Small Bank Holding Company Policy Statement Revisions

The Federal Reserve System issued revisions to the Small Bank Holding Company Policy Statement (Policy) on April 9, 2015. The revisions expand the number of institutions to which the Policy applies. This article briefly identifies entities to which the Policy applies after the revisions, outlines the benefits of the Policy to small noncomplex entities, and summarizes the restrictions on organizations that operate under the Policy.

The Federal Reserve Board originally issued the Policy in 1980 to facilitate the transfer of ownership of small community banks. The recent revisions made two significant changes to the institutions covered by the Policy. First, the Policy now applies to savings and loan holding companies (SLHCs) as well as bank holding companies (BHCs). Prior to the amendment, only BHCs were covered. In addition, the Policy now applies to larger holding companies, as the revision increased the asset size threshold. Approximately 95 percent of Ninth District holding companies are now subject to the Policy, compared with approximately 85 percent prior to the revision.

The Policy covers organizations that meet the asset size threshold and other qualifying criteria outlined in the Policy. As revised, the Policy applies to BHCs and SLHCs that meet the following criteria:

• They have consolidated assets of less than $1 billion and
• They do not
• have a material amount of debt or equity securities outstanding that are registered with the Securities and Exchange Commission (SEC) (excluding trust preferred securities),
• conduct significant off-balance sheet activities, directly or indirectly, or
• engage in significant nonbanking activities, directly or indirectly.

The Policy specifically excludes the operation of a savings association from the definition of nonbanking activity for determining applicability.¹ The qualifying criteria in addition to asset size did not change in the revision. However, the preamble to the revised final Policy provides direction on factors to consider when evaluating whether a particular holding company has material debt or equity securities registered with the SEC.²

There are several benefits to operating under the Policy. The Policy allows covered holding companies to operate with higher levels of debt than would normally be permitted. Also, holding companies that are subject to the Policy are exempt from the Federal Reserve Board’s consolidated risk-based and leverage capital rules. Generally, we assess compliance with capital requirements for holding companies subject to the Policy at the depository institution level when regulatory or statutory provisions require that an organization be well-capitalized (e.g., when determining if expedited procedures can be used). One exception to this practice is at initial election of financial holding company status. Companies operating under the Policy have significantly less extensive regulatory reporting requirements than larger organizations because they are not subject to capital requirements. Specifically, they file reports semi-annually rather than quarterly, and reports are significantly less detailed.

Organizations should be aware of restrictions that accompany the benefits the Policy confers. First, organizations are not to pay dividends if their debt-to-equity ratio exceeds 1:1.³ This limitation applies equally to companies that are S corporations and those that are C corporations. In addition, the Federal Reserve expects that holding companies will retire all debt within 25 years and reduce debt to 30 percent or less of equity within 12 years of incurring the debt. These requirements ensure that the higher leverage the Policy allows does not pose an undue burden on subsidiary depository institutions. Finally, we expect that each depository institution subsidiary will remain well-capitalized.

Endnotes

1 Under the Bank Holding Company Act of 1956, operation of a savings association is considered a nonbanking activity.

2 Similar guidance was provided related to the determination of whether nonbanking activities are significant when the Policy was revised in 2006.

3 The Federal Reserve applies a discounting factor to trust preferred securities when calculating a holding company’s debt-to-equity ratio. Contact our Applications staff if you have questions regarding this calculation.