24 Hoosier Banker August 2015 COMPLIANCE CONNECTION Question: My bank has been making a profit for the last several years. During the process of getting a loan for my holding company, the lender asked about my ability to continue paying dividends from the bank. What exactly are my restrictions on the ability to pay these dividends to support the loan to the holding company? © 2015 Krieg DeVault LLP THINKING BEYOND TRADITIONAL SOLUTIONS FOR FINANCIAL INSTITUTIONS FOR OVER 130 YEARS • Corporate Representation • Mergers and Acquisitions • Capital Offerings • Regulatory • Compliance • Supervision and Enforcement • New Product Development • Litigation • Commercial / Consumer Loan • Creditors’ Rights • Trust • Tax • Securities • Employment • Intellectual Property One Indiana Square • Suite 2800 • Indianapolis, Indiana 46204 p: 317.636.4341 f: 317.636.1507 INDIANA • ILLINOIS • GEORGIA • FLORIDA • MINNESOTA www.kriegdevault.com Ability to Pay Dividends Answer: There is some confusion surrounding the circumstances in which a bank may pay dividends. On its face, the Indiana law is relatively straightforward. Specifically a bank may not withdraw any of its “capital stock” in the form of a dividend,1 and may not declare or pay a dividend if the dividend would impair its capital stock.2 Indiana law permits a bank to pay a dividend only from “undivided profits” in an amount which the board of directors considers “expedient.”3 A bank must obtain the approval of the Department of Financial Institutions (DFI) if the amount of dividends paid during the calendar year, including the proposed dividend, is greater than the net income for the year, plus the “retained net income” for the previous two years.4 “Retained net income” is defined as the “net income of a specified period, calculated under the consolidated report of income instructions, less the total amount of all dividends declared for the specified period.”5 The DFI may exempt banks from this prior approval requirement.6 The DFI has adopted a policy providing that prior approval is not required if (1) the bank has a composite rating of 1 or 2 at its most recent federal or state examination; (2) the bank’s Tier 1 leverage ratio would be 7.5 percent or greater after the proposed dividend; and (3) the bank is not subject to any corrective action, supervisory order, supervisory agreement or board-approved operating agreement. The confusion has arisen around the ability to pay dividends with respect to a bank which has suffered operating losses in prior years.
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