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Banking Interpretations

NYSBL 103(1); 109; 110;111;112
 GRBB Part 27
 Supervisory Proc. CB 120


To: Examiner Mangra, Community Financial Services

From: Associate Counsel Abram

Date: November 16, 2004

Subject: [ ]


In computing "capital stock, surplus fund and undivided profits" for purposes of the legal
lending limit calculation in Banking Law Section 103(1), should (A) goodwill be
deducted, (B) unrealized gains/(losses) be deducted, and (C) the allowance for loan
losses be added?


There is nothing in the Banking Law or regulations which mandates, or even argues for,
the inclusion of goodwill in regulatory capital.

Unrealized gains and losses are not part of statutory net profit, and thus excluded from
the Banking Law definition of undivided profit, except for foreign exchange positions and
such other items as the Superintendent may permit.

Under Supervisory Procedure CB 120, reserves for loan losses are included in
undivided profits.

Attached to this memorandum, please find an outline of the components of capital
stock, surplus fund and undivided profits.


Banking Law Section 103(1) prohibits a bank or trust company from lending to any
person an amount which will exceed 15% of its "capital stock, surplus fund and
undivided profits".

Capital stock is defined in the Banking Law as the aggregate par value of all
outstanding shares of every class (Section 2(22)), plus the face amount of every capital
note or debenture issued by the bank in accordance with the required approvals by the
Superintendent of Banks (Section 14(1)(b) and Part 27 of the General Regulations of
the Banking Board).

Surplus is the amount of a bank's surplus fund as defined in Banking Law Section 110.
The fund consists of contributions and transfers from undivided profits or from net profit.
The "contributions" referred to in Section 110 presumably include amounts paid for the
bank's capital stock in excess of its par value - i.e., capital surplus.

Every bank is required to close its books at least annually and compute its net profits for
the period. Banking Law Section 109. Dividends are to be paid from net profits.
Banking Law Section 112. A portion of net profits may be, and in certain circumstances
may be required by the Banking Board to be, contributed to surplus. Banking Law
Sections 110, 111. The portion of net profits not contributed to surplus is transferred to
undivided profits. Banking Law Section109(1)..

"Undivided profits" are the accumulated net profits of the bank which have not been paid
out in dividends or transferred to surplus. Supervisory Procedure CB 120 describes
certain items which are to be included or excluded from undivided profits. Reasoning


The Banking Law and the Department's regulations specify only some aspects of what
constitutes capital stock, surplus fund and undivided profits. Other questions about how
these items should be computed can and should be primarily resolved as supervisory
rather than legal matters.

As regards the three specific questions raised by [ ]:

1. Goodwill -

I have not found anything in the Banking Law or the Department's regulations that deals
directly with the treatment of intangible assets for capital purposes. Nothing in the
definitions of "capital stock", "surplus fund" or "undivided profits" suggest that goodwill
should be included, and apparently it has not been the practice of the Department to
include it.

2. Unrealized gains/(losses) -

In computing "net profits", which are the source of undivided profits, Banking Law
Section 109 permits a bank to include in gross income "realizable" profits resulting from
a revaluation of a foreign exchange position (109(2)(b)). In contrast, only "profits
actually realized" from the sale of securities, real estate or other property are includable.
(109(2)(d)). However, to the extent that the Superintendent approves, an increase in
the book value of real estate used as the bank's place of business may be included in
gross income (109(2)(f)), and the Superintendent also may in her discretion permit any
other items to be included in gross income. (109(2)(g)).

3. Allowance for loan losses -

CB 120 states that undivided profits includes reserves for loan losses.



Capital Stock, Surplus Fund and Undivided Profits

The following limits for a New York bank are computed by multiplying the applicable
percentage by the bank's "capital stock, surplus fund and undivided profits":

  1. The fifteen percent general lending limit.
  2. The additional ten percent lending limit applicable to fully collateralized credits.
  3. The twenty-five percent deposit limit.

For the above purposes, "capital stock" equals:

  1. 1. the aggregate par value of all outstanding shares of every class of stock issued by the bank, plus
  2. 2. the face value of every capital note or debenture issued by the bank in accord with the required approvals of the Superintendent of Banks.

The "surplus fund" is a fund that must be established by each New York chartered bank "by
contributions, by transfers from undivided profits, or from net profits."

The term "undivided profits" includes:

  1. paid-in or earned profits (less unearned income),
  2. reserves for loan losses or bad debts,
  3. valuation reserves for securities,
  4. reserves for contingencies;

but does not include:

  1. reserves for dividends declared,
  2. reserves for taxes, interest and expenses,
  3. net gain or loss on securities available or held for sale, or
  4. accumulated translation adjustments.

Department of Financial Services


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