This story is the first in aseries on the Dodd-Frank Act in the weeks leading up to the legislation's fifthanniversary.

Nathan Stovall is a senioreditor and columnist with SNL Financial. The views and opinions expressed inthis piece are those of the author and do not necessarily represent the viewsof SNL.

Smallerbanks can use debt to fund organic growth and acquisitions, but they betterhave their regulators fully on board and pay attention to certain limits beforeadding leverage to their balance sheets.

Bankindustry experts said during an SNL-hosted webinar,"Raising and Managing Capital in a Post Dodd-Frank World," thatcommunity banks now have more capital-raising options available to them than inthe years following the credit crisis. The group said banks no longer need torely solely on common equity when raising capital and can harness leverage tofinance growth, but they need to communicate with their regulators early andoften through the process, and offer a clear plan on how they intend to managetheir debt service.

Bankcapital standards have changed significantly in the aftermath of the Dodd-FrankAct. Ultimately, regulators mandated that banks not only hold more capital, buthigher concentrations of common equity.

Morerecently, in April, the Federal Reserve expanded the applicability of the small bank holdingcompany policy statement to raise the asset threshold to $1 billion from $500million. The Fed also said that the rule would apply to certain savings andloan holding companies. Institutions falling under the $1 billion assetthreshold will be able to hold greater leverage at their holding companies anddownstream funds to their bank subsidiaries and count them as equity capital.

JulieStackhouse, senior vice president of banking supervision and regulation at theFederal Reserve Bank of St. Louis, noted during the webinar that the expansionof the small bank holding company policy statement represented a "bigwin" for community banks. Stackhouse said listeners likely know thatregulators will say common equity is the "best form of capital" —that much is clear in the final Basel III capital rules. However, Stackhousesaid regulators are open to other forms of capital, as long as banks considerhow they will service debt on their balance sheets. She said banks need to alsopay attention to covenants attached to certain instruments and evaluate if theycould trigger a change in control.

"Leverageis acceptable … it just can't be excessive," Stackhouse said on thewebinar.

Sheand others on the webinar agreed that regulators want to see banks engage inregular capital planning, at least on an annual basis. Banks must also takecare to communicate with regulators when changes to their capital plans occur,whether such alterations are the result of the institution taking a newstrategic approach or if they are in response to fluctuations in marketconditions.

MikeStevens, senior executive vice president in the policy and supervision divisionat the Conference of State Bank Supervisors, said banks should make theirregulators aware of what they are doing and even more importantly, what theyare thinking about pursuing. He said banks should target capital plans abovethe minimum regulatory thresholds and ensure that they are in sync with theirstrategic plans. Stevens further said that regular engagement with state andfederal regulators is critical to a bank's strategic and capital-planningprocess.

"Ifyour regulator is having to read about you in the newspaper, that's probablythe worst place you want to be," Stevens said on the webinar. "Goodnews or bad news. They should receive advance notification." He added thatany surprise with a regulator could set "you back miles."

Stackhouseechoed that sentiment and said she wants to see a bank's capital plan inconjunction with its strategic-planning process. She said regulators evaluateleverage during regular examinations, but pay considerable attention toleverage levels when a bank submits an application. Stackhouse said there aresome "light rules" around leverage associated with acquisitions. Forinstance, Stackhouse said that anytime a bank is planning to use leverage tofinance an acquisition that will push its debt-to-equity ratio above 100%, itwill require processing the application at the Federal Reserve Board ofGovernors.

"Thatdoes matter to a lot of banking organizations," Stackhouse said.

Mostbanking organizations would prefer that applications are dealt with at localreserve banks to avoid possible delays in their expansion plans. Randy Dennis,president of DD&F Consulting Group, said banks looking to grow throughacquisitions with the aid of leverage would be wise to keep the 1-to-1debt-to-equity ratio in mind.

"Youdon't want to go above it," Dennis said on the webinar. "Not that wedon't love Washington, but it's always better to stay in the district banks."

Dennisbelieves smaller banks will utilize leverage more with the recent expansion ofthe small bank holding company policy statement. He said many banks areperforming well and will be able to service additional debt levels at theirholding companies.

"Ithink we'll see holding company debt as a more viable tool, borrowing at theholding company and pushing down to the bank," Dennis said.

JoshuaSiegel, managing partner and CEO at StoneCastle Partners LLC, and chairman andCEO at StoneCastle FinancialCorp., encouraged bankers listening to the webinar to consider themerits of issuing debt over common equity to finance future growth. He saidbanks have always had misconceptions about what is good capital and howregulators really feel about different instruments. He said regulators are opento healthy banks issuing debt or noncumulative perpetual preferred stock attheir holding companies and then downstreaming those funds to their banksubsidiaries and counting them as capital.

"Commonequity, you can't undo it. Once you've made that choice, you've sold away thefuture of the company," Siegel said on the webinar.

Siegelsaid many banks seem to have recognized that the market has changed since the earlyyears that followed the credit crisis. Siegel said a shift in thecapital-raising process has occurred as institutions have become smarter aboutwhat they can raise, how they can limit dilution and avoid giving up controlrights or board seats. He said banks looking to raise capital need to have aclear outlook about what they can achieve, understand their investor base, andhave transparent and honest communication with their regulators through theprocess.

"Thereis a real opportunity to raise capital in the market today for a healthycommunity bank — doesn't have to have a story of an IPO or rollup, just normalbusiness — being able to raise capital at 6.75%, 7.25% and being able todownstream that. That's about 4.4% after tax. That's a very efficient cost ofcapital," Siegel said.