Banking Law 14-g and 14-h and 112,
Gen. Regs. of the BB Part 6 and Part 86
To: Examiner Mangra - CFSD
From: Associate Counsel Abram
Date: January 3, 2005
Subject: [ ] Interpretive Ruling on Dividends
- Can Banking Law Section 112(1) be interpreted to permit directors of New York banks and stock-form savings banks to declare and pay dividends as frequently as they judge prudent, subject to the other limitations on payment of dividends in the Banking Law and regulations?
- In the case of banks and stock-form savings banks that have elected to be taxed under Subchapter S of the Internal Revenue Code, can dividends declared for the purpose of providing cash to stockholders to pay estimated taxes ("estimated tax dividends") be excluded from the limitations of Banking Law Section 112(1)?
- The language of Banking Law Section 112(1) expressly prohibiting directors of a bank from declaring dividends more frequently than quarterly cannot be altered by interpretation.
- Regardless of the purpose for which they are declared, dividends are subject to the frequency limitations of Banking Law Section 112(1) for the reasons set forth in (1) above. Similarly, estimated tax dividends cannot be excluded by interpretation from the other significant prohibition in Section 112(1) - against paying dividends when capital stock is impaired.
By letter dated December 1, 2004, counsel for [ ], a New York stock-form savings bank [ ], and [ ], a New
York limited purpose commercial bank [ ], requested two interpretive rulings from the Department.
Both requested rulings relate to Banking Law Section 112(1), which contains three provisions regarding the declaration and payment of dividends by a bank or trust company. Under Part 86.7(b)(5) of the General Regulations of the Banking Board, the provisions of Section 112 apply also to stock-form savings banks.
Section 112(1) contains three provisions. First, it states that "The directors of a bank or trust company may annually, semi-annually or quarterly, but not more frequently, declare such dividends as they deem judicious to be paid from net profits." Second, it prohibits dividends from being declared, credited or paid so long as there is any impairment of capital stock. Last, it prohibits a bank or trust company from declaring dividends on common stock for a period other than a period for which dividends are declared on preferred stock, except as authorized by the Superintendent.
The first interpretive ruling requested is that the frequency limitation on dividends in Section 112 be interpreted in a manner similar to the manner in which the OCC in 12 CFR Part 5.64 has interpreted the comparable limitation on the frequency of dividends in 12 USC Section 60(a). In relevant part, that section states that "The directors of any national banking association may, quarterly, semiannually or annually, declare a dividend of so much of the undivided profits of the association as they shall judge expedient," subject to various limitations. The OCC regulation states that, subject to various restrictions, "the directors of a national bank may declare and pay dividends as frequently and of such amount as they judge prudent."
While the precise parameters of the- interpretation requested are not clear, the basic thrust is that Section 112 be interpreted in a manner that would give parity with national banks by permitting directors to declare and pay dividends as frequently as they judge prudent, subject to the other limitations on dividends set forth in Section 112 or elsewhere in the Banking Law.
The request letter indicates that the legislative intent for the dividend frequency limitation in Section 112(1) is unclear, and notes that in the case of [ ] Bank, although not [ ] Savings, there is a legislative policy expressed in Section 14-g(1) in favor of providing a means for state chartered banks and trust companies to achieve parity with national banks.
The second interpretive ruling requested is that dividends declared for the purpose of providing cash to stock holders to pay estimated taxes imposed on them by reason of a bank's Subchapter S election. The requester reasons that had the bank been taxed under Subchapter C, it would have paid taxes directly to the various federal, state and local taxing authorities, and such payments would not have been affected by the Section 112(1) limitations on dividend payments.
Applicant's counsel notes that its letter is not intended as a request for a declaratory ruling from the Superintendent pursuant to Supervisory Procedure G 110 or a request pursuant to General Regulations Section 6.2 that the Banking Board promulgate a regulation pursuant to Banking Law Section 14-g. However, counsel requests that the Department advise if it would prefer the applicant to submit such a petition or application rather than the request for an interpretative ruling.
As to the first interpretive ruling requested, it must be noted that the language of Banking Law Section 112 differs from the language of 12 USC Section 60(a) in one crucial respect. The Banking Law permits directors of a bank to declare dividends annually, semi-annually or quarterly, but not more frequently". (emphasis added) The underscored phrase is absent from the comparable provision of the National Bank Act, thus giving the OCC some latitude to interpret the USC language as permitting dividends to be declared more frequently than the quarterly, semiannual or annual periods expressly contemplated by the statute, The Banking Law language expressly prohibits directors from declaring dividends more frequently than quarterly, and that express prohibition cannot be overridden by interpretation.
While, as the requester notes, Banking Law Section 14-g(1) expresses a general policy in favor of achieving parity between state banks and national banks, it Section 14-g does not contain a self-operative or automatic wild card, but simply authorizes the Banking Board to achieve parity through the adoption of specific rules and regulations. The Banking Board has not as yet adopted a regulation to achieve parity in the frequency with which banks can declare dividends. The same observations apply to Section 14(h)(1)(b), insofar as it is relevant.
The response to the second interpretive ruling requested basically flows from the response to the first. Under Banking Law Section 112, dividends cannot be declared more frequently than quarterly. The fact that a particular dividend is for the purpose of providing cash to shareholders to facilitate their payment of estimated taxes does not affect the prohibition. It is equally irrelevant that same amounts might have been paid directly by the institution in taxes with no need to declare a dividend subject to the Section 112 restrictions had the bank not elected to be taxed under Subchapter S.
It should be noted that the second interpretive ruling request seeks to exclude such dividends from all of the limitations of Banking Law Section 112(1) rather than just the frequency limitations. The other relevant limitation is a prohibition against any dividends being declared, credited or paid so long as there is any impairment of capital stock. Again, I do not see that it would be possible to alter this express statutory prohibition by interpretation, and question whether it would be sound policy to do so.
(Cf. Banking Law Section 110, requiring a bank to obtain the approval of the Superintendent to pay dividends from its surplus fund.)"
1. Indeed, by way of comparison note that the OCC regulations expressly prohibit a national bank from permitting any portion of its permanent capital to be withdrawn, by way of a dividend or otherwise, except through a reduction of permanent capital with the approval of two-thirds of its shareholders and the Comptroller. 12 CFR
5.63(a). The OCC regulations also contain various restrictions on the declaration of dividends by a national bank whose capital surplus is not at least equal to its capital stock. 12 CFR Section 5.64(a).
In addition, the OCC's regulations prohibit a national bank from declaring or paying any dividend if, after paying such dividend, the national bank would be "undercapitalized". 12 CFR Section 5.65. A bank would be undercapitalized if, among other things, its ratio of Tier 1 capital to adjusted total assets would be less than 4% (or 3% if it had received a "1" rating at its most recent examination.) 12 CFR Section 6.4(b)(3). Note that this prohibition applies not only to national banks, but to all insured depositary institutions, including the applicant. 12 USCA Section 1831 o(d)(1).