The Small BHC Policy Statement has traditionally allowed smaller depository institution holding companies to operate with higher levels of debt than is otherwise permitted for larger banking organizations, which can expedite the transfer of ownership of these entities. Holding companies that meet certain qualitative standards are also excluded from consolidated capital requirements.
Holding companies that meet the qualitative requirements outlined in the Small BHC Policy Statement may generally use debt to finance up to 75 percent of the purchase price of an acquisition. This intended benefit will be a significant new tool for qualifying SLHCs looking to finance an acquisition. For small S&L holding companies they will be able to issue debt at the holding company level using the proceeds to downstream equity that qualifies as Tier 1 capital without netting the debt from capital which was required before the amendment. Small bank holding companies will be able to use more debt than they have previously been able to use in acquisition financing. This could also provide significant new flexibility for qualifying subchapter S banks looking to expand without losing subchapter S status. However, small banks and S&Ls are also subject to certain ongoing requirements, such as requirements that a qualifying holding company: (i) reduce its parent company debt in such a manner that all debt is retired within 25 years of being incurred; (ii) reduce its debt-to equity ratio to .3:1 or less within 12 years of the debt being incurred; (iii) ensure that each of its subsidiary insured depository institutions is well capitalized; and (iv) refrain from paying dividends until such time as it reduces its debt-to-equity ratio to 1:1 or less.
The Small BHC Policy Statement also specifically provides that a qualifying BHC may not: use the expedited procedures under the Board’s Regulation Y for acquisition proposals (12 CFR 225.14 or 225.23); or obtain a waiver of the stock redemption filing requirements applicable to BHCs under the Board’s Regulation Y (12 CFR 225.4(b)) unless such qualifying BHC has a pro forma debt-to-equity ratio of 1:1 or less.
The Federal Reserve Board press release, including the Final Rule, can be found here.
Locke Lord has a dedicated team of bank regulatory and transaction attorneys with significant experience with state and federal banking laws and regulations. Locke Lord banking attorneys regularly advise financial institutions on regulatory compliance matters and represent clients in regulatory enforcement matters, class actions and various lawsuits in the U.S. and abroad. Visit our Bank Regulatory and Transactions Practice Group page at or contact the authors with questions.
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