[Federal Register Volume 59, Number 232 (Monday, December 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29761]


[[Page Unknown]]

[Federal Register: December 5, 1994]


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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]
BILLING CODE 6720-01-P