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For several years we’ve been advocating that state-chartered banks that do not require a bank holding company should ditch the holding company structure. It now appears that several banks are paying attention. This morning, The Wall Street Journal published an article spotlighting banks that have recently dispensed with their bank holding company in an effort to reduce their regulatory burden.

Bank holding companies previously gained popularity as a means by which banks could conduct business across state lines when states had rules about interstate banking. Banks also used holding company structures to bolster their regulatory capital, including through the issuance of trust preferred securities. However, with the passage of Dodd-Frank, which effectively eliminated prohibitions on interstate banking and the ability of banks to count newly issued trust preferred securities for regulatory capital purposes, the reasons for smaller banks to maintain a holding company structure are fewer and farther between now more than ever.

Stand-alone bank structures can offer several advantages over bank holding company structures. For example, as compared to a bank holding company, banks can raise capital at a substantially lower cost due to the exemptions available under the Securities Act of 1933 for securities issued by a bank. Related to this, banking organizations that are publicly held, or are seeking to become publicly held, have the advantage of filing their Exchange Act filings and reports with the FDIC as opposed to the SEC. Among other advantages, the FDIC’s reporting system does not require the payment of any fees and is available 24 hours a day, seven days a week. Certain filings with the SEC require the payment of filing fees and may only be filed during the times that the EDGAR filing system is open. Speaking of EDGAR, one of the other benefits of not filing with EDGAR is that it is more difficult for plaintiff lawyers to monitor the FDIC’s filing system to bring strike suits in connection with announced mergers. There are several software programs or services that can be used to monitor merger-related filings on EDGAR, but we aren’t aware of any such programs or systems for the FDIC’s system.

Reducing regulation, or at least the number of regulators, is also a key advantage to operating as a stand-alone bank. A publicly held bank holding company with a state-chartered non-member bank subsidiary has four separate regulators. The Federal Reserve and SEC oversee bank holding company and securities matters, respectively, pertaining to the holding company, while the subsidiary bank is regulated by the FDIC and the applicable state bank regulatory agency. In contrast, a publicly held state-chartered non-member bank without a holding company only has two regulators – the FDIC and the state bank regulatory agency. While the bank regulatory requirements are not materially different under either structure, the reduction in the number of regulators can still relieve some of the regulatory burdens banking organizations face.

There are some downsides, however, to getting rid of the holding company. Under many states’ laws, mergers and acquisitions involving stand-alone banks must be approved by both the target bank shareholders as well as the acquiring bank shareholders. Generally, acquisitions involving bank organizations with holding company structures only need to be approved by the target shareholders. Thus, an acquisitive banking organization might see this as a negative since it would be required to hold a special shareholder meeting to vote on and approve each of its acquisitions. However, we’ve been working with the Florida Bankers Association to try to include legislation in the upcoming legislative session to level the playing field for banks that want to do business without a holding company structure.

The foregoing and other benefits notwithstanding, not all banking organizations may be able to follow this route. Bank holding companies with securities, insurance or other types of affiliates that would need to be segregated from banking operations would likely be unable to implement this strategy. However, smaller banks that engage in customary banking activities and don’t otherwise need a holding company could realize a significant boost in performance merely by changing their organizational structure.

If you are interested in learning more about how simplifying your bank’s organizational structure could benefit the organization and its shareholders, please contact us.