Since the April 2017 announcement that Bank of the Ozarks in Little Rock, Ark., had decided to eliminate its bank holding company in favor of operating directly through its bank subsidiary, multiple banks have followed suit. A number of Holland & Knight clients are either currently planning to eliminate their holding companies or are actively evaluating the pros and cons of doing so. Many prominent, publicly traded banks operate without a holding company. To the extent that your parent bank holding company actively conducts business through such holding company, this type of analysis may not be of interest, but for other organizations, particularly those that do not conduct significant operations through their holding company, it may be worth exploring the advantages and disadvantages of eliminating the holding company structure.

Pros and Cons of Holding Companies

The advantages of operating in a holding company structure have been well-documented over the years. A holding company form of organization arguably provides a greater access to capital and ability to borrow. For instance, a holding company can issue subordinated debt at the parent company level that qualifies as Tier 2 capital, but can downstream the proceeds to its subsidiary bank as Tier 1 capital. Bank holding companies can hold certain securities that banks are not permitted to hold and also may hold other real estate owned (OREO) property either in the holding company or non-bank subsidiary of the holding company to better insulate the bank from certain liabilities associated with such property (such as environmental liabilities). There also may be competitive advantages to acquiring a bank and maintaining it as a separate bank subsidiary under a holding company while consolidating administrative services and other back-office functions within the holding company. Finally, a holding company provides the ability to take advantage of state laws that have more permissive, company-friendly corporate laws as well as more established, director-and-officer-friendly case law than the law where the bank is incorporated. While some states' corporate laws may be developed in some respects, many do not have the same antitakeover protections and other benefits that Delaware and other state-chartered holding companies enjoy.

On the other hand, the disadvantages of a holding company structure and the incentive to eliminate a holding company can be significant. The expenses relating to the maintenance of a separate holding company (including a separate board, taxes, fees, administrative, regulatory and accounting expenses) are not immaterial. Furthermore, particularly for national banks, federal savings institutions and state-chartered non-member banks, the existence of a holding company introduces a separate regulator – the Federal Reserve Board (FRB) – and an added layer of complexity into the organization's examination and supervisory regime. The FRB can raise supervisory issues separate and apart from a bank's primary regulator and can cause delays in processing certain regulatory applications, particularly in the mergers and acquisitions (M&A) context. Incurring duplicate expenses, as referenced above, as well as duplicate regulatory examinations can be eliminated with the termination of a holding company charter.

Finally, elimination of a holding company also means that a bank does not have to deal with the U.S. Securities and Exchange Commission (SEC). A bank's securities, including its common stock, are exempt from the registration requirements of the federal securities laws pursuant to Section 3(a)(2) of the Securities Act of 1933 (Securities Act). Consequently, a bank does not have to file a registration statement with the SEC in order to publicly issue its securities. Banks instead are required to comply with a Federal Deposit Insurance Corporation (FDIC) policy statement regarding the use of offering circulars in connection with a public distribution of bank securities. Among other things, the policy statement states that the issuance of securities by banks is subject to the antifraud provisions of the federal securities laws. As a result, an offering of bank securities requires full and adequate disclosure of material facts. However, unlike in the SEC context, the FDIC will not review or comment on a bank offering circular. The ability to avoid the SEC registration and review process can result in significant advantages from both a cost and timing perspective. Finally, while most states have adopted exemptions from state registration requirements that are similar to Section 3(a)(2) of the Securities Act, certain states do have specific requirements. Therefore, attention must be given to each issuer's state of incorporation securities laws as they relate to securities offerings. It has been our experience that, where they exist, state requirements are generally not as onerous or cumbersome as a federal securities registration.

Conclusion and Considerations

Although the elimination of its holding company may not be the right decision for every bank, it is certainly the right decision for some banks currently maintaining a holding company for convention's sake. As former Acting Comptroller of the Currency Keith Noreika indicated in November 2017, near the end of his tenure, "bank holding companies may have outlived their practical business value and may, in fact, be obsolete."