Does every bank need a holding company?
That’s the question Bank of the Ozarks chairman, CEO, and founder George Gleason posed to corporate finance general counsel and corporate secretary Helen Brown in December 2016. Almost every bank has a holding company, but in some ways such organizations are anachronistic holdovers from the 1980s and 1990s. Then, banks interested in growing across state lines used holding companies to comply with certain federal banking restrictions. Today, however, bits of legislation such as the Dodd-Frank Act and the Basel III capital rules have reduced the need for bank holding companies. Although rules and regulations are still strict, it’s now easier for banks to expand into new territories. Simply put, banking laws have changed, but the widely accepted holding-company structure has remained largely in place. Why?
That’s the question Gleason asked Brown to examine. And, when she discovered that Bank of the Ozarks ran all operations through its bank subsidiary, she developed a detailed roadmap outlining the process to merge its bank holding company into its bank. When Brown completed the process, on June 26, 2017, Bank of the Ozarks became the first publicly traded financial institution to shed its holding company, thereby reducing costs, improving efficiency, and eliminating duplicative regulatory administration. Here’s a step-by-step look at how she did it.
1) Find Out Whether It’s Possible
Brown may have been the perfect person to answer her CEO’s question. She joined Bank of the Ozarks in 2013, after more than a decade at Bass, Berry & Sims, where she had been an equity partner since 2011. She had spent most of her time at the Memphis firm handling sophisticated transactions and helping public companies raise capital. Now, Brown advises Bank of the Ozarks’ board of directors on strategic matters, capital-raising initiatives, and corporate governance. The bank has completed fifteen mergers since 2010, six under Brown’s leadership. When Gleason asked her if Bank of the Ozarks could shed its holding company, she knew the state and federal regulations, she knew the bank’s growth plan, and she knew the ins and outs of corporate structure, and her immediate assumption was that the answer would be no.
But, the more she researched, the more motivation she found to press on. “We weren’t using our holding company, and we saw no reason to keep it,” she says. “Doing so simply maintains a status quo, while a change could bring more value to our shareholders.”
Bank of the Ozarks has grown from approximately $4.8 billion in assets in 2013 to nearly $21 billion today. That success has come as leaders and board members have worked to minimize costs and maintain low-efficiency ratios in an era of growing regulation. When Brown realized shedding the holding company would help the bank continue to achieve these goals, she started to examine state and federal laws to chart a path forward.
2) Outline the Benefits
Brown’s initial research phase uncovered several benefits associated with dropping the holding company. For example, the holding company was regulated by the Federal Reserve Bank, but the bank itself, as a nonmember state bank, was beholden to the FDIC and the Arkansas State Bank Department. “Bank of the Ozarks and its holding company were getting two examinations, and that meant that our employees were repeating a lot of activities,” Brown explains. “There are small cost savings associated with the move, but the real value comes as we free up our employees’ time and allow them to work on more value-added activities.”
3) Become a Part-Time Lobbyist
After realizing the change was both possible and beneficial, Brown set out to get state banking department officials and lawmakers’ approval. For her bank’s plans to succeed, she needed to get eleven statutes in Arkansas law changed. Luckily, it was February 2017, and state senators and representatives were already in session. Brown and her team worked to educate them on the benefits of her proposed changes.
“The changes were technical and not material or substantial in nature,” she says. “By changing the state laws, we would help modernize a banking code that was outdated by several decades and allow publicly traded banks to do what corporations already found permissible.”
Most other states had similar language in their laws, she explained, and if Arkansas laws remained outdated, financial groups might be tempted to relocate. Ultimately, the banking board and lawmakers agreed. A set of bills approved in March 2017 amended an Arkansas business corporation act and the state banking code. The changes created a regulatory atmosphere in which Bank of the Ozarks could legally merge its holding company into its bank subsidiary.
4) Prepare the Board
With the victory in hand, Brown prepared her team to advise Bank of the Ozarks’ board. “This major change was the board’s decision,” she says. “My role was to educate them on the issues they should consider before voting on a proposal that would eliminate our holding company.”
After the board approved the proposal, Brown’s legal team immediately began drafting all the necessary disclosure documents, regulatory applications, and other required paperwork for the merger and worked with Nasdaq to make sure the bank’s stock would trade without interruption. Brown’s goal was to maintain speed, compliance, and transparency. While there was no precedent to follow, most of her team had been through several mergers and knew how to facilitate the process.
5) Watch the Results
With the merger complete, Brown and her peers have been monitoring the situation closely. Since June 2017, at least one other publicly traded bank has announced plans to accomplish the same feat—and its legal team has turned to Brown for some practicable advice. “We were the first publicly traded bank to eliminate our bank holding company, and I frequently get calls from lawyers and financial executives who want to discuss this issue,” she says.
When Brown fields those calls, she shares her experience in leading Bank of the Ozarks through its transformation. The dust has since settled, and she’s seen some cost savings associated with stock-filing fees, and she’s heard from bank leaders who have been able to repurpose employees’ time. She also believes the Bank of the Ozarks’ structure now more closely aligns with its growth strategies.
“As corporate counsel for Bank of the Ozarks, we have worked with Helen on many M&A and corporate finance projects. She has an excellent grasp of complex issues and, most importantly, she gets things done.”
—H. Watt Gregory 111, Partner