The Board of Governors of the Federal Reserve Board has modified its Small Bank Holding Company Policy Statement to facilitate the sale of smaller community banks.

Under the final rule, a holding company with less than $1 billion in total consolidated assets may qualify under the policy statement, provided it also complies with the qualitative requirements. This new asset limit is set by statute.

Previously, only bank holding companies with less than $500 million in total consolidated assets that complied with the qualitative requirements could qualify under the policy statement.

The quantitative requirements are the bank holding company:

  • was not engaged in significant nonbanking activities either directly or through a nonbank subsidiary;
  • did not conduct significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary;  and
  • did not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the Securities and Exchange Commission.

Under the policy statement, holding companies that meet the qualitative requirements may use debt to finance up to 75 percent of the purchase price of an acquisition (that is, they may have a debt-to-equity ratio of up to 3.0:1), but are subject to a number of ongoing requirements. The principal ongoing requirements are that a qualifying holding company:

  • reduce its parent company debt in such a manner that all debt is retired within 25 years of being incurred;
  • reduce its debt-to equity ratio to .30:1 or less within 12 years of the debt being incurred;
  • ensure that each of its subsidiary insured depository institutions is well capitalized; and
  • refrain from paying dividends until such time as it reduces its debt-to-equity ratio to 1.0:1 or less.

The policy statement also specifically provides that a qualifying bank holding company may not use the expedited procedures for obtaining approval of acquisition proposals or obtaining a waiver of the stock redemption filing requirements applicable to bank holding companies under the Regulation Y unless the bank holding company has a pro forma debt-to-equity ratio of 1.0:1 or less.

The Fed has generally discouraged the use of debt by bank holding companies to finance the acquisition of banks or other companies because high levels of debt can impair the ability of the holding company to serve as a source of strength to its subsidiary banks. The Fed has recognized, however, that small bank holding companies have less access to equity financing than larger bank holding companies and that the transfer of ownership of small banks often requires the use of acquisition debt. Accordingly, the Fed adopted the policy statement to permit the formation and expansion of small bank holding companies with debt levels that are higher than typically permitted for larger bank holding companies.

Consistent with the proposed rule, the final rule applies the revised policy statement to savings and loan holding companies.