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Subject: 12 USC 60 -- Prior Approval of Dividends
Date: June 24, 1994
To: Chief Executive Officers of National Banks, Department and Division Heads and all Examining Personnel
Description: New Policy
This bulletin provides an interpretation of the language of 12 U.S.C. 60(b), regarding the OCC's approval of dividend payments by national banks. The guidelines set forth below are intended to give OCC supervisory offices more flexibility in reviewing certain requests to pay dividends. Specifically, this issuance allows OCC supervisory offices to grant prior approval for national banks' dividend requests subject to 12 U.S.C. 60(b) in advance of the period(s) in which the dividends would be declared. The goal in providing this flexibility is to reduce regulatory burden on national banks.
The requirements of 12 U.S.C. 60(b) provide the OCC with a legal mechanism to prevent national banks from dissipating their capital through dividend payments. A national bank must obtain the OCC's prior approval to pay dividends that exceed its current net profits and prior two years' retained net profits. As applied, "net profits" is defined as a bank's net income for a given period less any dividends paid during that period.
A national bank that obtains the OCC's prior approval to pay a dividend that fails the 12 U.S.C. 60(b) test during one period will have to seek prior approval for dividends in future periods until the test is satisfied again. This is because the dividend that caused the bank to fail the 12 U.S.C. 60(b) test is included in the "net profits" calculation and reduces the amount of permissible dividends in following periods. For the majority of non-troubled institutions, the effect could last up to three years. For troubled institutions, this period could be longer. This standard is uniformly applied, regardless of supervisory concerns about capital adequacy.
In addition, a national bank may experience another significant event, such as a loss relating to litigation or an unusually large loan loss, that would also affect the 12 U.S.C. 60(b) calculation. These losses would have the same effect as a large dividend in that "net profits" would be reduced. Therefore, the national bank would be subject to the same requirement to obtain prior approval for dividends as discussed above.
Historically, the OCC has interpreted "prior approval" to mean that national banks must seek permission immediately before declaring a dividend that fails the 12 U.S.C. 60(b) test. Affected national banks have had to request the OCC's prior approval to pay dividends out of current income on a recurring basis (e.g., quarterly, semi-annually, or annually).
Summary of New Policy
The OCC found that more flexibility can be used in granting prior approval for payment of dividends subject to 12 U.S.C. 60(b) constraints. Effective immediately, OCC supervisory offices may grant prior approval to national banks' requests to pay dividends in advance of the period(s) in which the dividend(s) would be declared. This advance approval may cover several anticipated dividend payments provided that the bank projects sufficient current net income during those periods to support the amount of the dividends declared.
This policy only applies to the timing of the OCC's approval of dividends subject to the prior approval requirements of 12 U.S.C. 60(b). It does not exempt national banks from complying with this law. Advance approvals will not apply to any proposed dividend payments that are in excess of the current period net income for national banks that are otherwise subject to the constraints of 12 U.S.C. 60(b). Further, this policy does not apply to those national banks that fail to meet other statutory dividend requirements, such as those contained in 12 U.S.C. 56 and in 12 U.S.C. 1831o.
In all cases, it is the responsibility of the national bank to request advance approval and submit documentation supporting it. The supervisory office will not grant an advance approval for dividend payments independent of a national bank's request or without sufficient review of the facts.
In determining whether to grant an advance approval, supervisory offices should consider the following:
The supervisory office may take one of the following actions based upon its review of the bank's request:
National banks and supervisory offices should continue to follow the existing procedures for processing requests to pay dividends subject to 12 U.S.C. 60(b).
Application of Policy
The following examples provide illustrations for applying this policy.
First National Bank submits a request to its supervisory office to pay a "special" dividend to its holding company. The purpose of this dividend is to reduce debt at the holding company level. This special dividend exceeds First's current plus prior two years' net profits and is therefore subject to OCC approval. As part of the bank's request, it asks the OCC to approve in advance the payment of future quarterly dividends from net income reported during those quarters without further restriction. After reviewing the bank's request and other documentation, the OCC supervisory office determines that payment of future dividends poses no supervisory concerns. The request is approved without further restrictions.
Second National Bank made a significant provision to its allowance for loan and lease losses to cover losses sustained when a major borrower unexpectedly filed for bankruptcy. The bank's loss history, loan review process, operations, and capital adequacy are otherwise not of significant supervisory concern. However, as a result of this loss, Second is subject to the constraints of 12 U.S.C. 60(b). Second requests advance approval from the OCC to pay future semi-annual dividends from net income reported during those future periods without further restriction. After reviewing the request and other OCC and bank documentation, the supervisory office provides a conditional approval based on Second maintaining a specific level of capital. The supervisory office further restricts this approval to one year. Second may apply for an extension of this approval after the one-year period has expired.
Third National Bank incurred significant expenses as a result of losing a major lawsuit. These expenses exceeded the bank's current and prior two year' net profits, therefore, future dividend payments would require OCC's prior approval. The bank submitted a request to the OCC supervisory office to approve in advance future dividends from net income reported during those future periods without further restriction. Based on an analysis performed by the supervisory office, this request was denied. Expenses incurred because of the lawsuit had strained capital, and future retained earnings could be critical to maintaining capital adequacy. Therefore, the supervisory office determined that each dividend proposed by Third should be submitted for approval before being declared.
Please refer all questions regarding this policy to the Office of the Chief National Bank Examiner (202) 874-5070.
Jimmy F. Barton