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SEC Increases Smaller Reporting Company Threshold

The Securities and Exchange Commission amended its definition of “smaller reporting company” (an “SRC”) increasing the public float threshold (cap on portion of shares held by public investors) to $250 million, up from the prior $75 million threshold.  Companies with a public float of up to $700 million may also qualify for SRC status under the new rule if their annual revenues are less than $100 million.

Benefits of SRC Status

The less rigorous reporting requirements for SRC’s provide a number of benefits to qualifying companies.  The Independent Community Bankers of America estimates that SRC status—thus exemption from the 404(b) reporting requirements—could cut audit fees for qualifying bank holding companies by as much as 50%.   Included in the lesser filing requirements for SRCs are the following scaled disclosure accommodations:

  • Audited historical financial statement filing requirements are reduced to two years (rather than three for larger reporting companies)
  • Less rigorous disclosure for annual and quarterly reports, proxy statements and registration statements
  • Two years of income statements (rather than three)
  • Two years of changes in stockholders’ equity (rather than three)
  • Reduced compensation disclosures
  • No stock performance graph required
  • Not required to make quantitative and qualitative disclosures about market risk

Methods of Calculation

A company’s public float, the total market value of the company’s outstanding common stock (voting and non-voting) held by non-affiliates or non-insiders, is the amount reflected on the first page of the company’s 10-K as the “aggregate market value of the common stock held by nonaffiliates of the registrant.”   The public float is measured as of June 30th each year.

To calculate “annual revenues” for the $100 million SRC limit, a financial institution must calculate its gross revenues earned from traditional banking activities.

Interest income

+ non-interest income

– gains and losses on securities

= annual revenues

The calculation of annual revenues is from the most recent 12 months for which audited financials are available.  We have no reason to believe based on the issuance of this new rule that the SEC will change the calculation of annual revenues for financial institutions.

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Congress Makes Capital Requirements Easier for Small Banks

Author’s Note: On April 9, 2015, the Federal Reserve adopted a final rule to implement the changes discussed below.  The final rule will be effective 30 days after publication in the Federal Register.

For many years, bankers have asked the question, “What size is the right size at which to sell a small community bank?”  Some offer concrete asset size thresholds, while others offer more qualitative standards. We have always believed the best answer is “whatever size allows an acquirer’s profits and capital costs to deliver a better return than yours can.” While that answer is typically greeted with a scratch of the head, a recent change in law impacts the answer to that question for smaller companies. Given a proposed regulatory change by the Federal Reserve, a growing number of small bank holding companies will soon have lower cost of capital funding options that are not available to larger organizations.

President Obama recently signed into law an act meant to enhance “the ability of community financial institutions to foster economic growth and serve their communities, boost small businesses, and increase individual savings.” The new law directs the Board of Governors of the Federal Reserve System to amend its Small Bank Holding Company Policy Statement by increasing the policy’s consolidated assets threshold from $500 million to $1 billion and to include savings and loan holding companies of the same size. By design, more community banks will qualify for the advantages of being deemed a small bank holding company.

The Federal Reserve created the “small bank holding company” designation in 1980 when it published its Policy Statement for Assessing Financial Factors in the Formation of Small One-Bank Holding Companies Pursuant to the Bank Holding Company Act. The policy statement acknowledged the difficulty of transferring ownership in a small bank, and also acknowledged that the Federal Reserve historically had allowed certain institutions to form “small one-bank holding companies” with debt levels higher than otherwise would be permitted for larger or multibank holding companies. The first version of the policy statement had a number of criteria for what constituted a small bank holding company, most importantly that the holding company’s subsidiary bank have “total assets of approximately $150 million or less.” The asset threshold has been revised on several occasions, most recently in 2006 to the current level of $500 million in consolidated assets.

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