On April 9, 2015, the Federal Reserve Board announced that it was broadening the applicability of its policy on the formation and expansion of small bank holding companies from $500 million in total consolidated assets to $1 billion, and extending the policy to savings and loan holding companies. The amendments to the policy are effective May 15, 2015.
Bank holding companies are required to serve as a source of financial strength for their subsidiary banks. If bank holding companies incur debt and then depend upon the subsidiary banks’ earnings to repay that debt, the Federal Reserve Board is concerned about the effect of that scenario on the financial condition of the holding companies and their subsidiary banks.
However, recognizing that smaller bank holding companies may need to incur higher levels of debt in order to finance an acquisition or expansion but concerned that it be accomplished in a safe and sound manner, the Federal Reserve Board first issued its “Small Bank Holding Company Holding Statement” in 1980, to allow qualifying smaller bank holding companies to incur debt to finance a larger percentage of the purchase price of an acquisition, subject to certain ongoing requirements. When originally issued in 1980, the “small” threshold was total assets of less than $150 million. The threshold was raised to less than $500 million in 2006. The current expansion of the “small” definition was due to legislation enacted in December 2014, which required the Federal Reserve Board to raise the threshold to less than $1 billion and to include savings and loan holding companies.
In order to qualify under the Policy Statement both currently and under the expansion, the bank holding company must not (i) be engaged in significant nonbanking activities either directly or through a nonbank subsidiary; (ii) conduct significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary; or (iii) have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the Securities and Exchange Commission.
Once a bank holding company qualifies under the Policy Statement, both currently and under the expansion, it may use debt to finance up to 75 percent of the purchase price of an acquisition (in other words a debt-to-equity ratio of up to 3 to 1), subject to certain ongoing requirements, the most major which are that the bank holding company must (i) retire all such debt within 25 years of its being incurred; (ii) reduce its debt-to equity ratio to .30 to 1 or less within 12 years of the debt being incurred; (iii) ensure that each of its subsidiary banks is well-capitalized in accordance with applicable regulations; and (iv) refrain from paying dividends until its debt-to-equity ratio falls to 1.0 to 1 or less.
The Policy Statement and several other parts of the Federal Reserve Board regulations also are amended to comply with the December 2014 requirement that the policy be extended to savings and loan holding companies, which own thrift institutions such as savings and loan associations and savings banks. Under the Bank Holding Company Act, such thrift institutions are not considered to be “banks” and thus their holding companies are not considered to be bank holding companies. The amendments make it clear that for purposes of the Policy Statement’s allowance for qualifying holding companies to incur additional acquisition debt, savings and loan holding companies are to treated the same as bank holding companies.
The Federal Reserve Board continues to reserve the right at any time in its discretion to exclude an otherwise qualifying holding company from the provisions of the Policy Statement or savings for supervisory reasons.