May 19, 1980

Ms. Helen V. Wegner 
Secretary 
Department of Commerce 
State Capitol 
Pierre, South Dakota 57501

Official Opinion No. 80-37

Whether Undivided Profits are Included in a Bank's Surplus Account for the Purpose of Determining the Deposit Capital Ratio Set Forth in SDCL 51-22-18

Dear Secretary Wegner:

You have requested an official opinion from this office in regard to the  following factual situation:

FACTS: 

In a recent examination of a state bank, the Division of Banking and Finance contended that the bank was not in compliance with the deposit capital ratio set forth in SDCL 51-22-18.  The Division requested that the bank transfer funds from its undivided profit account to surplus in order to meet the requirements of the statute.  The bank argued that undivided profits are part of a bank's surplus for the purpose of determining the deposit capital ratio under SDCL 51-22-18.

Based on the above facts, you have asked the following question:

QUESTION: 

Does the term 'surplus' as used in SDCL 51-22-18 include a bank's undivided profits account?

SDCL 51-22-18 provides: 

No bank shall receive deposits when its total average deposits less its average cash and due from banks exceed fifteen times its capital, capital notes or debentures, and surplus to be determined by the average of its  deposits less the average of the direct and unconditional obligation of the United States government owned by the bank, said averages to be for a period of six months, provided that said United States government obligations not to exceed seventy-five percent of the average deposits may be so deducted.

In my opinion, the answer is no.  To reach this conclusion it is necessary to read SDCL 51-22-18 in light of other statutes contained in Title 51--Banks and Banking--that use the terms being considered.

The Legislature, in SDCL 51-17 has provided for the organization and capitalization of banks.  In SDCL 51-17-5 surplus and undivided profits accounts are segregated.  The reason is that the two accounts are available or accountable for different purposes.

SDCL 51-17-8 provides that the undivided profits account, which is relatively fluid, may be used for payment of dividends.  Losses may be charged off against it.  Also, undivided profits can be carried to surplus or simply left untouched.

SDCL 51-17-9 provides the framework for the surplus account, a more rigid framework than for undivided profits.  Surplus must be maintained at a minimum amount equal to twenty percent of the bank's capital stock.  It is unavailable for dividend payments.  Finally, it is opened up to cover losses only when losses exceed undivided profits.  If that occurs, the payment of dividends is suspended until the surplus is again built to the required minimum.

There being no other definition of the words undivided profits and surplus in Title 51, it is clear that the term surplus does not included undivided profits.  The Legislature's omission of the term undivided profits from SDCL 51-22-18, it must be inferred, was intentional.  The statute cannot be read to reach beyond its words.

Respectfully submitted,

Mark V. Meierhenry
Attorney General