Sec. 18-5.3. Definition of net worth ratio

Tax Law, § 1455(b)(1)

(a) The term net worth ratio means the percentage of average net worth to average total assets. Such averages must be computed on a quarterly basis. The terms net worth and assets are determined in the same manner as determined under section 406(f)(B)(i) of the Federal National Housing Act (12 USC 1729[f][5][B] [i]) or part 572 of the Federal Home Loan Bank Board regulations (12 CFR part 572), as such clause and regulations were in effect on June 1, 1985.

(b)

(1) For purposes of this Subpart, net worth means regulatory net worth which is the sum of the following:

(i) all reserve accounts (except for specific or valuation reserves);

(ii) retained earnings;

(iii) common stock;

(iv) preferred stock;

(v) mutual capital certificates;

(vi) securities which constitute permanent equity capital in accordance with generally accepted accounting principles;

(vii) appraised equity capital, included in the taxpayer's reserve calculations for purpose of satisfying its reserve requirements, which consists of unrealized and unrecorded equity in office land, buildings and improvements (including leasehold improvements) owned by the taxpayer or a subsidiary thereof, unrealized deferred profits originating from the sale and leaseback of office properties formerly owned by the taxpayer or a subsidiary thereof, and the value of leasehold interests;

(viii) any other nonwithdrawable accounts of a taxpayer;

(ix) the sum of outstanding net worth certificates issued by the taxpayer or which the Federal Savings and Loan Insurance Corporation or the Federal Deposit Insurance Corporation has committed to purchase;

(x) savings accounts pledged pursuant to an agreement acceptable to the Federal Savings and Loan Insurance Corporation or the Federal Deposit Insurance Corporation; and

(xi) subordinated debentures and subordinated debt securities. However, unless the taxpayer is authorized or permitted to do otherwise pursuant to section 561.13(c)(1) of the Federal Home Loan Bank Board regulations (12 CFR 561.13 [c] [1]), the taxpayer may include subordinated debt securities as regulatory net worth only in accordance with the following schedule:

Years to maturity of outstanding subordinated debt	Percent included in net worth
Greater than or equal to 7	100
Less than 7 but greater than or equal to 6	86
Less than 6 but greater than or equal to 5	71
Less than 5 but greater than or equal to 4	57
Less than 4 but greater than or equal to 3	43
Less than 3 but greater than or equal to 2	29
Less than 2 but greater than or equal to 1	14
Less than 1	0

For purposes of determining the principal amount outstanding of an obligation issued at a discount which exceeds 10 percent of the face amount, the issuing taxpayer shall treat as principal only the gross consideration actually received upon issuance plus the accrued interest not payable until maturity, as of the date of the computation. In the case of an instrument sold at a discount which exceeds 10 percent and which bears no stated rate of interest, the amount which can be added to principal each period is an amount equal to the accrued interest payable computed on the “level-yield” or “interest” method. For purposes of computing the amount of subordinated debt includable as regulatory net worth pursuant to this provision, the issuing taxpayer must determine the effective maturity of each portion of the principal amount outstanding of the subordinated debt which is subject to required sinking-fund payments, other required prepayments and required reserve allocations, and calculate the percentage amount of each portion of the principal amount outstanding which may be included pursuant to the schedule set forth above.

(2) In order for any nonpermanent instrument other than a subordinated debt security to qualify for inclusion in regulatory net worth, the remaining period to maturity or required redemption (or time of any required sinking fund or other prepayment or reserve allocation, with respect to the amount of such prepayment or reserve) must not be less than one year, or the redemption or prepayment of such nonpermanent instrument may only be at the option of the issuer, and such payments will not cause the taxpayer to fail to meet its net-worth requirements. However, capital stock may be included in regulatory net worth without limitation if it would otherwise qualify but for either: (i) a provision permitting redemption in the event of a merger, consolidation or reorganization approved by the Federal Savings and Loan Insurance Corporation or the Federal Deposit Insurance Corporation where the issuer is not the survivor; or (ii) a provision permitting a redemption where the funds for redemption are raised by the issuance of permanent stock.

(See Federal Home Loan Bank Board regulations, 12 CFR part 572, 12 CFR 561.13, 12 CFR 563.13[c].)

(c) For purposes of this section, assets means the total amount of the assets of a taxpayer, net of contra-asset accounts. The total amount of the assets of a taxpayer shall include the following:

(1) mortgage loans and contracts;

(2) nonmortgage loans;

(3) repossessed assets;

(4) real estate held for development or investment or resale;

(5) cash, deposits and investment securities;

(6) fixed assets; and

(7) other assets, such as financial futures, goodwill and other intangible assets.

(See Federal Home Loan Bank Board regulations, 12 CFR 572.2[h], Federal Home Loan Bank Board form 1313 as of June 1, 1985.)