for Your Bank

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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?

6

• $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

7

• 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

8

• 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

9

• $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)

BancorpSouth

10

• 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

11

Framing the Discussion

12

Current Landscape of the Industry

13

Predominant Structure

Source: Board of Governors of the Federal Reserve System

14

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

• f New York

(2012)

15

• 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

16

• 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

17

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

18

Challenging Assumptions

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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.

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A Strategic Choice?

Considerations:

• 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 company

• 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
• rganizational 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

21

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

22

M&A and Regulatory Impacts

23

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

24

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
• ther 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.

25

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

26

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.

27

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)

28

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

29

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

30

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)

31

Capital Flexibility

32

• 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

33

• 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

34

• 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

35

• 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

36

• 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

37

• 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

38

• 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

39

• 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

40

Corporate Governance

41

• 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

42

• 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

43

Shareholder Regulation

44

• 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

45

• 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

46

• Voting vs. Non-Voting Stock
• Acting in Concert Presumptions
• Passivity Commitment

– Language – Expectations

Areas of Differing Interpretations

47

Securities Offerings and Securities Reporting

48

• 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

49

• 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

50

• 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

51

• 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

52

Summary and Conclusion

53

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)

54

Robert Klingler

Bryan Cave LLP (404) 572-6810 Robert.Klingler@BryanCave.com www.BankBryanCave.com @RobertKlingler The Bank Account

Cliff Stanford

Alston & Bird cliff.stanford@alston.com (404) 881-7833

Questions??

55