23 CAR § 304-126. Reserve allocations

(a) Credit unions shall establish and maintain such reserves as may be required: (1) By the act; (2) By regulation; or (3) In special cases, by the State Credit Union Supervisor on his or her finding that the reserves of the credit union concerned are insufficient. (b) The treasurer shall transfer to a reserve to be known as the regular reserve: (1) At the close of business each month all entrance fees, fines, and transfer fees collected during the month; (2) At the close of each fiscal year the transfer to the regular reserve required by paragraph one (1) of Section 26 of the act; and (3) Recoveries on items previously charged to the regular reserve. (c)(1) A credit union may charge to its regular reserve losses on uncollectable loans to members and losses on uncollectable loans to other credit unions, including unrecovered costs of collection. (2) No other charges may be made against the regular reserve unless specifically authorized by the Arkansas credit union act or unless prior written approval is given by the supervisor. (d)(1) The regular reserve of each credit union shall be supplemented by a special reserve to be known as the Special Reserve for Delinquent Loans, which shall be equal to the excess of the sum of ten percent (10%) of the unpaid balances of loans delinquent more than two (2) months and less than six (6) months, plus twenty-five percent (25%) of the unpaid balances of loans delinquent from six (6) months to less than twelve (12) months, and plus eighty percent (80%) of the unpaid balances of loans delinquent twelve (12) months or more over the balance in the regular reserve. (2) The transfer to the Special Reserve for Delinquent Loans shall be made on the last day of the dividend period from undivided earnings before any distribution of dividends or upon request of the supervisor. (3) The maintenance of a Special Reserve for Delinquent Loans shall not eliminate the necessity for making the transfer required by paragraph one (1) of Section 26 of the credit union act. (4) In the event the required transfer to the Special Reserve for Delinquent Loans exceeds the balance of undivided earnings, only the balance of undivided earnings shall be transferred to the Special Reserve for Delinquent Loans. (e) If at the end of the dividend period the amount in the Special Reserve for Delinquent Loans exceeds the amount required by subsection (d) of this section, the board of directors of the credit union may authorize the transfer of the excess to undivided earnings. (f)(1) If a credit union has amended its bylaws to provide for other than annual dividend periods, a computation of the reserve requirement must be made at each dividend date and a provision for allocation to the regular reserve must be entered on the credit union's books. (2) The actual transfer to the regular reserve should be made at the end of the fiscal year based upon the annual gross earnings of the credit union or before payment of any dividend. (g) To compute the requirements of subsection (d) of this section, the following procedure shall be utilized: (1) Determine the number of installments due from the due date of the first installment to the current date; (2)(A) Determine the number of installments paid. (B) If full installments are made with each payment, count the number of installments paid. (C) If any installments paid are more or less than the scheduled level payment, it may be necessary to total the payments and divide by the amount of the scheduled level payment to determine the number of full payments that have been made. (D) A partial installment missed is considered a whole installment missed; (3)(A) Subtract the number of installments paid from the number of installments due. (B) The difference will be the number of delinquent installments; and (4)(A) An installment is not due until after its due date. (B) Therefore, on a loan repayable monthly the actual number of full months of delinquency is one (1) less than the number of delinquent installments. (C) The same principle applies to loans with repayment terms more frequently than monthly. (D) As an example, the following illustration is to be analyzed for delinquency as of the close of business on December 31: Terms: $60.00 per month (includes principal and interest at 5/6 of 1% per month on the unpaid balance) beginning April 30: Date Amount Loaned Total Paid Interest Principal Balance March 31 $600.00 $600.00 April 30 $ 60.00 $ 5.00 $ 55.00 545.00 May 31 30.00 4.54 25.46 519.54 Aug. 31 25.00 12.99 12.01 507.53 Nov. 30 60.00 12.69 47.31 460.22 Total paid 12/31 $175.00 Step 1 - Number of installments due: 4/30 to 12/31 (incl.) = 9 installments due Step 2 - Actual installment paid: $175.00 + $60.00 = 2.91; 2 installments paid (a partial installment missed is considered a whole installment missed). Step 3 - Number of delinquent installments: 9 - 2 = 7 delinquent installments Step 4 - Full months delinquency is one less than the number of delinquent installments. 7 - 1 = 6 months delinquent. The loan is 6 months delinquent and, therefore, will be classified in the 6 to less than 12 months delinquent classification. This method can be used for level and non-level payment loans. (See 23 CAR § 304-102(1), definition of "contractual delinquency.") (h)(1) Any loan that is contractually delinquent for sixteen (16) or more months shall be charged to the regular reserve. (2) Nothing contained herein shall prohibit the board of directors from charging to the regular reserve any loan deemed by them to be uncollectable prior to the expiration of the sixteen-month period. (i) If at the end of the fiscal year, a ten percent (10%) gross income transfer to the regular reserve would cause the reserve to exceed seven and one-half percent (7 1/2%) of the outstanding loan and risk assets of the credit union, the following computation should be used as an example in computing the correct reserve contribution: Gross Income for 1975 $ 20,000.00 Loans Outstanding 12/31/75 100,000.00 Loans to other credit unions 12/31/75 50,000.00 Total Loans & Risk Assets 12/31/75 150,000.00 Amount in Reserve 12/31/75 Prior to year-end contribution $11,000.00 7-1/2% X 150,000.00 = $11,250.00 Amount of gross income needed to bring the reserve to 7-1/2% of the outstanding loans and risk assets 250.00 10% of $2,500.00 = $250.00 which represents the amount needed to bring the reserve to 7-1/2% of the outstanding loans and risk assets. The $2,500.00 is then subtracted from the gross income of $20,000.00 leaving a balance of $17,500.00 which is the basis for the 5% contribution. $17,500.00 X 5% = 875.00 Total Contribution needed $1,125.00