FFIEC Federal Financial Institutions Examination Council Washington, D.C. 20006 Image CALL REPORT DATE: September 30, 2003

THIRD 2003 CALL, NUMBER 225

SUPPLEMENTAL INSTRUCTIONS

September 2003 Call Report Materials

A sample set of the September 30, 2003, report form applicable to your bank is enclosed. Banks with domestic offices only must file the FFIEC 041 report form. Banks with domestic and foreign offices must file the FFIEC 031 report form.

Please retain the enclosed sample report form for reference. Sample forms also are available on both the FFIEC's Web site ( www.ffiec.gov/ffiec_report_forms.htm ) and the FDIC's Web site ( www.fdic.gov/regulations/resources/call/index.html ). A paper copy of the Call Report forms, including the cover (signature) page, can be printed from the Web sites. In addition, banks that use Call Report software generally can print paper copies of blank forms from their software.

Submission of Completed Reports

All banks must submit their Call Reports electronically to the banking agencies' electronic collection agent, Electronic Data Systems Corporation (EDS), using one of the two methods described in the agencies' cover letter for the September 30, 2003, report date. For assistance in submitting Call Reports to EDS, contact EDS toll free at (800) 255 1571.

Banks are required to maintain in their files a signed and attested record of the completed Call Report that has been submitted to EDS showing at least the title of each Call Report item and the reported amount. Either the cover page of the enclosed sample set of report forms, a photocopy of the cover page, or a copy of the cover page printed from Call Report software or from the FFIEC's or the FDIC's Web site should be used to fulfill the signature and attestation requirement. The signed cover page should be attached to the Call Report that is placed in the bank's files.

Currently, Call Report preparation software products marketed by DBI Financial Systems, Inc.; Financial Architects US; FRS, an S1 Corporation Business; IDOM, Inc.; Information Technology, Inc.; The InterCept Group; Jack Henry & Associates, Inc. (Banker-II Data Center); Milas LLC; and Sheshunoff Information Services have been certified for electronic submission by EDS. The addresses and telephone numbers of the vendors with EDS certified Call Report software are listed at the end of these Supplemental Instructions.

Call Report Central Data Repository

The FFIEC has contracted with the Unisys Corporation to build a Central Data Repository (CDR) for the collection, validation, and distribution of Call Report data submitted by banks. The FFIEC anticipates that implementation of the new CDR system will start with the Call Reports for September 30, 2004. Under this new system, all institutions will be required to file their Call Reports via the Internet using software that contains the FFIEC edits for validating Call Report data prior to submission. Call Report software vendors are currently modifying their software to incorporate these edits.

As part of the CDR development process, a CDR Focus Group has been established to serve as a collaboration bridge for communication about the project with those institutions that file Call Reports. The Focus Group will provide regular updates on the project through the FFIEC's Web site and other means. The Focus Group has representatives from bank trade groups, financial institutions, and the banking agencies. For more information on the CDR project, please refer to the FFIEC's Web site ( www.ffiec.gov ) beginning in October 2003.

Amending Previously Submitted Reports

Should your bank find that it needs to revise certain Call Report information in a previously submitted report, an amended Call Report data file may be electronically submitted to EDS. Otherwise, contact your Call Report analyst at the FDIC (for national and FDIC-supervised banks) or at your Federal Reserve District Bank (for state member banks) and arrange to provide the amended data by telephone, fax, or electronic mail.

FFIEC Instruction Books

The most recent update to your Call Report instruction book was distributed with the June 2003 Call Report materials. Copies of the Call Report instructions may be obtained from the FDIC's Reports Analysis and Quality Control Section (telephone toll free at 800-688-FDIC) or from your Federal Reserve District Bank. The Call Report instructions are also available on both the FFIEC's and the FDIC's Web sites.

Accounting for Indexed Retirement Plans

Banks that have agreements with individual employees to provide retirement benefits often fund the benefit obligation with the proceeds from bank-owned life insurance (BOLI). Some of these agreements are referred to as indexed retirement plans because retirement benefits are based upon the difference between the actual earnings on the BOLI and a predefined index ("excess spread"). If the agreements with individual employees, taken together, are equivalent to a postretirement income plan, then FASB Statement No. 87, Employers' Accounting for Pensions , governs the accounting. Otherwise, each agreement should be accounted for individually on an accrual basis in accordance with the terms of the underlying contract as required by the provisions of Accounting Principles Board Opinion No. 12, Omnibus Opinion, addressing deferred compensation contracts.

Many employee agreements provide for future benefit payments from the excess spread that accrues before and after retirement on the related BOLI. Opinion No.12, as amended by FASB Statement No. 106, requires employer obligations under deferred compensation contracts to be accrued over the required service periods until the date the employee is fully eligible for the benefits ("full eligibility date"). However, some institutions have failed to record a liability for the estimated cost of benefit payments related to the excess spread that the employee will be entitled to receive after retirement. In addition, some institutions have failed to accrue the present value of the expected future benefit payments by the full eligibility date.

The failure to record a liability for the postretirement excess spread or to appropriately consider the impact of vesting provisions on the full eligibility date represents an accounting error. If an institution has made an error that is deemed material, it should make an adjustment to correct this accounting error and report the effect of the adjustment on retained earnings as of the beginning of the year in Schedule RI-A, item 2. The effect of the adjustment on earnings since the beginning of the year should be reflected in the appropriate income statement (Schedule RI) account on a year-to-date basis. The institution also should contact its primary federal supervisor to determine whether prior Call Reports should be amended.

Revisions to the estimated cost of future benefits because of changes in assumptions (e.g., changes in interest rates) should be accounted for as a change in accounting estimate and not as an accounting error.

FASB Statement No. 149 and Loan Commitments That Must Be Accounted for as Derivatives

FASB Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities , provides guidance on the circumstances in which a loan commitment must be accounted for as derivative. This guidance applies to commitments issued after June 30, 2003. Commitments issued before July 1, 2003, are addressed by FASB Statement No. 133 Implementation Issue No. C13. Banks must follow the guidance in Statement No. 149 and Issue No. C13 for Call Report purposes.

Under Statement No. 149, loan commitments that relate to the origination of mortgage loans that will be held for sale must be accounted for as derivatives by the issuer of the commitment. Commitments to originate mortgage loans that will be held for investment purposes and commitments to originate other types of loans are not considered derivatives. However, for commitments to purchase or sell existing loans, the definition of a derivative in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities , (see page A-26 of the Glossary section of the Call Report instructions) should be applied to these commitments to determine whether they meet this definition and are subject to the provisions of Statement No. 133.

FASB Statement No. 149 differs somewhat from Issue No. C13. Under Issue No. C13, loan commitments that relate to the origination or purchase of mortgage loans that will be held for sale must be accounted for as derivative instruments in accordance with Statement No. 133. However, loan commitments that relate to the origination or purchase of mortgage loans that will be held for investment, i.e., loans for which the bank has the intent and ability to hold for the foreseeable future or until maturity or payoff, are not considered derivatives. In addition, commitments that relate to the origination of other types of loans (that is, other than mortgage loans) are not considered derivatives.

Mortgage loan commitments that must be accounted for as derivatives are considered over-the-counter written interest rate options. Therefore, because they are derivatives, these commitments should not be reported as unused commitments in item 1 of Schedule RC-L, Derivative and Off-Balance Sheet Items. Instead, mortgage loan commitments that are derivatives must be reported on the balance sheet (Schedule RC) at fair value. In addition, the par value of the mortgage loans to be acquired under these commitments must be reported in Schedule RC-L, item 12.d.(1), column A, and in Schedule RC-L, item 14, column A. Banks must also report the fair value of these mortgage loan commitments in the appropriate subitem of Schedule RC-L, item 15.b. As written options, mortgage loan commitments that are derivatives are outside the scope of the credit conversion process that applies to derivatives under the agencies' risk-based capital standards. However, if the fair value of these mortgage loan commitments is positive and therefore reported as an asset, this positive fair value is subject to the risk-based capital standards and must be risk weighted as an on-balance sheet asset.

The unused portion of loan commitments that are not considered derivatives should continue to be reported in Schedule RC-L, item 1. Unused commitments with an original maturity exceeding one year are subject to the risk-based capital standards and must be reported in Schedule RC-R, item 53.

FASB Interpretation No. 46

The FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities , in January 2003. This interpretation explains how to identify a "variable interest entity" (previously referred to as a "special purpose entity") and how an institution should assess its interests in a variable interest entity to decide whether to consolidate that entity. Variable interest entities often are created for a single specified purpose, for example, to facilitate securitization, leasing, hedging, research and development, and reinsurance. Most small banks are unlikely to have any "variable interests" in variable interest entities.

In general, a variable interest entity is an entity in which either the controlling financial interests are not voting interests or the equity investors do not bear the entity's residual economic risks. A variable interest is a contractual or ownership interest in an entity that changes when the value of the entity's net assets changes. An organization that has a variable interest (or a combination of variable interests) that will absorb a majority of a variable interest entity's expected losses if they occur, receive a majority of the entity's expected residual returns if they occur, or both, is the "primary beneficiary" of the variable interest entity and must consolidate it.

For Call Report purposes, banks with variable interests in variable interest entities created after January 31, 2003, must apply the provisions of Interpretation No. 46 to those entities immediately. A bank that is a public company, or a subsidiary of a public company, and has a variable interest in a variable interest entity created before February 1, 2003, must apply the provisions of Interpretation No. 46 to that entity no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. A bank that is neither a public company nor a subsidiary of a public company, but has a variable interest in a variable interest entity created before February 15, 2003, must apply the provisions of Interpretation No. 46 to that entity no later than the end of the first annual reporting period beginning after June 15, 2003.

The assets and liabilities of a consolidated variable interest entity should be reported on the Call Report balance sheet (Schedule RC) on a line-by-line basis according to the asset and liability categories shown on the balance sheet. This reporting treatment also carries over to the other schedules in both the Report of Condition and the Report of Income.

Reporting Asset-Backed Commercial Paper Conduits in Schedules RC-R and RC-S

For purposes of Memorandum item 3 of Schedule RC-S, Servicing, Securitization, and Asset Sale Activities, banks must report the requested information on credit enhancements and liquidity facilities provided to asset-backed commercial paper conduits regardless of their accounting treatment for the conduit. Thus, whether or not a bank must consolidate the conduit for reporting purposes in accordance with FASB Interpretation No. 46, the bank must report its maximum credit exposure arising from and its unused commitments to conduit structures in Memorandum items 3.a and 3.b, respectively.

The banking agencies have issued an interim final rule that sets forth a temporary risk-based capital treatment for assets in asset-backed commercial paper conduits that sponsoring banks are required to consolidate in accordance with Interpretation No. 46. This interim capital treatment allows sponsoring banks to exclude the consolidated asset-backed commercial paper program assets from their risk weighted asset bases when they calculate their risk-based capital ratios. However, sponsoring banks must continue to hold risk-based capital against all exposures arising in connection with these programs, including direct credit substitutes, recourse obligations, residual interests, long-term liquidity facilities, and loans. Furthermore, any minority interests in consolidated asset-backed commercial paper programs are not eligible for inclusion in Tier 1 capital (or total risk-based capital). This interim risk-based capital treatment will be in effect only for the September 30 and December 31, 2003, and March 31, 2004, Call Report dates. In addition, the interim risk-based capital treatment does not alter the accounting rules for balance sheet consolidation under Interpretation No. 46, nor does it affect the denominator of the Tier 1 leverage capital ratio calculation, which continues to be based primarily on on-balance sheet assets as reported under generally accepted accounting principles.

Under the agencies' interim rule, bank sponsors of any consolidated asset-backed commercial paper programs should include the consolidated assets in the appropriate balance sheet asset categories when completing items 34 through 43, column A, in Schedule RC-R, Regulatory Capital. The amounts of these consolidated assets should also be reported in items 34 through 43, column B, "Items not Subject to Risk-Weighting." However, sponsoring banks must continue to hold risk-based capital against all exposures arising in connection with these programs, whether or not the programs are consolidated, including direct credit substitutes, recourse obligations, residual interests, long-term liquidity facilities, and loans. These exposures should be reported in the appropriate items of Schedule RC-R. Any minority interests in consolidated asset-backed commercial paper programs should not be included in Schedule RC-R, item 6, "Qualifying minority interests in consolidated subsidiaries."

Reporting Gains and Losses from Extinguishments of Debt, Including Prepayment Penalties

Until it was rescinded by FASB Statement No. 145 in April 2002, FASB Statement No. 4 required gains and losses from the extinguishment (repayment or retirement) of debt to be aggregated and, if material, reported as extraordinary items. Under Statement No. 145, such gains and losses should be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30. For Call Report purposes, except for those unusual and infrequent gains and losses that qualify as extraordinary, banks should aggregate their gains and losses from the extinguishment of debt, including losses resulting from the payment of prepayment penalties on borrowings such as Federal Home Loan Bank advances, and consistently report the net amount in item 7.d, "Other noninterest expense," of the income statement (Schedule RI). Only if a bank's debt extinguishments normally result in net gains over time should the bank consistently report its net gains (losses) in Schedule RI, item 5.l, "Other noninterest income."

In addition, under FASB Emerging Issues Task Force (EITF) Issue No. 96-19, "Debtor's Accounting for a Modification or Exchange of Debt Instruments," the accounting for the gain or loss on the modification or exchange of debt depends on whether the original and the new debt instruments are substantially different. If they are substantially different, the transaction is treated as an extinguishment of debt and the gain or loss on the modification or exchange is reported immediately in earnings as discussed above. If the original and new debt instruments are not substantially different, the gain or loss on the modification or replacement of the debt is deferred and recognized over time as an adjustment to the interest expense on the new borrowing. EITF Issue No. 96-19 provides guidance on how to determine whether the original and the new debt instruments are substantially different.

Deposit Accounts on Which the Interest Rate Has Been Reduced to Zero

Many banks offer deposit products, such as money market deposit accounts or NOW accounts, on which they periodically adjust the interest rate paid on the accounts in response to changes in market interest rates and other factors. If a bank's rate adjustments on certain deposit accounts have reduced the interest rate to zero, but the interest rate paid on these accounts can be increased as market conditions change, the bank should continue to report the deposits as interest-bearing accounts in item 13 of Schedule RC, Balance Sheet, and include them in the appropriate deposit items in Schedule RC K, Quarterly Averages.

Equity-Indexed Certificates of Deposit

Under FASB Statement No. 133, a certificate of deposit (CD) that pays "interest" based on changes in an equity securities index is a hybrid instrument with an embedded derivative that must be accounted for separately from the host contract, i.e., the CD. Examples of equity-indexed CDs include the "Index Powered® CD" and the "Dow Jones Industrials Indexed Certificate of Deposit."

Banks that either issue or invest in equity-indexed CDs should continue to follow the accounting and reporting guidance provided on this subject in the Call Report Supplemental Instructions for June 30, 2003. These Supplemental Instructions can be accessed via the FFIEC's Web site ( www.ffiec.gov/PDF/FFIEC_forms/FFIEC031_041_suppinst0603.pdf (182.9 KB PDF File - PDF Help or Hard Copy )).

FASB Interpretation No. 45

For Call Report purposes, banks must follow FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others . This interpretation clarifies that a guarantor, at the inception of a guarantee, is required to recognize a liability on its balance sheet for the fair value of the obligation undertaken in issuing the guarantee. Among the types of guarantee contracts to which Interpretation No. 45 applies are both financial and performance standby letters of credit. However, commercial letters of credit and other loan commitments, as well as subordinated interests in securitizations, are not considered guarantees under Interpretation No. 45 and, therefore, are not subject to the interpretation. For further information, please refer to Interpretation No. 45 and to the Call Report Supplemental Instructions for June 30, 2003, which can be accessed via the FFIEC's Web site ( www.ffiec.gov/PDF/FFIEC_forms/FFIEC031_041_suppinst0603.pdf ).

FASB Statements Nos. 141, 142, and 147

When completing their Call Reports, banks must follow FASB Statements No. 141, Business Combinations, No. 142, Goodwill and Other Intangible Assets, and No. 147, Acquisitions of Certain Financial Institutions . In particular, banks should note that core deposit intangibles have a finite useful life and must be amortized over this period using a method that reflects the pattern in which the economic benefit of the asset is consumed. For core deposit intangibles, this results in the use of an accelerated method of amortization.

For further information on these three accounting standards, please refer to the Call Report Supplemental Instructions for June 30, 2003, which can be accessed via the FFIEC's Web site ( www.ffiec.gov/PDF/FFIEC_forms/FFIEC031_041_suppinst0603.pdf ).

Reporting of Funds Invested Through Bentley Financial Services, Inc.

Banks should continue to follow the guidance provided on this subject in the Call Report Supplemental Instructions for June 30, 2003. These Supplemental Instructions can be accessed via the FFIEC's Web site ( www.ffiec.gov/PDF/FFIEC_forms/FFIEC031_041_suppinst0603.pdf ).

Optional Tax Worksheet

For assistance in calculating year to date applicable income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes , an optional worksheet geared toward smaller banks is available upon request. For a copy of this worksheet, state member banks should contact their Federal Reserve District Bank. National and FDIC supervised banks should telephone the FDIC's Reports Analysis and Quality Control Section in Washington, D.C., toll free at (800) 688 FDIC. The optional tax worksheet also is available on the FDIC's Web site ( www.fdic.gov/regulations/resources/call/index.html ).

Call Report Software Vendors

For information on available Call Report software, banks should contact:

DBI Financial Systems, Inc. P.O. Box 14027 Bradenton, Florida 34280 Telephone: (800) 774-3279 www.e-dbi.com	Financial Architects US 12040 Provincetowne Drive Charlotte, North Carolina 28277 Telephone: (800) 763-7070 www.finarch.com	FRS, an S1 Corporation Business 2815 Coliseum Centre Drive, Suite 300 Charlotte, North Carolina 28217 Telephone: (704) 423-0394 www.frsglobal.com
IDOM, Inc. One Gateway Center, Third Floor Newark, New Jersey 07102 Telephone: (973) 648-0900 www.idomusa.com	Information Technology, Inc. 1345 Old Cheney Road Lincoln, Nebraska 68512 Telephone: (402) 423-2682 www.itiwnet.com	The InterCept Group 27200 Agoura Road, Suite 100 Calabasas Hills, California 91301 Telephone: (800) 825-3772 www.intercept.net
Jack Henry & Associates, Inc. Banker-II Data Center 2405 Schneider Avenue, Suite A Menomonie, Wisconsin 54751 Telephone: (715) 235-8420	Milas LLC 1317 26th Street, Suite 1 Santa Monica, California 90404 Telephone: (888) 862-7610 www.baygan.com/milas/	Sheshunoff Information Services P.O. Box 13203 Capitol Station Austin, Texas 78711 Telephone: (800) 456-2340 www.sheshunoff.com