Many banks formed holding companies in the late 1980s and 1990s. They had various reasons for doing this. Some formed a holding company to hold subsidiaries providing nonbank activities. Some used the holding company to reduce state taxes in states where banks are taxed differently. Some were acquisitive, and holding companies gave them more options in acquiring banks. Some thought the holding company would help improve the marketability of the stock. Some intentionally submitted to regulation by the SEC, hoping that it would help with a new stock sale or marketability of current stock. Most community banks we talk with that have holding companies can barely remember why they formed them.

I know no community bank that uses its holding company to hold nonbank subsidiaries because it is too difficult to fund them. Keeping those subsidiaries under the bank makes them simpler to fund and manage. Only a few states, such as Virginia, tax banks in a significantly different way. Even in Virginia, most banks cannot take full advantage of the difference because it requires keeping capital at the holding company level. If a holding company acquires another bank, it can leave that bank as a separate entity, with its own name, management, etc. This also separates in part the risk of the two banks. A bank without a holding company does not have that ability. If a community bank without a holding company acquires another bank, it typically merges with that new bank, usually with the buyer being the “survivor.” This can give the seller’s market the impression that its bank no longer is “locally owned.” However, most community banks are not acquiring other banks now. Even if they do, there are other ways to handle individual markets without needing multiple bank charters. It is not clear that a holding company ever helped sales of the stock, but it does not now. And regulation by the SEC has become so burdensome and expensive that few still believe the trade-off favors registration. But what do you gain if you already have a holding company and eliminate it?

The obvious gain from eliminating the holding company is that you save the annual fees and administrative costs. If your bank regulator is the OCC or FDIC and state, you will eliminate the Federal Reserve as a regulator. Cutting a regulator usually saves money. Even if the bank is a reporting company and will remain a reporting company, eliminating the holding company means that the bank now reports to the bank regulator, not the SEC, which can be less stressful. The SEC’s focus is to protect shareholders and to ensure that registrants report fully and properly. Your federal bank regulator also expects you to prepare the required reports properly and file them on a timely basis, but the bank regulator’s primary mission is to protect depositors by ensuring the safety and soundness of the bank. The same laws and regulations apply, but our experience is that the bank regulators are not as persnickety as the SEC on these filings.

So, how do you get rid of your holding company? There is a tried and true method for this, but it is not simple or cheap. You merge the holding company into the bank. That sounds simple, but it requires approval of the holding company shareholders. That requires a shareholder vote, which requires that you either call a special meeting or plan ahead and notify shareholders that you will do this at the annual meeting. You must prepare proxy materials describing in detail what you are doing and include articles and a plan of merger. This may involve regulatory notice or filing. Dissolving and terminating the holding company requires final tax payments. Banks who go through this, however, may find many savings and more time for management to concentrate on operating the bank.