Community Banks: The Fed’s New Dividend Limits Don’t Apply to You – Or Do They?

On June 25, 2020, the Federal Reserve released an assessment of the strength of the banking system as the economy has deteriorated due to the COVID-19 pandemic. As was widely reported, the Federal Reserve announced it was taking additional action to preserve bank capital.

The Federal Reserve limitations on bank dividends and share repurchases apply - by their terms - only to the biggest banks, generally with more than $50 billion in assets. These limits may, however, reflect a more broadly applicable policy view by the Federal Reserve and other banking regulators. Banks should expect dividends or capital repurchases or redemptions, or any other transaction, such as acquisitions, that could result in lower capital ratios, to be closely scrutinized. Any bank planning dividends, repurchases or other transactions with similar effects on capital should carefully review the rules and guidance issued by their regulators.

The Federal Reserve’s SR 09‑4, Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies issued in February 2009 and revised in December 2015, remains the primary guidance on dividends and stock repurchases and redemptions for community bank holding companies (BHCs).

In general, the Federal Reserve expects that BHCs have a process for assessing their capital adequacy, understand the risks arising from their business and the economic environment and ensure the hold capital commensurate with those risks. Dividends and stock repurchases and redemptions must be evaluated in this context and the obligation of BHCs to be sources of strength for their subsidiary banks.

Further, the Federal Reserve expects that BHCs will consult with it prior to repurchasing any capital stock if the repurchases would result in a net reduction of the BHC's capital instruments during the quarter. In practice, this means that BHCs should preclear any stock repurchase programs with the Federal Reserve. BHCs should also contact the Federal Reserve prior to paying dividends that may raise supervisory issues (e.g., dividends that exceed period earnings) or repurchases when the BHC is experiencing financial weakness.

Lewis Rice LLC has a team of attorneys with broad experience in all aspects of bank capital structure, operations and lending. If you have any questions concerning Federal Reserve policies or other aspects of the federal bank regulatory response to the effects of COVID-19 guidance, or the implications and disruptions of COVID-19 on your business, please contact the author above or another member of the Lewis Rice COVID-19 Task Force.