One of the most significant issues impacting community banks over the last decade has been the effect of increased regulation on community banks' bottom lines. In the wake of the Great Recession, state and federal governments have overhauled the bank regulatory regime in an attempt to address the problems that led to the market turmoil in 2008 and to prevent future credit crises. However, these new regulations disproportionately impacted smaller community banks because they do not have the same resources to effectively and efficiently handle the increased regulatory burdens. As a result, smaller financial institutions have been considering options to reduce their regulatory costs and burdens and increase profitability. A few banks have sought to accomplish this by eliminating their holding companies.

Historically, there were several advantages to using a bank holding company structure. However, many of those benefits have ceased to exist in the post-Dodd-Frank era. Among them, the Federal Reserve used to permit trust preferred securities (hybrid debt/equity instruments), or TruPS, to receive Tier 1 capital treatment for regulatory capital purposes. Many bank holding companies raised capital through the issuance of TruPS because they received the same regulatory capital treatment as common stock, but allowed the issuer to take a deduction for interest payments and did not dilute existing shareholders.

Another former advantage to the bank holding company structure was the increased flexibility to conduct banking business across state lines. Prior to the Riegle-Neal Act, many states had in place laws that significantly restricted the ability for banks to branch across state lines. However, bank holding companies had greater opportunities to facilitate banking across state lines, particularly through the acquisition of failed institutions in other states. The Riegle-Neal Act and the Dodd-Frank Act each modified the federal statutes governing interstate branching by state member banks, greatly increasing he ability of banks to branch.

Additionally, there are several potential benefits to operating as a stand-alone bank, among them, the ability to raise capital without a holding company. Foremost is that banks seeking to raise capital can take advantage of the exemption in Section 3(a)(2) of the Securities Act to automatically exempt the offering and sale of bank securities from federal securities registration requirements. Complying with these exemptions is one of the biggest hurdles in raising capital privately due to the very strict requirements. Failure to comply with these requirements can result in very draconian penalties. Unlike banks, bank holding companies are not able to take advantage of the automatic 3(a)(2) exemption.

Publicly trader banks may also find the public company regulatory environment more favorable compared to publicly traded bank holding companies. For one, banks that are publicly traded make their periodic filings with the FDIC as opposed to the SEC. Not only does this result in one less regulatory agency having oversight over the bank, but the filing system used by the FDIC is much simpler to use than the SEC's system and is available 24 hours a day.

Another advantage to the FDIC's filing system is that there are no services that regularly monitor public filings with the FDIC. This results in a lower probability of so-called “strike suits” being lodged against banks involved in acquisitions since plaintiffs' lawyers won't automatically receive alerts when a bank files a report indicating that it has entered into an acquisition agreement. Therefore, public banks are much less likely to be the victims of meritless litigation that often hinders or delays acquisitions.

Despite some advantages, banks must also consider the potential disadvantages before dispensing with their holding company. For example, because banks usually need regulatory approval to reduce their capital, it's much more involved for banks to implement a stock repurchase program whereas bank holding companies may generally repurchase stock up to 10% of their net worth within the prior 12-month period without regulatory approval.

Smaller financial institutions might also be able to take advantage of the Federal Reserve's policy statement on small bank holding companies, which provides institutions with less than $1 billion in consolidated assets greater flexibility in using debt to raise capital, finance acquisitions or make markets in their own stock. This policy statement would not be available for institutions without a holding company.

Additional advantages to operating with a bank holding company structure include the following:

• The ability to transfer of problem assets from the bank to improve the bank's balance sheet.

• Having affiliates that engage in insurance, securities and merchant banking activities.

• Greater flexibility with regard to the timing of the integration of an acquired institution.

• Shareholders of an acquiring bank holding company aren't generally required to vote on an acquisition

While every situation is different, we believe that community banks are generally better off without a bank holding company. Additionally, publicly traded bank holding companies can take advantage of rules that seamlessly allow the bank to transition to being the reporting entity following a merger designed to eliminate the holding company. Banks seeking to eliminate their bank holding companies through a merger should be considering this so the proposal can be voted on by shareholders at their 2018 annual meeting.

Gustav L. Schmidt is a Fort Lauderdale shareholder in Gunster's banking practice group.