Put simply, bank holding companies own one or more banks, but don’t engage in banking themselves. And although BHCs involve legal complexities and regulatory considerations, BHCs are favored by many banks because they provide more flexibility in raising capital and more liquidity for shareholders.
BHCs are favored by both large and small banks.
“It is a common practice,” said Tony Sims, senior vice president of marketing, Community Bancshares, a BHC based in Brandon. “One difference with ours is we have four separately chartered banks under our holding company. Most of the others have only one bank in the holding company.”
Sims said advantages of BHCs include the ability for improved capital planning, financial flexibly and greater flexibility in raising capital.
“It also allows them the opportunity to get into other investment opportunities,” Sims said. “We prefer it because it definitely shows people the true size of our company. You have to add four separately chartered banks together to get the full picture of Community Bancshares.”
One drawback is that there is an additional layer of regulations.
“It is more complex because we are scrutinized in depth,” Sims said. “We have another layer of administration costs because you are running another company. But in addition to offering you the chance for different capital planning and opportunities for raising capital, and it helps with geographic expansion. For example, one of our charters is located in Alabama.”
Community Bancshares four banks include Community Bank of North Mississippi, Community Bank of Mississippi, Community Bank of Ellisville and Community Bank Coast headquartered in Mobile, Ala. There are currently 43 banking offices in the banking chain, with two more under construction, one on Spillway Road in Brandon and another in Mobile. Both are set to open later this year.
One advantage that Sims touts for stockholders is that for the price of one stock, they own four independently chartered banks. “That helps with the flexibility as far as our shareholders,” Sims said.
Hancock Holding Company President & CEO John M. Hairston said their holding company was useful when Hancock Bank acquired Whitney Bank in 2011.
“One thing important to successfully completing the merger was maintaining the two century-old brand names of Hancock and Whitney,” Hairston said. “As a bank holding company, we were able to acquire Whitney Bank headquartered in New Orleans through its holding company and operate as a holding company with two bank subsidiaries.”
But banking industry laws changed tremendously after the merger. Hairston said the plan to operate two charters under one holding company was working very well, but the regulatory bodies introduced changes that eliminated their ability to operate the two banks as one.
“The cost of doing so became extremely expensive and complex, and also prevented customers from seamlessly transacting business with us in multiple states,” Hairston said.
“To make it easier for customers and to make regulatory compliance less expensive, we opted to simplify the organization through combining the two bank charters.”
Before the merger with Whitney, Hancock Holding Company had four separate subsidiary bank charters in the states where it operated — Mississippi, Louisiana, Alabama and Florida.
“However, as companies look for ways to become more efficient, reduce costs, and streamline processes and procedures, sometimes it is a better strategy to operate under a single bank charter in multiple states,” he said.
“Hancock’s strategic decision to consolidate two bank charters into one state bank charter based in Mississippi eliminated two of five regulatory examinations, helped cut millions of dollars in redundant effort and expenses (thus, benefiting shareholders), and allowed the company to keep doing business under two bank brands trusted by clients and communities since the late 1800s.”
Jimmy Clayton, chairman and CEO, Planters Bank & Trust, Indianola, said they formed their holding company in 1981 in order to assist in a transfer of ownership in their bank.
“Many community banks have formed one-bank holding companies over the years,” Clayton said.
Clayton said the following are some of the primary reasons holding companies make sense:
» A BHC can repurchase its own stock within limits, but a bank can’t do that. This helps make the stock more liquid.
» A subsidiary bank can take BHC stock as collateral for a loan up to an overall limit of 10 percent of bank capital, but bank stock is totally ineligible at the same bank. This adds flexibility for a shareholder/borrower and also may help liquidity.
» A BHC can invest in other common stocks within limits, but banks are very restricted in this activity.
» A BHC can engage in bank-related activities that management may not want in the subsidiary bank such as a small loan company or insurance agency.
» BHCs can raise capital in many more ways than the bank. The bank would have to sell common or preferred stock, which would dilute existing shareholders.
“The BHC has these options, but it can also borrow on a loan or debenture sale and contribute the proceeds as capital to the bank so existing shareholders are not diluted,” Clayton said.
“The loan could then be repaid over time.”
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