1. (a) Definitions. The following words and terms, when used in this chapter, shall have the following meanings, unless the context clearly indicates otherwise.

   1. (1) Net worth means the retained earnings balance of the credit union as determined under generally accepted accounting principles. Retained earnings consists of undivided earnings, regular reserves, and any other appropriations designated by management, the insuring organization, or the commission. This means that only undivided earnings and appropriations of undivided earnings are included in net worth. Net worth does not include the allowance for loan and lease losses account.
   2. (2) Net worth ratio means, with respect to a credit union, the ratio of the net worth of the credit union to the total assets of the credit union.

   3. (3) Total assets means the average of the total assets as measured using one of the following methods:

      1. (A) average quarterly balance. The average of quarter-end balances of the four most recent calendar quarters; or
      2. (B) average monthly balance. The average of month-end balances over the three calendar months of the calendar quarter; or
      3. (C) average daily balance. The average daily balance over the calendar quarter; or
      4. (D) quarter-end balance. The quarter-end balance of the calendar quarter as reported on the credit union's call report, and for semi-annual filers as calculated for the quarters ending March 31 and September 30.

2. (b) In accordance with the requirements of §122.104 of the Act, state-chartered credit unions shall set aside a portion of their current gross income, prior to the declaration or payment of dividends as follows:

   1. (1) A credit union shall transfer in accordance with GAAP the following amounts at the indicated intervals to its regular reserve account until its net worth ratio equals 7% of total assets:

      1. (A) in the case of a monthly dividend period, net worth must increase monthly by an amount equivalent to at least 0.0334% of its total assets; and
      2. (B) in the case of a quarterly, semi-annual or annual dividend period, net worth must increase quarterly by an amount equivalent to at least 0.1% per quarter of its total assets.

   2. (2) For a credit union in operation less than ten years or having assets of less than $10 million, a business plan must be developed that reflects, among other items, net worth projections consistent with the following:

      1. (A) 2% net worth ratio by the end of the third year of operation;
      2. (B) 3.5% net worth ratio by the end of the fifth year of operation;
      3. (C) 6% net worth ratio by the end of the seventh year of operation; and
      4. (D) 7% net worth ratio by the time it reaches $10 million in total assets or by the end of the tenth year of operation, which ever is shorter.
   3. (3) Whenever the net worth ratio falls below 7%, the credit union shall transfer a portion of its current gross income to its regular reserve in such amounts as described in paragraph (1) of this subsection.
   4. (4) Special reserves. In addition to the regular reserve, special reserves to protect the interest of members may be established by board resolution or by order of the commissioner, from current income or from undivided earnings. In lieu of establishing a special reserve, the commissioner may direct that all or a portion of the undivided earnings and any other reserve fund be restricted. In either case, such directives must be given in writing and state with reasonable specificity the reasons for such directives.
   5. (5) Insuring organization's capital requirements. As applicable, a credit union shall also comply with any and all capital requirements imposed by an insuring organization as a condition to maintain insurance on share and deposit accounts.

3. (c) Net Worth Restoration Plan.

   1. (1) When a credit union's net worth ratio falls below 6%, it must submit a plan to restore and maintain its net worth ratio at the 7% minimum requirement.

   2. (2) The net worth restoration plan must be submitted to the department within 45 calendar days of the occurrence. At a minimum, the plan shall include the following:

      1. (A) reasons why the net worth ratio fell below the minimum requirement;
      2. (B) descriptions of steps to be taken to restore net worth to the minimum requirement within specific time frames;
      3. (C) actions to be taken to maintain the net worth ratio at the minimum required level and increase it thereafter;
      4. (D) balance sheet and income projections, including assumptions, for the current calendar year and one additional calendar year; and
      5. (E) certification from the board of directors that it will follow the proposed plan if approved by the department.

   3. (3) For the purposes of this subsection, a credit union must determine its net worth no less frequently than once each calendar quarter. The effective date or date of occurrence for a credit union's net worth ratio which falls below 6% shall be the most recent to occur of:

      1. (A) the last day of the calendar month following the end of the calendar quarter; or
      2. (B) the date the credit union's net worth ratio is recalculated by or as a result of its most recent examination.

   4. (4) If a credit union fails to submit a net worth restoration plan; or the plan submitted is not deemed adequate to either restore net worth or restore net worth within a reasonable time; or the credit union fails to implement its approved net worth restoration plan, the department may impose the following administrative sanctions in addition to, or in lieu of, any other authorized regulatory action:

      1. (A) all unencumbered reserves, undivided earnings, and current earnings are encumbered as special reserves;
      2. (B) dividends and interest refunds may not be declared, advertised, or paid without the prior written approval of the commissioner; and
      3. (C) any changes to the credit union's board of directors or senior management staff must receive the prior written approval of the commissioner.
4. (d) Revised business plan for new credit unions. A credit union that has been in operation for less than ten years or has assets of less than $10 million shall file a written revised business plan within 30 calendar days of the date the credit union's net worth ratio has failed to increase consistent with its then-present business plan. Failure to submit a revised business plan; or submission of a plan not deemed adequate to either increase net worth or increase net worth within a reasonable time; or failure of the credit union to implement its revised business plan, may trigger the regulatory actions described in subsection (c)(4) of this section.
5. (e) Unsafe practice. Any credit union which has less than a 6.0% net worth ratio may be deemed to be engaged in an unsafe practice pursuant to §122.255 of the Finance Code, except that such a credit union which has entered into and is in compliance with a written agreement or order with the department or is in compliance with a net worth restoration or revised business plan approved by the department to increase its net worth ratio will not be deemed to be engaged in an unsafe practice on account of its inadequate capital structure. The department is not precluded from taking enforcement action against a credit union with capital above the minimum requirement if the specific circumstances deem such action to be appropriate.

Source Note:The provisions of this §91.901 adopted to be effective March 8, 1984, 9 TexReg 1156; amended to be effective July 8, 1994, 19 TexReg 4940; amended to be effective March 17, 1995, 20 TexReg 1525; amended to be effective August 14, 2000, 25 TexReg 7636.