Capital and Dividends

Capital and Dividends

Comptroller’s Licensing Manual

Washington, DC
May 2006

Capital and Dividends

Table of Contents

Introduction............................................................................................................ 1
Key Policies .............................................................................................................1
Application Process .................................................................................................2
Prior Approval ..............................................................................................2
Prior Approval Not Required ........................................................................3
Securities Disclosure Requirements ..............................................................4
Lending Limit Calculation.............................................................................5
Specific Requirements for Increases .........................................................................5
Sale of Common Stock for Cash....................................................................5
Sale of Preferred Stock for Cash ....................................................................5
Blank Check Preferred Stock.........................................................................6
Sale of Capital Stock for Other than Cash......................................................6
Receipt of Cash Contribution ........................................................................6
Receiving Noncash Contribution ..................................................................6
Specific Requirements for Decreases .......................................................................7
Reduction in Capital by Distributing Cash or Assets......................................7
Reduction in Capital by a Quasi-reorganization ............................................8
Specific Requirements for Other Changes................................................................9
Stock Split.....................................................................................................9
Change in Par Value of Capital Stock............................................................9
Retirement of Capital Stock…………………………………………………………..10
Employee Stock Option Plans………………………………………………………..10
Acquisition of Treasury Stock......................................................................11
Reverse Stock Split......................................................................................12
Innovative Capital Instruments Included in Tier 1 Capital ...........................13
Hybrid Capital Instruments Included in Tier 2 Capital.................................15
Dividends.............................................................................................................. 15
Stock Dividends..........................................................................................15
Dividends-In-Kind.......................................................................................16
Dividends Exceeding the Limits of 12 USC 60 ............................................16
Procedures: Filing the Application ........................................................................18
Procedures: Notice ...............................................................................................23
Appendix A: Changes in Capital ...........................................................................25
Appendix B: Payment of Dividends ......................................................................26
Glossary ................................................................................................................27
References .............................................................................................................29

ii

Capital and Dividends
Introduction
A national bank must obtain OCC prior approval for any decrease and for certain
increases in permanent capital (the sum of a bank’s capital stock and capital surplus
accounts). National banks may make some increases to permanent capital by
sending the OCC an after-the-fact notice. Other changes require the OCC’s prior
approval. Additionally, the OCC must certify to increases in a bank’s permanent
capital before the bank can issue additional capital or reflect the capital change on
its financial statements.
This booklet provides guidance and instructions to banks intending to change
permanent capital. It also describes key policies, summarizes both the prior
approval and the after-the-fact processes, and details specific requirements for
increases and decreases in permanent capital. Additionally, this booklet describes
innovative and so-called hybrid capital instruments that the OCC has determined
qualify as capital, subject to various limitations. The booklet also discusses
dividends, including the process that banks must follow to obtain OCC approval for
dividends that exceed the earnings limits of 12 USC 60.
There is a step-by-step procedure section for applicants and the OCC to follow and
a glossary of terms used in this booklet. The reference section includes applicable
laws, regulations, and OCC issuances to assist applicants in completing the capital
and dividend process. This booklet is to be used together with other booklets of the
Comptroller’s Licensing Manual. You should review the “General Policies and
Procedures” booklet prior to completing the application for filing instructions and to
the “Charters” booklet for sample corporate documents. Throughout this booklet
there are hyperlinks to related corporate decisions and to filing samples.

Key Policies
Generally, the OCC will approve a change in permanent capital that:
•

Is consistent with applicable law, regulation, and OCC policy.

•

Provides an adequate capital structure.

•

Complies with the capital plan filed by the bank under either 12 CFR 3.7 or 12
USC 1831o and 12 CFR 6.5, if appropriate.

•

Complies with applicable securities disclosure requirements.

The OCC regulations permit national banks to follow the corporate governance
procedures of the laws of the state in which the main office of the bank is located;
the law of the state in which the bank’s holding company is incorporated; the
Delaware General Corporation Law; or the Model Business Corporation Act.
National banks, however, may follow those laws only to the extent that they are not
inconsistent with applicable federal banking statutes or regulations and safe and
sound banking practices. The bank must designate in its bylaws the body of law
selected. (Refer to section 8.4 of the model Bylaws and 12 CFR 7.2000.)
1

The OCC generally does not approve dividend requests that:
•

Would reduce capital to less than regulatory minimums, as required by 12 CFR
5.65, “Restrictions on undercapitalized institutions,” or below levels specified in
an enforcement action.

•

Are intended to specifically service shareholder debt, protect stock value, or to
continue a trend of paying dividends.

There are various arrangements a bank may adopt to avoid complicated
recordkeeping for fractional shares. Some acceptable alternatives are detailed in 12
CFR 5.67, Fractional shares, and the OCC has approved alternative means. A bank
considering an option not discussed in the regulation should consult with the
appropriate director for district licensing.

Application Process
Certain changes in permanent capital do not require OCC approval or certification,
although they are subject to other legal requirements. Such changes include a
change in the amount of authorized, but unissued, capital stock; and a stock split or
other adjustment that does not change the amount in the common stock account.
These changes are effective upon shareholder approval (see Appendix A). Other
changes in permanent capital do require OCC approval or notice as follows.

Prior Approval
The OCC must review and approve certain changes in capital before the transaction
can be completed. Once the bank has requested and received prior OCC approval,
the bank then notifies the OCC when the change is made and that it complies with
legal requirements. Upon receipt of the bank’s notification, the OCC will certify or
acknowledge the change.
A national bank must obtain the OCC’s prior approval for:
•

The sale of common or preferred stock for consideration other than cash.

•

The receipt of a material1 noncash contribution to capital surplus.

•

The reduction in capital stock or capital surplus through a distribution of cash or
assets, or a transfer to undivided profits or to any other noncapital account.

•

Acquisition of a bank’s own shares to be held as treasury stock. However,
shares of the bank’s own stock taken to satisfy a debt previously contracted,
while accounted for as treasury stock, are not subject to this prior approval
procedure. (See 12 USC 83 for specific requirements in this situation.)

1

A contribution to capital surplus will be considered material if the fair value of the noncash item
represents 3 percent or more of Tier 1 capital prior to the contribution.
2

•

Any change in permanent capital if the bank seeking to make the change is
required to receive prior OCC approval pursuant to letter, order, directive,
written agreement, or similar communication.

•

The planned use of innovative capital instruments if the bank wants such
2
instruments to be considered Tier 1 capital.

For changes requiring prior approval, the bank must submit an application to the
OCC to change permanent capital. The application must describe the proposed
change and explain the reason(s) for it. The OCC will review the change to
determine that it:
•

Conforms to the terms of any capital adequacy agreement.

•

Can be considered capital for regulatory and accounting purposes.

•

Complies with laws and regulations.

•

Satisfies any related supervisory concerns.

Unless the OCC notifies the bank to the contrary, an eligible bank (see Glossary)
may consider a proposed change in capital approved and certified 30 days after the
OCC receives the application. The OCC will advise the applicant if any additional
steps or information are required to complete the change.
Under 12 USC 51b, the OCC must review the terms of preferred stock concerning
dividends, voting and conversion rights, rights to exercise control over
management, and retirement of preferred stock. All banks must submit provisions
in the Articles of Association about those terms prior to the sale of the preferred
stock. A bank may consider the provisions approved by the OCC on the 30th day
after the day of receipt by the OCC, unless otherwise notified in writing. Any OCC
notification will include the reason for the delay.

Prior Approval Not Required
The following changes in capital do not require the OCC’s prior approval.
However, these changes do not become effective until the OCC certifies or
acknowledges that they comply with legal requirements.
The following changes require the bank to notify the OCC:
•

Sale of common or preferred stock for cash.

•

Stock issued either in accordance with an Employee Stock Option Plan or as a
form of compensation to bank employees (refer to the “Specific Requirements
for Increases” discussion for details).

•

Conversion of preferred stock to common stock.

2

See 12 CFR 3.2 describing the various Tier 1 and Tier 2 components of capital.
3

•

Payment of stock dividends that do not exceed the 12 USC 56 earnings
limitations.

•

A stock split, other than a reverse stock split, involving a change in the par value
of capital stock when the change in the capital stock account is offset by an
equal change in the capital surplus account.

•

Receiving cash contributions to capital surplus.

•

Receiving immaterial noncash contributions to capital surplus (see footnote 1).

Upon receipt of the bank’s notice of a permanent capital change, the OCC will
review the notice and certify an increase in permanent capital; or if a reduction, it
will acknowledge the bank has completed the transaction.
Upon the OCC’s certification of a permanent capital increase, a bank may issue
shares and reflect the capital on financial statements and the Consolidated Reports
of Condition and Income (Call Report).
Changes in capital must be completed within one year of OCC’s approval. If the
approval time runs out and the transaction is not consummated, the OCC’s approval
ends automatically. The OCC normally does not grant extensions of time.

Securities Disclosure Requirements
A national bank offering its securities for sale must comply with 12 CFR 16,
Securities Offering Disclosure Rules. Part 16 prohibits the offer or sale of bank
securities unless:
•

The bank has filed a registration statement with the OCC and the OCC has
declared it effective, and the securities have been sold through the use of a
prospectus filed as part of that registration statement; or

•

The transaction is exempt from the registration statement requirement or
qualifies for an abbreviated registration requirement, such as a private
placement, for nonconvertible debt, or a limited offering. Banks proposing to
offer and sell securities should consult with legal counsel for the appropriate
registration requirement or exemption under the Securities Act of 1933 and its
rules and regulations.

Under the Securities and Exchange Act of 1934, banks that have securities
registered on a national securities exchange, or with more than 500 shareholders,
must register those securities with the OCC. Banks with registered securities also
must file certain periodic and current reports with the OCC. These reports include,
among others, quarterly reports, annual reports, and proxy or information statements
for shareholder meetings.
The filing requirements for banks that have securities registered under the Securities
and Exchange Act of 1934 are set forth in 12 CFR 11, Securities Exchange Act
Disclosure Rules. This regulation incorporates Securities Exchange Commission
rules, regulations, and forms, except where otherwise provided.

4

Lending Limit Calculation
When a capital transaction results in a change in capital category under 12 USC
1831o, and 12 CFR 6 (prompt corrective action), the OCC will confirm in writing
that the bank should begin to calculate its lending limit based on the resulting
capital and will note the effective date of such change. In addition, on a case-bycase basis, the OCC can require recalculation of a bank's lending limit when a
capital transaction causes a change to capital but does not result in a change in
capital category. Further, a bank may request permission from the OCC to
recalculate its lending limit when a capital transaction causes a material change to
capital but does not result in a change in capital category.

Specific Requirements for Increases
Shareholders must approve by two-thirds vote any changes to the Articles of
Association that increase the amount of authorized, but unissued, common stock. A
majority of shareholders must approve other changes to the Articles of Association
including authorized, but unissued, preferred stock. Changes to the Articles of
Association are not required if the existing articles authorize unissued shares of
common or preferred stock.

Sale of Common Stock for Cash
Generally national banks have only one class of common stock. National banks
may not create classes of common stock with different or no voting rights. Federal
banking law provides, without exception, that common shareholders are entitled to
one vote per share in all matters, except the election of directors for which the
common shareholders have cumulative voting rights. If a bank proposes to issue
more than one class of common stock, legal, supervisory, and policy issues must be
considered. A bank should consult with the OCC prior to issuing more than one
class of common stock.
Common stock may be par value stock or no par stock. Banks should consult with
the OCC prior to considering a sale of common stock at a price below par value. If
the stock is no par stock, the stock may have a stated value so that the bank will
have capital surplus and capital stock. Prior to issuing no par common stock, a
bank should consider the relationship between capital surplus and restrictions on
dividends contained in 12 USC 60 and 12 CFR 5.64. For a more complete
explanation of these issues, see Corporate Decision 2003-3 (March 3, 2003).
Once the shares of common stock are sold, the bank must notify the OCC (refer to
Notice: Increase in Stock for Cash for details). Upon receipt of the notice, the OCC
certifies the increase in outstanding capital if it meets legal requirements (Capital
Increase Certification Letter).

Sale of Preferred Stock for Cash
Generally, the Articles of Association define the terms, rights, privileges, and
authorized amount of a bank’s preferred stock. Once the sale of the preferred stock
is completed, the bank notifies the OCC (refer to Notice: Reduction of Permanent
Capital for sample). Upon receipt of the notification, the OCC certifies the increase
in preferred stock.
5

Although cash sales of preferred stock do not require prior OCC approval, 12 USC
51b requires the agency to review terms of preferred stock for dividends, voting and
conversion rights, control of management, and retirement. A bank must submit to
the director for district licensing, the provisions in the Articles of Association about
those terms at least 30 days prior to the sale of the preferred stock (refer to Notice:
Preferred Stock Terms for sample).

Blank Check Preferred Stock
Blank check preferred stock enables banks to respond more quickly to market
conditions to meet their capital needs and is consistent with 12 USC 51a and 51b.
This flexibility comes from shareholders providing in the Articles of Association an
overall authorized amount of preferred stock and delegating to the board the ability
to determine the timing and specific terms of one or more series of preferred stock.
When the board decides that an opportune time to issue the preferred stock exists, it
passes resolutions defining and approving the terms of the preferred stock.
A bank must take several steps to use the blank check preferred stock option. First,
under 12 CFR 7.2000(b), the board designates in its bylaws corporate governance
procedures that permit blank check preferred stock to be issued. Second,
shareholders adopt Articles of Association containing a provision authorizing the
board to issue preferred stock using the blank check procedure. The shareholderapproved articles also provide that a board resolution that specifies the exact terms
of the preferred stock will be incorporated by reference into the Articles of
Association. Third, the articles are filed with the OCC. Fourth, when determined
by the board, and before issuing any of the preferred shares, the terms of the sale of
the preferred stock are submitted to the OCC for its review. Finally, when issued,
the OCC certifies the preferred stock as capital.

Sale of Capital Stock for Other than Cash
The bank must submit to the OCC an application to change its permanent capital
and receive its approval prior to trading or exchanging common or preferred stock
for assets. The bank should be prepared to provide documentation supporting the
fair value of any asset to be exchanged or traded for its capital stock. Refer to
Application: Increase in Capital for Other Than Cash for sample. Also 12 CFR
34.42(g) if a real estate-related transaction.

Receipt of Cash Contribution
A bank may be the recipient of a capital contribution, typically either from its
holding company or controlling owner. The cash contribution is recorded as an
increase in the bank’s capital surplus account. No shareholder approval is required.
The bank should inform the OCC of receipt of the contribution within 10 days of
receiving it (refer to Notice: Increase in Stock for Cash). At that time the OCC will
authorize inclusion of the contribution as capital.

Receiving Noncash Contribution
A bank must submit an application for prior OCC approval if it will receive a
noncash contribution that has a fair value that represents 3 percent or more of Tier 1
6

capital prior to the contribution (refer to sample application). The bank must submit
documentation that describes the property and valuation method. Also refer to 12
CFR 34.41-34.47 if the property is a real estate-related transaction to determine the
market value. The bank also must notify the OCC upon receipt of the property
(refer to sample Notice: Noncash Contribution to Surplus).
If the bank’s noncash contribution to capital surplus has a fair value of less than 3
percent of Tier 1 capital prior to the contribution, it need not seek prior OCC
approval; however, the bank must notify the OCC.

Specific Requirements for Decreases
A bank must submit to the OCC an application and receive its approval for any
reduction in permanent capital that results in a distribution of either cash or assets or
a transfer to undivided profits or any other noncapital account. This includes the
retirement of outstanding shares or the acquisition of outstanding shares that will be
held by the bank as treasury stock. Transfers of so-called “surplus-surplus” into
undivided profits for the payment of dividends do not require OCC prior approval,
or notification if they meet the earnings criteria of 12 CFR 5.64(c) and if the board of
directors of the bank approves the transfer. However, any subsequent dividends
must satisfy the requirements of 12 USC 56 and 60.
Under 12 USC 59, shareholders must approve any reduction in permanent capital
and related distribution of cash or assets.
The OCC generally approves reductions in permanent capital for banks in
satisfactory condition, unless the proposed capital structure is not considered
adequate under OCC policies. The OCC will approve applications for capital
reductions from eligible banks that contemplate up to four consecutive quarterly
distributions. However, approval of such distribution plans is contingent upon the
bank maintaining its eligible bank status before and after each decrease.
The OCC may deny, or conditionally approve, any reduction in capital for:
•

Failure to comply with a capital plan submitted to the OCC.

•

A capital structure that the OCC considers inadequate.

•

Use of treasury stock as a means to speculate in the bank’s own stock or bypass
a requirement or obligation under federal banking laws.

•

A violation of laws or regulations.

•

Conditions that threaten the safety and soundness of a bank.

•

Failure to provide adequate information.

Reduction in Capital by Distributing Cash or Assets
A bank must submit an application and receive OCC’s prior approval to reduce its
capital stock or capital surplus through a distribution of cash or assets. When a
bank distributes assets in this manner, it must record the assets at fair value. The
7

OCC has allowed banks to reduce permanent capital through a “return of capital.”
This accounting method will allow a bank to return excess funds to their
shareholders. Moreover, because a return of capital does not constitute a dividend,
the reduction will not affect a bank’s future dividend paying capacity.

Reduction in Capital by a Quasi-reorganization
A quasi-reorganization is an accounting procedure that allows a bank to restructure
its capital accounts to remove a deficit in undivided profits without undergoing legal
reorganization. This procedure allows a bank that has previously suffered losses,
but subsequently corrected its problems, to restate its records as if it were
reorganized.
The bank can accomplish the restructuring by transferring amounts from capital
stock and capital surplus to the undivided profits account to remove the deficit.
Upon OCC approval, a quasi-reorganization is recognized as a recapitalization.
Following the quasi-reorganization, a bank may pay dividends from future earnings
without regard to the prior deficit in undivided profits and the limitation under
12 USC 56.
A quasi-reorganization is available only to banks that meet certain legal and
accounting requirements. To satisfy legal requirements, the shareholders must
approve by a two-thirds vote the quasi-reorganization and any related reduction in
capital stock and capital surplus. The bank must provide shareholders with full
disclosure of the material aspects of the proposal, including the appraisal process.3
In addition, the bank must meet the following accounting requirements:
•

The bank’s financial records should reflect the fair value of all assets and
liabilities based on an appropriate appraisal or evaluation process. The bank
should never recognize new intangible assets because of the quasireorganization. Further, existing intangible assets should be reviewed for
impairment.

•

The bank’s undivided profits account must be adjusted to a zero balance.

•

If the net effect of the fair value adjustments results in decreased capital, the
bank must charge this amount to the existing deficit in undivided profits.

•

Total capital cannot be increased as the result of a quasi-reorganization. If the
fair value adjustments would result in increased capital, the bank must reduce
proportionately the fair value of any noncurrent, nonmarketable assets, so that
capital is not increased.

•

Any resulting deficit in undivided profits should be eliminated against the bank’s
capital surplus account. If the capital surplus account is not sufficient, the bank
should reduce the par value of existing capital stock to increase the surplus
account.

3

National banks with securities registered under the Securities Exchange Act of 1934 should submit
proposed shareholder disclosures to the Securities and Corporate Practices Division for review.
8

•

Following the quasi-reorganization, the bank should be accounted for as a new
entity. Anticipated or planned changes in accounting principles should be
adopted before, or at the same time with, the quasi-reorganization. The bank
must report any unrecognized tax benefits of deductible temporary differences
and carry-forwards existing as of the date of the quasi-reorganization as an
increase to capital surplus when recognized in subsequent years.

•

The effective date of the quasi-reorganization is generally the date upon which
the bank receives shareholder approval or OCC approval, if later. However, the
bank may use the first day of the quarter in which approval is obtained as the
effective date.

To use this procedure, the bank must submit an application and receive the OCC’s
prior approval. The application must describe how the bank satisfies the various
requirements and provide a schedule of the proposed changes in capital, including
the fair value adjustments. If the OCC determines that a bank’s circumstances
warrant a “fresh start” and it satisfies the applicable requirements, the OCC
generally will approve the proposal. The bank must notify the OCC of completion
of the change.

Specific Requirements for Other Changes
Stock Split
Shareholders must approve by a two-thirds vote any increase in authorized, but
unissued, shares of stock. No prior OCC approval of a stock split is required,
because the dollar amount in the capital stock account does not change. However,
once the stock split occurs, the bank must notify the OCC. Upon receipt of the
notice, the OCC will certify the increase in the number of shares of stock
outstanding in capital stock.
A stock split typically increases the number of shares of stock outstanding and
reduces the par value and the market price of the shares. For example, one million
shares of $10 par with a $12 market price might split 2 for 1. This would result in
two million shares of $5 par with a $6 market price for the stock. The shareholders
must approve by a majority vote an amendment to the Articles of Association to
change the par value of the stock.
A stock split also can be affected by declaring a stock dividend. A stock dividend
exceeding 20 percent of issued shares is classified as a stock split and accounted for
by transferring to permanent capital an amount not less than the par value of the
additional shares issued. A stock dividend classified as a stock split is considered a
realignment of capital accounts according to generally accepted accounting
principles. Consistent with 12 CFR 5.60, it is subject to the restrictions of
12 USC 56, but not 12 USC 60.

Change in Par Value of Capital Stock
Shareholders must approve any amendment to the Articles of Association to change
the par value of capital stock. Par value cannot exceed $100 and there is no
minimum par value. Shareholders also must approve any reduction in the bank’s
permanent capital by a two-thirds vote as required under 12 USC 59. Upon
9

completion of the change, the bank must notify the OCC and certify that the change
meets legal requirements, providing a copy of any amendment to the Articles.
Upon receipt of the notice, the OCC will certify any increase.

Retirement of Capital Stock
A bank may buy back any portion of its outstanding common stock consistent with
12 USC 59. The bank must receive prior approval from the OCC and a vote of
shareholders owning two-thirds of the shares of outstanding common stock. A bank
deciding to retire capital stock, or hold it as treasury stock, is cautioned to ensure
full and adequate disclosure to shareholders under the federal securities laws, and
to consider the interest of remaining shareholders under applicable fiduciary
principles. Directors have a fiduciary relationship to their bank and are responsible
for certain fiduciary duties. These duties include ensuring that legitimate business
reasons exist for entering into the transaction; that any conflict of interest has been
minimized appropriately; and that the actions taken are in the best interest of the
bank. The value per share offered to individual shareholders is a board decision,
and shareholders have a right to reject any offer for purchase of their shares.

Employee Stock Option Plans
A national bank should account for employee stock compensation in accordance
with generally accepted accounting principles (GAAP). The bank should consider
the effect of the Statement of Financial Accounting Standards Number 123 (Revised
2004): Shared-Based Payment (FAS 123R) in developing and implementing stock
benefit plans. (Refer to the Glossary for the definition of employee stock option
plan.)
FAS 123R generally requires a company to recognize in its financial statements the
cost of employee services received in exchange for stock compensation. The
accounting treatment applies regardless of whether the shares awarded to the
employee, for services rendered to the bank, are shares of bank stock or shares of
the bank’s parent holding company. This accounting treatment represents a change
from previous guidance under Accounting Principles Board (APB) Number 25:
Accounting for Stock Issued to Employees that generally resulted in recognition of
no compensation cost.
The cost of employee services is based on the grant-date fair value of the stock
award. Usually fair value (refer to Glossary for definition) is determined by either
observable market value or calculated value based on option-pricing models, such
as Black-Scholes. A nonpublic bank’s stock with no observable market value may
require expert assistance to determine the calculated value of the stock
compensation. The compensation cost is recognized usually over the vesting period
with a corresponding credit to equity (generally, paid-in capital). Recording the
compensation cost also gives rise to deferred tax consequences; that is, a deferred
tax asset that must be recognized and evaluated for realizability.
The accounting entries likely will result in an increase in permanent capital with an
offsetting decrease to retained earnings. Such an increase requires an after-the-fact
notice or an application to the OCC. If the bank is an eligible bank, it may file its
notice on a quarterly basis, as it files its call report. The proposed change is
deemed approved and certified seven days after the date on which the OCC
10

receives the notice. If the bank does not qualify for the notice process, it must
obtain the OCC’s prior approval by filing an application.
In rare instances, the accounting entries may result in a reduction in capital. In that
case, the bank must submit an application and obtain the OCC’s prior approval
before making any reduction to its permanent capital (refer to the Specific
Requirements for Decreases section of this booklet for detailed information).
NOTE: Shares held in an employee stock ownership plan (ESOP) are exempt from
FAS 123R and should be accounted for in accordance with the American Institute of
Certified Public Accountants’ Statement of Position No. 93-6, Employers’
Accounting for Employee Stock Ownership Plans (SOP 93-6).

Acquisition of Treasury Stock
Twelve USC 24(Seventh) and 12 CFR 7.2020 allow banks to acquire and hold
treasury stock to fulfill a legitimate corporate need, as long as the repurchase of
outstanding shares and consequent reduction in capital complies with 12 USC 59.
A bank may not acquire, or hold, treasury stock for speculation.
Examples of legitimate corporate purposes include the acquisition and holding of
treasury stock to:
•

Have shares available for use in connection with employee stock option,
bonus, purchase, or similar plans.

•

Sell to a director for the purpose of acquiring qualifying shares.

•

Purchase a director’s qualifying shares upon cessation of the director’s
service in that capacity if there is no ready market for the shares.

•

Reduce the number of shareholders to qualify as a Subchapter S corporation.

•

Reduce costs associated with shareholder communications and meetings.

•

Repurchasing bank stock to facilitate a bank's shareholder dividend
reinvestment plan.

To acquire and hold treasury stock, the bank must receive prior approval from the
OCC and a vote of shareholders owning two-thirds of the outstanding shares of
common stock. However, shares of a bank’s own stock acquired as a debt
previously contracted, while accounted for as treasury stock, are not subject to prior
OCC or shareholder approval.
A bank whose securities are not actively traded must disclose in its application to
the OCC the method used to establish a price or valuation of the treasury stock. If a
bank’s board determines that the treasury stock should be repurchased for a
consideration that exceeds the fair value, it must provide an opinion as to why the
proposed consideration is fair to the bank and minority shareholders.

11

Reverse Stock Split
A reverse stock split is a restructuring of ownership interests by which a bank
reduces the number of its outstanding shares and, frequently, the number of its
shareholders. To reduce the number of shares, a bank exchanges one share of a
new stock issuance for a predetermined number of existing shares, and pays cash to
shareholders who would have held fractional shares after the exchange.
To effect a reverse stock split, national banks generally complete the following fivestep process:
•

The bank adopts a corporate governance system that permits reverse stock
splits and designates it within its bylaws as permitted by 12 CFR 7.2000(b)
and safe and sound banking practices. If adequate protections are provided
for dissenting shareholders, a bank may elect to follow corporate governance
procedures of the law of the state in which the main office of the bank is
located; the law of the state in which the holding company of the bank is
incorporated; the Delaware General Corporation Law; or the Model Business
Corporation Act. (Refer to section 8.4 of the model Bylaws.)

•

The bank sets an exchange ratio for the transaction and obtains shareholder
approval for the proposal. The holders of two-thirds of the bank’s
outstanding shares must vote in favor of the change.

•

The bank reduces the par value of its outstanding shares so it does not
exceed the $100 statutory maximum par value at any time.

•

The bank effects the reverse stock split at the established ratio and pays cash
for fractional shares.

•

Upon completion, the bank’s capital accounts change only by the amount
paid to fractional shareholders.

A bank must submit an application and obtain the OCC’s approval prior to
completing a reverse stock split. A bank must provide a legitimate business purpose
for the transaction; offer sufficient dissenting shareholder’s rights; and pay the cash
equivalent of the fractional shares of stock repurchased consistent with 12 CFR
7.2023.
The OCC has approved reverse stock splits conducted under the corporate
governance procedures of the following states: Alabama, Arkansas, California,
Colorado, Delaware, Iowa, Kansas, Kentucky, Michigan, Minnesota, Mississippi,
Missouri, New Mexico, New York, Oklahoma, Pennsylvania, and Texas. This
booklet will be updated as other states are added.

12

Innovative Capital Instruments Included in Tier 1 Capital
In addition to capital instruments a bank may issue directly, certain minority
interests in the equity accounts of its consolidated subsidiaries are eligible for
inclusion in Tier 1 capital. A number of banks have established subsidiaries with
the sole purpose of raising additional Tier 1 capital. The minority interest results
from the issuance of noncumulative, perpetual preferred stock by the subsidiary of
the bank to outside investors or an affiliated company.
To qualify as Tier 1 capital, the instrument issued by the subsidiary must meet the
same criteria as an instrument issued directly by a bank. These types of instruments
are generally considered “innovative capital instruments.” The OCC has approved
two different types of innovative capital instruments that are eligible as Tier 1
capital; (1) preferred stock issued by its Real Estate Investment Trust (REIT)
subsidiary, and (2) noncumulative, perpetual trust preferred stock issued by a
subsidiary to investors. The OCC does not certify these instruments as permanent
capital.
REIT Structure
In Corporate Decision 97-109, the OCC determined that the minority interest
resulting from the preferred stock issued by a REIT subsidiary of a national bank
would be eligible for inclusion in Tier 1 capital of the bank, up to a limit of 25
percent of Tier 1 capital. REITs are tax-advantaged companies that invest in real
estate assets. The dividends paid to shareholders by the REIT are taxable to the
shareholders but the REIT itself does not pay taxes on its income if the assets and
income are primarily real estate related, and it pays out at least 90 percent if its
taxable income to shareholders.
National banks are permitted to establish REITs as long as the REIT only invests in
bank eligible assets. Although in most cases, well-capitalized banks do not need
prior OCC approval to establish a REIT, prior OCC approval of the capital
instrument’s inclusion in Tier 1 capital is required. Banks considering such a capital
instrument should consult with the director for district licensing to ensure that the
proposed REIT preferred securities qualify for inclusion as Tier 1 capital.
Trust Preferred Structure
In Interpretative Letter No. 894, the OCC approved a structure whereby a subsidiary
of the bank issued noncumulative, perpetual preferred stock to investors. The
proceeds from the issuance were lent to the bank in the form of a 30-year
subordinated debenture. Upon redemption of the subordinated debenture, the
subsidiary will invest the proceeds in earning assets. This structure is very similar to
trust preferred securities often issued by bank holding companies and included in
Tier 1 capital of the holding company. However, the structure approved by the
OCC has two features that differ from typical bank holding company trust preferred.
The OCC-approved security is noncumulative and perpetual—the proceeds are
reinvested upon the redemption of the underlying subordinated debt—while bank
holding company trust preferred issues are usually cumulative and have an effective
term of 30 years. Banks must receive prior OCC approval before it can consider as
Tier 1 capital the preferred stock described in Interpretative Letter 894. The
13

minority interest in the subsidiary is eligible for inclusion in Tier 1 capital up to a
limit of 15 percent of Tier 1 capital.
Requirements for REIT and Trust Preferred Structure
In both the REIT and trust preferred structures, the instrument the subsidiary issues
must be exchangeable automatically into noncumulative perpetual preferred stock
of the bank in the event that the OCC directs the bank in writing to make a
conversion because the bank is:
•

Undercapitalized under the prompt corrective action regulations,
12 CFR 6.4(b);

•

Placed into conservatorship or receivership; or

•

Expected to become undercapitalized in the near term.

Shareholder approval generally is required for a bank’s subsidiary to issue preferred
stock. If a bank does not have sufficient preferred shares authorized for such an
exchange, shareholder approval is required to amend the Articles of Association to
authorize preferred shares. OCC policy is to require the amendment prior to
issuance of the innovative instrument.
The dividends paid by the subsidiary are treated as bank dividends for purposes of
12 USC 60, 12 CFR 5.63(b), and the safety and soundness protections provided by
the prompt corrective action statute pursuant to 12 USC 1831o and 12 CFR 6.
Before the subsidiary declares a dividend, the bank should confirm that payment of
such a dividend is permissible. The bank should determine that it has sufficient
dividend capacity under 12 USC 60(b) and undivided profits to cover the dividend.
If the total of a bank’s retained net income from the prior two years plus earnings for
the current year is less than the planned dividend on the innovative instrument, the
bank must seek the OCC’s approval under 12 USC 60(b) before the subsidiary can
declare and pay the dividend. Similarly, if the planned subsidiary dividend is
greater than the bank’s undivided profits, the dividend would be considered a
reduction in capital for which the bank must comply with 12 USC 59 (refer to the
Dividends section of this booklet).
Each of the two types of eligible innovative instruments may be included in Tier 1
capital up to the specified limit, and the total amount of innovative instruments that
may be included in Tier 1 capital is limited to 25 percent of Tier 1 capital, including
the eligible innovative instrument(s). A bank may include the proceeds from the
issuance of innovative instruments that exceed the Tier 1 limit in Tier 2 capital
(subject to limits on “lower” Tier 2 capital).4 The OCC does not certify these
instruments as permanent capital. Any dividends paid on such innovative
instruments included in Tier 2 are subject to the same dividend treatment as
described above.

4

Lower Tier 2 includes term subordinated debt and limited life preferred stock and is limited to a
maximum of 50 percent of Tier 1 capital. (Section 2(b)(4) of Appendix A of 12 CFR 3.)
14

Hybrid Capital Instruments Included in Tier 2 Capital
Hybrid capital instruments have features of both equity and debt instruments. To be
eligible for inclusion in Tier 2 capital, a hybrid instrument must be unsecured,
subordinated to the claims of depositors and general creditors, and fully paid-up.
The instrument may be redeemable prior to maturity at the option of the investor
only on the condition that prior OCC approval is required for such redemption. The
proceeds must be available to the bank to cover losses, that is, the instrument must
automatically convert to common stock or perpetual preferred stock of the bank if
the sum of the retained earnings and capital surplus of the bank fall below zero.
Finally, the bank must be able to defer principal and interest payments in the event
that the bank does not report a net profit for the most recent four quarters and has
eliminated cash dividends on common and preferred stock. As with other
nontraditional capital instruments, a bank should consult the director for district
licensing prior to issuing a hybrid capital instrument to ensure Tier 2 capital
eligibility.

Dividends
The OCC’s prior approval must be obtained for:
•

Dividends paid in something other than cash (that is, dividends-in-kind).

•

Dividends that exceed the limitations established by 12 USC 60.

No dividend may be declared from permanent capital unless the bank follows
procedures for decreasing permanent capital. Any payment, described as a
dividend or otherwise, by a bank that results in a reduction of its permanent capital
requires the OCC’s prior approval as a reduction of capital under 12 USC 59 and 12
CFR 5.46. A bank may obtain prior OCC approval to reduce permanent capital or
pay dividends in advance of the period(s) in which the capital reduction or dividend
would occur. Notwithstanding any such approval, a bank is prohibited from
reducing permanent capital or declaring or paying a dividend if, following the
action, it would become an undercapitalized institution as defined in 12 CFR 6.4.
(Refer to the sample dividend documents before filing.)

Stock Dividends
A stock dividend is an issuance of shares of stock that reflect the current owners’
share of accumulated earnings. Stock dividends (other than stock splits in the form
of a dividend) are accounted for by transferring an amount equal to the fair value of
the additional shares issued from undivided profits to a category of permanent
capital (capital stock and capital surplus). The amount transferred from undivided
profits shall be no less than the par value of the additional shares being issued.
After a stock dividend, undivided profits must be zero or greater. Stock dividends
are subject to 12 USC 56, but not 12 USC 60.
Fractional shares sometimes arise together with stock dividends, stock splits, reverse
stock splits, and other transactions. Methods for dealing with fractional shares are
described in 12 CFR 5.67 and 12 CFR 7.2023.

15

Shareholders must approve by a two-thirds vote any necessary increase in
authorized, but unissued shares. Upon payment of the dividend, the bank must
notify the OCC attesting that the change meets legal requirements. Upon receipt of
the notification, the OCC certifies the increase in capital.

Dividends-In-Kind
With prior OCC approval, a bank may declare dividends payable in property or in a
form other than cash (together “property”), not including stock dividends.
Dividends-in-kind are subject to OCC approval regardless of whether they are paid
on common or preferred stock. Before the dividend is declared, the property must
be written up or down to reflect its current fair value. The bank should record any
write-up or write-down in the income statement as if the bank had disposed of the
property through a sale. The dividend is recorded at an amount equal to the current
fair value of the property and reduces undivided profits by that amount. The bank
may need to use an independent appraisal to substantiate the value of the property.
A bank seeking to declare dividends-in-kind must submit an application to the
appropriate Licensing office. (See Appendix B for a summary of requirements.)

Dividends Exceeding the Limits of 12 USC 60
Under 12 USC 60, a national bank must obtain prior OCC approval from the
appropriate supervisory office to declare a dividend if the total of all dividends
(common and preferred), including the proposed dividend, declared by a bank in
any calendar year will exceed its net retained income of that year to date plus the
retained net income of the preceding two calendar years.
A bank that declares a dividend in excess of its current year net income may
attribute dividends in excess of the current year’s net income to each of the prior
two years, to the extent that there is sufficient undistributed net income in those
years. The bank must attribute the excess first to the earlier of the two years and
then to the immediately preceding year.
If the dividend in any year exceeds the bank’s net income for that year plus the
previously undistributed net income of the preceding two years, the bank would
carry forward a negative amount to compute its dividend paying capacity in future
years. This situation would arise only if the amount of the dividend exceeds the
limitation in 12 USC 60, and, therefore, would require prior OCC approval. In
determining any such request for approval, the OCC’s appropriate supervisory office
could consider any request for different treatment of the excess dividend amount,
including advance waivers for future periods. Also, this attribution method applies
only to the treatment of earning deficits that result from dividends declared in excess
of a single year’s earnings and not to other types of current earnings deficits. See
Interpretive Letter No. 816.
Notwithstanding the permissibility of any particular dividend payment under 12
USC 56 and 12 USC 60, national banks are subject to the safety and soundness
protections provided by the prompt corrective action statute. Accordingly, under
prompt corrective action [12 USC 1831o(d)(1)(A); 12 CFR 5.65], a national bank
may not pay a dividend if the bank would be undercapitalized after the dividend
payment is made.
16

An eligible bank may request advance approval to cover several anticipated
dividend payments, provided that the bank projects sufficient current net income
during those periods to support the amount of the dividends declared. In
determining whether to grant advance approval, the supervisory office will consider:
•

The reasonableness of the bank’s request, including its historical dividend
payout ratio and projected dividend payments.

•

The bank’s historical trends and current projections for capital growth through
earnings retention.

•

The overall condition of the institution, with particular emphasis on current and
projected capital adequacy.

•

The reason(s) for which the bank became subject to the restrictions of 12 USC
60(b).

•

Any other information that the supervisory office deems pertinent to reviewing
the bank’s request.

After considering these standards, the OCC may grant prior approval for a bank’s
dividend request in advance of the period(s) in which the dividend(s) will be
declared. Notwithstanding any such approval, a bank may not declare or pay a
dividend if, after making the dividend payment, the bank would be
“undercapitalized” as defined in 12 CFR 6.4(b)(3).

17

Procedures: Filing the Application
Licensing Staff
1.

Refers a bank that requests filing instructions to the “General Policies and
Procedures” booklet, sample corporate documents to the “Charters” booklet,
and capital and dividend information to this booklet of the Comptroller’s
Licensing Manual. Generally, a bank needs only to submit a notice to increase
its permanent capital. Prior approval is required if: the OCC requires a bank
to obtain prior approval; the bank plans to sell common or preferred stock for
consideration other than cash; it will receive a material noncash contribution;
or it will decrease capital stock or capital surplus through a distribution of cash
or assets, or a transfer to undivided profits or to any other noncapital account.
Applications to pay cash dividends pursuant to 12 USC 60(b) and 12 CFR 5.64
are filed with the appropriate supervisory office, which will acknowledge and
act on the filing. All other applications and notices are filed with the
appropriate director for district licensing.

Bank
2. Submits a complete application (see sample) and filing fee to the director for
district licensing at the appropriate district office.
If reducing permanent capital, submits information about the planned method
of reduction (that is, quasi-reorganization, treasury stock, reverse stock split,
dividends-in-kind); and
•

For treasury stock, provides the business purpose for the capital
reduction.

•

For all transactions involving the repurchase of equity securities,
provides the method of valuation used to determine fair value.

•

For transfer of assets other than cash, provides the method of valuation.

•

For transactions involving the distribution of an entire legal entity or
business, contacts the appropriate district accountant for guidance.

•

For reverse stock splits,
−

Within its bylaws, the bank adopts a corporate governance
system that permits reverse stock splits. Cites the authority to
conduct reverse stock splits under state law and dissenters rights
for shareholders.

−

The bank sets an exchange ratio for the transaction and obtains
shareholder approval for the proposal. The holders of two-thirds
of the bank’s outstanding shares must vote in favor of the
change.
18

−

The bank reduces the par value of its outstanding shares so it
does not exceed the $100 statutory maximum par value at any
time.

−

The bank effects the reverse stock split at the established ratio
and pays cash for fractional shares.

−

Upon completion, the bank’s capital accounts change only by
the amount paid to fractional shareholders.

3. If the bank is subject to 12 CFR 11 and the change requires shareholders’
approval, submits preliminary proxy materials or information statement to
Securities and Corporate Practices Division (SCP), Washington, DC, for review
and clearance.
4. Before commencing the sale of securities, prepares and files with SCP a
registration statement or other document that may be required under 12 CFR
16. NOTE: SCP will send the bank a letter of effectiveness or a comment
letter detailing deficiencies in the registration statement or its amendment.
SCP will notify the district licensing staff of the action.
5. If issuing preferred stock, submits information to the director for district
licensing about the preferred stock’s dividends, voting and conversion rights,
retirement terms, and rights to exercise control over management. This
information must be submitted 30 days prior to issuance.

Review
Licensing Staff
6. Sends an e-mail to notify the appropriate assistant deputy comptroller (ADC)
and ADC analyst or large bank examiner-in-charge (EIC) of receipt of the
application. Sends SCP a copy of the bank’s corporate governance legal
opinion (analysis) if it elects procedures from a state not previously approved
(refer to Reverse Stock Split section of this booklet for listing of approved
states).
7. Initiates and enters required information into the Corporate Activities
Information System (CAIS).
8. Establishes the official file to maintain all original documents.
9. If a filing fee is submitted, forwards it and the deposit memorandum (Form
6043-01) to the Comptroller of the Currency, Attention: Accounts Receivable,
250 E Street, S.W., MS 4-8, Washington, DC 20219. Retains a copy of the
memorandum. Contacts the bank if the filing fee is not received or is
inaccurate.
10. Within five business days of receipt:
•

Reviews the application and other relevant information about the bank to
determine whether the application contains a detailed description of the
change, all information required in the sample application, and the
19

required enclosures. For a capital reduction, reviews the proposed terms,
verifying that no reasons exist to object to the terms.
•

With the issuance of preferred stock, verifies that no reason exists to object
by reviewing sample Articles of Association within the “Charters” booklet
for appropriate terms.

•

If a reverse stock split is proposed, considers whether the national bank:
− Will perform each step of the reverse stock split process in compliance
with legal requirements governing its capital structure.
− Has adopted corporate governance provisions that authorize reverse
stock splits under 12 CFR 7.2000(b) and if those provisions are in a
state previously approved (refer to Reverse Stock Split section for
listing).
− Has a legitimate corporate purpose for undertaking the reverse stock
split.
− Has provided to its shareholders adequate dissenters’ rights.

11. Solicits comments from the ADC and ADC analyst or large bank EIC and from
other OCC divisions (supervisory, compliance, economic, accounting), as
appropriate, with a preliminary response required within 15 days after receipt.
For undercapitalized banks, contacts the supervisory office staff for capital plan
status.
•

If the transaction involves the distribution of an entire legal entity or
business, sends a copy of the bank’s financials to the district accountant to
ensure compliance with generally accepted accounting principles (GAAP).

•

If a legal question is identified or a legal opinion submitted, forwards the
question and application to the district counsel with a preliminary response
required within 15 days after receipt.

•

Verify whether or not SCP reviewed securities disclosures and any analysis
discussing corporate governance provisions. Refer to Step 6.

•

If the filing contains all the information needed to reach a decision, sends
the bank an acknowledgment letter or an e-mail providing the target date
for decision and the CAIS Control Number.

•

If additional information is needed, requests the missing information from
the bank, specifying a response date (sample letter). Also determines if the
bank is eligible for expedited review and informs the bank whether the 30day automatic approval date remains in effect.

12. If at any time the application presents significant policy, legal, or supervisory
issues, contacts Headquarters Licensing (HQ LIC) to decide:
• If the application should be forwarded to HQ LIC for processing, or
20

•

If specific issues should be carved out for Washington action, while the
application continues to be processed in the appropriate district office.

Decision
Licensing Staff
13. For a bank that is eligible for expedited review, verifies before expiration of the
30-day processing period, that no reasons exist to disqualify the bank from
expedited review.
•

If the bank remains qualified, proceeds to the next step.

•

If the bank is disqualified, immediately notifies the bank that it no longer
qualifies for expedited review, identifies the specific reason(s), and
requests any necessary information from the bank, specifying a response
date.

14. Prepares the confidential memorandum and decision letter, recommending a
decision to the delegated official.
15. Decides the application under delegated authority or forwards the official file
to HQ LIC for decision. If referred to HQ LIC, go to step 21.
16. Notifies bank and, if appropriate, any interested parties. Sends the bank the
decision letter and a satisfaction survey.
17. Notifies the appropriate ADC and ADC analyst or large bank EIC of the
decision by forwarding updated CAIS comments and an electronic copy of the
decision letter.
18. If the decision is either a denial or conditional approval, forwards a copy of the
confidential memorandum, decision letter to the director, licensing activities.
19. Makes appropriate CAIS entries.
20. When the change requires the bank to file information with SCP, under 12 CFR
11 and 16, sends a copy of the approval letter to SCP.
21. If the application is denied, goes to step 34.

HQ LIC
22. Makes appropriate CAIS entries.
23. Reviews the file, draft decision documents, and all relevant information; solicits
comments from other OCC divisions as appropriate; makes a recommendation;
and forwards the official file to the appropriate official for decision.
24. Once decided, notifies the bank. Notifies the appropriate ADC and ADC
analyst or large bank EIC of the decision by forwarding updated CAIS
comments and an electronic copy of the decision letter.
21

25. Sends the bank the decision letter and, if appropriate, a satisfaction survey and
notifies any interested parties.
26. If the decision is either denial or conditional approval, forwards a copy of the
confidential memorandum and decision letter to the director, licensing
activities.
27. Sends a copy of the decision letter to SCP, if the change requires the bank to
file with SCP under 12 CFR 16.
28. Makes appropriate CAIS entries.
29. If either approved or conditionally approved, returns the official file to the
appropriate district office. If denied, goes to step 34.

Shareholders’ Approval
Bank

30. If required, obtains shareholders’ approval of the change in capital.
31. Amends the Articles of Association, if necessary, and executes the secretary’s
certificate.
32. Files amended Articles of Association with appropriate director for district
licensing (refer to Instructions and Articles for guidance).
33. Notifies OCC when capital change occurs (see sample Notice).

Close Out
Licensing Staff or HQ LIC
34. Reviews Articles of Association (if amended), secretary’s certification, and
notice of capital change completion. Reviews the file for completeness and
forwards it to Central Records.
35. Makes appropriate CAIS entries.

22

Procedures: Notice
Licensing Staff
1. Refers a bank that requests instructions to the “General Policies and
Procedures” booklet and this booklet of the Comptroller’s Licensing Manual.

Bank
2. If required, obtains shareholders’ approval of the change in capital.
3. Amends the Articles of Association, if necessary, and executes the secretary’s
certificate. Files amended Articles with appropriate director for district
licensing.
4. If the bank is subject to 12 CFR 11 and the change requires shareholders’
approval, submits preliminary proxy materials or information statement to
Securities and Corporate Practices Division (SCP), Washington, DC, for review
and clearance.
5. Before commencing the sale of securities, prepares and files with SCP a
registration statement or other document that may be required under 12 CFR
16. NOTE: SCP will send the bank a letter of effectiveness or a comment
letter detailing deficiencies in the registration statement or its amendment.
SCP will notify the district licensing staff of the action.
6. If issuing preferred stock, submits information to the director for district
licensing about the preferred stock’s dividends, voting and conversion rights,
retirement terms, and rights to exercise control over management. This
information must be submitted 30 days prior to the stock’s issuance.
7. Notice of Completed Changes. Using the specific notice applicable to the
particular type of change, sends a notarized letter to the director for district
licensing providing the amount and effective date of the change in capital,
along with amended Articles of Association (if applicable). Refer to the
appropriate sample Notice for specific filing requirements.
8. Considers an increase in capital approved and certified seven days after the day
on which the OCC receives the Notice.

Licensing Staff
9. Reviews the bank’s Notice; and when prior approval was granted, reviews the
official file to determine that all required actions have occurred.
10. Notifies the bank by telephone, and e-mail or letter, if necessary, of any
problems.
11. Notifies the bank by telephone, e-mail, or letter (certification or
acknowledgment) of the date the OCC received the Notice.
23

12. Notifies the appropriate assistant deputy comptroller (ADC) and ADC analyst if
the bank’s capital category changed.

Close Out
Licensing Staff
13. Makes appropriate CAIS entries.
14. Reviews the file for completeness and forwards it to Central Records.

24

Appendix A: Changes in Capital
Prior
Approval
Required

Notice
Only

Shareholder
Approval
Required

Expedited
Review

no

yes

Two-thirds*

yes

Sale of preferred stock for cash or issued
for employee stock ownership plan1

no

yes

Majority**

Sale common stock for other than cash

yes

na

Sale of preferred stock for other than cash

yes

Receiving material (3% or more) noncash
contribution to capital surplus

Law(s)

Regulation(s)

12 USC 51a
12 USC 51b
12 USC 57

12 CFR 5.46(i)(3)

yes

12 USC 51a
12 USC 51b

12 CFR 5.46(i)(3)

Two-thirds*

yes

12 USC 57

12 CFR 5.46(g)(1)(i)(B)

na

Majority **

yes

12 USC 51a

12 CFR 5.46(g)(1)(i)(B)

yes

na

Two-thirds*

yes

12 USC 57

12 CFR 5.46(g)(1)(i)C)

Receiving nonmaterial (less that 3%)
noncash contribution to capital surplus

no

yes

Two-thirds*

na

12 USC 57

12 CFR 5.46(g)(1)(i)(C)

Receiving cash contribution to surplus

No

Yes

No

na

Acquire treasury stock

yes

na

Two-thirds

yes

12 USC 24(7)
12 USC 59

12 CFR 5.46(h)
12 CFR 7.2020

Change to permanent capital if under any
form of agreement with OCC

yes

na

Yes

no

12 USC 57
12 USC 59

12 CFR 5.46(g)(1)(i)(A)
12 CFR 5.46(h)

Change par value when offset by an equal
change in the surplus account

no

yes

Majority

yes

12 USC 52

12 CFR 5.46(i)(3)

Reduction in capital stock or capital
surplus

yes

na

Two-thirds

yes

12 USC 59

12 CFR 5.46(h)

Change amount of authorized but
unissued capital stock2

no

no

Two-thirds

na

12 USC 57

Stock split or other adjustment that does
not change amount in common stock
account

no

no

Two-thirds

na

12 USC 21a

Quasi-reorganization3

yes

na

Two-thirds

yes

12 USC 56
12 USC 59

12 CFR 5.47

Reverse stock split

yes

na

Two-thirds

yes

12 USC 52
12 USC 215

12 CFR 7.2000(b)
12 CFR 7.2023(b)

Sale of common stock for cash or issued
for employee stock ownership plan

12 CFR 5.46(i)(3)

1
In the case of the sale of preferred stock, the national bank shall also submit provisions in the Articles of Association
concerning preferred stock dividends, voting and conversion rights, retirement of the stock, and rights to exercise
control over management to the appropriate district office prior to the sale of the preferred stock. The provisions will
be deemed approved by the OCC within 30 days of its receipt, unless the OCC notifies the applicant otherwise.
2

A national bank need not obtain prior OCC approval to increase its permanent capital unless the bank is:
• Required by OCC to receive prior approval.
• Selling common or preferred for consideration other than cash.
• Receiving a material noncash contribution.

3

A quasi-reorganization allows a bank to restructure its capital accounts without legal reorganization by transferring
amounts from capital stock and surplus to the undivided profits account to remove a deficit. It is available to banks
that meet legal and accounting requirements.
*Two-thirds approval is needed if the shares have not been authorized previously.
** A majority approval is needed if the shares have not been authorized previously.

25

Appendix B: Payment of Dividends
Prior OCC
Approval
Required

Notice
Only

Shareholder
Approval
Required

Expedited
Review

Dividend-in-kind1

yes

na

no

yes

12 USC 56
12 USC 60

12 CFR 5.63
12 CFR 5.66

Dividend in excess of
12 USC 56 and 60

yes

na

no

yes

12 USC 56
12 USC 60

12 CFR 5.63
12 CFR 5.64
12 CFR 5.65

Stock dividend

no

yes

Two-thirds*

yes

12 USC 57
12 USC 60

12 CFR 5.66
12 CFR 5.67

Earnings limitations

no2

no

no

na

12 USC 60

12 CFR 5.64

Undercapitalized institutions3

n/a

na

n/a

na

12 USC
1831o(d)

12 CFR 5.65

Fractional shares

no

na

Two-thirds*

na

12 USC 56

12 CFR 5.67
12 CFR 7.2023

Transfer from surplus surplus

no4

na

na

na

12 USC 56

12 CFR 5.64(c)

Law(s)

Regulation(s)

12 USC 60
Transfer from surplus surplus not
meeting the criteria in 5.64(c)

yes

na

Two-thirds

yes

12 USC 56
12 USC 60

12 CFR 5.64(c)

Issue a nondividend dividend5

no

na

Two-thirds*

yes

12 USC 60

12 CFR 5.67

1

Assets must be written up or down to reflect current fair value.

2

Yes, if capital surplus is less than capital stock of the bank, except when the bank has:
•
In the case of ANNUAL dividends transferred 10 percent of its net income for the preceding four quarters to
capital surplus, or
•
In the case of QUARTERLY or SEMIANNUAL dividends transferred 10 percent of its net income for the
preceding two quarters to capital surplus.

3
A national bank may NOT declare or pay any dividend if, after making the dividend, the national bank would be
undercapitalized (12 CFR 5.65).

4

For the payment of dividends provided: 1) the bank can demonstrate that the surplus came from earnings of prior
periods, EXCLUDING the effect of any stock dividend, and 2) the board of directors approves the transfer of the surplus
surplus from capital surplus to undivided profits.
5

A nondividend dividend occurs when a bank pays a dividend (within the limitations of 12 USC 56 and 60) to its
parent holding company to acquire another bank entity that will be merged ultimately with the original bank.
*Needed if shares have not been authorized previously.

26

Glossary
Blank check preferred stock is preferred stock where the shareholders approve
Articles of Association that grant the board of directors’ authority to establish
specific terms of the preferred stock rather than providing the specific terms in the
Articles of Association.
Capital plan means a plan describing the manner and schedule by which a bank
will attain specified capital levels or ratios filed with the OCC under 12 CFR 3.7 or a
capital restoration plan filed with the OCC under 12 USC 1831o and 12 CFR 6.5.
Capital stock means common and preferred stock.
Capital surplus means the total of:
•
•
•
•

The amount paid in on capital stock in excess of the par or stated value.
Direct capital contributions representing the amount paid in other than capital
stock.
Amounts transferred from undivided profits as a result of stock dividends.
Amounts transferred from undivided profits required by 12 USC 60.

Cash dividends are payments of cash to stockholders in proportion to the number of
shares they own.
Dividend-in-kind, also known as property dividend, means a distribution to
stockholders paid in something other than cash.
An eligible bank is a national bank that:
•
•
•
•

Has a composite CAMELS rating of 1 or 2.
Has an “outstanding” or “satisfactory” Community Reinvestment Act (CRA)
rating. (This factor does not apply to an uninsured bank or branch, or a special
purpose bank covered by 12 CFR 25.11(c)(3).)
Is well capitalized as defined in 12 CFR 6.4(b)(1).
Is not subject to a cease and desist order, consent order, formal written
agreement, or prompt corrective action directive or, if subject to any such order,
agreement or directive, is informed in writing by the OCC that the bank still may
be treated as an “eligible bank.”

Employee Stock Option Plans are contracts between a company and its employees
that give employees the right to buy a specific number of the company’s shares at a
fixed price within a certain period of time. Employee Stock Option Plans should
not be confused with “ESOPs,” or Employee Stock Ownership Plans, which are
retirement plans.
Employee Stock Ownership Plans (ESOPs) is a retirement plan in which the
company contributes its stock to the plan for the benefit of the company’s
employees. With an ESOP, you never buy or hold the stock directly. This type of
plan should not be confused with employee stock option plans (see above), which
are not retirement plans.
27

Expedited review means that an application to change permanent capital from an
eligible bank is approved by the OCC 30 days after the receipt date, unless the bank
is notified within the 30-day period that the application is not eligible for expedited
processing.
Fair value is the amount at which an asset (or liability) could be bought (or incurred)
or sold (or settled) in a current transaction between willing parties, other than in a
forced or liquidation sale.
Legal lending limit means the limit on the aggregate amount of credit that a bank
can extend to a single customer or a group of affiliated customers. The limit is a
function of the bank’s capital structure.
Market value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the buyer
and seller each acting prudently and knowledgeably, and assuming the price is not
affected by undue stimulus. Refer to 12 CFR 34.42(g) for additional discussion.
Permanent capital means the sum of capital stock and capital surplus. See 12 CFR
5.46(4) and 12 CFR 5.61.
Retained net income means the net income of a specified period less the total
amount of all dividends declared in that period.
Stock dividends are distributions of additional shares to stockholders in proportion
to the number of shares they own.
Tier 1 and Tier 2 Capital are defined in 12 CFR 3.2, Components of Capital.

28

References
Approval by Comptroller—Capital
Regulation

12 CFR 5.46

Approval by Comptroller—Dividends
Regulation

12 CFR 5.60-5.67

Articles of Association
Law

12 USC 21a

Assessment – Capital Stock Deficiency
Law

12 USC 55

Blank Check Preferred Stock
Issuance

Interpretive Letter 921

Capital Category
Law
Regulation
Issuances

12 USC 1831o
12 CFR 6
Interpretive Letter 894
Bank Accounting Advisory
Series

Capital Requirements and Minimum Ratios
Regulation

12 CFR 3

Capital Stock Deficiency
Law

12 USC 55

Capital Stock—Par Value
Law

12 USC 52

Capital Stock—Paid In
Law

12 USC 53

Changes in Permanent Capital
Regulation

12 CFR 5.46

Corporate Governance
Regulation

12 CFR 7.2000

Decrease in Capital
Law

12 USC 59

Dividends—Capital Limit
Law
Regulation

12 USC 56
12 CFR 5.63

Dividends—Earnings Limit
Law
Regulation
Issuance

12 USC 60
12 CFR 5.64
OCC Bulletin 94-41
29

Interpretative Letter 816

Dividends-In-Kind
Regulation

12 CFR 5.66

Dividends—Undercapitalized Banks
Regulation

12 CFR 5.65

Fractional Shares
Regulations

12 CFR 5.67, 7.2023

Hybrid Capital Instruments
Regulation

12 CFR Part 3, App. A, Sec.
2(b)(3)
Interpretative Letter 894
Corporate Decision 87-109

Issuance
Impairment
Laws

12 USC 51b-1, 56

Increase in Capital
Law

12 USC 57

Legal Lending Limit Calculation
Law
Regulation

12 USC 84
12 CFR 3, 6, 32

Market Value
Regulation

12 CFR 34.42(g)

Offering Circular
Regulation

12 CFR 16

Par Value
Law

12 USC 52

Preemptive Rights
Regulation

12 CFR 7.2021

Preferred Stock
Laws
Regulation
Issuance

12 USC 51a, 51b
12 CFR 5.46
Interpretive Letter 894

Prompt Corrective Action
Law
Regulation

12 USC 1831o
12 CFR 6

Proxy Materials, Rules
Regulation

12 CFR 11

Quasi-reorganization
Issuance

Bank Accounting Advisory
Series (Topic 8C)
30

Reduction in Capital
Law
Regulation

12 USC 59
12 CFR 5.46

Reverse Stock Split
Regulation

12 CFR 7.2023

Risk-based Capital
Regulation

12 CFR 3
Appendices A and B

Securities Offering Disclosures Rules
Regulation

12 CFR 16

Shareholder Approval
Law

12 USC 21a, 51a, 57, 59

Stock Dividend
Law
Regulation

12 USC 57
12 CFR 5.66, 5.67

Tier 1 and 2 Capital
Regulation

12 CFR 3, Appendix A,
Section 2(a), (b)

Treasury Stock
Regulation

12 CFR 7.2020

31