View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

F ederal

reserve

Ba n k

DALLAS. TEXAS

of

Dallas

75222

C ircular No. 80-72
April 15, 1980

POLICY STATEMENT
BANK HOLDING COMPANY ACT
(Formation of Small One-Bank Holding Companies)
TO ALL MEMBER BANKS,
BANK HOLDING COMPANIES,
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of Governors of the Federal Reserve System has issued a
policy statem ent for assessing the financial factors in the formation of small
one-bank holding companies pursuant to the Bank Holding Company Act. The
Board's press release and order relating to this m atter, are printed on the
following pages.
The policy adopted by the Board in consideration of the formation of
small one-bank holding companies is essentially the same as th at previously
proposed for comment and which was attached to Circular No. 80-2, dated
January 7, 1980. The policy statem ent adopted by the Board, which was
effective March 28, 1980, applies to one-bank holding companies th at would not
have significant leveraged nonbank activities and whose subsidiary bank would
have to tal assets of approximately $150 million or less.
Any questions concerning the enclosed documents should be referred
to Mr. Robert Hankins, Director of Applications, of our Holding Company
Supervision Departm ent, Ext. 6120.
Sincerely yours,
Robert H. Boykin
First Vice President

Banks and others are encouraged to use the following incoming W A T S numbers in c ontacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

..vjbfco*;-.

FEDERAL RESERVE press release
, . Tiu

For immediate release

March 28, 1980

The Federal Reserve Board today issued a policy statement designed
to facilitate the change of ownership of small banks and to help maintain the
safety and soundness of the banking system by amending the criteria applied in
considering applications for one-bank holding company formations.
The new policy applies to one-bank holding companies meeting both
of the following conditions:

total assets of approximately $150 million or

less and no significant nonbank activities that use large amounts of debt in
their businesses.
It permits acquisition by one-bank holding companies of small
community banks under revised terms.

The new terms continue in more flexible

form the Board's standing policy of permitting transfer of ownership of such
banks on less demanding terms than those the Board applies in considering appli­
cations involving larger banks.
The Board gave this background to its proposal:
In acting on applications filed under the Bank Holding Com­
pany 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....
The Board believes that a high level of debt at the parent
holding company level impairs the ability of a bank hold­
ing company to provide financial assistance to subsidiary
bank(s), and in some cases the servicing requirements on such
debt may be a significant drain on the bank's resources.
For these reasons, the Board has not favored the use of ac­
quisition debt in formations of bank holding companies.
Nevertheless, the Board has recognized that the transfer of
ownership of small banks often requires the use of acquisi­
tion debt. The Board, therefore, has permitted the forma­
tion of small one-bank holding companies with debt levels
higher than would be permitted for larger or multibank hold­
ing companies.

While continuing to adhere to these principles, the Board has re­
examined the factors which apply to small one-bank holding company applications
with a view to improving the flexibility of these companies in dealing with
their debt obligations.
Past policy called for repayment of all acquisition debt within 12
years, while maintaining a satisfactory level of capital in the company's bank
subsidiary.
The revised policy provides that the holding company's debt to equity
ratio be reduced to no more them 30 percent within 12 years, which isapproxi­
mately the level maintained by many multibank holding companies.
This can be accomplished by direct debt repayment,

or by building up

equity through the retention of earnings, or both.
The new policy requires that capital in the subsidiary bank be main­
tained at no less than 8 percent of assets, and allows for reasonable holding
company dividends and the use of preferred stock as equity under certain condi­
tions .
The Board's policy statement is attached.

-0 -

FEDERAL RESERVE SYSTEM

POLICY STATEMENT
FOR ASSESSING FINANCIAL FACTORS IN
THE FORMATION OF SMALL ONE-BANK HOLDING COMPANIES
PURSUANT TO THE BANK HOLDING COMPANY ACT
(Docket No. R-0265)

AGENCY: Board of Governors of the Federal Reserve System
ACTION: Policy Statement
SUMMARY: In the interest of improving the transferability of ownership of
small community banks and facilitating local ownership of such institutions, as
well as helping to maintain the safety and soundness of the banking system, the
Federal Reserve Board has adopted a policy for assessing financial factors in
the formation of small one-bank holding companies.

DATE:

The policy statement is effective March 28, 1980.

POLICY
OF THE BOARD OF GOVERNORS
FOR ASSESSING THE
THE FORMATION OF SMALL
PURSUANT TO THE BANK

STATEMENT
OF THE FEDERAL RESERVE SYSTEM
FINANCIAL FACTORS IN
ONE-BANK HOLDING COMPANIES
HOLDING COMPANY ACT

In acting on applications filed under the Bank Holding Company Act,
the Board has adopted, and continues to follow, the principle that bank hold­
ing 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 sub­
sidiary banks as the means of repaying such debt, a question arises as to the
probable effect upon the financial condition of the company and its subsidiary
bank or banks.
The Board believes that a high level of debt at the parent holding com­
pany level impairs the ability of a bank holding company to provide financial
assistance to its subsidiary bank and in some cases the servicing requirements on
such debt may be a significant drain on the bank's resources. For these reasons
the Board has not favored the use of acquisition debt in the formation of bank
holding companies. 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 of small one-bank holding companies with
debt levels higher than would be permitted for larger or multibank holding com­
panies. Approval of these applications has been given on the condition that the
small one-bank holding companies demonstrate the ability to service the acquisi­
tion debt without straining the capital of their subsidiary bank and, further,
that such companies restore their ability to serve as a source of strength for
their subsidiary bank within a relatively short period of time.

In the interest of furthering its policy of facilitating the transfer
of ownership in banks without diluting bank safety and soundness, the Board has
reexamined the analytical framework and financial criteria it applies when con­
sidering the formation of small one-bank holding companies and has adopted cer­
tain revisions in its procedures and standards as described below.
The revised criteria shift the focus from debt repayment to the rela­
tionship between debt and equity at the parent holding company. The holding
company will have the option of improving the relationship of debt to equity by
repaying the principal amount of its debt or through the retention of earnings,
or both. Under these procedures, newly organized small one-bank holding com­
panies will be expected to reduce the relationship of their debt to equity over
a reasonable period of time to a level comparable to that maintained by many
large and multibank holding companies.
In general, this policy is intended to apply only to one-bank holding
companies that would not have significant leveraged nonbank activities and whose
subsidiary bank would have total assets of approximately $150 million or less at
the time the application is filed. Small one-bank holding companies formed be­
fore the effective date of this policy may switch to a plan that adheres to the
intent of this policy provided they comply with criteria 2, 3, and 4 set forth
below.
The criteria are as follows:
General
In evaluating applications filed pursuant to Section 3(a)(1) of the
Bank Holding Company Act, as amended, when the applicant intends to incur debt
to finance the acquisition of a small bank, the Board will take into account a
full range of financial and other information, including the recent trend and
stability of earnings of the bank, the past and prospective growth of the bank,
the quality of the bank's assets, the ability of the applicant to meet debt ser­
vicing requirements without placing an undue strain on the bank's resources, and
the record and competency of management of the applicant and the bank. In addi­
tion, the Board will require applicants to meet the minimum requirements set
forth below. As a general rule, failure to meet any of these requirements will
result in denial of the application; however, the Board reserves the right to
make exceptions if the circumstances warrant.
1.

Minimum Down Payment

The amount of acquisition debt should not exceed 75 percent of the
purchase price of the bank to be acquired. When the owner(s) of the holding
company incur debt to finance the purchase of the bank, such debt will be con­
sidered 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 or bank holding company.
2.

Maintenance of Adequate Capital

An applicant proposing to use acquisition debt must demonstrate to the
satisfaction of the Board that any debt servicing requirements to which the bank
holding company may be subject would not cause the subsidiary bank's ratio of
-2 -

gross capital to assets to fall below 8 percent during the 12-year period fol­
lowing consummation of the acquisition. Gross capital is defined as the sum of
total stockholders' equity, the allowance for possible loan losses, and subor­
dinated capital notes and debentures.
3.

Reduction in Parent Company Leverage

The applicant must demonstrate to the satisfaction of the Board that
the parent holding company's ratio of debt to equity will decline to 30 percent
within 12 years after consummation of the acquisition. The holding company must
also demonstrate that it will be able to safely meet debt servicing and other
requirements imposed by its creditors.
The term "debt," as used in the ratio of debt to equity, means any bor­
rowed funds (exclusive of short-term borrowings that arise out of current trans­
actions, the proceeds of which are used for current transactions), and any se­
curities issued by, or obligations of, the holding company that are the functional
equivalent of borrowed funds.
The term "equity," as used in the ratio of debt to equity, means the
total stockholders' equity of the bank holding company adjusted to reflect the
periodic amortization of "goodwill" (defined as the excess of cost of any ac­
quired company over the sum of the amounts assigned to identifiable assets ac­
quired, less liabilities assumed) in accordance with generally accepted account­
ing 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 sub­
stitute for common stock in a one-bank holding company formation. Nevertheless,
to a limited degree and under certain circumstances the Board will consider re­
deemable 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 com­
pany would be at or remain below 30 percent following the redemption or retire­
ment of any preferred stock. Preferred stock that is convertible into common
stock of the holding company may be treated as equity.
4.

Dividend Restrictions

The bank holding company is not expected to pay any corporate dividends
on common stock until such time as its debt to equity ratio is below 30 percent.
However, some dividends may be permitted provided all of the following conditions
are met: a) the applicant has begun making scheduled repayments of principal
on the acquisition debt; b) such scheduled repayments of principal are reasonable
in amount, will be made at least annually, and will allow for the retirement of
the acquisition debt over a period not to exceed 25 years; and c) the applicant
can clearly demonstrate at the time the application is filed that such dividends
will not jeopardize the ability of the holding company to reduce its debt to equity
ratio to 30 percent within 12 years of consummation of the proposal or cause the
gross capital to assets of the subsidiary bank to fall below 8 percent over the
same period. Also, it is expected that dividends will be eliminated if the hold­
ing company is not meeting the projections made at the time the application was
-3 -

filed regarding the ability of the holding company to reduce the debt t o e q u i t y
ratio to 30 percent within 12 years of consummation of the proposal.
Board of Governors of the Federal Reserve System, March 28, 1980.

(signed) Theodore E. Allison

Theodore E. Allison
Secretary of the Board


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102