Small Bank Holding Company Policy Statement
Author: Brok Lahrman
On April 9, 2015, the Board of Governors of the Federal Reserve System adopted final amendments to the Small Bank Holding Company Policy Statement. This final rule, effective 30 days after the publication in the Federal Register, raises the asset threshold to qualify under the policy statement from $500 million to $1 billion in total assets, expands the statement’s scope to include savings and loan holding companies, revises the applicability of the board’s regulatory capital rules and revises certain reporting requirements. The board last raised the asset threshold on February 28, 2006, when it increased from $150 million in assets to $500 million.
Historically, the board has discouraged the use of debt by bank holding companies to finance the acquisition of banks or other companies, as high levels of debt can impair the holding company’s ability to serve as a source of strength to its subsidiary banks. The policy statement is a response to the board’s acknowledgment that small bank holding companies have less access to equity financing than larger bank holding companies, meaning transfer of small bank ownership often requires acquisition debt. Accordingly, the board adopted the policy statement to allow small bank holding companies to assume debt at levels higher than typically permitted for larger bank holding companies.
The policy statement contains several conditions and restrictions designed to ensure small bank holding companies operating with higher debt levels do not present undue risk to the safety and soundness of their subsidiary banks. The following qualitative requirements under the 2006 final rule are retained in the amended policy statement:
- The holding company is not engaged in significant nonbanking activities, either directly or through a nonbank subsidiary.
- The holding company doesn’t conduct significant off-balance sheet activities, as defined in 2006 final rule, either directly or through a nonbank subsidiary.
- The holding company does not have a material amount of debt or equity securities outstanding that are registered with the Securities and Exchange Commission, with the exception of trust preferred securities.
Under the policy statement, holding companies meeting the qualitative requirements outlined above may use debt to finance up to 75 percent of an acquisition. This threshold is subject to several ongoing requirements, including that the qualifying holding company:
- Reduces its parent company debt so that all debt is extinguished within 25 years of being incurred
- Reduces its debt-to-equity ratios to .30:1 or less within 12 years of the debt being incurred
- Ensures each subsidiary-insured depository institution is “well-capitalized”
- Refrains from paying dividends until its debt-to-equity ratio is 1:1 or less.
One caveat to the policy statement is that a qualifying bank holding company may not use the expedited procedures for obtaining approval of acquisition proposals or a waiver of the stock redemption filing requirements applicable to bank holding companies under Regulation Y unless the bank holding company has a pro forma debt-to-equity ratio of 1:1 or less.
Basel III capital rules and reporting requirements will not apply to small bank holding companies as defined in the policy statement. However, Basel III rules and regulations continue to apply to the subsidiary bank(s) of the holding company covered under the policy statement. The statement requires banks to continue filing quarterly call reports, while small bank holding companies meeting the qualitative requirements will be required only to file semi-annual FR Y-9SP, Parent Company Only Financial Statements for Small Holding Companies reports.
For more information on how this issue could affect your organization, contact your BKD advisor.