by Andrew Nix, Maynard Cooper & Gale
Life as a community bank has become increasingly challenging in recent years, with massive increases in regulatory burdens, compliance costs and capital requirements on top of industry consolidation and impediments to quality asset growth. There are a number of regulatory reforms currently percolating in the halls of Congress that attempt to address, in some form or fashion, these difficulties. One in particular – H.R. 4771, the Small Bank Holding Company Relief Act of 2018 – recently passed the House and has been received by the Senate. H.R. 4771 would require the Federal Reserve to change its Small Bank Holding Company Policy Statement to apply to bank (and savings and loan) holding companies with total consolidated assets of less than $3 billion, instead of the current $1 billion ceiling.
The policy statement was developed originally by the Federal Reserve in 1980 to allow for the formation and expansion of small bank holding companies in a manner consistent with bank safety and soundness. Although the Federal Reserve has generally discouraged the use of debt by bank holding companies to finance acquisitions based on the concern that high debt levels can impair the ability of holding companies to serve as a source of strength to their subsidiary banks, the Board of Governors has also acknowledged 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. The policy statement attempts to facilitate the transfer of ownership by allowing small bank holding companies to operate with higher levels of debt than would normally be permitted.
The small bank holding companies that qualify for the policy statement are excluded from the Federal Reserve’s consolidated capital requirements; however, their depository institution subsidiaries continue to be subject to minimum capital requirements, and all institutions must continue to meet certain qualitative requirements, including those pertaining to non-banking activities, off-balance sheet activities and publicly-registered debt and equity. Additionally, in accordance with the policy statement, small bank holding companies may use debt to finance up to 75 percent of the purchase price of an acquisition, subject to certain ongoing requirements and restrictions. Because of the increased likelihood of failure of banking institutions with higher levels of debt, the Federal Reserve 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.
Proponents of H.R. 4771 view the expansion of the Small Bank Holding Company Policy Statement as a targeted way to promote economic growth in the markets served by community banks while minimizing regulation that increases burden without corresponding benefit. If enacted, the bill would make it easier for community banks to raise additional capital needed to form new holding companies, fund existing holding companies and make acquisitions by issuing debt at the holding company level – all important to ensure that these institutions have the resources that they need to continue to grow and lend to their local communities. All community bank holding companies that may qualify for the relief provided by the expanded Small Bank Holding Company Policy Statement should continue to monitor this legislation.
Andrew Nix is a shareholder in Maynard Cooper & Gale, P.C.’s Corporate, Securities & Tax Section and a member of the firm’s Securities Regulation and Corporate Finance, Mergers and Acquisitions, and Banking practice groups. Andrew routinely advises financial services institutions, including banks and bank holding companies, regarding various securities regulatory, capital raising and corporate governance issues.
