Full text of Federal Reserve Bank of New York Circulars : 8792. Formation of Small One-Bank Holding Companies

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FE D E R A L R ESER VE BANK
O F N EW YO RK
r C ircular No. 8792
L A p ril 9, 1980

FORMATION OF SMALL ONE-BANK HOLDING COMPANIES
Policy on Assessing Financial Factors
To A ll Commercial Banks and Bank Holding Companies
in the Second Federal Reserve District:

The Board of Governors of the Federal Reserve System has issued a policy statement setting
forth the criteria for assessing financial factors in considering applications for the formation of
small one-bank holding companies. The new policy is designed to facilitate the change in owner­
ship of small banks and to help maintain the safety and soundness of the banking system.
The following is quoted from the Board’s announcement of the new policy:
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 applications involving
larger banks.
The Board gave this background to its proposal:
In acting on applications filed under the Bank Holding Company Act, the Board has adopted, and con­
tinues 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 holding 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 acquisition debt in formations of bank holding companies. Never­
theless, 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 companies.
While continuing to adhere to these principles, the Board has reexamined 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 than
30 percent within 12 years, which is approximately 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 maintained 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 conditions.

A copy of the Board’s policy statement is enclosed. Questions thereon may be directed to our
Domestic Banking Applications Department (Tel. No. 212-791-5861).




A

nthony

M.

S olom on,

President.

FEDERAL RESERVE SYSTEM
POLICY STATEMENT
F O R A S S E S S I N G F I N A N C I A L F A C T O R S IN
TH E F O R M A T I O N O F S M A L L O N E - B A N K H O L D I N G C O M P A N I E S
P U R S U A N T TO T H E B A N K H O L D I N G C O M P A N Y AC T
(Docket No.

A GENCY:

B o a r d o f G o v e r n o r s o f the F e d e r a l

ACTION:

Policy Statement

R-0265)

Reserve System

SUMMARY:
In the i n t e r e s t of i m p r o v i n g the t r a n s f e r a b i l i t y of o w n e r s h i p of
small c o m m u n i t y b a n k s and f a c i l i t a t i n g loc a l o w n e r s h i p of s u c h i n s t i t u t i o n s , as
w e l l as h e l p i n g to m a i n t a i n the s a f e t y an d s o u n d n e s s of the b a n k i n g system, the
F e d e r a l R e s e r v e B o a r d has a d o p t e d a p o l i c y for a s s e s s i n g f i n a n c i a l f a c t o r s in
the f o r m a t i o n of sma l l o n e - b a n k h o l d i n g c o m p a n i e s .

DATE:

The p o l i c y s t a t e m e n t

is e f f e c t i v e M a r c h

28,

1980.

POLICY STATEMENT
OF T HE B O A R D O F G O V E R N O R S
F O R A S S E S S I N G THE
TH E F O R M A T I O N OF S M A L L
P U R S U A N T TO T HE B A N K

OF TH E F E D E R A L R E S E R V E S Y S T E M
F I N A N C I A L F A C T O R S IN
0NE-3ANK HOLDING COMPANIES
H O L D I N G C O M P A N Y AC T

In a c t i n g on a p p l i c a t i o n s fil e d u n d e r the B a n k H o l d i n g C o m p a n y Act,
the B o a r d has adop t e d , an d c o n t i n u e s to follow, the p r i n c i p l e tha t b a n k h o l d ­
ing c o m p a n i e s s h o u l d ser v e as a s o u r c e of s t r e n g t h for t h e i r s u b s i d i a r y banks.
W h e n b a n k h o l d i n g c o m p a n i e s inc u r d e b t and r e l y u p o n the e a r n i n g s of t h e i r s u b ­
s i d i a r y b a n k s as the m e a n s of r e p a y i n g suc h debt, a q u e s t i o n a r i s e s as to the
p r o b a b l e e f f e c t u p o n the f i n a n c i a l c o n d i t i o n of th e c o m p a n y and its s u b s i d i a r y
b a n k or banks.
Th e B o a r d b e l i e v e s

t h a t a h i g h level of d e b t at the p a r e n t h o l d i n g c o m ­

p a n y level i m p a i r s the a b i l i t y of a b a n k h o l d i n g c o m p a n y to p r o v i d e f i n a n c i a l
a s s i s t a n c e to its s u b s i d i a r y b a n k and in some c a s e s the s e r v i c i n g r e q u i r e m e n t s on
suc h d e b t m a y be a s i g n i f i c a n t d r a i n o n the b a n k ' s r e sources.
For these r e a s o n s
the B o a r d ha s no t f a v o r e d the u s e of a c q u i s i t i o n d e b t in the f o r m a t i o n of ba nk
holding companies.
N e v e r t h e l e s s , the B o a r d has r e c o g n i z e d t h a t the t r a n s f e r of
o w n e r s h i p of small b a n k s o f t e n r e q u i r e s the us e of a c q u i s i t i o n debt.
The B o ard
t h e r e f o r e has p e r m i t t e d the f o r m a t i o n of sma l l o n e - b a n k h o l d i n g c o m p a n i e s w i t h
d e b t l evels h i g h e r t h a n w o u l d be p e r m i t t e d for larg e r or m u l t i b a n k h o l d i n g c o m ­
panies.
A p p r o v a l of t h e s e a p p l i c a t i o n s has b e e n g i v e n on the c o n d i t i o n that the
small o n e - b a n k h o l d i n g c o m p a n i e s d e m o n s t r a t e the a b i l i t y to s e r v i c e the a c q u i s i ­
tion d e b t w i t h o u t s t r a i n i n g the c a p i t a l of t h e i r s u b s i d i a r y b a n k and, further,
tha t suc h c o m p a n i e s r e s t o r e t h e i r a b i l i t y to serve as a sou r c e of s t r e n g t h for
t h eir

ic. Cir

s u b s i d i a r y b a n k w i t h i n a r e l a t i v e l y sho r t p e r i o d o f time.

No. 8792)




In the i n t e r e s t of f u r t h e r i n g its p o l i c y of f a c i l i t a t i n g the t r a ns f e r
of o w n e r s h i p in b a n k s w i t h o u t d i l u t i n g b a n k s a f e t y and s o undness, the B o a r d has
r e e x a m i n e d the a n a l y t i c a l f r a m e w o r k and f i n a n c i a l c r i t e r i a it a p p l i e s w h e n c o n ­
s i d e r i n g the f o r m a t i o n of small o n e - b a n k h o l d i n g c o m p a n i e s an d ha s a d o p t e d c e r ­
tain r e v i s i o n s

in its p r o c e d u r e s

and s t a n d a r d s as d e s c r i b e d below.

The r e v i s e d c r i t e r i a s h i f t the focus fr o m d e b t r e p a y m e n t to the r e l a ­
t i o n s h i p b e t w e e n d e b t an d e q u i t y at the p a r e n t h o l d i n g c ompany.
Th e h o l d i n g
c o m p a n y w i l l h a v e the o p t i o n of i m p r o v i n g the r e l a t i o n s h i p of d e b t to e q u i t y by
r e p a y i n g the p r i n c i p a l a m o u n t of its d e b t o r t h r o u g h the r e t e n t i o n of e a rnings,
or both.
U n d e r t h e s e p r o c e d u r e s , n e w l y o r g a n i z e d small o n e - b a n k h o l d i n g c o m ­
p a n i e s w i l l be e x p e c t e d to r e d u c e the r e l a t i o n s h i p of t h e i r d e b t to e q u i t y o v e r
a r e a s o n a b l e p e r i o d o f ti m e to a level c o m p a r a b l e to tha t m a i n t a i n e d b y m a n y
large an d m u l t i b a n k h o l d i n g c o m p a n i e s .

companies

In gener a l , this p o l i c y is i n t e n d e d to a p p l y o n l y to o n e - b a n k h o l d i n g
that w o u l d no t ha v e s i g n i f i c a n t l e v e r a g e d n o n b a n k a c t i v i t i e s and w h o s e

s u b s i d i a r y b a n k w o u l d h a v e tot a l a s s e t s o f a p p r o x i m a t e l y $150 m i l l i o n or less at
the time the a p p l i c a t i o n is filed.
S m a l l o n e - b a n k h o l d i n g c o m p a n i e s formed b e ­
fore the e f f e c t i v e d a t e of this p o l i c y m a y s w i t c h to a p l a n that a d h e r e s to the
i n t e n t of thi s p o l i c y p r o v i d e d th e y c o m p l y w i t h c r i t e r i a 2, 3, and 4 set forth
below.
T h e c r i t e r i a are as

follows:

General
In e v a l u a t i n g a p p l i c a t i o n s

fil e d p u r s u a n t

to S e c t i o n

3 ( a ) (1)

of the

B a n k H o l d i n g C o m p a n y Act, as amen d e d , w h e n the a p p l i c a n t i n t e n d s to inc u r deb t
to f i n a n c e the a c q u i s i t i o n of a sma l l bank, the B o a r d w i l l take into a c c o u n t a
full r a ng e of f i n a n c i a l and o t h e r i n f o r m a t i o n , i n c l u d i n g the r e c e n t trend and
s t a b i l i t y of e a r n i n g s of the bank, the p a s t an d p r o s p e c t i v e g r o w t h of the bank,
the q u a l i t y o f the b a n k ' s a ssets, the a b i l i t y o f the a p p l i c a n t to m e e t d e b t s e r ­
v i c i n g r e q u i r e m e n t s w i t h o u t p l a c i n g an u n d u e s t r a i n on the b a n k ' s r e s o u r c e s, and
the r e c o r d a nd c o m p e t e n c y of m a n a g e m e n t of the a p p l i c a n t a n d the bank.
In a d d i ­
tion, the B o a r d w i l l r e q u i r e a p p l i c a n t s to m e e t the m i n i m u m r e q u i r e m e n t s set
f o r t h below.
As a g e n e r a l rule, f a i l u r e to m e e t a n y of t h e s e r e q u i r e m e n t s will
r e s u l t in d e n i a l of the a p p l i c a t i o n ; howe v e r , the B o a r d r e s e r v e s the r i g h t to
m a k e e x c e p t i o n s if the c i r c u m s t a n c e s w a r r a n t .
1.

Minimum Down Payment

The amount of acquisition debt

s h o u l d no t e x c e e d 75 p e r c e n t of

the

p u r c h a s e p r i c e of the b a n k to be acqu i r e d .
W h e n the owner(s) of the h o l d i n g
c o m p a n y inc u r d e b t to f i n a n c e the p u r c h a s e of the bank, such d e b t w i l l be c o n ­
s i d e r e d a c q u i s i t i o n d e b t e v e n t h o u g h it d o e s no t r e p r e s e n t an o b l i g a t i o n of the
b a n k h o l d i n g comp a n y , u n l e s s the owner(s) c a n d e m o n s t r a t e t h a t such d e b t c a n be
s e r v i c e d w i t h o u t r e l i a n c e o n the r e s o u r c e s of the b a n k or b a n k h o l d i n g company.
2.

M a i n t e n a n c e of A d e q u a t e C a p i t a l

tion.
A n a p p l i c a n t p r o p o s i n g to u s e a c q u i s i t i o n d e b t m u s t d e m o n s t r a t e to the
s a t i s f a c t i o n of the B o a r d tha t a n y d e b t s e r v i c i n g r e q u i r e m e n t s to w h i c h the ban k
h o l d i n g c o m p a n y m a y be




s u b j e c t w o u l d no t c a u s e the s u b s i d i a r y b a n k ' s

-2 -

rat i o of

g ross c a p i t a l to a s s e t s to fall b e l o w 8 p e r c e n t d u r i n g the 1 2 - y e a r p e r i o d f o l ­
l o w i n g c o n s u m m a t i o n of the a c q u i s i t i o n .
G r o s s c a p i t a l is d e f i n e d as the sum of
t o tal stockho l d e r s ' equity, the a l l o w a n c e for p o s s i b l e loan losses, and s u b o r ­
d i n a t e d c a p i t a l n o t e s an d d e b e n t u r e s .
3.

R e d u c t i o n in P a r e n t C o m p a n y L e v e r a g e

The a p p l i c a n t m u s t d e m o n s t r a t e

to the

s a t i s f a c t i o n of the B o a r d that

the p a r e n t h o l d i n g c o m p a n y ' s r a t i o of d e b t to e q u i t y w i l l d e c l i n e to 30 p e r c e n t
w i t h i n 12 y e a r s a f t e r c o n s u m m a t i o n o f the a c q u i s i t i o n .
Th e h o l d i n g c o m p a n y m u s t
als o d e m o n s t r a t e t h a t it w i l l be ab l e to s a f e l y m e e t d e b t
r e q u i r e m e n t s i m p o s e d b y its cr e d i t o r s .

s e r v i c i n g an d o t h e r

The t e r m "debt," as u s e d in the r a t i o of d e b t to equity, m e a n s a n y b o r ­
r o w e d funds (exclusive of s h o r t - t e r m b o r r o w i n g s that a r i s e o u t of c u r r e n t t r a n s ­
actions, the p r o c e e d s o f w h i c h are u s e d for c u r r e n t t r a n s a c t i o n s ) , and an y s e ­
c u r i t i e s i s s u e d by, or o b l i g a t i o n s of, the h o l d i n g c o m p a n y th a t are the f u n c t i o n a l
e q u i v a l e n t of b o r r o w e d

funds.

Th e t e r m " e quity," as u s e d in the rat i o of d e b t to equity, m e a n s the
total s t ockh o l d e r s ' e q u i t y of the b a n k h o l d i n g c o m p a n y a d j u s t e d to r e f l e c t the
p e r i o d i c a m o r t i z a t i o n of " g o o d w i l l " (defined as the e x c e s s of c o s t of a n y a c ­
q u i r e d c o m p a n y o v e r the sum of the a m o u n t s a s s i g n e d to i d e n t i f i a b l e a s s e t s a c ­
quired, less l i a b i l i t i e s assumed) in a c c o r d a n c e w i t h g e n e r a l l y a c c e p t e d a c c o u n t ­
ing p r i n c i p l e s .
In d e t e r m i n i n g the tot a l a m o u n t of s t o c k h o l d e r s ' equity, the
b a n k h o l d i n g c o m p a n y s h o u l d a c c o u n t for its i n v e s t m e n t s in the c o m m o n s t o c k of
s u b s i d i a r i e s by the e q u i t y m e t h o d of a c c o u n t i n g .

stitute

O r d i n a r i l y the B o a r d d o e s no t v i e w r e d e e m a b l e p r e f e r r e d s t o c k as a s u b ­
for c o m m o n s t o c k in a o n e - b a n k h o l d i n g c o m p a n y formation.
Nevertheless,

to a l i m i t e d d e g r e e an d u n d e r c e r t a i n c i r c u m s t a n c e s the B o a r d w i l l c o n s i d e r r e ­
d e e m a b l e p r e f e r r e d s t o c k as e q u i t y in the c a p i t a l a c c o u n t s of the h o l d i n g c o m p a n y
if the f o l l o w i n g c o n d i t i o n s are met:
1)
the p r e f e r r e d sto c k is r e d e e m a b l e o n l y
at the o p t i o n of the i s s u e r and 2)
the d e b t to e q u i t y r a t i o of the h o l d i n g c o m ­
p a n y w o u l d be at or r e m a i n b e l o w 30 p e r c e n t f o l l o w i n g the r e d e m p t i o n or r e t i r e ­
m e n t of a n y p r e f e r r e d stock.
P r e f e r r e d sto c k that is c o n v e r t i b l e into c o m m o n
s tock o f the h o l d i n g c o m p a n y m a y be t r e a t e d as equity.
4.

Dividend Restrictions

The b a n k h o l d i n g c o m p a n y is no t e x p e c t e d to p a y a n y c o r p o r a t e d i v i d e n d s
on c o m m o n s t o c k u n t i l s u c h time as its d e b t to e q u i t y r a t i o is b e l o w 30 p e r c e nt.
However, some d i v i d e n d s m a y be p e r m i t t e d p r o v i d e d all of the f o l l o w i n g c o n d i t i o n s
are met:
a)
the a p p l i c a n t has b e g u n m a k i n g s c h e d u l e d r e p a y m e n t s of p r i n c i p a l
on the a c q u i s i t i o n debt; b)
suc h s c h e d u l e d r e p a y m e n t s of p r i n c i p a l are r e a s o n a b l e
in amount, w i l l be m a d e at lea s t a nnually, and w i l l a l l o w for the r e t i r e m e n t of
the a c q u i s i t i o n d e b t o v e r a p e r i o d n o t to e x c e e d 25 years; an d c)
the a p p l i c a n t
c a n c l e a r l y d e m o n s t r a t e at the time the a p p l i c a t i o n is
w i l l not j e o p a r d i z e the a b i l i t y of the h o l d i n g c o m p a n y
r atio to 30 p e r c e n t w i t h i n 12 y e a r s of c o n s u m m a t i o n of
g r oss c a p i t a l to a s s e t s of the s u b s i d i a r y b a n k to fall
same period.
Also, it is e x p e c t e d th a t d i v i d e n d s w i l l
ing c o m p a n y is n o t m e e t i n g the p r o j e c t i o n s m a d e at the




-3-

______ ____________

____4.

f i l e d tha t s u c h d i v i d e n d s
to r e d u c e its d e b t to e q u i t y
the p r o p o s a l or cau s e the
b e l o w 8 p e r c e n t o v e r the
be e l i m i n a t e d if the h o l d ­
time the a p p l i c a t i o n was

filed r e g a r d i n g the a b i l i t y of the h o l d i n g c o m p a n y to r e d u c e the d e b t
r atio to 30 p e r c e n t w i t h i n 12 y e a r s of c o n s u m m a t i o n of the p r o p o s a l .




B o a r d of G o v e r n o r s of

the F e d e r a l R e s e r v e System,

(signed)

March

28,

T h e o d o r e S. A l l i s o n

T h e o d o r e E. A l l i s o n
S e c r e t a r y of the B o a r d

to e q u i t y

1980.