Capital, Surplus and Undivided Profits; Accounting Requirements

(a)No credit shall be entered in the undivided profits account of a territorial bank founded upon an unrealized appreciation in the value of any type of asset. Before any net profits are credited to the undivided profits account, proper deduction shall be made for all expenditures, accrued expenses, accrued taxes, losses, bad debts and any write-offs or other deductions (including interest accrued and uncollected) required by the Commissioner.

(b)At the end of any accounting period a debit balance in the undivided profits account shall be charged to the surplus account, but no charge reducing the surplus account to less than 40% of the capital stock account shall be made without the prior written consent of the Commissioner; for the purpose of this sentence, the surplus account shall be considered the surplus remaining after the book value of the bank premises, and of the furniture and fixtures, and of any stock in a corporation owning the bank’s premises, vaults, safe deposit boxes, and furniture and fixtures shall have been deducted from the capital stock account and any excess over such account shall have been deducted from the surplus account. No transfer shall be made from the surplus account to the undivided profits account or to any but the capital stock account if tile surplus after the transfer would be less than the capital stock. Prior to determining that undivided profits are available for the declaration of dividends the following transfers shall be made:

(1)A net loss shall be deducted from the undivided profits account.

(2)There shall be transferred from the undivided profits account to the surplus account

(A)the amount required to raise the surplus to 40% of the capital stock; and

(B)an amount, not less than 10% of net profits, until, the surplus equals the capital stock.