Holding Company Structure Still Advantageous for Most Community Banks 

A little over one year ago, Bank of the Ozarks in Little Rock, Ark., publicly announced its plans to dissolve its holding company, sparking debates across the country as to whether or not the holding company structure still has value for community banks. Spoiler alert: it does.

Why Shed Your BHC?

In boardroom discussions, executives may hear a director ask why the bank has a holding company and if they should get rid of it. "This mostly comes up in the context of a one-bank holding company," said John Knight, partner at Boardman and Clark, llp. However, for most Wisconsin banks, considering disbanding the holding company will be little more than a thought experiment. "It's the kind of thing that should come up during a board discussion, but it's not my expectation that it will go beyond that in most cases," said Knight. "The benefits of a bank holding company structure outweigh the costs, and to get rid of it requires going through a fairly complex legal process."

The most common arguments for shedding the holding company are reducing regulatory burden and expenses. Since holding companies are regulated by the Federal Reserve, merging the BHC into the bank reduces the number of regulators and exams for the institution. "If there's no debt and no plans to buy another bank or have multiple banks, then shareholders may want to shed the extra layer of regulation," said Paul Sirek, CPA, Partner at Eide Bailly LLP. However, the Fed's examinations are typically done off-site and based on Call Reports and exams performed by the bank's primary regulators, so the added regulatory oversight isn't overly burdensome for community banks. 

Reducing expenses is another motivating factor in the desire to discard the BHC. "The bank holding company establishes a more complicated structure," explained Attorney James Sheriff, partner at Reinhart Boerner Van Deuren, s.c. "The decision to form a BHC meant bringing in another regulator and setting up another board of directors, and it's also more complex for accounting and auditing." That complexity leads to greater expenses. By removing the holding company, a bank may de-register with the SEC (if they're a public company) and will no longer need to pay directors and an executive to run the holding company. However, for most community banks, the costs saved by getting rid of the BHC "don't add up to a significant dollar amount," Sheriff said. 

Sidebar: Eliminating the Holding Company
If a bank determines a change in structure is the best decision for the institution, the process of combining the bank holding company and bank into one entity is not a simple one. "There is significant complexity and some cost associated with the process of getting rid of the bank holding company," Sheriff explained. 

The first step, Sheriff says, is a thorough review of all agreements (change of employment, financing, etc.) and due diligence throughout the entire company to determine the impact of removing the holding company. Then, the holding company and its subsidiary bank would undergo a formal merger process. This requires legal documents prepared by the BHC's lawyers (including a proxy statement and prospectus) followed by a shareholder vote. If the majority of the holding company's shareholders vote in favor of the merger it will pass, however, any shareholders who object to the merger may have a legal right to dissent, Knight explained. That means—if they follow the proper statutory steps—they are entitled to receive the fair value of their shares. 

Once the shareholders approve the merger, the bank and BHC must file a merger application with their respective regulators. In addition, if the company is registered with the SEC, the merger must also be reviewed by the SEC. All of this complexity not only adds cost to the decision of getting rid of the BHC, but also uncertainty. "It gets complicated, which can lead to some unpredictability," said Knight.

Benefits of BHCs 

In addition to the negligible impact of the primary motivations for getting rid of the BHC cited above and the general inertia created by the complexity of actually jettisoning the BHC, the holding company structure provides several important benefits that will prevent most Wisconsin banks from deciding to move away from their BHC. First is more flexibility in structuring M&A deals. "If the bank's strategic goals include acquisition, the bank holding company structure can be helpful," said Knight. By having a holding company in place, the acquiring institution is not required to immediately integrate all systems and processes. Instead, the acquired bank can operate independently under the holding company while preparations are made for a smooth transition. "It allows you to buy another bank and wait a few months before converting everything," Sheriff explained. The BHC structure can also be helpful for institutions looking to sell. "Sometimes a buyer doesn't want certain assets, in which case the BHC can hold the unwanted assets," Sirek explained.

Additionally, the holding company can quickly raise the cash needed for a purchase via a bank stock loan, unlike the bank, which would need to use existing capital or sell additional shares. "If you do plan to make acquisitions in the future or if your bank is growing very quickly and you need to incur debt to inject capital, it's easier to do that bank stock loan with a bank holding company rather than individual shareholders," said Sirek. That flexibility in buying back stock and capital raising is another key benefit of maintaining the holding company structure. Many single-bank holding companies included a right of first refusal provision when they were set up, Knight explained. That means the BHC itself can match an offer a potential buyer gets for stock and make the purchase instead. "With that ability, holding companies can help keep locally owned banks locally owned," he said. 

Finally, the recent changes to tax law make having a BHC more attractive for shareholders, as well. "It's widely expected that some s-corps will go back to being c-corps for tax purposes," Sirek said. "In a c-corp, if you incur debt to make an acquisition or buy back stock, it's more tax-efficient to have a bank holding company in place in order to deduct that interest." 

"If there's no holding company, then it's difficult for shareholders to deduct that interest expense on their personal returns," he continued.  "With the new higher standard deductions for individuals, there will be fewer people who get a benefit from investment interest deductions." In short, it's easier to make the deduction at the corporate level than at the individual shareholder level. "Anytime there's debt involved with a c-corp you want a bank holding company in place so you can deduct that interest expense," Sirek explained. 

The decision of whether or not to eliminate the bank holding company is very specific to each individual institution making the determination, says Sheriff. "It's possible some banks will decide to get rid of their holding company," said Sirek. "It all depends on the long-term goals." For most Wisconsin institutions, the BHC's benefits still outweigh its costs. 

Boardman and Clark, llp is a WBA Gold Associate Member.
Eide Bailly LLP is a WBA Silver Associate Member.
Reinhart Boerner Van Deuren, s.c. is a WBA Associate Member.