We are a state-chartered bank with a holding company. Are there any federal or state regulations restricting our ability or our holding company’s ability to pay dividends on our stock?

The Federal Deposit Insurance Act generally prohibits FDIC banks from banking capital distributions, including dividend distributions, if the distribution would result in the institution becoming undercapitalized. Additionally, after a bank receives notice from the FDIC that it is considered undercapitalized, it is subject to restrictions on capital distributions.

The Illinois Banking Act also appears to limit dividends to a bank’s “net profits then on hand, deducting first therefrom its losses and bad debts.” Also, a bank must carry “at least one-tenth of its net profits” since the last dividend to its surplus.

We are not aware of any IDPFR interpretive letters interpreting these provisions. We did find FRB guidance on dividend declarations by bank holding companies, but the guidance mainly relates to maintaining sufficient capital levels when distributing dividends, with factors for a holding company’s board to consider. The FRB’s guidance does strongly recommend informing the Federal Reserve regarding a dividend distribution if:

(1) The BHC’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;

(2) The BHC’s prospective rate of earnings retention is not consistent with the BHC’s capital needs and overall current and prospective financial condition; or

(3) The BHC will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

Failure to do so could result in a supervisory finding that the organization is operating in an unsafe and unsound manner.

For resources related to our guidance, please see:

Federal Deposit Insurance Act, 12 USC 1831o(d)(1) (“(A) An insured depository institution shall make no capital distribution if, after making the distribution, the institution would be undercapitalized.”)

Federal Deposit Insurance Act, 12 USC 1831o(d)(1) (“(B) Notwithstanding subparagraph (A), the appropriate Federal banking agency may permit, after consultation with the Corporation, an insured depository institution to repurchase, redeem, retire, or otherwise acquire shares or ownership interests if . . . .”)

FDIC Regulations, 12 CFR 325.105(a)(2) (“ Immediately upon receiving notice or being deemed to have notice, as provided in § 325.102 of this subpart, that the bank is undercapitalized, significantly undercapitalized, or critically undercapitalized, the bank shall become subject to the provisions of section 38 of the FDI Act: (i) Restricting payment of capital distributions and management fees (section 38(d)); . . . .”)

Illinois Banking Act, 205 ILCS 5/14(8) (“(a) Subject to the provisions of this Act, the board of directors of a state bank from time to time may declare a dividend of so much of the net profits of such bank as it shall judge expedient, but each bank before the declaration of a dividend shall carry at least one-tenth of its net profits since the date of the declaration of the last preceding dividend, or since the issuance of its charter in the case of its first dividend, to its surplus until the same shall be equal to its capital.”)

Illinois Banking Act, 205 ILCS 5/14(8) (“(b) No dividends shall be paid by a state bank while it continues its banking business to an amount greater than its net profits then on hand, deducting first therefrom its losses and bad debts. All debts due to a state bank on which interest is past due and unpaid for a period of 6 months or more, unless the same are well secured and in the process of collection, shall be considered bad debts.”)

Illinois Banking Act, 205 ILCS 5/14.1 (a) For the purposes of declaring dividends pursuant to Section 14(8)(b) of this Act upon a change in control , if a bank: (1) incurs a change in ownership of more than 50% of its voting stock; and (2) has a deficit in its net profits then on hand at the time of such change in ownership; and (3) receives the prior written approval of the Secretary; such bank may restate its asset and liability accounts to fair value for the purpose of reorganizing the capital accounts of the bank so that net profits then on hand are restated to zero; provided that in no event may total capital be increased as a result of a capital reorganization made pursuant to this Section.”)

Illinois Banking Act, 205 ILCS 5/14.1 (b) A bank may reorganize its capital accounts pursuant to item (3) of subsection (a) of this Section without a change in control to the same extent and in the same manner authorized for national banks, subject to the same limitations and restrictions as are applicable to national banks, upon receiving the prior written approval of the Secretary.”)

FRB Supervision and Regulation Letter, SR 09-4 (February 24, 2009) (“As a general matter, the board of directors of a BHC should inform the Federal Reserve and should eliminate, defer, or significantly reduce the BHC’s dividends if: . . . .”)