Alert July 29, 2014

FDIC Issues Guidance on Requests by Banks That Are S-Corporations for Dividend Exceptions to Capital Conservation Buffer

The FDIC issued guidance (the “Guidance”; FIL-40-2014) to banks and savings associations that have elected S-corporation tax treatment (collectively, “S-corporation Banks” and each an “S-corporation Bank”) concerning the factors that the FDIC will consider when it receives a request from an S-corporation Bank to pay dividends to its shareholders “to cover taxes on their pass-through share of the [S-corporation Bank’s] earnings, where these dividends would otherwise not be permitted under the capital conservation buffer contained in the new Basel III capital rules.”  The capital conservation buffer, when it takes effect, will limit the amount of dividends a bank can pay when its capital ratios fall below the threshold levels of the buffer.  The capital conservation buffer will be phased-in over the years 2016 through 2018 and will become fully effective in 2019.  There are currently approximately 2,000 U.S. community banks, which are structured for tax purposes as Subchapter S corporations.

In the Guidance, the FDIC states that in evaluating requests from S-corporation Banks for exceptions to the limits of the capital conservation buffer it would consider each of the following four factors:

  • whether the S-corporation Bank was requesting a dividend of no more than 40% of its net income;
  • whether the S-corporation Bank believes that the dividend payment is necessary to allow its shareholders to pay income taxes associated with their pass-through share of the S-corporation Bank’s earnings;
  • whether the S-corporation Bank has a composite rating of at least 1 or 2 under the CAMELS rating system and is not subject to a written supervisory directive; and
  • whether the S-corporation Bank is at least “adequately capitalized” and would remain adequately capitalized after the payment of the requested dividend.

The FDIC states in the Guidance that it will consider requests on a case-by-case basis, but, absent significant safety-and-soundness concerns, it would generally expect to approve requests for such exceptions from a well-rated S-corporation Bank that satisfies the four factors if the request is limited to “the payment of dividends to cover shareholders’ taxes on their portion of an [S-corporation Bank’s] earnings.”  Without such relief, the FDIC notes, an S-corporation Bank’s ability to attract capital could be adversely affected.