case in which the rate of interthe loan exceeds 6 per cent, the ntee fee shall be computed as h the interest rate were 6 per However, at its discretion, a guaring department or agency may se the 6 per cent ceiling rate to a r rate (not to exceed the actual ■f interest charged); but if it does e policy in this regard must be ed consistently with respect to all cations received while the policy effect. Commitment fees. Any commitfee charged a borrower for a Vshall not exceed 1⁄2 of 1 per cent nnum, based on the average daily ed balance of the maximum prinamount of the loan. That fee not begin to accrue prior to the on which the committed funds irst available to the borrower acng to the terms of the loan agreeI or other similar financing arement. In any such case, the fiing institution shall pay to the anteeing department or agency, a entage of the commitment fee (1) d on the guaranteed portion of oan, and (2) equal to the percentof the interest on the loan that is ble as a guarantee fee by the ficing institution. O Prepayment penalties. (1) In the of a V-loan made primarily for King captial purposes, a financing itution may not charge a penalty prepayment of the loan but may ver out-of-pocket expenses. ) In the case of a V-loan made for purpose of financing facilities exsion, provision for a prepayment alty may be made in the loan agreement if all of the following conditions are met: (i) The loan has a maturity of 5 years or more; (ii) The prepayment penalty shall not exceed the rate of interest to be paid by the borrower according to the terms of the loan; (iii) Provision is made for a graduated decrease in the prepayment penalty as the loan approaches maturity; and (iv) The loan agreement explicitly provides that the prepayment penalty shall not be applicable in the event the loan is refinanced by or consolidated with another loan that is made or guaranteed by the federal government or any of its agencies. 250.101 Necessity for Board approval of stock dividend by State member bank. 250.102 Payment of dividends; effect of net losses. 250.103 Payment of dividends exceeding net profits to date of declaration. 250.104 Dividends of State member banks-Meaning of "net profits." 250.120 Underwriting bonds payable from proceeds of State sales taxes. 250.121 Application of investment securities regulation to member State banks. 250.122 Underwriting of public Authority bonds payable from rents under lease with governmental entity having general taxing powers. 250.123 Underwriting of notes payable from proceeds of subsequent sale of general obligation bonds. 250.140 Member bank acquisition of stock of another bank. 250.141 Member bank purchase of stock of "operations subsidiaries." 250.142 Meaning of "obligor or maker" in determining limitation on securities investments by member State banks. 250.143 Member bank purchase of stock of foreign operations subsidiaries. 250.160 Federal funds transactions. 250.161 Capital notes and debentures as "capital," "capital stock," or "surplus." 250.162 Undivided profits as "capital stock and surplus". 250.163 Inapplicability of amount limitations to "ineligible acceptances." 250.180 Reports of changes in control of management. Sec. 250.181 Reports of change in control of bank management incident to a merger. 250.182 Terms defining competitive effects of proposed mergers. 250.200 Investment in bank premises by holding company banks. 250.220 Whether member bank acting as trustee is prohibited by section 20 of the Banking Act of 1933 from acquiring majority of shares of mutual fund. 250.221 Issuance and sale of short-term debt obligations by bank holding companies. 250.240 Applicability of section 23A of the Federal Reserve Act to transactions between a member State bank and its "operations subsidiary". 250.250 Applicability of section 23A of the Federal Reserve Act to a member State bank's purchase of, or participation in, a loan originated by a mortgage banking affiliate. 250.260 Miscellaneous interpretations; gold coin and bullion. BANK SERVICE ARRANGEMENTS 250.300 Kinds of bank servicers subject to Board examination under the Bank Service Corporation Act. 250.301 Scope of investment authority and notification requirement under the Bank Service Corporation Act. 250.302 Applicability of Bank Service Corporation Act to bank credit card service organization. AUTHORITY: 12 U.S.C. 248(i), unless otherwise noted. SOURCE: 33 FR 9866, July 10, 1968, unless otherwise noted. INTERPRETATIONS § 250.101 Necessity for Board approval of stock dividend by State member bank. (a) The opinion of the Board of Governors has been requested as to whether section 5199(b) of the Revised Statutes of the United States, as amended September 8, 1959 (12 U.S.C. 60), requires the Board's approval for the declaration of a stock dividend by a State member bank in an amount which would exceed the total of net profits for the present year combined with the retained net profits of the preceding 2 years. This statute is made applicable to State member banks by the sixth paragraph of section 9 of the Federal Reserve Act (12 U.S.C. 324). excessive dividends. Since a stock dis dend does not result in the distrib tion of cash or assets, the Board does not consider the term "dividend this statute as including stock dividends. Consequently, the Board's approval for the declaration of a stock dividend is not required. (12 U.S.C. 60) § 250.102 Payment of dividends; effect of net losses. (a) Section 5199(b) of the Revised Statutes (12 U.S.C. 60), as amended in 1959: Provides, That: The approval of the Comptroller of the Currency shall be required if the total of a... dividends declared by [a national bank) i any calendar year shall exceed the total of its net profits of that year combined with its retained net profits of the preceding 2 years Under the sixth paragraph of section 9 of the Federal Reserve Act (12 U.S.C. 324), member State banks are required "to conform to the provisions of section 5199(b) * with respect to the payment of dividends", except that the approval of the Board of Gover nors is required in lieu of the approval of the Comptroller. (b) The question has arisen whether it is necessary in determining whether a bank's dividends in a particular year "exceed the total of its net profits of that year combined with its retained net profits of the preceding two years", to take into consideration the amount of a net loss in the current year or in one or both of the preceding 2 years. (c) The purpose of the 1959 amendment of section 5199(b) was to prevent a bank from paying a dividend (except with supervisory approval) unless it has on hand, from operations during the 3 latest years, sufficient net profits to cover the proposed dividend. If a net loss for one or more of those 3 years was disregarded in making the calculation called for by section 5199(b), a member State bank could pay dividends, without the approval of the Board of Governors, even though the aggregate results of the 3 latest years' operations was a net deficit. This was precisely the sort of situation in which Congress intended to prevent (b) The purpose of this provision is to prevent the depletion of the capital structure of a bank by the payment of yment of a dividend unless the isory authority was satisfied special circumstances justified oposed dividend. Accordingly, it is the position of ard that, in making the calculaequired by section 5199(b), it is ary to take into consideration cual results of operations during rrent year and the 2 preceding whether the figures for those are plus or minus figures. For le, if a bank had with its retained net profits of the preceding 2 years. (c) If the question related only to the literal meaning of words, divorced from the statute's underlying purpose and from the factual situations to which it relates, it might be contended that since the statute refers to "all dividends declared * in any calendar year" and "the total of its net profits of that year", its applicability cannot be determined until the calendar year is completed. As explained Retained net profits of $30,000 below, however, such an interpretation 959; A net loss of $40,000 in 1960 (and nds of $10,000 were paid in that with the Board's approval); and Net profits of $20,000 in 1961, ld not pay any dividend in 1961 ut the Board's approval, since calculation required by section D) would result in a zero figure 00 minus $50,000 plus $20,000). 1 be noted that, for the purposes tion 5199, any dividends paid in a wear must be included in the "net for that year, just as dividends in a profitable year must be deed from "net profits" in calculatretained net profits". _S.C. 60) (12 103 Payment of dividends exceeding b) The question has been presented is not required by the language of the statute and would substantially defeat its purpose, as revealed by the legislative history; and consequently it is believed that the statute should be construed as relating to dividends declared, and to net profits, in the calendar year up to the date of such declaration. (d) The purpose of the statute was described as follows by the Senate Banking Committee: This provision is designed to restrict the payment of dividends *** where such payments would result in dissipating needed capital funds. This provision strengthens the regulatory authority of the Comptroller [and the Board of Governors]. Under it, he will be able to prevent the declaration of dividends which are not justified by current and recent accumulated earnings, and which would result in a weakened and undercapitalized bank and violate safe and sound banking practice. (S. Rep. No. 730, 86th Cong. (Aug. 19, 1959), pp. 6-7) (1) It seems that Congress had in mind the following test: At the time the dividend is declared, does the bank have available, from profits of the current calendar year and the 2 preceding calendar years, enough profits to cover the dividend? If not, the dividend may not be declared and paid unless the Comptroller or the Board of Governors specifically approves, in view of the circumstances of the particular case. (2) Bearing in mind the Senate Committee's reference to "dissipating needed capital funds," it is obvious that the danger that a proposed dividend would unduly weaken a bank's capital structure is just as great if the dividend is declared in June as if it is declared in December. If a bank does not have profits on hand sufficient to cover a proposed dividend, the fact that the declaration is made in 1 month rather than in another has little or no bearing on the extent to which payment of the dividend may unduly diminish the capital "cushion" on which depend the bank's continued existence and the safety of its depositors. (e) An illustration may be helpful. For simplicity, let us assume that a member State bank opened for business on January 1, 1959, with a capital structure of $300,000, as required by the supervisory authorities. The bank had no net profit in 1959 or 1960. Up to June 30, 1961, it still has no net profits, but nevertheless the directors declare a dividend of $20,000 on that date. The bank's capital structure is thereby reduced from $300,000 to $280,000. It seems that this was precisely what Congress intended should not happen unless the Board of Governors approved the dividend, for adequate reasons. An undesirable situation would exist, and the Congressional purpose would be defeated, if such a weakening of the bank's capital structure were permissible if the dividend was declared and paid (without supervisory approval) in June, whereas the same action would involve a violation of the statute if the dividend was declared and paid, instead, in December. This might actually mean that no violation of section 5199(b) could occur except with respect to end-of-year dividends-unless, perhaps, it could be established that the bank's directors, when they declared the dividend earlier in the year, knew (or had reason to believe) that the bank's net profits for the entire year would not be sufficient. without the Board's approval, of a dividend in the amount of $20.00 would be in violation of the applicable statutes, since the amount of that div.dend would exceed "the total of (th bank's) net profits of that year combined with its retained net profits c the preceding two years." (12 U.S.C. 60) § 250.104 Dividends of State member banks-Meaning of “net profits." (a) Section 5199(b) of the Revised Statutes of the United States (12 U.S.C. 60), as made applicable to State member banks by the 6th paragraph of section 9 of the Federal Reserve Act (12 U.S.C. 324), provides that: The approval of (the Board of Governors shall be required if the total of all dividends declared by (a State member bank) in ani calendar year shall exceed the total of its net profits of that year combined with t retained net profits of the preceding 2 years, less any required transfers to surplus or a fund for the retirement of any preferred stock. (b) The term "net profits" is defined in section 5199(c) to mean "the remainder of all earnings from current operations plus actual recoveries or 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." (c) For the purpose of employing a uniform means for the determination of net profits before dividends on common stock, as required by section 5199(b), it is the Board's view that net profits shall be the amount of "net income" determined in accordance with the Report of Income (FR Form 107a), adjusted as set forth hereinafter. The statutory adjustments prescribed by section 5199 require the recognition of actual losses and recoveries on loans and investments and other assets recorded in reserve accounts and the elimination of corresponding provisions for such items entered against income. Further, to ascertain net profits available for common stock cash dividends, net profits for the cur rent year and proceeding 2 years shall be adjusted for preferred stock divi (f) The statutory reference to "all dividends declared *** in any calendar year" can be interpreted, even from the viewpoint of literal meaning, as referring to dividends declared in a calendar year up to the date of declaration. Particularly because the clear Congressional purpose would otherwise be largely defeated, it is concluded that this is the correct interpretation and that, consequently, the declaration by the member State bank, aid or accrued and for required s to surplus or a fund for the ent of preferred stock. light of the prevalent use of accounting by banks, it also appropriate to recognize "pro income tax adjustments in the nation of net profits. The adt, if any, would be related to ount of difference between profor losses (or reversal of provincluded in the determination of come" and actual net losses or ies incorporated in the section calculations. If the "pro income tax adjustment s to less than 5 percent of net before such adjustment, it need recognized. he following guideline schedule rth the most common adjustrequired in calculating net profsection 5199(b) purposes. ATIONS OF NET PROFITS FOR PURPOSES OF SECTION 5199(b) NET INCOME (SCHEDULE A) a) Recoveries credited to reserve acSchedule D). rovision for loan losses (Schedule A). ny other provisions charged against (Schedule A), constituting additions ve accounts (Schedule D). Pro forma income tax adjustment enting decrease of applicable income SUBTOTAL ct: (a) Losses charged to reserve ac(Schedule D). referred stock dividends paid or acor the period. To forma income tax adjustment (repng increase of applicable income tax). SUBTOTAL NET PROFITS AS DEFINED act: (a) Required transfers to surplus und for the retirement of preferred Common stock dividends paid or acfor the period. SUBTOTAL ained net profits available for common dividends. E 1: Schedule references are to superReport of Income (FR Form 107a). Contra elements to applicable captions d be shown in parentheses. (f) The above schedule for the determination of net profits will also be employed by the Comptroller of the Currency and its use will be uniform for all member banks. (g) Special factors affecting net profits, such as charge-offs of bank premises in excess of normal annual depreciation or unusual security losses, will be weighed by the Board in consideration of requests by State member banks to declare dividends which would be prohibited by section 5199(b) without Board approval. Accordingly, any unusual charge-offs should be presented for Board consideration. (h) The objective of section 5199 is to restrict the payment of dividends where such payments would result in dissipating needed capital funds. The law is designed to prevent the declaration of dividends which are not justified by current and recent accumulated earnings and which would result in a weakened and under-capitalized bank and violate safe and sound banking practices. (Interprets and applies 12 U.S.C. 60) [37 FR 25486, Dec. 1, 1972] § 250.120 Underwriting bonds payable from proceeds of State sales taxes. (a) The opinion of the Board of Governors of the Federal Reserve System has been requested with respect to the authority of member State banks to underwrite securities issued by States and political subdivisions thereof, with particular reference to $35,750,000 of Public Building Bonds, 1961, Series D, and Public School Plant Facilities Bonds, 1961, Series C, of the State of Washington. The Comptroller of the Currency has held that said bonds are eligible for underwriting by national banks. (b) Paragraph Seventh of section 5136 of the Revised Statutes (12 U.S.C. 24) provides that a national bank "sh ll not underwrite any issue of securities", but further provides that this restriction "shall not apply to *** general obligations of any State or of any political subdivision thereof". The 20th paragraph of section 9 of the Federal Reserve Act (12 U.S.C. 335) subjects State member banks to the same limitations with re |