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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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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
• $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
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)
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
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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.
20
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
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
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
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 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.
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
• 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
• 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
• 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
• 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
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
www.BankBryanCave.com
@RobertKlingler
The Bank Account
Cliff Stanford
Alston & Bird
(404) 881-7833
Questions??
55