Community Bank Access to Capital

Position

  • ICBA supports legislative and regulatory changes that would improve the ability of community banks to raise capital.
  • ICBA supports increasing the asset limit under the Federal Reserve’s Small Bank Holding Company Policy Statement from $1 billion to $10 billion. This change would make it easier for many community bank holding companies and small savings and loan holding companies to issue debt and equity that could be used to support their banking subsidiaries.
  • Subchapter S of the tax code should be updated to facilitate capital formation for community banks by increasing the shareholder limit for Subchapter S eligibility, allowing the issuance of preferred shares, and permitting individual retirement account (IRA) shareholders.
  • The present exemption for publicly held community banks from the internal control attestation requirements of Section 404(b) of the Sarbanes Oxley Act should be increased from $75 million in market capitalization to $350 million. The asset threshold under the Federal Deposit Insurance Corporation Improvement Act (FDICIA) for requiring an annual audit should be raised from $500 million to $1 billion, and the asset threshold for an internal control report, also required by FDICIA, should be raised from $1 billion to $10 billion.
  • SEC Regulation D should be revised so that the definition of an “accredited investor” would include individuals with a net worth of $1 million or more, including their primary residence. The number of non-accredited investors allowed to purchase stock pursuant to a Rule 506 private offering should be increased from 35 to 50.

Background

Access to capital for community banks has never been more difficult than it is today. Since 2007, the public capital markets have been either unavailable or unattractive to many community banks and holding companies. Many community banks have had to rely more on existing shareholders, directors and insiders for capital raises and less on new investors, including institutions and private equity investors. Furthermore, many community banks will need to raise additional capital not only for business purposes but also to ensure compliance with regulatory requirements including Basel III. Those community banks that have not redeemed their Troubled Asset Relief Program (TARP) or Small Business Lending Fund (SBLF) securities, or that have been deferring dividends on their trust preferred securities, have additional capital needs.

As a result of ICBA’s advocacy, Congress passed legislation that raised the asset limit under the Federal Reserve’s Small Bank Holding Company Policy Statement to $1 billion and, for the first time, allowed savings and loan holding companies with assets of less than $1 billion to be covered by the Policy Statement. Already, larger community bank holding companies are taking advantage of the institutional bond market and issuing investment grade bonds. ICBA believes the qualifying threshold should be further increased to $10 billion. Bills pending in the House and Senate would raise this threshold to various levels, some as high as $10 billion. This change would allow more community bank holding companies to issue debt on an unconsolidated basis and downstream the proceeds as capital to their subsidiary banks.

Various tax code changes would facilitate capital formation for Subchapter S banks. The limit on Subchapter S shareholders should be increased from 100 to 200; Subchapter S corporations should be allowed to issue preferred shares; and Subchapter S shares, both common and preferred, should be permitted to be held in individual retirement accounts (IRAs).

The present exemption that small publicly held corporations have from the internal control attestation requirements of Section 404(b) of the Sarbanes-Oxley Act should be increased from $75 million in market capitalization to $350 million for community banks. Because community bank internal control systems are monitored continually by bank examiners, they should not have to sustain the unnecessary annual expense of paying an outside audit firm for attestation work.  In addition, the asset thresholds for requiring both an annual audit of an insured depository institution by an independent public accountant and for an internal control report under the Federal Deposit Insurance Corporation Improvement Act (FDICIA) should be raised to reflect industry consolidation and the overall increase in size of community banks. The asset threshold for requiring an annual audit should be raised from $500 million to $1 billion, and the asset threshold for an internal control report should be raised from $1 billion to $10 billion.

Community banks often rely on the safe harbor of SEC’s Regulation D when raising capital. However, SEC Regulation D should be revised so that the definition of an “accredited investor” includes individuals with a net worth of $1 million or more, including their primary residence. The current definition requires individuals to exclude their primary residence when computing their net worth. The number of non-accredited investors allowed to purchase stock pursuant to a Rule 506 private offering should also be increased.  

Staff Contact: Chris Cole