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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 10423 ~|
January 8, 1991
DIVIDEND PAYMENTS BY STATE MEMBER BANKS
Amendment to Regulation H
To All State Member Banks and Bank Holding Companies
in the Second Federal Reserve District, and Others Concerned:
Following is the text of a statement issued by the Board of Governors o f the
Federal Reserve System:
The Federal Reserve Board has amended its Regulation H, Membership in the
Federal Reserve System, concerning the payment of dividends by State member
banks.
The rule revises the way in which State member banks calculate their dividend
payment capacity, and brings the treatment of loan loss reserves for dividend payment
purposes into line with current regulatory reporting standards and generally accepted
accounting principles (GAAP).
Portions of the rule were made effective on December 20, 1990 in order to allow
State member banks to use the new rule in calculating dividend payments for 1990.
The provisions of the Board’s rule are consistent with a similar rule published
for national banks by the Office of the Comptroller of the Currency on December 13th.
Enclosed — for depository institutions and others maintaining sets of Board
regulations — is the text of the amendment to Regulation H, which has been re
printed from the Federal Register of December 26. Questions on this matter may
be directed to Albert Toss, Assistant Chief Examiner, Domestic Banking
Department (Tel. No. 212-720-5895).
E. G e r a l d C o r r i g a n ,
President.
Board of Governors of the Federal Reserve System
MEMBERSHIP REQUIREMENTS FOR STATE-CHARTERED BANKS
AM ENDM ENT TO REGULATION H
FEDERAL RESERVE SYSTEM
Governors of the Federal Reserve
System, Washington, DC 20551. For the
12 CFR Parts 208 and 250
hearing impaired only,
[Docket No. R-0696]
Telecommunications Device for the Deaf
(“TDD”), Dorothea Thompson (202/452Regulation H—Payment of Dividends
3544).
by State Bank Members of the Federal
SUPPLEMENTARY INFORMATION: On June
Reserve System; Miscellaneous
13,1990, the Board published for
Interpretations
comment a notice of proposed
rulemaking concerning the payment of
AGENCY: Board of Governors of the
dividends by state member banks. 55 FR
Federal Reserve System.
23941. The proposed rule, which would
a c t io n : Final rule.
add a new section to the Board’s
Regulation
H, interprets and clarifies
SUMMARY: The Board of Governors of
the Federal Reserve System is adding a two statutory provisions that restrict the
payment of dividends by state member
new section to its Regulation H,
banks. These statutory provisions, 12
Membership in the Federal Reserve
U.S.C. 56 and 60, are designed to protect
System, that will clarify the
and stabilize the capital support of a
circumstances under which state
bank’s operations. The purpose of the
member banks may pay dividends and
rule is to interpret these provisions to
will bring calculation of dividend
payment capacity more closely into line provide definitive guidelines for state
member banks to use in calculating their
with current regulatory reporting
dividend
payment capacity and to
standards and generally accepted
accounting principles (GAAP). The rule clarify the circumstances under which
defines the terms used in two statutory state member banks are required to
obtain the approval of the Board to pay
provisions that impose capital and
dividends. The rule will also bring the
current earnings restrictions on the
calculation of dividend paying capacity
payment of dividends by national
more
closely in line with current
banks. These provisions, 12 U.S.C. 56
regulatory reporting standards and
and 60, are made applicable to state
generally accepted accounting principles
member banks by section 9 of the
(“GAAP”).*1
Federal Reserve Act.
While 12 U.S.C. 56 and 60 both place
DATES: Section 208.19(a) of this
limitations on the ability of a bank to
regulation will be effective January 25,
pay cash dividends, the two sections
1991. Section 208.19(b) will be effective serve different purposes. Before a state
December 20,1990, although a state
member bank can declare a dividend, it
member bank may choose to apply the
must establish that the payment of the
paragraph retroactively (see transition
dividend will not impair its capital
provisions in § 208.19(b)(5)).
under 12 U.S.C. 56, and that the dividend
can be paid out of recent earnings under
FOR FURTHER INFORMATION CONTACT:
12 12 U.S.C. 60.2 If the dividend payment
Oliver Ireland, Associate General
does not meet the requirements of these
Counsel (202/452-3625), or Lawranne
Stewart, Attorney (202/452-3513), Legal sections, the state member bank must
obtain the approval of the Board before
Division; or Rhoger Pugh, Manager,
Policy Development (202/728-5883), or
1 The OCC has adopted a similar rule for national
Charles Holm, Senior Accountant (202/
banks. 55 FR 51269 (Dec. 13,1990).
452-3502), Division of Banking
1 Sections 5204 and 5199 of the Revised Statutes,
Supervision and Regulation, Board of
respectively.
paying the dividend. Both sections 56
and 60 were adopted as part of the
National Bank Act. The coverage of
•these provisions extends to state
member banks under section 9 of the
Federal Reserve Act, which provides
that all state member banks are required
“to conform to those provisions of law
imposed on national banks * * * which
relate to the withdrawal of capital or
impairment of their capital stock, and to
conform with the provisions of sections
56 and 60(b) of this title with respect to
the payment of dividends.” 3*
Under 12 U.S.C. 56, banks may not
pay a dividend in excess of undivided
profits then on hand or reduce capital by
paying a dividend. Historically, banks
have added the bank’s Allowance for
Loan and Lease Loss ("ALLL”) back to
and deducted bad debts from reported
undivided profits to determine the
undivided profits then on hand. Under
the proposed rule, the ALLL would no
longer be added back to reported
undivided profits and only bad debts in
excess of the ALLL (if any) would be
subtracted from reported undivided
profits. The proposed rule also provided
guidance to banks as to when assets
must be considered bad debts for the
purposes of the dividend payment
restrictions. Finally, the proposed rule
provided that earned surplus could be
transferred to undivided profits for the
purpose of dividend payment, providing
that the transfer had been approved by
the bank’s board of directors and by the
Board.
12 U.S.C. 60 provides that dividends
may not be paid in excess of the current
year's net profits combined with the
retained net profits of the prior two
years, unless the approval of the Board
is obtained. The proposed rule provided
that net profits will be equal to the net
income figure reported in the bank's
Report of Condition and Income. For the
3 Section 9, paragraph 6 of the Federal Reserve
Act (12 U.S.C. 324).
PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 55, NO. 248, pp. 52982-52987
For this Regulation to be complete, retain:
1) Regulation H pamphlet, effective April 1, 1989.
2) This slip sheet.
[Enc. Cir. No. 10423]
purpose of calculating net profits or
retained net profits, therefore,
provisions for loan and lease losses
(“PLLL’’) would not be added back to
reported net income, and loans charged
off during the year would not be
deducted from reported net income.4
Previously, banks had added their
PLLL back to reported net income and
deducted loan charge offs from reported
net income. Net profits are defined
under section 60 as the remainder of
earnings plus recoveries on loans after
the deduction of current operating
expenses, actual losses, accrued
preferred dividends, and taxes. Under
GAAP and regulatory reporting
standards, provisions to loan loss
reserves are treated as current operating
expenses, and are therefore deducted
from earnings. The shift to GAAP
standards takes into account the
existence of the loan loss reserve
account. As a result, under GAAP there
are no longer actual losses to be
subtracted from earnings, as charge offs
merely reduce loan loss reserves. The
treatment of PLLL and loan charge offs
provided in the proposed rule would be
consistent with regulatory reporting
standards and GAAP. The proposed rule
also included transition provisions that
allowed banks the option of applying
this rule as of either calendar year 1990
or 1991, and allowed banks the option of
recalculating retained net profits for the
prior two years using the new rule.
Summary of Comments
The Board received 13 comments on
the proposed amendments to Regulation
H. Commenters included:
Commercial ban k s_______
Bank holding com panies------------ ----—
Trade associations..........................
Federal Reserve B anks----------------------T otal.................
3
3
2
5
13
Of the thirteen commenters, nine
generally supported or did not object to
the proposed amendments. Three
commenters were generally opposed to
the proposal, and one commenter
supported some aspects of the proposal
while opposing others. One commenter
indicated that its support was
contingent upon reasonable loans loss
reserve requirements, and stressed that
the Board should not require banks to
make unnecessary provisions to loan
loss reserves. Three commenters
* If loans charged off exceed the amount of loan
loss reserves, banks are required to make additional
provisions to loan loss reserves. As a result, loan
charge offs would not be made directly against
income.
expressed concern that the proposed
amendments could discourage state
member banks from maintaining
adequate loan loss reserves, and one of
these suggested that the Board needed
to provide greater guidance as to when
provisions to loan loss reserves must be
made.
The Board continues to believe that
the standard set forth in the Reports of
Condition and Income and under GAAP
generally provide sufficient guidance for
state member banks to determine when
provisions to loan loss reserves should
be made. At this time, the Board does
not propose to alter these standards to
make then any more or less rigorous.
The Board will, however, consider in the
future whether more extensive
guidelines are needed in light of
experience with the new rule.
One commenter stated that the
proposed amendments would make it
more difficult for state member banks to
raise capital, and particularly objected
to the application of the rule to preferred
stock. The Board does not anticipate
that this rule will make it substantially
more difficult for banks to raise capital,
as safety and soundness considerations
would otherwise restrict the ability of
banks to pay dividends even if the rule
did not apply. In addition, the Board has
not excluded dividends on preferred
stock from coverage of the rule, as the
statutory prohibition on dividend
payments out of capital covers both
common and preferred stock.*8 This is
not a new restriction and merely sets
forth the scope of the statutory
provision.
Three commenters stressed the need
for consistency among federal bank
regulatory agencies as to the terms and
timing of the implementation of the
proposals, with one expressing approval
with the coordination that had taken
place among federal bank regulatory
agencies and between regulators at the
federal and state levels. Two
commenters, however, stated that the
Board’s proposed rule would conflict
with laws of their respective states,
8 The OCC proposal indicated that the provisions
of section 56 did not apply to the payment of
dividends on preferred stock. This exclusion was
based on a provision of the National Bank Act (12
U.S.C. 51b(a)J that the OCC interpreted as
overriding section 56 with respect to dividends on
preferred stock. Unlike section 56, section 51b is not
applicable to state member banks. In practice, there
will be no difference between the Board's rule and
the OCC's, as a national bank will also be required
to obtain the approval of the OCC under 12 U.S.C.
59 to pay dividends on preferred stock if such a
payment will reduce the capital of the bank.
2
North Dakota and Montana, concerning
dividend payments. In addition to
working closely with the OCC to
coordinate the timing and content of the
rule, the Board has contacted state
supervisory authorities in a number of
states with potentially conflicting
statutory and regulatory provisions, and
will continue to work with state
authorities to minimize any conflicts.
Staff of the bank supervisory authority
in Montana have indicated to Board
staff that there is no conflict with
Montana state law, while bank
supervisory staff in North Dakota have
indicated that there is no significant
conflict with North Dakota law. Both
state supervisory agencies have
indicated that they have no objections
to the rule.
One commenter approved of the
portions of the proposed rule relating to
the earnings limitations of section 60,
but objected to the provisions
concerning the capital limitations on the
payment of dividends under section 56.
The commenter stated that the rationale
for the capital limitations had
disappeared with the adoption of capital
adequacy guidelines. This commenter
also particularly objected to the portion
of this provision that allowed dividends
to be paid from only the portions of
surplus surplus that had been earned,
rather than paid in by shareholders.
Finally, the commenter stated that if
such provisions were adopted, the Board
should provide a “transition period” in
implementing the provisions.
The prohibition on the payment of
dividends from capital contained in
section 56 is a statutory provision, and
the Board will not waive the approval
requirements of this provision. With
regard to the portion of the rule
concerning surplus accounts, while the
OCC had previously adopted an
interpretation of section 56 that allowed
all of the surplus surplus account to be
paid out as dividends, the Board had
never adopted such an interpretation.
The Board believes that funds paid in by
shareholders should be considered
capital under section 56, regardless of
whether the funds are placed in the
capital or surplus accounts, and that it is
not appropriate for funds invested by
shareholders to be paid out as
dividends, both for considerations of
safety and soundness and for statutory
compliance. This does not represent a
change in policy or interpretation for the
Board, and an extended transition
provision is therefore not necessary or
appropriate.
Two commenters opposed the
proposed requirement that regulatory
approval be obtained before surplus
surplus could be transferred to
undivided profits for the payment of
dividends, as the requirement for
approval could cause unnecessary
delays and penalties to institutions with
adequate capital. One of these
commenters also stated that standards
for approval of surplus transfers should
be stated.
The Board has restructured the
provisions concerning the transfer of
funds out of surplus to clarify the
purpose of the approval and the
requirements for approval.6 The
provisions of section 56 do not
specifically address the treatment of
surplus account funds, and the Board
must therefore determine whether such
funds should be treated as capital or as
part of undivided profits. Because
shareholder funds have generally been
paid into surplus accounts, the Board
will normally presume that funds in the
surplus account were paid in by
shareholders and should be treated as
capital. All transfers out of the surplus
account for the payment of dividends
are subject to the section 56 restrictions
on the payment of dividends out of
capital. Further, even if the Board did
not take the position that shareholder
funds in the surplus account are to be
treated as capital, there is no basis for
treating such funds as undivided profits.
Accordingly, the .transfer of unearned
funds from the surplus account is
subject to the section 56 prohibition on
the payment of dividends in excess of
undivided profits.
In order to satisfy the Board that a
proposed transfer is not a withdrawal of
capital or a payment in excess of
undivided profits, the bank must
demonstrate to the Board that the
portion of surplus surplus that the bank
wishes to transfer came from the
earnings of prior periods, excluding
earnings transferred as a result of stock
dividends. The rule now states that this
information should be submitted to the
Reserve Bank in order to request
approval of the transfer.
In order to address concerns regarding
delays in approval of transfers of
surplus surplus, the approval process
has been structured as a notice
requirement. A bank may consider its
request approved if the Board or
Reserve Bank does not notify it within
6 Additionally, the definition of “surplus surplus"
has been amended to reflect the fact that state
member banks are subject to the provisions of
a pplicable state law concerning capital and surplus,
and that not all states require state-chartered banks
to maintain surplus equal to 100% of common
capital. “Surplus surplus" is now defined as that
portion of the bank’s surplus account that exceeds
the amount required under state law.
thirty days that the transfer request has
been disapproved or is subject to
continuing consideration.
The responses also included
comments on a number of specific
accounting issues. Two commenters
indicated that the Board’s proposed rule
was not based fully on GAAP, as the
proposed earnings limitation on
dividend payments would require
dividend payment capacity to be based
on the net income figure contained in
the Report of Condition, which is based
on regulatory reporting standards rather
than generally accepted accounting
principles.
While net income figure contained in
the Report of Income is not fully in
accordance with GAAP, the differences
are generally not significant. For many
institutions, there will be no difference
between the GAAP and Report of
Income net income figures. Differences
between the net income figures under
GAAP and the Report of Income arise
primarily from differences between
GAAP and regulatory reporting
standards in the recognition of income
on certain recourse, securitization, and
hedging transactions. Additionally, the
Board is studying ways in which the
differences between the two accounting
standards can be reduced. Because the
net income figure in the Report of
Income is readily accessible for all
banks and is used for a variety of
regulatory purposes, the Board feels that
the use of this figure is justified.
One commenter requested
clarification concerning the effect of
changes in accounting principles in the
financial statements and Report of
Income of a financial institution. Under
GAAP, in some cases a bank that
changes an accounting principle may
elect to restate its prior year financial
statements to reflect the change. In that
case, however, the bank would not be
permitted to restate its prior year Report
of Income. Net income in the Report of
Income therefore would differ from the
net income in its GAAP-based financial
statements. Since the dividend limit is
based on net income as defined in the
Report of Income, the commenter
believed that an unjust limit on
dividends would result. However, the
Board is concerned that allowing
retroactive restatement may raise
questions as to the appropriateness of
the prior year’s dividend payments that
were based on figures prior to any
restatement. The Board also believes
there is an inherent advantage in
simplicity and understanding of the new
rule by basing the limitation on net
income as reported in the Report of
Income without adjustment. Retroactive
3
restatement thus is not appropriate in
these circumstances.
One commenter asked for clarification
on whether the deduction of bad debts
in excess of ALLL from undivided
profits would be on a before- or after
tax basis. The Board does not believe
that the deduction for bad debts should
be taken on an after-tax basis. One
advantage of the conversion to GAAP
treatment of bad debts and loan loss
provisions is to avoid the uncertainty
associated with allowing bad debts to
be deducted on an after-tax basis, as the
future tax benefits from the recognition
of bad debt are often uncertain. Any tax
benefit might not be realized until the
charge off occurs, which could be
several years in the future. The Board
believes that any excess statutory bad
debt should be deducted on a gross
basis so that subjective uncertainty and
valuations concerning future tax
benefits do not affect the dividend
calculation.
One commenter addressed the
definition of “bad debt” included in the
section of the proposed rule concerning
capital limitations on the payment of
dividends. The commenter stated that
leases and time deposits should be
explicitly included as obligations that
could become “bad debts.” The Board
concurs with this comment and has
revised the definition of obligations to
include time deposits and leases. The
commenter also stated that demand
debt should be defined as "bad debt"
after one year’s interest has accrued and
remained unpaid, including demand
obligations on which interest is due on
demand. The Board believes that such
determinations should be based on
whether under the terms of the
individual credit the interest is past due
rather than the period over which the
interest has accrued. Additionally, the
commenter stated that “bad debt”
should also include any obligation on
which interest had not been paid in cash
for six months, and that interest cannot
be “paid” by taking a note. Although the
Board agrees that as a general matter
the taking of a note from the borrower
would not constitute the payment of
interest for purposes of determining a
bad debt, there may be instances where
additional collateral or other
mechanisms could be provided that may
indicate that the obligation is not a bad
debt.
The same commenter also noted that
the use of terms such as “undivided
profits” and “surplus” should conform to
their general use in the banking
industry, and that use of the term
"surplus surplus” was unnecessary. The
Board has adopted this terminology in
order to be consistent with the OCC.
Adoption of differing terminology would
raise questions as to whether the
Board’s standards were intended to
differ from those of the OCC. This
commenter also suggested that the
Board should take the opportunity to
address issues concerning the capital
structure of state member banks at the
same time as dividend payments. As
such an effort could result in
inconsistencies between the treatment
of national and state member banks, the
Board does not plan to address the
capital structure of state member banks
at this time. Additionally, many states
have their own statutory requirements
concerning the capital structure of state
chartered banks, and a federal standard
would be likely to result in unnecessary
conflicts with many state laws.
On a procedural level, two
commenters supported the issue of a
regulation on bank dividends, stating
respectively that a single regulation
would eliminate confusion and would
enhance the enforceability of the
provisions. One trade association
commenter urged the adoption of
expedited procedures under the
proposed regulation in order to provide
prompt responses to applications for the
payment of dividends. The Board
anticipates that requests for approval
under the new regulation may be
handled more expeditiously than in the
past, as the regulation should clarify a
number of issues. However, institutions
that believe that they may need
regulatory approval to pay a dividend
are encouraged to consult with their
Federal Reserve Bank in advance in
order to avoid delays when approval is
actually requested.
Effective Date
Section 208.19(a) will be effective as
of January 25,1991, thirty days after
publication of this notice. Section
208.19(b), however, has been given
immediate effect under provisions of tne
Administrative Procedures Act that
allow for less than the usual thirty day
notice where the rule grants an
exemption or relieves a restriction or for
good cause. 5 U.S.C. 553(d) (1) and (3).
Section 208.19(b) provides banks with
an option for dividend calculation for
calendar year 1990 that would not
otherwise be available, and therefore
provides relief from the restrictions of
the current requirements concerning the
payment of dividends from current
earnings. Although § 208.19(b) is
effective immediately, use of the rule is
not required for state member banks
until January 1,1991.
Aside from the relief from the current
some effect on the dividend paying
capacity of all state member banks,
regardless of size, but does not
anticipate that there will be any
disproportionate or significant economic
impact on a substantial number of small
banks. For these reasons, the Board
believes that the rule adopted will result
in the least possible economic impact on
small entities.
List of Subjects in 12 CFR Part 208
Accounting, Agricultural loan losses,
Applications, Appraisals, Banks,
Banking, Branches, Capital adequacy,
Confidential business information,
Currency, Dividend payments, Federal
Reserve System, Flood insurance,
Publication of reports of condition,
Final Regulatory Flexibility Act
Reporting and recordkeeping
Analysis
requirements, Securities, State member
The Regulatory Flexibility Act (Pub. L. banks.
96-354, 5 U.S.C. 601 et seq.) requires an
For the reasons set out in the
agency to prepare a final regulatory
preamble, the Board amends 12 CFR
flexibility analysis containing (1) A
parts 208 and 250 as follows:
succinct statement of the need for and
PART 208—MEMBERSHIP OF STATE
objectives of the rule; (2) a summary of
BANKING INSTITUTIONS IN THE
the issues raised by the public
FEDERAL RESERVE SYSTEM
comments, the agency’s assessment of
the issues, and a statement of the
1. The authority citation for part 208
changes made in the final rule in
continues to read as follows:
response to the comments; and (3) a
Authority: Sections 9 ,11(a), 11(c), 19, 21, 25.
description of significant alternatives to
and 26(a) of the Federal Reserve Act, as
the rule that would minimize the
amended (12 U.S.C. 321-338, 248(a), 248(c),
economic impact of the rule on small
461, 481-486, 601, and 611, respectively);
entities and the reason why the
sections 4 and 13(j) of the Federal Deposit
alternatives were rejected. 12 U.S.C.
Insurance Act, as amended (12 U.S.C. 1814
604(a). The first and second of these
and 1823{j), respectively): section 7(a) of the
requirements are included in the
International Banking Act of 1978 (12 U.S.C.
discussion above. With regard to
3105); sections 907-910 of the International
Lending Supervision Act of 1983 (12 U.S.C.
alternatives considered, the Board does
3906-3909); sections 2 ,12(b), 12(g), 12(i),
not believe that any alternatives exist
15B(c)(5), 17,17A, and 23 of the Securities
that would minimize the effects of the
Exchange Act of 1934 (15 U.S.C. 78b, 787(b),
statutory restrictions on dividend
787(g), 787(i), 78o-4(c)(5), 78q. 78q-l, and 78w,
payment capacity on small banks. The
respectively); section 5155 of the Revised
primary alternatives to the rule were to
Statutes (12 U.S.C. 36) as amended by the
refrain from bringing the accounting
McFadden Act of 1927; and sections 1101methods used in calculating dividend
1122 of the Financial Institutions Reform,
payment capacity into line with
Recovery, and Enforcement Act of 1989,12
U.S.C. 3310 and 3331-3351).
generally accepted accounting
principles, or to adopt GAAP by
2. Section 208.19 is added to read as
amending the miscellaneous
follows:
interpretations and policy statements
§ 208.19 Payment of dividends.
concerning dividend payments. The
Board believes that by adopting a
(a) Capital limitations on payment of
comprehensive rule as part of
dividends. No state member bank shall,
during the time it continues its banking
Regulation H, which sets out the
operations, withdraw, or permit to be
responsibilities of state member banks,
withdrawn, either in the form of
the rules on dividend payments will be
more accessible, and state member
dividends or otherwise, any portion of
its capital. If losses have at any time
banks will be able to determine their
legal dividend payment capacity more
been sustained by a state member bank
easily. This should be particularly useful that equal or exceed its undivided
profits then on hand, no dividend shall
for smaller institutions. With regard to
be paid. No dividend shall be paid by a
the rule’s use of GAAP in calculating
state member bank while it continues its
dividend payments, the Board
banking operations, to an amount
anticipates that this change will have
restrictions provided for 1990, there is
also good cause for immediate
effectiveness in order to preserve parity
between state member and national
banks. The OCC has published a final
rule with the parallel provisions that
have been made effective immediately,
with mandatory use of the rule
beginning January 1,1991. 55 FR 51269
(Dec. 13,1990). A delay in the effective
date beyond January 1,1991, would also
be contrary to the public interest
because the delay would necessitate
additional accounting adjustments to
apply the rule other than on a full
calendar year basis that would not be
required if the rule is effective prior to
January 1,1991.
4
greater than its net profits then on hand,
deducting therefrom its losses and bad
debts.
(1) Exceptions. Exceptions to the
limitations contained in this paragraph
(a) may be made only with the prior
approval of the Board and of at least
two-thirds of the shares of each class of
stock outstanding.
(2) Dividends on common and
preferred stock. The provisions of this
paragraph (a) shall apply to the payment
of dividends on both common and
preferred stock.
(3) Bad debt. Under this paragraph (a),
bad debts must be deducted from the
net profits then on hand in computing
funds available for the payment of
dividends.The term “bad debt” includes
matured obligations due a bank on
which the interest is past due and
unpaid for six months unless the debts
are well secured and in the process of
collection. Obligations include every
type of indebtedness owed to the bank,
including, for example, loans,
investment securities, time deposits in
other depository institutions, and leases.
The six-month period of default may
begin at any time, regardless of when
the debt matures.
(i) Matured debt. Whether a debt has
matured for the purposes of this
subsection usually will be determined
by applicable contract law. Generally, a
debt is matured when all or a part of the
principal is due and payable as a result
of demand, arrival of the stated maturity
date, or acceleration by contract or by
operation of law. Nevertheless, any
demand debt on which the payment of
interest is six months past due will be
considered matured even though
payment on the debt has not been
demanded. Installment loans on which
any payment is six months past due will
be considered matured even though
acceleration of the total debt may not
have occurred.
(ii) Well-secured debt. A debt is well
secured if it is secured by collateral in
the form of liens on, or pledges of, real
or personal property, including
securities, having realizable value
sufficient to discharge the debt in full, or
by the guaranty of a financially
responsible party. If a loan that would
otherwise be considered a bad debt is
partially secured, that portion not
properly secured will be considered a
bad debt.
(iii) Debt in process of collection. A
debt is in the process of collection if
collection of the debt is proceeding in
due course, either through legal action,
including judgment enforcement
procedures, or, in appropriate
circumstances, through collection efforts
not involving legal action which are
reasonably expected to result in
repayment of the debt or in its
restoration to current status. In any
case, the bank should have a plan of
collection setting forth the reasons for
the selected method of collection, the
responsibilities of the bank and the
borrower, and the expected date of
repayment of the debt or its restoration
to current status.
(iv) Debts o f bankrupt or deceased
debtors. A claim duly filed against the
estate of a bankrupt or deceased debtor
is considered as being in the process of
collection. The obligation is well
secured if it meets the criteria set forth
in paragraph (a)(3}(ii) of this section or if
the claim of the bank against the estate
has been duly filed and the statutory
period for filing has expired and the
assets of the estate are adequate to
discharge all obligations in full.
(v) Documentation. The bank must
maintain in its files documentation to
support its evaluation of the obligation.
In addition, the bank must retain, at a
minimum, monthly progress reports on
its collection efforts, noting and
explaining any deviation from the
collection plan.
(4) Undivided profits then on hand.
For the purpose of this section, the terms
“undivided profits then on hand” and
“net profits then on hand” shall have the
same meaning, and shall be referred to
herein as “undivided profits then on
hand”.
(i) Allowance for loan and lease
losses. When calculating the amount of
dividends a bank can pay under 12
U.S.C. 50 and this paragraph, the bank
may not add the balance in its
allowance for loan and lease losses to
its undivided profits for the purpose of
determining undivided profits then on
hand. The terms “allowance for loan
and lease losses" and “undivided
profits” shall have the same meaning as
set forth in the instructions for the
Reports of Condition and Income.
(ii) Bad debts. When deducting its bad
debts from its undivided profits then on
hand, a bank shall first subtract the sum
of its bad debts from the balance of its
allowance for loan and lease losses
account. If the sum of a bank’s bad
debts is greater than its allowance for
loan and lease losses, the excess bad
debt shall then be deducted from the
bank’s undivided profits then on hand.
(iii) Surplus surplus. State member
banks are required to comply with state
law provisions concerning the
maintenance of surplus funds in
addition to common capital. To the
extent a bank has capital surplus in
5
excess of that required under applicable
state law, the bank has “surplus
surplus.” Only that portion of the
surplus surplus that meets the following
conditions may be transferred to the
undivided profits account and be
available for the payment of dividends:
(A) The bank’s board of directors
approves the transfer of funds from
capital surplus to undivided profits; and
(B) The transfer has been approved by
the Board. The bank must be able to
demonstrate to the Board that the
portion of the surplus surplus to be
transferred came from the earnings of
prior periods, excluding earnings
transferred as a result of stock
dividends. Requests for Board approval
shall be submitted to the appropriate
Federal Reserve Bank. The bank may
consider the transfer to be approved if
the Board or the Reserve Bank does not
notify the bank within thirty days after
the Reserve Bank’s receipt of the notice
that the transfer has been disapproved
or that it is subject to continuing
consideration.
(b) Earnings limitations on payment
of dividends. A state member bank may
not pay a dividend if the total of all
dividends declared by the bank in any
calendar year exceeds the total of its net
profits for that year combined with its
retained net profits of the preceding two
calendar years, less any required
transfers to surplus or to a fund for the
retirement of any preferred stock, unless
the bank has received the prior approval
of the Board for the dividend under
paragraph (b)(3) of this section.
(1) Dividends on common and
preferred stock. The provisions of this
paragraph (b) apply to the payment of
dividends on both preferred and
common stock.
(2) Net profits. “Net profits" shall be
equal to the net income or loss as
reported by a state member bank in its
Reports of Condition and Income. When
computing its “net profits” under this
section, a bank should not add its
provisions for loan and lease losses to,
nor deduct net charge offs from, its
reported net income.
(3) Retained net profits. Retained net
profits of any period shall be equal to
the net income or loss as reported in the
Reports of Condition and Income less
any common or preferred stock
dividends declared or otherwise charged
to the undivided profits of the period for
which retained net profits are computed.
(4) Approval of dividends. A bank
must request and receive the approval of
the Board before declaring a dividend if
the amount of all dividends (common
and preferred), including the proposed
dividend, declared by the bank in any
calendar year exceeds the total of the
bank’s net profits of that year to date
combined with its retained net profits of
the preceding two calendar years, less
any required transfers to surplus or a
fund for the retirement of any preferred
stock. Requests for the Board’s approval
shall be submitted to the appropriate
Federal Reserve Bank.
(5)
Effective date and transition
provisions, (i) For the purpose of
computing “net profits” pursuant to 12
U.S.C. 60, a state member bank must
apply paragraph (b)(2) of this section no
later than January 1,1991. A bank may
elect to use this paragraph (b)(2) of this
section to calculate net profits for 1990,
if it applies this provision on a full
calendar year to date basis.
(ii) Whether a bank chooses to use
paragraph (b)(2) of this section
beginning as of January 1,1990 or 1991,
it may elect to apply the paragraph
(b)(2) of this section to recalculate
retained net profits for one or both of
the prior two years.
(iii) Once a bank has elected to
calculate net profits or retained net
profits for a particular year applying the
provisions of paragraph (b)(2) of this
section, retained net profits and net
profits for all subsequent periods in the
calculation must also be calculated
using paragraph (b)(2) of this section. If
a state member bank has elected to use
paragraph (b)(2) of this section for a
particular year, the bank may not
change the method of calculation used
for that year during subsequent periods.
PART 250—MISCELLANEOUS
INTERPRETATIONS
1. The authority citation for part 250
continues to read as follows:
Authority: 12 U.S.C. 248(i).
§§ 250.101, 250.102 and 250.103
[Redesignated as 208.125, 208.126 and
208.127]
2. Sections 250.101, 250.102, and
250.103 are redesignated as §§ 208.125,
208.126, and 208.127, respectively.
§ 250.104
[Rem oved]
3. Section 250.104 is removed.
By order of the Board of Governors of the
Federal Reserve System, December 20,1990.
William W. Wiles,
Secretary of the Board.
IFR Doc. 90-30191 Filed 12-24-90; 8:45 am)
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