§ 3.701 Capital and surplus. For purposes of determining statutory limits that are based on the amount of a national bank's *capital* and/or *surplus,* the provisions of this section are to be used, rather than the definitions of capital contained in subparts A through J of this part. ( a ) *Capital.* The term *capital* as used in provisions of law relating to the capital of national banks shall include the amount of common stock outstanding and unimpaired plus the amount of perpetual preferred stock outstanding and unimpaired.
( b ) *Capital Stock.* The term *capital stock* as used in provisions of law relating to the capital stock of national banks, other than 12 U.S.C. 101, 177, and 178 shall have the same meaning as the term *capital* set forth in paragraph (a) of this section.
( c ) *Surplus.* The term *surplus* as used in provisions of law relating to the surplus of national banks means the sum of paragraphs (c)(1), (2), (3), and (4) of this section: ( 1 ) Capital surplus; undivided profits; reserves for contingencies and other capital reserves (excluding accrued dividends on perpetual and limited life preferred stock); net worth certificates issued pursuant to 12 U.S.C. 1823(i); minority interests in consolidated subsidiaries; and allowances for loan and lease losses; minus intangible assets;
( 2 ) Mortgage servicing assets;
( 3 ) Mandatory convertible debt to the extent of 20 percent of the sum of paragraphs (a) and (c) (1) and (2) of this section;
( 4 ) Other mandatory convertible debt, limited life preferred stock and subordinated notes and debentures to the extent set forth in paragraph (f)(2) of this section.
( d ) *Unimpaired surplus fund.* The term *unimpaired surplus fund* as used in provisions of law relating to the unimpaired surplus fund of national banks shall have the same meaning as the term *surplus* set forth in paragraph (c) of this section.
( e ) *Definitions.* ( 1 ) *Allowance for loan and lease losses* means the balance of the valuation reserve on December 31, 1968, plus additions to the reserve charged to operations since that date, less losses charged against the allowance net of recoveries.
( 2 ) *Capital surplus* means the total of those accounts reflecting: ( i ) Amounts paid in in excess of the par or stated value of capital stock;
( ii ) Amounts contributed to the national bank other than for capital stock;
( iii ) Amounts transferred from undivided profits pursuant to 12 U.S.C. 60; and
( iv ) Other amounts transferred from undivided profits.
( 3 ) *Intangible assets* means those purchased assets that are to be reported as intangible assets in accordance with the *Instructions—Consolidated Reports of Condition and Income* (Call Report).
( 4 ) *Limited life preferred stock* means preferred stock which has a maturity or which may be redeemed at the option of the holder.
( 5 ) *Mandatory convertible debt* means subordinated debt instruments which unqualifiedly require the issuer to exchange either common or perpetual preferred stock for such instruments by a date at or before the maturity of the instrument. The maturity of these instruments must be 12 years or less. In addition, the instrument must meet the requirements of paragraphs (f)(1)(i) through (v) of this section for subordinated notes and debentures or other requirements published by the OCC.
( 6 ) *Minority interest in consolidated subsidiaries* means the portion of equity capital accounts of all consolidated subsidiaries of the national bank that is allocated to minority shareholders of such subsidiaries.
( 7 ) *Mortgage servicing assets* means the national bank-owned rights to service for a fee mortgage loans that are owned by others.
( 8 ) *Perpetual preferred stock* means preferred stock that does not have a stated maturity date and cannot be redeemed at the option of the holder.
( f ) *Requirements and restrictions: Limited life preferred stock, mandatory convertible debt, and other subordinated debt* — ( 1 ) *Requirements.* Issues of limited life preferred stock and subordinated notes and debentures (except mandatory convertible debt) shall have original weighted average maturities of at least five years to be included in the definition of *surplus.* In addition, a subordinated note or debenture must also: ( i ) Be subordinated to the claims of depositors;
( ii ) State on the instrument that it is not a deposit and is not insured by the FDIC;
( iii ) Be unsecured;
( iv ) Be ineligible as collateral for a loan by the issuing national bank;
( v ) Provide that once any scheduled payments of principal begin, all scheduled payments shall be made at least annually and the amount repaid in each year shall be no less than in the prior year; and
( vi ) Provide that no prepayment (including payment pursuant to an acceleration clause or redemption prior to maturity) shall be made without prior OCC approval unless the national bank remains an eligible bank, as defined in 12 CFR 5.3, after the prepayment.
( 2 ) *Restrictions.* The total amount of mandatory convertible debt not included in paragraph (c)(3) of this section, limited life preferred stock, and subordinated notes and debentures considered as surplus is limited to 50 percent of the sum of paragraphs (a) and (c) (1), (2) and (3) of this section.
( 3 ) *Reservation of authority.* The OCC expressly reserves the authority to waive the requirements and restrictions set forth in paragraphs (f)(1) and (2) of this section, in order to allow the inclusion of other limited life preferred stock, mandatory convertible notes and subordinated notes and debentures in the capital base of any national bank for capital adequacy purposes or for purposes of determining statutory limits. The OCC further expressly reserves the authority to impose more stringent conditions than those set forth in paragraphs (f)(1) and (2) of this section to exclude any component of tier 1 or tier 2 capital, in whole or in part, as part of a national bank's capital and surplus for any purpose.
( g ) *Transitional rules.* ( 1 ) Equity commitment notes approved by the OCC as capital and issued prior to April 15, 1985, may continue to be included in paragraph (c)(3) of this section. All other instruments approved by the OCC as capital and issued prior to April 15, 1985, are to be included in paragraph (c)(4) of this section.
( 2 ) Intangible assets (other than mortgage servicing assets) purchased prior to April 15, 1985, and accounted for in accordance with OCC instructions, may continue to be included as surplus up to 25 percent of the sum of paragraphs (a) and (c)(1) of this section.
[78 FR 62272, Oct. 11, 2013, as amended at 85 FR 80434, Dec. 11, 2020]