Appendix C to Part 225 - Small Bank Holding Company and Savings and Loan Holding Company Policy Statement
12:3.0.1.1.6.15.8.1.12 : Appendix C
Appendix C to Part 225 - Small Bank Holding Company and Savings and
Loan Holding Company Policy Statement Policy Statement on
Assessment of Financial and Managerial Factors
In acting on applications filed under the Bank Holding Company
Act, the Board has adopted, and continues to follow, the principle
that bank holding companies should serve as a source of strength
for their subsidiary banks. When bank holding companies incur debt
and rely upon the earnings of their subsidiary banks as the means
of repaying such debt, a question arises as to the probable effect
upon the financial condition of the holding company and its
subsidiary bank or banks.
The Board believes that a high level of debt at the parent
holding company impairs the ability of a bank holding company to
provide financial assistance to its subsidiary bank(s) and, in some
cases, the servicing requirements on such debt may be a significant
drain on the resources of the bank(s). For these reasons, the Board
has not favored the use of acquisition debt in the formation of
bank holding companies or in the acquisition of additional banks.
Nevertheless, the Board has recognized that the transfer of
ownership of small banks often requires the use of acquisition
debt. The Board, therefore, has permitted the formation and
expansion of small bank holding companies with debt levels higher
than would be permitted for larger holding companies. Approval of
these applications has been given on the condition that small bank
holding companies demonstrate the ability to service acquisition
debt without straining the capital of their subsidiary banks and,
further, that such companies restore their ability to serve as a
source of strength for their subsidiary banks within a relatively
short period of time.
In the interest of continuing its policy of facilitating the
transfer of ownership in banks without compromising bank safety and
soundness, the Board has, as described below, adopted the following
procedures and standards for the formation and expansion of small
bank holding companies subject to this policy statement.
1. Applicability of Policy Statement
This policy statement applies only to bank holding companies
with pro forma consolidated assets of less than $3 billion
that (i) are not engaged in significant nonbanking activities
either directly or through a nonbank subsidiary; (ii) do not
conduct significant off-balance sheet activities (including
securitization and asset management or administration) either
directly or through a nonbank subsidiary; and (iii) do 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. The Board may in its discretion
exclude any bank holding company, regardless of asset size, from
the policy statement if such action is warranted for supervisory
purposes. 1 With the exception of section 4 (Additional Application
Requirements for Expedited/Waived Processing), the policy statement
applies to savings and loan holding companies as if they were bank
holding companies.
1 [Reserved].
While this policy statement primarily applies to the formation
of small bank holding companies, it also applies to existing small
bank holding companies that wish to acquire an additional bank or
company and to transactions involving changes in control, stock
redemptions, or other shareholder transactions. 2
2 The appropriate Reserve Bank should be contacted to determine
the manner in which a specific situation may qualify for treatment
under this policy statement.
2. Ongoing Requirements
The following guidelines must be followed on an ongoing basis
for all organizations operating under this policy statement.
A. Reduction in parent company leverage: Small bank holding
companies are to reduce their parent company debt consistent with
the requirement that all debt be retired within 25 years of being
incurred. The Board also expects that these bank holding companies
reach a debt to equity ratio of .30:1 or less within 12 years of
the incurrence of the debt. 3 The bank holding company must also
comply with debt servicing and other requirements imposed by its
creditors.
3 The term debt, as used in the ratio of debt to equity,
means any borrowed funds (exclusive of short-term borrowings that
arise out of current transactions, the proceeds of which are used
for current transactions), and any securities issued by, or
obligations of, the holding company that are the functional
equivalent of borrowed funds.
Subordinated debt associated with trust preferred securities
generally would be treated as debt for purposes of paragraphs 2.C.,
3.A., 4.A.i., and 4.B.i. of this policy statement. A bank holding
company, however, may exclude from debt an amount of subordinated
debt associated with trust preferred securities up to 25 percent of
the holding company's equity (as defined below) less goodwill on
the parent company's balance sheet in determining compliance with
the requirements of such paragraphs of the policy statement. In
addition, a bank holding company subject to this policy statement
that has not issued subordinated debt associated with a new
issuance of trust preferred securities after December 31, 2005, may
exclude from debt any subordinated debt associated with trust
preferred securities until December 31, 2010. Bank holding
companies subject to this policy statement also may exclude from
debt until December 31, 2010, any subordinated debt associated with
refinanced issuances of trust preferred securities originally
issued on or prior to December 31, 2005, provided that the
refinancing does not increase the bank holding company's
outstanding amount of subordinated debt. Subordinated debt
associated with trust preferred securities will not be included as
debt in determining compliance with any other requirements of this
policy statement.
In addition, notwithstanding any other provision of this policy
statement and for purposes of compliance with paragraphs 2.C.,
3.A., 4.A.i, and 4.B.i. of this policy statement, both a bank
holding company that is organized in mutual form and a bank holding
company that has made a valid election to be taxed under Subchapter
S of Chapter 1 of the U.S. Internal Revenue Code may exclude from
debt subordinated debentures issued to the United States Department
of the Treasury under (i) the Troubled Asset Relief Program
established by the Emergency Economic Stabilization Act of 2008,
Division A of Public Law 110-343, 122 Stat. 3765 (2008), and (ii)
the Small Business Lending Fund established by the Small Business
Jobs Act of 2010, title IV of Public Law 111-240, 124 Stat. 2504
(2010).
The term equity, as used in the ratio of debt to equity,
means the total stockholders' equity of the bank holding company as
defined in accordance with generally accepted accounting
principles. In determining the total amount of stockholders'
equity, the bank holding company should account for its investments
in the common stock of subsidiaries by the equity method of
accounting.
Ordinarily the Board does not view redeemable preferred stock as
a substitute for common stock in a small bank holding company.
Nevertheless, to a limited degree and under certain circumstances,
the Board will consider redeemable preferred stock as equity in the
capital accounts of the holding company if the following conditions
are met: (1) The preferred stock is redeemable only at the option
of the issuer; and (2) the debt to equity ratio of the holding
company would be at or remain below .30:1 following the redemption
or retirement of any preferred stock. Preferred stock that is
convertible into common stock of the holding company may be treated
as equity.
B. Capital adequacy: Each insured depository subsidiary of a
small bank holding company is expected to be well-capitalized. Any
institution that is not well-capitalized is expected to become
well-capitalized within a brief period of time.
C. Dividend restrictions: A small bank holding company whose
debt to equity ratio is greater than 1.0:1 is not expected to pay
corporate dividends until such time as it reduces its debt to
equity ratio to 1.0:1 or less and otherwise meets the criteria set
forth in §§ 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) of
Regulation Y. 4
4 Dividends may be paid by small bank holding companies with
debt to equity at or below 1.0:1 and otherwise meeting the
requirements of §§ 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7)
if the dividends are reasonable in amount, do not adversely affect
the ability of the bank holding company to service its debt in an
orderly manner, and do not adversely affect the ability of the
subsidiary banks to be well-capitalized. It is expected that
dividends will be eliminated if the holding company is (1) not
reducing its debt consistent with the requirement that the debt to
equity ratio be reduced to .30:1 within 12 years of consummation of
the proposal or (2) not meeting the requirements of its loan
agreement(s).
Small bank holding companies formed before the effective date of
this policy statement may switch to a plan that adheres to the
intent of this statement provided they comply with the requirements
set forth above.
3. Core Requirements for All Applicants
In assessing applications or notices by organizations subject to
this policy statement, the Board will continue to take into account
a full range of financial and other information about the
applicant, and its current and proposed subsidiaries, including the
recent trend and stability of earnings, past and prospective
growth, asset quality, the ability to meet debt servicing
requirements without placing an undue strain on the resources of
the bank(s), and the record and competency of management. In
addition, the Board will require applicants to meet the following
requirements:
A. Minimum down payment: The amount of acquisition debt should
not exceed 75 percent of the purchase price of the bank(s) or
company to be acquired. When the owner(s) of the holding company
incurs debt to finance the purchase of the bank(s) or company, such
debt will be considered acquisition debt even though it does not
represent an obligation of the bank holding company, unless the
owner(s) can demonstrate that such debt can be serviced without
reliance on the resources of the bank(s) or bank holding
company.
B. Ability to reduce parent company leverage: The bank holding
company must clearly be able to reduce its debt to equity ratio and
comply with its loan agreement(s) as set forth in paragraph 2A
above.
Failure to meet the criteria in this section would normally
result in denial of an application.
4. Additional Application Requirements for Expedited/Waived
Processing
A. Expedited notices under §§ 225.14 and 225.23 of Regulation Y:
A small bank holding company proposal will be eligible for the
expedited processing procedures set forth in §§ 225.14 and 225.23
of Regulation Y if the bank holding company is in compliance with
the ongoing requirements of this policy statement, the bank holding
company meets the core requirements for all applicants noted above,
and the following requirements are met:
i. The parent bank holding company has a pro forma debt
to equity ratio of 1.0:1 or less.
ii. The bank holding company meets all of the criteria for
expedited action set forth in §§ 225.14 or 225.23 of Regulation
Y.
B. Waiver of stock redemption filing: A small bank holding
company will be eligible for the stock redemption filing exception
for well-capitalized bank holding companies contained in §
225.4(b)(6) if the following requirements are met:
i. The parent bank holding company has a pro forma debt
to equity ratio of 1.0:1 or less.
ii. The bank holding company is in compliance with the ongoing
requirements of this policy statement and meets the requirements of
§§ 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) of Regulation
Y.
[Reg. Y, 62 FR 9343, Feb. 28, 1997, as amended at 71 FR 9902, Feb.
28, 2006; 74 FR 26081, June 1, 2009; 80 FR 20158, Apr. 15, 2015; 83
FR 44199, Aug. 30, 2018]