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FE D E R A L RESER VE BA N K O F DALLAS DALLAS. TEX AS 75222 C irc u la r No. 75-105 J u ly 22, 1975 American Revolution Bicentennial PROPOSED AMENDMENTS TO REGULATIONS D AND Q TO A L L MEMBER BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE D ISTRICT: The Board of Governors of the Federal Reserve System has proposed amendments to its Regulation D, "Reserves of Member B anks," and Regulation Q, "Interest on Deposits," with respect to the issuance of subordinated debt. In connection with the proposed amendments, the Board also issued for comment guidelines to be applied by the Board in evaluating requests from State member banks for approval of new subordinated debt issues as an addition to the bank's capital s tru c tu re . To aid in the consideration of the proposed amendments and to facilitate the evaluation of the appropriateness and effectiveness of the guid elin e c r ite r ia , interested persons are invited to submit relevant data, view s, or argum ents. A n y such material should be submitted in w ritin g to the S e c re ta ry , Board of Governors of the Federal Reserve System, Washington, D . C . 20551 , to be received not later than August 29, 1975. The Board's proposal is p rinted on the enclosed pages as it appeared in the FEDERAL REGISTER on Ju ly 15, 1975. Additional copies w ill be furnished upon request to the S e creta ry 's Office of this Bank. Sincerely y o u rs, T . W. P la n t F i r s t V ic e P r e s i d e n t Enclosure This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Extract From FEDERAL REGISTER, VO L. 40, No. 136, Tuesday, July 15, 1975, pp. 29732 - 29735 FEDERAL RESERVE SYSTEM [ 12 CFR Part 204 and 217 ] [Reg. D and Reg. Q] RESERVES OF MEMBER BANKS AND INTEREST ON DEPOSITS Definition of Deposits— Subordinated Notes The Board of Governors proposes to amend Regulations D (12 CFR 204) and Q (12 CFR 217) to provide greater flexi bility to the requirements for exemption from deposit treatment under both regu lations where a member bank issues cer tain subordinated notes and debentures for the purpose of adding to the bank’s capital structure. These amendments would (1) modify the present require ment that an obligation have an original maturity of seven years or more to per mit an obligation (or an issue of obli gations) to have an average maturity of seven years or more under certain con ditions; (2) modify the present require ment that an obligation must be in an amount of at least $500 to permit excep tions to be made by the appropriate Federal banking agency to the $500 mini mum denomination (a) to facilitate sale of convertible debt where, in order to satisfy preemptive rights of sharehold ers, the bank would be required to issue a convertible obligation of less than $500 face amount; (b) to maintain a ratable unit offering to holders of preemptive rights where a subordinated debt obliga tion is issued exclusively as a part of a unit including shares of stock which are subject to such preemptive rights; (c) to satisfy shareholders’ ratable claims where an obligation is issued wholly or partially in exchange for shares of vot ing stock or assets pursuant to a plan of merger, consolidation, reorganization, or other transaction where the issuer will acquire either a majority of such shares of voting stock or all or substan tially all of the assets of the entity whose assets are being acquired; and (3) re quire the issuing bank to receive the approval of the appropriate Federal banking agency of any redemption prior to maturity or any payment pursuant to acceleration of maturity in event of de fault. Under the proposal, the Board would retain the option to deny a re quest that it waive the amount limita tion in those instances in which it deter mines that reasonable alternatives are available to the party seeking the waiver. If adopted, the amendments would ap ply to applications for new debt issues acted upon after the effective date of the amendments and would not affect the status of any outstanding issues. In all cases, the appropriate Federal bank ing agency is the Comptroller of the Currency for national banks and the Board of Governors for State member banks. Since 1966, the Board has exempted from reserve requirements of Regulation D and Interest rate limits of Regulation Q certain subordinated debt Issues of member banks by providing an excep tion to the definition of deposits under Regulations D and Q. Upon review of the existing regulation, the Board believes that, in certain circumstances, greater flexibility should be available to permit member banks to receive approval from the appropriate Federal banking agency for subordinated note and debenture is sues that may not conform to the exist ing regulatory requirements. Under the proposal, regular debt amortization or retirement could begin at any time so long as the weighted av erage maturity of the obligation or issue of obligations would be at least seven years and so long as once the reduction of principal begins, all scheduled repay ments of principal shall be made an nually in an amount no less than the previous scheduled payment. As an alter native, the Board is considering whether the seven-year minimum maturity should be retained for unamortized issues and a ten-year minimum maturity be set for amortized issues, with repayment begin ning at any time after the date of issue provided that once repayment of princi pal begins, all scheduled repayments shall be made annually in an amount no less than the prior scheduled repayment. The proposed exception to the $500 minimum denomination would facilitate sale of convertible debt where, in order to satisfy preemptive rights of stock holders, an issuing bank would be re quired to issue obligations in face amounts less than $500. An exception to the $500 minimum denomination is also proposed where, in order to maintain a ratable unit offering to holders of pre emptive rights in the case of a subordi nated debt obligation issued exclusively as part of a unit which includes shares of stock which are subject to such pre emptive rights, an issuing bank would be required to issue obligations in face amounts less than $500. The third pro posed exception to the $500 minimum de nomination requirement would apply where an issuing bank would be required to issue obligations in face amounts less than $500 in order to satisfy sharehold ers’ ratable claims in the case of an ob ligation which is issued wholly or par tially in exchange for shares of voting stock or assets pursuant to a plan of merger, consolidation, reorganization, or • other transaction in which the issuer will acquire either a majority of such share of voting stock or all or substantially all the assets of another entity. The provisions requiring prior approval of redemption and payment pursuant to acceleration of maturity are meant to permit the appropriate Federal banking agency to assess the impact of such pay ment on the capital structure of the bank. Pursuant to its authority under sec tion 19 of the Federal Reserve Act (12 U.S.C. 461) to define the terms used in that section, its authority to examine member banks under section 9 of the Federal Reserve Act (12 U.S.C. 325), its authority C take action to stop unsafe o and unsound banking practices (12 U.S.C. 1818b), and related provisions of the law, the Board proposes to amend Regulation D (12 CFR 204) and Regula tion Q (12 CFR 217) as follows: 1. Section 204.1 would be amended by revising paragraph (f) (3) as follows: § 2 0 4 .1 * D efin itio n s. * * * * (f) Deposits as including certain promissory notes and other obligations. For the purposes of this Part, the term “deposits” also includes a member bank’s liability on any promissory note, ac knowledgement of advance, due bill, banker’s acceptance, or similar obligation (written or oral) that Is issued or un dertaken by a member bank as a means of obtaining funds to be used in its thank ing business, except any such obligation that: * * * * ♦ (3) (i) Bears on its face, in bold-face type, the following: “This obligation is not a deposit and is not insured by the Federal Deposit Insurance Corporation”; is subordinated to the claims of deposi tors, is unsecured, and is ineligible as collateral for a loan by the issuing bank and also expressly states said provisions on its face; has a maturity of at least seven years, or, in the case of an obliga tion or issue that provides for scheduled repayments of principal, has an average maturity* of at least seven years* and provides that once repayment of princi pal begins, all scheduled repayments shall be made annually in an amount no less than the prior scheduled repay ment; is issued subject to a requirement that no repayment (other than an ap proved regularly scheduled repayment), including but not limited to a payment pursuant to acceleration of maturity, may be made without the prior written approval of the appropriate Federal banking agency;Tis in an amount of at least $500 except that the appropriate Federal banking agency may approve the issuance of an obligation that is less than $500 if the obligation is convertible into common stock and, in order to satis fy the preemptive rights of shareholders, the issuing bank would be required to is sue obligations in an amount of less than $500, or if the obligation is issued exclu sively as part of a unit including shares 6 The “average m a tu rity ” of an obligation or issue repayable in scheduled periodic pay m ents shall be th e tim e-w eighted average of all such scheduled paym ents. * T he Board is also considering w h eth er th e 7-year m in im u m m a tu rity should be re tain e d for u nam ortized issues and a 10-year m inim um m a tu rity be set for am ortized is sues w ith repaym ent beginning a t any tim e a fte r th e date of issue provided th a t, once rep ay m ent of principal begins, all scheduled, repaym ents shall be m ade a n n ually in a n a m o u n t no less th a n th e prior scheduled repaym ent. TFor th e purposes of th is p art, th e "ap p ro p riate Federal b a n k ing agency" is t h e Com ptroller of th e Currency In th e case of a n a tio n a l ban k a nd th e Board of Gover nors in th e case of a S ta te m em ber bank. at least seven years* and provides that once repayment of principal begins, all scheduled repayments shall be made an nually in an amount no less than the prior scheduled repayment; is issued sub ject to a requirement that no repayment (other than an approved regularly sched uled repayment), including but not lim ited to a payment pursuant to accelera tion of maturity, may be made without the prior written approval of the appro priate Federal banking agency;7 is in an amount of at least $500 except that the appropriate Federal banking agency may approve the issuance of an obligation that is less than $500 if the obligation is convertible into common stock and, in order to satisfy the preemptive rights of shareholders, the issuing bank would be required to issue obligations in an amount of less than $500, or if the obliga tion is issued exclusively as part of a unit including shares of stock which are sub ject to such preemptive rights and, in order to maintain a ratable unit offering to holders of preemptive rights, the issu ing bank would be required to issue obli gations in an amount of less than $500, or where, in the case of an obligation issued wholly or partially in exchange for shares of voting stock or assets pursuant to a * * * * * plan of merger, consolidation, reorga 2. Section 217.1 of Regulation Q would nization, or other transaction where the be amended by revising the introductory issuer will acquire either a majority of paragraph in paragraph (f) & (f) (3) as such shares of voting stock or all or sub stantially all of the assets of the entity follows: whose assets are being acquired, and in § 2 1 7 .1 D efin ition s order to satisfy shareholders’ ratable * * * * * claims, the issuing bank would be re (f) Deposits as including certainquired to issue obligations in an amount promissory notes and other obligations. of less than $500; and has been approved For the purposes of this Part, the term by the appropriate Federal banking “deposits” also includes a member agency as an addition to the capital bank’s liability on any promis structure of the issuing bank; or (ii) sory note, acknowledgment of advance, meets all of the requirements in the pre due bill, or similar obligation (written ceding clause except maturity and with or oral) that is issued or undertaken by respect to which the appropriate Federal a member bank principally as a means of banking agency has determined that ex obtaining funds to be used in its bank igent circumstances require the issuance ing business, except any such obligation of such obligation without regard to the that: provisions of this part; or (iii) was issued * * * * * or publicly offered before June 30, 1970, (3) (i) Bears on its face, in bold-face with an original maturity of more than type, the following: "This obligation is two years. * * * * * not a deposit and is not insured by the Federal Deposit Insurance Cor In connection with its consideration of poration”; is subordinated to the claims the regulatory amendments proposed of depositors, is unsecured, and is in herein, the Board also has determined eligible as collateral for a loan by that State member banks should be pro the issuing bank and also expressly vided with guidance as to the criteria to states said provisions on its face; has a be applied by the Board in evaluating maturity of at least seven years, or, in requests for approval of new issues of the case of an obligation or issue that subordinated notes and debentures “as provides for scheduled repayments of an addition to the bank’s capital principal, has an average maturity" of structure.” In acting upon requests from State •T h e “average m a tu rity ” of a n obligation or issue repayable in scheduled periodic p ay member banks for approval of proposed m en ts shall be th e tim e-w eighted average or issues of subordinated notes and de bentures, the Board takes into account all such scheduled paym ents. •T h e Board is also considering w hether various aspects of the applicant’s finan th e 7-year m in im u m m a tu rity should be cial condition and its prospective ca re ta in ed for un am o rtized issues an d a 10year m in im u m m a tu rity be set for am ortized pacity to service the proposed debt in of stock which are subject to such pre emptive rights and, in order to maintain a ratable unit offering to holders of pre emptive rights, the issuing bank would be required to issue obligations in an amount of less than $500, or where, in the case of an obligation issued wholly or partially in exchange for shares of voting stock or assets pursuant to a plan of merger, consolidation, reorganization, or other transaction where the issuer will acquire either a majority of such shares of voting stock or all or substantially all of the assets of the entity whose assets are being acquired, and in order to sat isfy shareholders’ ratable claims, the is suing bank would be required to issue ob ligations in an amount of less than $500; and has been approved by the appropri ate Federal banking agency as an addi tion to the capital structure of the issu ing bank; or (ii) meets all of the require ments in the preceding clause except ma turity and with respect to which the ap propriate Federal banking agency has determined that exigent circumstances require the issuance of such obligation without regard to the provisions of this part; or (iii) was issued or publicly of fered before June 30, 1970, with an orig inal maturity of more than two years; or issues, w ith repaym ent beginning a t any tim e afte r th e d a te of issue provided t h a t once re p ay m en t of p rin cipal begins, all scheduled repaym ents shall be m ade a n nu ally in an a m o u n t no less th a n th e prior scheduled re paym ent. ’ For th e purposes of th is p a rt, th e “a p p ro p riate Federal ban k ing agency” is th e Com ptroller of th e Currency in th e case of a n atio nal b an k an d th e Board of Governors in th e case of a S ta te m em ber bank. view of the bank’s earnings history and capital structure. Application of these criteria is intended also to promote the accumulation by debt-issuing banks of an adequate cushion of equity capital, protect against undue concentrations of maturing debt in any one year, and pre vent the inclusion of terms in such is sues that could be regarded as In con flict with the public interest. In addition, it is stressed that the guidelines set forth below, as applied by the Board are not intended to provide or be administered in a manner resulting in a rigid set of requirements in addition to those set forth in Regulations D and Q. Rather, they are to be administered flexibly, tak ing into account the special circum stances of particular applicants. (These might include the urgency of the bank’s need for additional capital and. the ac cessibility of additional equity, the prospective growth of the bank, the im pact of unusual income and expense de velopments on recent earnings, and the relative strength of earnings of nonbank affiliates or subsidiaries.) By publication of these guidelines which the Board intends to use in its evaluation of applications for such ex emption, the Board also invites com ments from the public on these criteria at the same time as comments are re ceived on the regulatory amendments proposed herein. The Comptroller of the Currency has advised the Board that he is considering use of the same guidelines in evaluating applications from national banks for ap proval of subordinated debt issues pursuant to 12 CFR 14.5. G u id e l in e -C riteria fo r E valuating D ebt I s su e s as A d d it io n to a S tate M ember B a n k ’s C apital S tru ctu re 1. M axim um ratio o f debt to equity. The total amount of subordinated notes and debentures outstanding, including the debt proposed to be issued, should not exceed 50 per cent of a bank’s equity capital base. However, banks with signifi cant asset or management problems gen erally would not be presumed to be en titled to issue debt capital up to the 50 per cent ceiling. A bank’s equity capital base, for purposes of this test, is con sidered to include capital stock, surplus, undivided profits, capital reserves, and all reserves for losses on loans and securities. 2. Earnings coverage test. The total of fixed charges as a result of any issue of subordinated notes or debentures should not exceed 33% per cent of a State mem ber bank’s average net income before taxes and before fixed charges over the preceding five years. Therefore, in gen eral, average adjusted net income should exceed total fixed charges by a multiple of at least three. For purposes of this test, before-tax net income would include securities gains or losses, exclude extra ordinary charges and credits, and would be adjusted where necessary to reflect actual loan loss experience rather than other “provision for loan loss.” Total fixed charges include annual interest charges before taxes on all existing debt program aimed at replacing shorteras well as the new debt proposed to be term debt with longer-term debt. issued. Fixed charges on existing debt 4. Accumulation of equity over the life would include interest on all outstanding of the debt. Each State member bank mortgage debt and subordinated notes issuing subordinated notes and deben and debentures, plus one-third of lease tures would be expected to accumulate contracts. equity, in equal annual installments In applying this test to a bank that is from retained earnings, in an amount a subsidiary of a holding company which sufficient to increase equity capital by the shows a net deficit on its nonbank oper full amount of outstanding and newly ations, the amount of such deficit, cal issued debt over the lifetime of the debt. culated on a before-tax basis, would be In effect, this requirement would provide substracted from net income as derived for replacement of each debt issue with from the paragraph above. To determine equity by maturity. the amount, if any, of net deficit on non 5. Provision for debt retirement. Where bank operations, net income before taxes the residual amount of a proposed new of the bank would be substracted from debt issue to be repaid at maturity, to consolidated net income before taxes of gether with scheduled repayments in the holding company. For multibank that year on other debt-type capital and holding companies, the nonbank net defi mortgage indebtedness, would exceed 15 cit generally would be allocated among per cent of the bank’s present capital subsidiary banks in proportion to their base, the bank shall either provide for net income. Ordinarily, the adjustment reducing the amount of debt outstand would be based on data for the most re ing at maturity by a sinking fund or cent year, but, in some cases, an average other debt-retirement arrangement or (covering not more than the most recent have the right to call such obligations fi(ve years) would be more representative for redemption at least five years before of prospective earnings experience. This maturity. adjustment, in effect, would reduce the 6. Approval of interbank debt transac allowable amount of new fixed interest tions. In general, the Board does not in expense which could be asumed by any tend to approve a subordinated note or bank whose nonbank affiliates, including debenture issued by a State member the parent holding company, incur an bank directly or indirectly (through a aggregate net deficit. The offset against holding company or otherwise) to the bank’s earnings recognizes the pos another bank as an addition to the issu sibility that the parent might have to ing bank’s capital structure unless spe rely on dividends from the bank in cifically authorized as such an addition order to cover a nonbank deficit, thereby by the Board of Governors upon a pres reducing the bank’s ability to maintain entation and finding of compelling cir or build its equity capital. cumstances. Such transactions provide 3. Retained earnings test. Annual prono additional capital protection for the forma amortization on all subordinated banking system as a whole and ordinar notes and debentures, including the pro ily will be discouraged. posed debt issue, should not exceed 50 7. Covenants in conflict with the public per cent of a State member bank’s aver interest. No indenture or other contract age retained earnings over the preceding covering the issuance of a subordinated five years. Retained earnings under this note or debenture by a State member criterion are considered to include net bank shall include any covenants, re income after taxes minus dividends de strictions, or other terms which are de clared on common and preferred stock. termined by the Board to be inconsistent For each issue of subordinated debt, in with the public interest. Examples of cluding a proposed new issue, annual pro such terms are those regarded as im forma amortization would be calculated pairing the ability of the bank to comply by dividing the original amount of the with statutory or regulatory require issue by the number of years from date ments regarding disposition of assets or of issue to maturity. Total pro forma incurrence of additional debt, limiting amortization would be the sum of annual the ability of the Board or the chartering pro forma amortization for all outstand authority to take any necessary action ing and proposed issues. to resolve a problem bank situation, un Considerable discretion would be used duly interfering with the ability of the In the administration of this test. In bank to conduct normal banking opera some circumstances, banks which have tions, or imposing terms and conditions issued additional shares of equity capi on the bank that are unduly harsh or tal during the five-year period for which onerous. average retained earnings are calculated E x a m p l e s o p P r o p o s e d G u i d e l i n e C r i t e r i a would receive credit for these new issues 1, 2 AND 3 as if they had been part of retained earn dem ings. In addition, some banks which have th The followingof calculations a n d 3o n strate e app lication T ests 1, 2, of th e outstanding substantial amounts of rel g uideline-criteria for evaluating d e b t issues. atively short-term subordinated debt T he d a ta used in th e calculations are fo r a prior to the issuance of these guidelines h yp o th etical bank, wholly-owned by a onewould be granted special consideration b a n k h olding company. W here applicable, item a a re rep rted In th e Consolidated In the application of the retained earn R ep osrtt hof t Incom e oan d Consolidated R eport ings test to proposed new issues, so long of C ondition are designated by th e ir lin e as the new Issues were part of a specified n um bers on th e req u ired reports. For ex ample, [RI-A10] refers to n e t incom e as re ported in Section A, line 10 of th e Report of Income. T otal assets, as reported on line 14 of th e R eport of C ondition would be identified as [RC-14]. All dollar am o u n ts are in th o u sa n d s of dollars. (Banks t h a t are re q uired to file a C onsolidated Report of Con d itio n including foreign an d dom estic su b sidiaries would use a m o u n ts show n in t h a t rep o rt, ra th e r t h a n those show n in th e Consolidated R eport of C ondition including only dom estic subsidiaries.) The h yp o th etical ban k presently has o u t sta n d in g two issues of sub ord in ated d eb t: (1) $8,000—8 percen t S ubordinated d eben tures, due Sept. 15, 1987. (2) $7,000—10 percent Capital notes, due Ju n e 30, 1980. I t proposes, on Ja n u a ry 1, 1975, to issue $9 m illion of ad ditional subo rdin ated d eb t on term s described in th e illu stratio n s t h a t follow. TEST 1: M A X IM U M R A T IO OF DEBT TO E Q U IT Y Guideline. T he to ta l a m o u n t of sub o rd i n a te d notes an d d ebentu res o u tstand in g , including su b o rd in ated deb t proposed to be issued, should n o t exceed 50 p ercen t of a b a n k ’s eq u ity capital base. Calculations 1. Sub ord in ated notes and deben tu re s o utstan d in g , Dec. 31, 1974 (RC-34) ____________________ $15,000 2. E quity capital, total, Dec. 31, 1974 (R C -35)________________ 50,000 3. Total reserves on loans and se curities, Dec. 31, 1974 (RC— _ 33) 4. E quity capital base (line 2 plus line 3 ) ______________________ 5. C u rren t ra tio of subordinated d eb t to equity capital base (line 1 divided by line 4 ) __________ 6. A m ount of proposed new issue- 10,000 60, 000 .25 9, 000 7. S ub o rd in ated debt, including proposed new issue (line 1 plus line 6 ) ______________________ 24, 000 8. R atio of subordinated debt, in cluding proposed new issue, to eq u ity capital base (line 7 d i .40 vided by line 4 ) ____________ Conclusion. Since th e ra tio of sub o rd in ated debt, including th e proposed new issue (line 8), does n o t exceed 50 percent, te s t 1 is m et. T E S T 2 : E A R N I N G S COVERAGE T E S T Guideline. I n general, average a n n u al a d ju ste d n e t Income over th e p a st 5 years shou ld exceed to ta l fixed charges, Including th e a n n u a l in te re st charge o n th e proposed new issue, by a m u ltip le of a t least 3. Calculations 9. Incom e before incom e taxes an d securities gains or losses, 1970-74 average (R I-A 3 )____ ,__________$9, 740 10. Net securities gains or losses, be fore tax effect, 1970-74 average (RI-A6 (col. 1 ) ) _______________ 290 11. Provision for lo an losses, 1970-74 average (RI-A21)1______________ 230 12. Net chargeoffs on loans, 1970-74 average (RI-D6 (col. 1 p lu s 2) m in u s RI-D3 (col. 1 p lu s 2 ) ) 1— 260 1 B anks usin g a ctu a l n e t chargeoffs as th e a m o u n t of th e ir provision fo r lo an losses need m ake no en trie s in lines 11 a n d 12. 13. N onbank deficit of hold in g com pany, If any, 1974 * (e n te r only if n egative n u m b e r)_____________ 14. Average ad ju ste d n e t incom e be fore incom e taxes, 1970-74 (line 9 p lu s line 10 plus lin e 11 m in u s lin e 12 p lu s line 13 )____________ (800) 9,200 15. In te re st o n su b o rd in ated notes a n d debentures, 1974 (R I-A 2f)_ 16. In te re st on m ortgage debt, 197417.% of lease paym ents o n ban k prem ises an d equipm ent, 1974— 18. Fixed charges on p resen t obliga tio n s (line 15 p lu s lin e 16 plus (line 17)............................................ 1,340 660 1, 000 3,000 19. Average a d ju ste d n e t incom e be fore fixed charges o n p resen t o bligations (line 14 p lu s lin e 18) 12,200 20. C u rre n t earn ing s coverage ra tio (line 19 divided by lin e 1 8)____ 4.07 21. A nnual in te re st charge o n p ro posed new issue (assum es a 9 p e rce n t a n n u a l r a te ) _________ 810 1 T his a d ju s tm e n t to n e t Incom e is m ade only If th e ban k is a subsidiary of a h olding com pany t h a t In cu rs a n e t deficit in Its n o n b a n k operations. T he n o n b an k deficit, cal cu la ted o n a before-tax basis, is th e negative difference o b tain ed by su b tra c tin g th e con solidated n e t Incom e of th e ban k from th e consolidated n e t Incom e of th e h olding com pany, b o th a d ju ste d in th e m an n e r Il lu stra te d in lin es 9 th ro u g h 12 of th is ex am ple. O rdinarily, th e a d ju s tm e n t fo r a n o n b a n k deficit would be based on d a ta fo r th e m o st re ce n t year, b u t in som e cases, a n aver age covering no m ore th a n th e m o st re ce n t 5 years would be m ore rep resen tativ e of pro spective earn ing s experience. 22. Average a d ju ste d n e t income, before fixed charges o n p resen t o bligations an d In tere st charge o n proposed new issue (lin e 19 p lu s lin e 2 1 )__________________ 13,010 23. Fixed charges on p resen t obliga tio n s an d Interest charge on p ro posed new issue (line 18 plus lin e 2 1 ) ............ ............................... 3,810 24. E arn ing s coverage ratio , in c lu d ing In tere st charge on proposed new issue (line 22 divided by lin e 2 3 )______________________ 3.41 Conclusion. T he earnin g s coverage ratio, includ in g th e in te re st charge o n th e pro posed new Issue (line 24) equ als 3.41 an d th erefo re m eets th e req u ire m en ts of te s t 2. T E S T 3 : R E T A IN E D E A R N I N G S T E S T G uideline. Average a n n u a l re ta in ed e a rn ings over th e p a st 5 years sh o uld exceed th e a n n u a l p ro form a a m o rtizatio n on all su b o rd in ated no tes an d deb en tures, in clu d ing th e proposed new issue, by a m u ltip le of a t lea st 2. Two illu stra tio n s are provided below. T he first exam ple (lines 30a th ro u g h 32a) as sum es a final m a tu rity of 10 years. T h e sec o n d exam ple (lines 30b th ro u g h 32b) a s sum es a final m a tu rity of 20 years. Calculations 25. N et incom e, 1970-74 average (RI-A10) ................................ ........$8,000 31a. T o tal pro form a am ortization, in clu d in g propo6ed new issue lin e 38 plus line 30 a)________ 2, 433 32a. R etained earnings ratio, in c lu d ing proposed new issue (line 27 divided by line 3 1 a)_______ 1. 64 Conclusion. U nder a n assum ed final m a tu r ity of 10 years for th e proposed new issue, t h e b a n k ’s re ta in ed earn ing s ra tio of 1.64 (line 32a) would n o t m eet th e m in im um re q u irem e n t of te s t 3. Calculations Assum ing a 20-year final m a tu rity o n proposed new Issue: 30b. Pro form a am o rtizatio n of p ro posed new issue (line 6 divided by a final m a tu rity of 20 years) ______________________ $450 31b. T otal pro form a am ortization, including proposed new issue (line 28 plus line 3 0 b )_______ 1,983 32b. R etain ed earn ing s ratio , in clu d in g proposed new issue (line 27 divided by line 3 1 b )__________ 2. 02 Conclusion. T he longer final m a tu rity of 20 years resu lts in a re ta in ed earn ing s ra tio of 2.02 (line 32b) w hich passes th e m in i m u m acceptable ra tio for te s t 3. To aid in the consideration of the pro posed amendments to Regulations D and Q by the Board and to facilitate the evaluation of the appropriateness and effectiveness of the guideline-criteria set 27. Average a n n u a l re ta in ed e a rn forth herein, Interested persons are re ings, 1970-74 (lin e 25 m in u s lin e quested to submit relevant data, views, or 26) .............................. .................... 4,000 arguments. Any such material should be 28. P ro form a a m o rtiza tio n of ex ist submitted in writing to the Secretary, in g d e b t (to ta l of col. 4 b elow ). 1, 533 Board of Governors of the Federal Re serve System, Washington, D.C. 20551, to (2) (3) (4) (l) be received not later than August 29, Years from Pro forma 1975. Such material will be made avail Description of issue Amount of date of issue amortization original issue to date of (col. 2 divide able for inspection and copying upon maturity by ooL 1) request, except as provided In 9 261.6(a) 8 percent subordinated debentures_______ $8,000 18 $533 of the Board’s rules regarding avail 10 percent capital notes......... ....... ........................ 7,000 7 1,000 ability of Information. Total____________________;..............16,000 ________________________________ 1,633 By order of the Board of Governors, July 1,1975. 29. C u rre n t re ta in ed earnings ra tio 80a. P ro form a a m o rtizatio n of p ro (lln e 27 divided by lin e 2 8 )___ A ssum ing a 10-year final m a tu rity on proposed new issue: 3.61 ------------ 26. C ash dividends declared o n com m o n a n d preferred stock, 1970 74 average (R I-B 3a p lu s R IB3b) _______________________4,000 posed new Issue (line 6 divided by a final m a tu rity of 10 years) _______________________ [ s e a l] $900 — ——— T h e o d o re E . A llis o n , Secretary of the Board. [FR D oc,75-18178Filed 7-14-75;8:45 am ]