Capital Distributions

DEPARTMENT OF THE TREASURY

12 CFR Part 563

[No. 94-245]

RIN 1550-AA72

Capital Distributions

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of Thrift Supervision (OTS) proposes to amend its

capital distributions regulation to conform to the system of prompt

corrective action (PCA) established by the Federal Deposit Insurance

Corporation Improvement Act of 1991 (FDICIA) and by implementing

regulations adopted by the OTS and the other federal banking agencies.

The proposed regulation incorporates the PCA definition of capital

distributions. Under the proposal, a savings association that is not

held by a savings and loan holding company and that has a composite

CAMEL rating of ``1'' or ``2'' need not notify the OTS before making a

capital distribution. Other savings associations that will remain at

least adequately capitalized after making a capital distribution would

be required to provide notice to the OTS. ``Troubled'' associations and

undercapitalized associations may make capital distributions only by

filing an application and receiving OTS approval. Such applications may

be approved only under certain limited conditions.

The proposed regulation defines ``troubled condition'' as a

function of a savings association's composite examination rating, its

capital condition, or on the basis of supervisory directives issued, or

``troubled condition'' designation made, by the OTS.

DATES: Comments must be received on or before February 3, 1995.

ADDRESSES: Send comments to Director, Information Services Division,

Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,

Attention Docket No. 94-245. These submissions may be hand delivered to

1700 G Street, NW. from 9:00 A.M. to 5:00 P.M. on business days; they

may be sent by facsimile transmission to FAX Number (202) 906-7755.

Submissions must be received by 5:00 P.M. on the day they are due in

order to be considered by the OTS. Late-filed, misaddressed or

misidentified submissions will not be considered in this rulemaking.

Comments will be available for inspection at 1700 G Street, NW., from

1:00 P.M. until 4:00 P.M. on business days. Visitors will be escorted

to and from the Public Reading Room at established intervals.

FOR FURTHER INFORMATION CONTACT: Therese Monahan, Project Manager,

(202) 906-5740, Robyn Dennis, Program Manager, (202) 906-5751,

Supervision; Evelyne Bonhomme, Counsel (Banking and Finance), (202)

906-7052, Deborah Dakin, Assistant Chief Counsel, (202) 906-6445,

Regulations and Legislation Division, Chief Counsel's Office; Office of

Thrift Supervision, 1700 G Street, NW., Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION:

I. Introduction

The OTS is proposing today to simplify its current capital

distributions regulation in light of both its implementation of PCA and

the improved capital position of the thrift industry. The proposal

reduces the regulatory burden and compliance costs associated with

capital distributions and, for the healthiest savings associations,

removes those costs and burden entirely to the extent permitted by

statute. Adequately or well capitalized savings associations that (1)

are not held by savings and loan holding companies1; (2) have a

composite rating of ``1'' or ``2;'' (3) are not deemed to be in

``troubled condition;'' and (4) will remain at least adequately

capitalized after the proposed capital distribution are not required to

provide notice to the OTS before making capital distributions. Notice

is not required because these associations are in the two highest

rating categories and the rule requires that savings associations

continue to be adequately capitalized after the capital distribution.

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\1\Section 10(f) of the Home Owners Loan Act of 1933, as

amended, requires that every subsidiary savings association of a

savings and loan holding company give the Director of the OTS no

less than 30 days advance notice of the proposed declaration by its

directors of any dividend on its guaranty, permanent, or other

nonwithdrawable stock. See 12 U.S.C. 1467a(f).

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In 1990, the OTS adopted a capital distributions regulation, 12 CFR

563.134, 55 FR 17185 (July 2, 1990), designed to apply a uniform

regulatory approach to all capital distributions made by savings

associations, including dividends, stock repurchases, and cash-out

mergers. The OTS adopted this rule during a period when the thrift

industry was considered generally undercapitalized. The rule

established a ``tiered'' approach under which an association's ability

to make capital distributions varied according to its level of

capitalization. Associations that met their fully phased-in capital

requirements had greater flexibility to make capital distributions than

associations that did not. All associations were required either to

provide notice to the OTS or to apply for approval before making any

capital distribution. At that time, thrifts were under pressure to

increase capital in order to meet rapidly rising standards and the

regulation was intended to restrict capital distributions by

associations that were not expected to meet the FIRREA capital

requirements.

In September 1992, the OTS promulgated its Prompt Corrective Action

Final Rule (PCA Rule). 57 FR 44866 (September 29, 1992). The PCA Rule

implemented section 131 of FDICIA,2 which created a new statutory

framework that applies to all insured depository institutions a system

of supervisory actions indexed to capital levels. Well-capitalized and

adequately capitalized institutions are generally not subject to PCA

restrictions;3 institutions falling into the undercapitalized,

significantly undercapitalized, and critically undercapitalized

categories are subject to increasing levels of supervisory

restrictions. Under the PCA Rule, the ratio of total capital to risk-

weighted assets, the ratio of core capital to risk-weighted assets, and

the ratio of core capital to total average assets (the leverage

ratio)4 are used to determine a thrift's PCA category.

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\2\Section 131 of FDICIA added a new section 38 to the Federal

Deposit Insurance Act. The provision is codified at 12 U.S.C. 1831o.

The OTS's implementing regulations appear at 12 CFR Part 565.

\3\Under certain circumstances, an institution may be

reclassified to a lower capital category or treated as if it were in

a lower capital category. See 12 CFR 565.4(c).

\4\Core capital, which is defined in part 567 of the OTS's

regulations, is the thrift capital measure comparable to Tier 1

capital for banks. 12 CFR Part 567.

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In the preamble to the PCA Rule, the OTS indicated ``that the

permissibility of capital distributions will be determined by the

prompt corrective action regulations.''5 Moreover, specific

regulatory incentives are now in place to encourage associations to

maintain high capital levels, which was the original goal of the

capital distributions regulation. Additionally, the capital tier

thresholds in the current regulation have become partially obsolete as

associations have met targets for the fully phased-in capital

requirements under part 567.

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\5\See 57 FR at 44868.

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II. Description of Proposal

This proposal simplifies the current capital distribution

regulation by replacing the ``tiered'' approach to allowing savings

associations to make capital distributions with one that allows

associations to make only capital distributions that would not cause

capital to drop below the level required to remain adequately

capitalized. The OTS believes that the proposed rule, which is revised

to conform with the PCA, is, on balance, as stringent as the Office of

the Comptroller of the Currency (OCC) treatment of capital

distributions. Each agency provides guidance and standards relating to

limitations on the amount of capital distributions permissible although

the OCC has another statutorily imposed standard in addition to the PCA

standard and the OTS does not.6 In addition, each agency requires

prior notification if capital distributions exceed these standards.

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\6\See 12 U.S.C. 60.

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Conformity with PCA

The proposed regulation incorporates the standards established in

the PCA Rule into 12 CFR 563.134 by defining ``capital distributions''

to reflect the language of section 38(b)(2)(B).

Pursuant to the regulatory standards set forth in the PCA Rule, a

savings association is ``adequately capitalized'' if it has a total

risk-based capital ratio of 8.0 percent or greater; a core risk-based

capital ratio of 4.0 percent or greater; and a leverage ratio of 4.0

percent or greater (or of 3.0 percent or greater, if it was rated

composite 1 after its most recent examination).

Associations may not make capital distributions that would cause

capital to drop below the level required to remain adequately

capitalized. The OTS believes that distinguishing among savings

associations on this basis, rather than the current multi-tiered

structure, is more appropriate for an industry that is generally not

capital deficient.

Notices and Applications

Under the proposal, a savings association may make a capital

distribution using one of three procedures: (1) without notice or

application, if the association is not held by a savings and loan

holding company and received a composite rating of ``1'' or ``2;'' (2)

by providing notice to the OTS if, after the capital distribution, the

association would remain at least adequately capitalized; or (3) by

submitting an application to the OTS.

The OTS notes that the first procedure--distribution without notice

or application in certain circumstances--could permit a savings

association to reduce its capital significantly and quickly so long as

it remained at, or just above, the adequately capitalized threshold.

OTS has proposed this procedure because it wishes to allow maximum

flexibility to the best institutions consistent with its overall goal

of reducing regulatory burden where possible and where consistent with

safety and soundness. The OTS, however, specifically solicits comment

on whether the broad flexibility that this procedure allows to the

institutions that qualify to use it poses safety and soundness

concerns. Commenters addressing this issue are also invited to suggest

alternative procedures and/or additional conditions that would strike

the appropriate balance between reducing regulatory burden and ensuring

prompt and effective regulatory oversight. For instance, should notice

be required if the dividend will cause the capital level to fall below

``well capitalized'' or, as the discussion below describes, if it

exceeds an established threshold amount?

The second procedure--distribution upon notice to OTS--would be

available to institutions that do not qualify for the first, that is,

to institutions with a composite CAMEL rating of lower than 2 or to

those in a holding company structure.

The third procedure--distribution upon application to and approval

by the OTS--is available in two circumstances: first, if under PCA

criteria the applicant institution is undercapitalized or would be

undercapitalized after the capital distribution; second, if the

applicant institution is not undercapitalized under the PCA standards

but is nonetheless in ``troubled condition.''

The Prompt Corrective Action statute and the OTS's implementing PCA

Rule prohibit savings associations from declaring any dividend or

making any other capital distribution if, following the distribution,

the institution would fall within any of the three undercapitalized

categories. A limited exception to this prohibition permits the OTS to

approve the repurchase, redemption, retirement or acquisition of shares

or ownership interests by an undercapitalized institution in connection

with the issuance of additional shares in at least an equivalent amount

if that distribution will reduce the institution's financial

obligations or otherwise improve the institution's financial condition.

The OTS proposes to incorporate this limited exception into its

capital distribution rule and to add the requirement that the

distribution be consistent with an institution's capital restoration

plan. Thus, with respect to a savings association that is, or post-

distribution would be, undercapitalized, the OTS will approve an

application to make a capital distribution only if the distribution

meets the criteria for the limited statutory and regulatory exception

described above and is consistent with the association's capital

restoration plan. When considered in the context of the capital

restoration plan, the proposed distribution must be consistent with

safe and sound operation and must not hinder the association from

achieving any increased levels of capital required to meet the OTS's

capital standards as certain statutory ``phase-in'' schedules take

effect.\7\ The OTS notes that, since enactment of the PCA statute, it

has authorized use of the limited exception principally to provide

incentives to private investors in recapitalization transactions where,

at the conclusion of the entire transaction, the institution was

adequately capitalized or better.

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\7\The statutory authority for certain savings associations to

include ``qualifying supervisory goodwill'' in core capital expires

on December 31, 1994. 12 U.S.C. 1464(t)(3)(A). After June 30, 1996,

savings associations will not be permitted to include in capital any

portion of their investments in and extensions of credit to

subsidiaries engaged in activities not permissible for a national

bank. Id. at 1464(t)(5)(D).

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The OTS will use the same application procedure and will apply the

same approval standards with respect to savings associations in

``troubled condition.'' ``Troubled condition'' would be defined in the

rule to mean the condition of any savings association that: (1) has a

composite rating of 4 or 5 under the OTS's examination rating system;

(2) is subject to a capital directive, a cease and desist order, a

consent order, a formal written agreement, or a PCA directive relating

to the safety and soundness or financial viability of the association,

unless otherwise informed in writing by the OTS; or (3) is informed in

writing by the OTS that it has been designated in ``troubled

condition'' based on its current financial statements, report of

examination, or limited scope review.

The OTS intends to continue to use net income to date during the

calendar year plus 50 percent of surplus capital above the adequately

capitalized level as the general rule of thumb for determining the

permissible amount of a capital distribution. Under the proposal,

however, this limit would no longer be prescribed by regulation. The

effect of its removal from regulatory language would be that

institutions not in a holding company structure with composite ratings

of 1 or 2 could make capital distributions that exceeded the limit

without any notice to the OTS. The OTS invites comment on whether it

would be preferable to retain a notice requirement for all capital

distributions above the amount described by the general rule of thumb

regardless of an institution's CAMEL rating. Commenters are also

invited to address and suggest alternatives to the computation that OTS

uses to determine the permissible amount of a capital distribution.

Finally, the proposal would explicitly reserve the OTS's authority

to prohibit any capital distribution that it determines would

constitute an unsafe or unsound practice.

Comment Solicitation

In addition to the specific requests for comment that appear above,

the OTS solicits comment on all aspects of the proposal.

Executive Order 12866

The Director of the OTS has determined that this regulation does

not constitute a significant regulatory action for purposes of

Executive Order 12866.

Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act, the

Office certifies that this regulation will not have a significant

economic impact on a substantial number of small entities. This

regulation merely conforms the capital distribution regulation to

standards already in place for all institutions as a result of PCA.

Paperwork Reduction Act

The reporting requirements contained in this proposed rule have

been submitted to the Office of Management and Budget for review in

accordance with the Paperwork Reduction Act of 1980 (44 U.S.C.

3504(h)). Comments on the collections of information should be sent to

the Office of Management and Budget, Paperwork Reduction Project

(1550), Washington, DC 20503 with copies to the Office of Thrift

Supervision, 1700 G Street NW., Washington, DC 20552.

The reporting requirements in this proposed rule are found in 12

CFR 563.134. The information to be collected will provide the OTS with

the opportunity to preserve and enhance capital levels of all

associations. The likely respondents are Federal savings associations.

Estimated number of respondents: 610.

Estimated average annual burden per respondent: .275 hour.

Estimated annual frequency of responses: Once.

Estimated total annual reporting burden: 168 hours.

List of Subjects in 12 CFR Part 563

Accounting, Advertising, Crime, Currency, Flood insurance,

Investments, Reporting and recordkeeping requirements, Savings

associations, Securities, Surety bonds.

Accordingly, the Office of Thrift Supervision hereby proposes to

amend part 563, subchapter D, chapter V, title 12 of the Code of

Federal Regulations as follows:

SUBCHAPTER D--REGULATIONS APPLICABLE TO ALL SAVINGS ASSOCIATIONS

PART 563--OPERATIONS

1. The authority citation for part 563 continues to read as

follows:

Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,

1817, 1828, 3806; 42 U.S.C. 4106.

2. Section 563.134 is revised to read as follows:

Sec. 563.134 Capital distributions.

(a) Definitions. For purposes of this part--(1) Capital

distribution means:

(i) A distribution of cash or other property by any savings

association to its owners made on account of that ownership, but not

including--

(A) Any dividend consisting only of shares of the institution or

rights to purchase such shares; or

(B) Any amount paid on the deposits of a mutual or cooperative

institution that the OTS determines is not a distribution for purposes

of this section;

(ii) A payment by a savings association to repurchase, redeem,

retire, or otherwise acquire any of its shares or other ownership

interests, including any extension of credit to finance an affiliated

company's acquisition of those shares or interests; or

(iii) A transaction that the OTS or the Corporation determines, by

order or regulation, to be in substance a distribution of capital of

the savings associations.

(2) Undercapitalized association means an association in one of the

three undercapitalized categories set forth in part 565 of this

subchapter.

(3) Shares means common or preferred stock; or any options,

warrants, or other rights for the acquisition of such stock. This term

does not include convertible debt securities prior to their conversion

into common or preferred stock or other securities that are not equity

securities at the time of a capital distribution. The term ``share''

does include:

(i) Convertible securities upon their conversion into common or

preferred stock; and

(ii) Securities structured for the purpose of evading the

restrictions on capital distributions in this section.

(4) Troubled condition means any savings association that:

(i) Has a composite rating of 4 or 5 under the examination rating

system;

(ii) Is subject to a capital directive, a cease and desist order, a

consent order, a formal written agreement, or a prompt corrective

action directive, relating to the safety and soundness or financial

viability of the savings association, unless otherwise informed in

writing by the OTS; or

(iii) Is informed in writing by the OTS that it has been designated

in troubled condition based on the current financial statements, report

of examination, or limited scope review of the savings association.

(b) Capital Distribution Restrictions. (1) An undercapitalized

association is not authorized to make any capital distributions except

in accordance with the provisions of this paragraph.

(2) Subject to the concurrence of the Corporation, applications to

repurchase, redeem, retire or otherwise acquire shares or ownership

interests may be approved in the case of:

(i) An association operating in compliance with an approved capital

restoration plan under Sec. 565.5 of this subchapter; or

(ii) An association that is well or adequately capitalized and that

wishes to make a capital distribution that would result in the

association being undercapitalized; Provided, that the association has

filed with the OTS, and obtained approval for, a capital restoration

plan under Sec. 565.5 of this subchapter.

(3) The proposed repurchase, redemption, retirement or other

acquisition of shares or ownership interests must:

(i) Be consistent with the association's capital restoration plan;

(ii) Be made in connection with the issuance of additional shares

or obligations of the institution in at least an equivalent amount; and

(iii) Reduce the financial obligations or otherwise improve the

association's financial condition.

(c) Notices and applications. (1) Notices. A savings association

that:

(i) Is at least adequately capitalized, as defined in part 565 of

this subchapter;

(ii) Is not deemed to be in troubled condition, as defined herein;

and

(iii) Will remain at least adequately capitalized following the

proposed capital distribution must notify the OTS pursuant to

Sec. 516.3(a) of this chapter of its intent to make a capital

distribution; Provided, That a savings association meeting the

requirements of paragraphs (c)(1) (i) through (iii) of this section

that is not held by a savings and loan holding company and that

received a composite rating of ``1'' or ``2'' is exempt from the notice

requirement.

(2) Applications. An association that proposes to make a capital

distribution must submit a written application to the OTS pursuant to

Sec. 516.2 of this chapter if it is:

(i) An association that is deemed to be in ``troubled condition;''

(ii) A well or adequately capitalized association that wishes to

make a capital distribution that would result in the association being

undercapitalized; or

(iii) An undercapitalized association.

(3) Multi-purpose notices or applications. A separate notice or

application for making a capital distribution is not necessary if a

notice or application providing sufficient information is required

under other OTS regulations. In such a case, the standards of this

section shall govern whether the capital distribution is approved or

disapproved or whether, under a notice, the OTS will object to the

capital distribution. The association has the burden of stating clearly

that the notice or application submitted for other purposes is also

serving as its notice or application for purposes of this section.

Associations may seek approval or provide notice of prospective capital

distributions by submitting schedules of such prospective capital

distributions in accordance with supervisory guidance on such

procedures.

(d) Prohibition of otherwise permitted capital distributions. The

OTS may prohibit any capital distribution otherwise permitted under

this section upon a determination that the making of a capital

distribution would constitute an unsafe or unsound practice. The

circumstances posing such risk include, but are not limited to, a

capital distribution by an adequately capitalized association whose

capital is or may be impaired as a result of substantial losses.

(e) Corporate reorganizations. The limits set forth in paragraph

(c) of this section shall be applicable to any direct or indirect

distributions of capital to affiliates, including those in connection

with corporate reorganizations.

(f) Less stringent prior provisions or conditions. The requirements

of this section shall supersede the provisions of agreements or

conditions to approved applications controlling an association's

prospective capital distributions that were less stringent than the

restrictions imposed under this rule.

(g) More stringent prior provisions or conditions. An association

may substitute the requirements of this rule for more stringent

requirements imposed upon it by a previous written agreement or

application condition after obtaining the written approval of the OTS.

Dated: November 16, 1994.

By the Office of Thrift Supervision.

Jonathan L. Fiechter,

Acting Director.

[FR Doc. 94-29761 Filed 12-2-94; 8:45 am]

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