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FEDERAL RESERVE B O A R D WASHINGTON A D D R E S S O F F IC IA L C O R R E S P O N D E N C E T O T H E FEDERAL RESERVE B O A R D X-9215 May 20, 1935. SUBJECT: Inclusion of a "Reserve Fund for Dividends Payable in Common Stock11 as Part of a Member Bank's Capital and Surplus in Determination of Federal Reserve Bank Stock Which Should be Held by the Member Bank. Dear Sir: There is inclosed herewith for your information and guidance* in the event that cases involving similar circumstances come to your attention, a copy of a letter addressed by the Federal Reserve Board to the Assistant Federal Reserve Agent at the Federal Reserve Bank of Atlanta with regard to the necessity for a surrender of Federal re serve bank stock by a member bank upon retirement of preferred stock and the establishment of a reserve fund for dividends payable in common stock* As you know, numerous member banks have issued preferred stock, capital debentures, and capital notes which may be retired out of earnings, and it is understood that upon such retirement reserves are frequently established for the payment of common stock dividends in substantially the same manner as indicated in the attached letter. In any case where a reserve fund is thus set aside for dividends pay able in common stock, such reserve fund may be treated as surplus for X-9215 the purpose of determining the amount of Federal Reserve bank stock which should be held by the member bank involved. Applications for adjustments in Federal Reserve bank stockholdings, Forms 56 and 60, should indicate clearly the amount of ’’Reserve for dividends payable in common stock", and, accordingly, pending the revision of the forms it is suggested that this be accomplished on Form 56 by writing in the item ’’Reserves for dividends payable in common stock” immediately after the item ’’Surplus”, and on Form 60 by appending a note on the reverse side, immediately above the directors1 signatures, reading ’’The surplus on the above given date included a reserve for dividends payable in common stock of $ ________ The capital structure of the bank, including the existence or non-existence of a reserve for dividends payable in common stock, should be checked against condition reports or other available data, in accordance with the usual practice. The Comptroller’s office now notifies Federal reserve agents of all increases and decreases in capital stock of national banks, in cluding all retirements of preferred stock and all issues of common stock whether through the declaration of a stock dividend or otherwise* It is understood, however, that at present it will not be practicable for the Comptroller’s office to furnish similar advice with respect to transfers made to the account ’’Reserves for dividends payable in common stock” incident to retirements of preferred stock* Very truly yours, Chester Morrill Secretary. Inclosure TO ALL FEDERAL RESERVE AGENTS• 42o X-9215-a May 20, 1935. Mr. L. M. Clark Assistant Federal Reserve Agent Federal Reserve Bank of Atlanta Atlanta, Georgia. Deaf Mr. Clark: This refers to Mr. Newt or.*s letter of November 13, 1934, in which he advised that t h e ________ ________ _______________________ . _____________ . __ „__ ___ , contemplates the retirement of preferred stock at six arnth intervals out of earnings and intends, as preferred stock is so retired, to set up in a "special reserve fund" an amount equal to the par value of the shares retired. It appears that, when the reserve fund is of a sufficient amount to justify it, the bank will declare a stock dividend to its common stockholders out of such reserve fund. In these circumstances, he requests advice as to whether the Federal Reserve Bank of Atlanta may comply with the wish of the bank to ’withhold an application for an adjustment in its Federal Re serve bank stock holdings until such time as the entire recapitaliza tion plan has been completed. As you know, under the provisions of Section 5 of the Federal Re serve Act, subscriptions for Federal Reserve bank the capita.! and surplus of the member bank. stock are based on It is understood that the bank contemplates that the amounts set up in the "special reserve fund" referred to will be a part of the permanent capital of the bank, and X-9£15-a will not be resorted to .for any other purpose than the issuance of common stock dividends, and that such reserve fund is intended merely to facilitate adjustments of the Dank's capital stock. It is assumed that such purposes will be evidenced by a resolution or resolutions of the board of directors of the bank authorizing the establishment of the "special reserve fund" mid the setting aside of the appropriate amounts in such fund. In such circumstances, the Board is of the opinion that a "special reserve fluid" of the kind described may be regarded as "surplus" for the purpose of determining the amount of ^Federal Reserve bank stock which the bank is required or entitled to hold. Accordingly, since it is con templated that the r etirement by the _____, _____ _____________________ _ ______ __________ of its preferred stock will bo accompanied by a corres ponding increase in the amount of its surplus, including the "special reserve fund", the aggregate amount of the bank's capital and surplus will not- be altered by .such transaction; and it will not be necessary, therefore, as a result of such transaction for the bank to file an appli cation for a reduction in the amounc of Federal Reserve bank stock held by it. Since, however, the bank's December 51, 1954 condition report shows an aggregate capital and surplus, including the reserve for common stock dividends, of §193,500 on the basis of which it is required to hold 117 shares of Federal Reserve bank stock, and as it now holds only 114 shares of such stock, it should be requested to file an application for 3 additional shares of Federal Reserve bank stock, unless there has 42 ^ - 3 - been some further change in the bank’s capital and surplus. In this connection, it should be noted that if a bank holds an amount of Federal reserve bank stock in excess of an amount represented by 6 per cent of its capital and surplus (because of the exercise of its option, on previous occasions, not to surrender Federal re serve bank stock incident to reductions in surplus), such excess holdings would not be affected by the views of the Board stated herein with regard to a reduction of the bank's preferred stock and a siiuultaneous increase in its surplus represented by a re serve for dividends payable in common stock, and the right of the bank to subscribe at any time- for additional shares in view of its holding of such excess shares will be- governed by the previous rulings of the Board vith regard thereto. Very truly yours, (Signed) Chester Morrill Chester Morrill, Secretary.
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