A look at the Loan and Lease Losses Account: Net Worth Requirement.
Sec. 36a-441a. Loan and lease losses account. Net worth requirement. (a) A Connecticut credit union shall establish and maintain an allowance for loan and lease losses account in an amount that represents the estimated losses on loans and leases. The allowance for loan and lease losses account requirement shall be computed and adjusted, through the provision for loan and lease losses account, prior to the declaration or payment of dividends.
(b) A Connecticut credit union shall contribute from its earnings, as net worth, the greater of (1) such amounts as may be required by 12 CFR Part 702, as from time to time amended, or (2) amounts in accordance with the following schedule: (A) In the case of a Connecticut credit union in existence for more than four years and having assets of two million dollars or more, ten per cent of its gross income until its net worth equals four per cent of total assets, then five per cent of gross income until its net worth equals six per cent of total assets; and (B) in the case of a Connecticut credit union in existence for four years or less or a Connecticut credit union having assets of less than two million dollars, ten per cent of its gross income until its net worth equals seven and one-half per cent of total assets, then five per cent of its gross income until its net worth equals ten per cent of total assets.
(c) The commissioner may increase the net worth requirement of any Connecticut credit union set forth in subsection (b) of this section when the commissioner deems it necessary to protect the safety and soundness of such Connecticut credit union.
(d) Whenever the net worth falls below the applicable percentages of total assets specified in subsection (b) of this section, the Connecticut credit union shall make regular contributions in such amounts as specified in subsection (b) of this section as may be needed to maintain such net worth. Such contributions shall be made prior to the declaration or payment of dividends.
(e) As used in this section, the term "net worth" means the retained earnings balance of the Connecticut credit union at the end of each dividend period, excluding the allowance for loan and lease losses account and, in the case of a Connecticut credit union designated by the National Credit Union Administration as a low-income credit union under 12 CFR 701.34, as from time to time amended, net worth includes any secondary capital account that is uninsured and subordinate to all other claims, including claims of creditors, shareholders and the National Credit Union Share Insurance Fund. Retained earnings shall consist of undivided earnings, as determined under generally accepted accounting principles, regular reserves and other appropriations designated by the commissioner or the National Credit Union Administration, or its successor agency, or by the governing board of the Connecticut credit union with the approval of the commissioner.
(P.A. 02-73, S. 43; P.A. 03-84, S. 50.)
History: P.A. 03-84 changed "Commissioner of Banking" to "commissioner" in Subsecs. (c) and (e), effective June 3, 2003.
Note: As of read date 3/14/12 ALL Connecticut State Rules on Credit Unions are subject to change and update and your MUST confirm as filing or relying for best results.
Additional reference in citation above is correspondent to NCUA Rules in Federal Laws correspondent to National Credit Unions. Generally speaking Credit Unions can be governed under various levels of Rules from the Federal Level to the State to the local / Municipal level depending on the organization of the Credit Union.
The reference above corresponds to Banks and Banking / NCUA under Federal Rules where part 702 correspond to Prompt Corrective Action for this purpose we will just visit an underlying Definition which corresponds to categorization, however you should note that there are additional elements of the Net Worth Classification, Mandatory and Discretionary Supervisory Actions, Alternative Prompt Corrective Action for Credit Unions and Reserves to consider with detailed steps under Part 702.
here is a sample of the definitions from Part 702:
§ 702.2 Definitions.
Except as provided below, the terms used in this part have the same meanings as set forth in FCUA sections 101 and 216, 12 U.S.C. 1752, 1790d.
(a) Appropriate regional director means the director of the NCUA regional office having jurisdiction over federally-insured credit unions in the state where the affected credit union is principally located.
(b) Appropriate State official means the commission, board or other supervisory authority having jurisdiction over credit unions chartered by the State which chartered the affected credit union.
(c) Credit union means a federally-insured, natural person credit union, whether federally- or State-chartered, as defined by 12 U.S.C. 1752(6).
(d) CUSO means a credit union service organization as described in 12 CFR 712 et seq. for federally-chartered credit unions, and as defined under State law for State-chartered credit unions.
(e) NCUSIF means the National Credit Union Share Insurance Fund as defined by 12 U.S.C. 1783.
(f) Net Worth means (1) The retained earnings balance of the credit union at quarter-end as determined under generally accepted accounting principles, subject to paragraph (f)(3) of this section. Retained earnings consists of undivided earnings, regular reserves, and any other appropriations designated by management or regulatory authorities;
(2) For a low income-designated credit union, net worth also includes secondary capital accounts that are uninsured and subordinate to all other claims, including claims of creditors, shareholders and the NCUSIF; and
(3) For a credit union that acquires another credit union in a mutual combination, net worth includes the retained earnings of the acquired credit union, or of an integrated set of activities and assets, less any bargain purchase gain recognized in either case to the extent the difference between the two is greater than zero. The acquired retained earnings must be determined at the point of acquisition under generally accepted accounting principles. A mutual combination is a transaction in which a credit union acquires another credit union or acquires an integrated set of activities and assets that is capable of being conducted and managed as a credit union.
(4) The term “net worth” also includes loans to and accounts in an insured credit union established pursuant to section 208 of the Act [12 U.S.C. 1788], provided such loans and accounts:
(i) Have a remaining maturity of more than 5 years;
(ii) Are subordinate to all other claims including those of shareholders, creditors and the National Credit Union Share Insurance Fund;
(iii) Are not pledged as security on a loan to, or other obligation of, any party;
(iv) Are not insured by the National Credit Union Share Insurance Fund;
(v) Have non-cumulative dividends;
(vi) Are transferable; and
(vii) Are available to cover operating losses realized by the insured credit union that exceed its available retained earnings.
(g) Net worth ratio means the ratio of the net worth of the credit union (as defined in paragraph (f) of this section) to the total assets of the credit union (as defined by a measure chosen under paragraph (j) of this section).
(h) New credit union means a federally-insured credit union which both has been in operation for less than ten (10) years and has $10,000,000 or less in total assets.
(i) Senior executive officer means a senior executive officer as defined by 12 CFR 701.14(b)(2).
(j) Shares means deposits, shares, share certificates, share drafts, or any other depository account authorized by federal or state law.
(k) Total assets. (1) Total assets means a credit union's total assets as measured by either—
(i) Average quarterly balance. The average of quarter-end balances of the current and three preceding calendar quarters; or
(ii) Average monthly balance. The average of month-end balances over the three calendar months of the calendar quarter; or
(iii) Average daily balance. The average daily balance over the calendar quarter; or
(iv) Quarter-end balance. The quarter-end balance of the calendar quarter as reported on the credit union's Call Report.
(2) For each quarter, a credit union must elect a measure of total assets from paragraph (k)(1) of this section to apply for all purposes under this part except §§702.103 through 702.108 [risk-based net worth requirement].
(l) Weighted-average life means the weighted-average time to the return of a dollar of principal, calculated by multiplying each portion of principal received by the time at which it is expected to be received (based on a reasonable and supportable estimate of that time), and then summing and dividing by the total amount of principal.
[65 FR 8584, Feb. 18, 2000, as amended at 65 FR 44966, July 20, 2000; 67 FR 71087, Nov. 29, 2002; 73 FR 72691, Dec. 1, 2008; 75 FR 34620, June 18, 2010; 76 FR 60367, Sept. 29, 2011]
Note as of Read Date 3/14/12 ALL US Laws and Rules correspondent to Credit Unions are subject to change and update and MUST be confirmed as filing.
DCarsonCPA.com is the web presence of Dean T. Carson II, CPA interested in supporting Credit Unions, Non Profits, Businesses and Individuals on Accounting, Taxes, Financials and related Compliance, Analysis and more. Building a line for Decision Makers at the connecting points of Government, Industry, Business, Non Profit and Individual Financials. Learn more at www.dcarsoncpa.com .
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