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FEDERAL RESERVE BANK

OF NEW YORK

r Circular No. 8792 L April 9, 1980

FORMATION OF SMALL ONE-BANK HOLDING COMPANIES 

Policy on Assessing Financial Factors

To All 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 pol i cy appl i es to one- bank hol di ng compani es meet i ng both of the f ol l owi ng condi t i ons: totalassets of approxi matel y $150 mi l l i on or l ess and no si gni f i cant nonbank acti vi ti es that use l arge amount s of

debt i n thei r busi nesses.

It permi t s acqui si t i on by one- bank hol di ng compani es of smal l communi t y banks under revi sed terms.

 The new t erms cont i nue i n mor e fl exi bl e f or mt he Boar d’s standi ng pol i cy of permi t t i ng transfer of ownershi pof such banks on l ess demandi ng terms than those the Boar d appl i es i n consi deri ng appl i cati ons i nvol vi ng

l arger banks.

 The Boar d gave thi s backgr ound to i ts proposal :

I n acti ng on appl i cati ons fi led under the Bank Hol di ng Company Act, the Boar d has adopted, and con

ti nues to fol l ow, the pri ncipl e that bank hol di ng compani es shoul d serve as a source of st rength for thei r

subsi di ary banks. . ..

 The Boar d bel i eves that a hi gh l evel of debt at the parent hol di ng company l evel i mpai rs the abi l i ty of abank hol di ng company to provi de f i nancial assi stance to subsi di ary bank( s) , and i n some cases theservici ng requi rements on such debt may be a signi f i cant drai n on the bank’s resources. For these reasons,

the Boar d has not f avored the use of acqui si ti on debt i n f ormati ons of bank hol di ng compani es. Never thel ess, the Board has recogni zed that t he transfer of ownershi p of smal l banks of ten requi res the use ofacqui si ti on debt. The Board, therefore, has permi t ted the f ormati on of smal l one- bank hol di ng compani eswi th debt l evel s hi gher than woul d be permi t ted for l arger or mul t i bank hol di ng compani es.

Whi l e cont i nui ng to adhere to these pri ncipl es, the Boar d has r eexami ned the factors whi ch appl y to smal lone- bank hol di ng company appl i cati ons wi th a vi ew to i mprovi ng the fl exibi l i ty of these compani es i n deal i ng

wi t h thei r debt obl i gati ons.

Past pol i cy cal l ed for r epayment of all acqui si ti on debt wi thi n 12 years, whi l e mai ntai ni ng a sati sfactory

l evel of capi tal i n the company’s bank subsi di ary.

 The revi sed pol i cy provi des that the hol di ng company’s debt to equi ty rati o be reduced to no mor e than

30 percent wi thi n 12 years, whi ch is approxi matel y the l evel mai ntai ned by many mul t i bank hol di ng compani es.

 Thi s can be accompl i shed by di rect debt repayment , or by bui l di ng up equi ty through the retenti on of

earni ngs, or both.

 The new pol i cy requi res that capi tal i n the subsi di ary bank be mai ntai ned at no l ess than 8 percent of

assets, and al l ows for reasonabl e hol di ng company di vi dends and the use of pref erred stock as equi ty under

certai n condi ti ons.

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 n t h o n y  M. S o l o m o n ,

 President.

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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)

 AGE NC Y: Board of Governors of the Federal Reserve System 

 AC TI ON : Policy Statement

SUMMARY: In the interest of improving the transferabil ity of owners hip of

small commu nity banks and facilita ting 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 pol icy statem ent is effe ctive March 28, 1980.

POLICY STATEMENT

OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM  

FOR ASSESSING THE FINANCIAL FACTORS IN 

THE FORMATION OF SMALL 0NE-3AN K HOLDING COMPANIES 

PURSUANT TO THE BANK HOLDING COMPANY ACT

In acting on applications filed under the Bank Holding Company Act, 

the Board has adopted, and continu es to follow, the princip le that bank hold

ing companies should serve as a source of strength for their subsidiary banks.  

 When bank holding companies incur debt and re ly upon the earnings of thei r sub

sidiary banks as the means of repa ying such debt, a questio n 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 finan ci al  

assistan ce to its subsidiar y bank and in some cases the servicing re quirements on 

such debt may be a signifi cant 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 

owners hip of small banks often requires the use of acquisit ion debt. The Board  

therefore has permitted the formation of small one-bank holding companies with  

debt levels high er than would be permit ted for larger or multib ank holding c om

 panie s. Approval of thes e applications has be en given on the condition that the 

small one-bank holding companies demonstrate the ability to service the acquisi

tion debt witho ut str aining the capital of their subsidia ry 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.

Cir No. 8792)

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In the interest of furthe ring its poli cy of facilitati ng the transfer 

of ownership in banks without diluti ng 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 cri teria shift the focus from debt repa yment to the rel a

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, newl y 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 maintain ed by many 

large and multibank holding companies.

In general, this policy is intended to apply only to one- bank holdi ng 

companies that would not have signi ficant leveraged nonbank activities and whose 

subsidiary bank would have total assets of approximately $150 million or less at 

the time the app lica tion is filed. Small one- bank holding companies formed before the effectiv e date of this pol icy may s witch to a plan that adher es to the

 

intent of this pol icy provi ded they comply with criteria 2, 3, and 4 set forth

 below.

The criteria are as follows:

General

In eva luat ing applica tion s filed purs uant to Sectio n 3( a) (1) of the 

Bank Holdi ng Compa ny Act, as amended, when the applic ant intends to incur debt 

to finance the acqui siti on of a small bank, the Board will take into account a 

full range of financial and other information, includin g the recent trend and  

stabi lity of earnings of the bank, the past and prospe ctiv e growt h of the bank, 

the quality of the bank's assets, the abil ity of the appli cant to meet debt s er

vicing require ments without placi ng 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 appl icant s to meet the min imum req uireme nts set 

forth below. As a general rule, fail ure to meet any of these requi remen ts will 

resul t in denia l of the application; however, the Board rese rves the right to 

 make exceptions if the circumstances warrant.

1. Mini mum Down Paymen t

The amount of acquis ition debt should not exceed 75 percent of the 

 purchase price of the bank to be acquired. When the owner(s) of the holding 

comp any incur debt to finance the purch ase of the bank, such debt will be con

sidered acquisition debt even though it does not rep resent 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

tion. An applicant proposi ng to use acquisitio n 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

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gross capital to assets to fall below 8 percent during the 12-year period fol

lowing consu mmati on of the acquisit ion. Gross capital is defi ned as the sum of 

total stockholders' equity, the allowance for possi ble loan losses, and sub or

dinated capital notes and debentures.

3. Reducti on in Paren t Comp any Lever age

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 proce eds of whic h are used for current tr an sa cti on s) , 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 a djusted to reflect the 

 periodic amortization of "goodwill" (defined as the exces s of cos t 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 ac count

ing princip les. In dete rmin ing the total amount of stockholders' equity, the 

 bank holding company sho ul d account for its investmen ts 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 commo n stock in a one- bank holding comp any formation. Neverthe less,  

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 follo wing condi tions are met: 1) the pre ferr ed stock is rede emab le only 

at the option of the issuer and 2) the debt to equity ratio of the hold ing co m

 pany would be at or remain below 30 percent foll ow ing the redemption or retire

 ment of any preferred stock. Prefer red stock that is convertible into common 

stock of the holding c ompan y may be treat ed as equity.

4. Divid end Restricti ons

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 conditi ons 

are met: a) the appli cant has begun maki ng schedu led repaym ents of prin cipal

on the acqui siti on debt; b) such sched uled repaym ents of princ ipal are reason able 

in amount, will be made at least annually, and will allow for the retirement of  

the acqu isit ion debt over a period not to exceed 25 years; and c) the appli cant 

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 divide nds will be elimi nate d if the ho ld

ing comp any is not mee ting the project ions made at the time the applic atio n was

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filed regarding the ability of the holding company to reduce the debt to equity  

ratio to 30 percent within 12 years of consummation of the proposal.

Board of Governors of the Federal Reserve System, March 28, 1980.

(signed) Th eod ore S. All iso n

Theodore E. Allison 

Secretary of the Board