Banking Interpretations



TO:        Deputy Superintendent and Counsel Kelsey

FROM:   Assistant Counsel Kane

RE:         Dividend Restrictions on State Member Banks

DATE:    January 7, 2003

New York Banking Law and Regulations.

Section 112(1) of the Banking Law provides that "The directors of a bank or trust company may annually, semiannually or quarterly, but not more frequently, declare such dividends as they deem judicious to be paid from net profits. No dividends shall be declared, credited or paid so long as there is any impairment of capital stock. No bank or trust company having outstanding preferred stock shall, except as otherwise authorized by the Superintendent, declare dividends upon common stock for any period for which dividends are declared upon preferred stock.

Section 112(2) provides that the approval of the Superintendent shall be required if the total of all dividends declared by a bank or trust company in any calendar year shall exceed the total of its net profits for that year combined with its retained net profits of the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock.

Section 112(3) provides that "For the purposes of this section, the term "net profits" shall mean the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets, after deducting from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all Federal and State taxes.

We also note that Part 29 of the General Regulations of the Banking Board, which was promulgated pursuant to Section 14(1) of the Banking Law governs the declaration of dividends by banks and trust companies.

Federal Banking Law and Regulations.

Section 324 of Title 12 of the United States Code (Federal Reserve Act Section 9, paragraph 6) provides that all banks admitted to membership are required to comply with the reserve and capital requirements of the Federal Reserve System, to conform to those provisions of law imposed on national banks which prohibit such banks from lending on or purchasing their own stock and which relate to the withdrawal or impairment of their capital stock, and to conform to the provisions of Section 56 and 60(b) of Title 12 of the United States Code with respect to the payment of dividends; except that any reference in any such provision to the Comptroller of the Currency shall be deemed for the purposes of this sentence to be a reference to the Board of Governors of the Federal Reserve System. Such banks and the officers, agents and employees thereof are also be subject to the provisions of and the penalties prescribed by Sections 334, 656 and 1005 of Title 18 of the United States Code, and are required to make reports of condition and the payment of dividends to the Federal reserve bank of which they become a member. Not less than three such reports may be made annually on call of the Federal reserve bank on dates to be fixed by the Board of Governors of the Federal Reserve System.

Part 208 of the Code of Federal Regulations (Regulation H), which was enacted pursuant to the authority set forth in Section 324, sets forth the regulations governing the membership of State banking institutions in the Federal Reserve System. Section 208.5 governs the payment of dividends and other distributions by State member banks.

Section 208.5(b) provides that the limitations set forth in Part 208 apply to the payment of dividends and withdrawal of capital consisting of cash and property dividends or distributions on common or preferred stock. The limitations do not apply to dividends paid in the form of common stock.

State member banks, under Section 208.5(c)(1) are prohibited from declaring or paying a dividend if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the bank's net income (as reportable in its Reports of Condition and Income) during the current calendar year and the retained net income of the prior two calendar years, unless the dividend has been approved by the Board.

"Capital surplus" is defined under Section 208.5(a)(1) as the total of surplus as reportable in the bank's Reports of Condition and Income and surplus on perpetual preferred stock. "Permanent capital" is defined in Section 208.5(a)(2) as the total of the bank's perpetual preferred stock and related surplus, common stock and surplus, and minority interest in consolidated subsidiaries, as reportable in the Reports of Condition and Income. "Retained net income", in a calendar year, under Section 208.5(c)(2), means the bank's net income (as reported in its Report of Condition and Income for such year), less any dividends declared during such year. The bank's net income during the current year and its retained net income from the prior two calendar years is reduced by any net losses incurred in the current or prior two years and any required transfers to surplus or to a fund for the retirement of preferred stock.

Section 208.5(d) sets forth the limitation on withdrawal of capital by dividend or otherwise. Subsection 208.5(d)(1) provides that a State member bank may not declare or pay a dividend if the dividend would exceed the bank's undivided profits as reportable on its Reports of Condition and Income, unless the bank has received the prior approval of the Board of Governors and of at least two- thirds of the shareholders of each class of stock outstanding.

Section 208.5(d)(3) further provides that if a State member bank has capital surplus in excess of that required by law, the excess amount may be transferred to the bank's undivided profits account and be available for the payment of dividends if: (i) the amount transferred came from the earnings of prior periods, excluding earnings transferred as a result of stock dividends; (ii) the bank's board of directors approves the transfer of funds; and (iii) the transfer has been approved by the Board of Governors.