Last year, BancorpSouth Bank and Bank of the Ozarks eliminated their bank holding companies to improve operating efficiencies by significantly reducing administrative, regulatory and accounting costs. As a result, both banks consolidated operations and generally removed themselves from the oversight of two federal regulators, the Federal Reserve and the SEC. Following this, many banks have started to explore whether they should keep their bank holding company (BHC) structure.
Although BHCs were initially limited, the Bank Holding Company Act of 1956 was amended over time to expand the activities in which a BHC could engage. Until the late 1990s, such activities were far more extensive than those permissible for a bank without a BHC. But by the early 2000s, the scope of permissibility had expanded. Regulatory burdens on BHCs also increased, especially with the passage of the Dodd-Frank legislation in 2010. Those trends have led to the current environment in which the BHC structure may no longer be necessary.
Currently, we would not recommend eliminating your BHC if your organization has assets of less than $3 billion. The Federal Reserve’s Small Bank Holding Company Policy Statement applies only to BHCs with less than $1 billion in assets. Yet in March 2018, the Senate passed a bill to increase the threshold to $3 billion. At the current threshold, the Policy Statement applies to more than 80 percent of BHCs. If raised, it would apply to several hundred more BHCs.
Under the current Policy Statement, a qualifying BHC with less than $1 billion in assets is exempt from the Federal Reserve’s risk-based capital and leverage rules, and can incur various kinds of debt in greater amounts than BHCs generally. If the total asset threshold remains unchanged, BHCs with assets of more than $1 billion should analyze whether the structure remains advantageous.
Other plusses for keeping a BHC
Even if your BHC cannot avail itself of the benefits of the Policy Statement, your organization may wish to retain its structure in order to benefit from the following traditional BHC advantages:
- The ability to engage in certain nonbanking activities closely related to banking or managing/controlling banks. Regulation Y lists 14 permissible nonbanking activities that meet this definition.
- The ability to retain capital instruments that do not qualify as Tier 1 capital at the subsidiary bank.
- Greater flexibility than allowed under state banking laws.
The BHC structure generally facilitates the ability of a shareholder to sell stock, and the BHC to redeem its outstanding shares, and gives companies the ability to make equity investments in other firms without regulatory approval. Eliminating your BHC structure is likely unjustified if it benefits from any of these advantages—and if the advantages outweigh enhanced regulatory burdens.
Benefits of ending a BHC
If the above statement doesn’t apply to your BHC, it may be time for a change. Potential benefits to consider:
- The Federal Reserve oversees BHCs, while a bank’s primary regulator oversees the bank. By dissolving the BHC, national banks and state-chartered, non-member banks can peel off a duplicated layer of oversight.
- There would be no need for two sets of directors, officers, corporate records and regulatory examinations.
- Banks without BHCs generally experience more streamlined regulatory processing and approval timeframes.
Steps in elimination process
These seven key steps are integral to dissolving your BHC:
- Meet with the primary regulators and review relevant state requirements.
- Review change-of-control issues under debt instruments, contracts, and benefit plans and arrangements.
- Resolve BHC trust-preferred and other debt securities issues through redemption or other means.
- File regulatory applications with state and federal bank regulators.
- Prepare merger agreements and draft proxy materials needed to obtain shareholder approval.
- Register the bank’s common stock (if applicable) under the 1934 Act with the federal bank regulator and apply for listing with the relevant stock exchange.
- Familiarize yourself with the filing and reporting system of your primary federal banking regulatory agency (if applicable).
Parting shot: BHC = Banks Have Choices
Before you decide to end a BHC structure, keep in mind that while maintaining a BHC remains necessary for most large institutions, many community and regional banks do not require it. Banks should no longer assume a BHC is necessary.
Instead, undertake a careful analysis in light of the bank’s current and future strategic plans. Only then can you determine whether a bank holding company is holding you back.
Richard T. Hills, is a partner at Waller Lansden Dortch & Davis.
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