REVISIONS TO THE REPORTS OF CONDITION
(CALL REPORT) FOR 1999
Unless otherwise indicated, the
revisions described below apply to all four versions of the Call Report
(FFIEC 031, 032, 033, and 034). Where appropriate, samples of the schedules
that are being revised, or portions thereof, are shown to illustrate the
specific changes in reporting requirements. These samples are from the
FFIEC 034 report forms. The Call Report revisions will take effect as
of the March 31, 1999, report date. In the report for that date, banks
may report a reasonable estimate for any new or revised item for which
the requested information is not readily available. In addition, the wording
of the instructions presented below should be regarded as preliminary.
An update to the Call Report instruction book will be distributed with
the March 31, 1999, Call Report materials.
In April 1998, the FFIEC and its
member agencies rescinded their 1992 Supervisory Policy Statement on
Securities Activities and approved in its place a new Supervisory
Policy Statement on Investment Securities and End-User Derivatives Activities.
In adopting the new policy statement, the agencies removed the 1992 policy
statement's specific constraints concerning investments in high-risk mortgage
securities, including its "high risk" tests, and substituted broader guidance
covering all investment securities, including the establishment by each
institution of appropriate risk limits. As a result, the FFIEC has eliminated
from the securities schedule Memorandum items 8.a and 8.b for the amortized
cost and fair value, respectively, of "High-risk mortgage securities."
Schedule RC -- Balance Sheet (FFIEC 034 only)
Banks with less than $100 million
in assets that participated in the banking agencies' agricultural loan
loss deferral programs, which were mandated by statute (12 U.S.C. 1823(j))
in 1987, reported the unamortized amount of their deferred losses on the
balance sheet of the FFIEC 034 report. Under these programs, participating
banks had to fully amortize their deferred losses by December 31, 1998.
Accordingly, the FFIEC is deleting the four items that pertained to deferred
agricultural loan losses (items 12.b, 12.c, 28.b, and 28.c) from the FFIEC
034 version of Schedule RC.
Relating to Accumulated Net Gains (Losses) on Cash Flow Hedges
The Financial Accounting Standards
Board (FASB) issued Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities (FAS 133), on June 16, 1998. This statement
takes effect for fiscal years beginning after June 15, 1999, with earlier
application encouraged by the FASB. Banks must adopt FAS 133 for Call
Report purposes upon the statement's effective date based on their fiscal
year, with earlier application permitted consistent with the statement.
Most banks have calendar year fiscal years and, therefore, will not need
to apply this accounting standard until January 1, 2000. However, some
banks have fiscal years that will require them to begin applying FAS 133
during 1999, e.g., beginning on July 1, 1999. Furthermore, other banks
may choose to adopt this new accounting standard earlier in 1999 or may
already have adopted FAS 133.
Under FAS 133, all derivatives must
be reported as either assets or liabilities on the balance sheet and must
be carried at fair value. If certain conditions are met, a derivative
may be specifically designated as a "cash flow hedge." In a cash flow
hedge, to the extent the hedge is effective, the gain or loss on the derivative
is not initially reported in earnings, but instead in a separate component
of equity capital (referred to as "accumulated other comprehensive income"
in FAS 133). The gain or loss will subsequently be recognized in earnings
in the period or periods when the transaction being hedged affects earnings.
The ineffective portion of the cash flow hedge is reported in earnings
As part of the disclosure requirements
of FAS 133, an institution must disclose the accumulated net gains (losses)
on cash flow hedges that are included in equity capital as of the balance
sheet date. An institution also must disclose the related change in these
accumulated net gains (losses) during the reporting period. Accordingly,
the FFIEC is adding a new item to the balance sheet and to the changes
in equity capital schedule of the Call Report. Banks that have adopted
FAS 133 will report any accumulated net gains (losses) on cash flow hedges
as of the report date in new item 26.c in the equity capital section of
the balance sheet (Schedule RC). Banks also will report the year-to-date
change in these accumulated net gains (losses) in new item 11.b of the
changes in equity capital schedule (Schedule RI-A). Existing item 11 on
Schedule RI-A will be renumbered as item 11.a. The instructions for each
new item are presented below following the illustration of the schedule,
or portion thereof, in which the new item appears.
When a bank adopts FAS 133, derivatives
held for purposes other than trading must be reported at fair value on
the balance sheet (Schedule RC) in item 11, "Other assets," or item 20,
"Other liabilities," as appropriate. Derivatives held for trading will
continue to be reported at fair value on the balance sheet in item 5,
"Trading assets," or item 15.b, "Trading liabilities," as appropriate.
RC, Item 26.c, Accumulated net gains (losses) on cash flow hedges.2
Report the effective portion3
of the accumulated change in fair value (gain or loss) on derivatives
designated and qualifying as cash flow hedges in accordance with FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging
Under Statement No. 133, a bank
that elects to apply hedge accounting must exclude from net income the
effective portion of the change in fair value of a derivative designated
as a cash flow hedge and record it on the balance sheet in a separate
component of equity capital (referred to as "accumulated other comprehensive
income" in the accounting standard). The ineffective portion of the cash
flow hedge must be reported in earnings. The equity capital component
(i.e., the accumulated other comprehensive income) associated with a hedged
transaction should be adjusted each reporting period to a balance that
reflects the lesser (in absolute amounts) of:
(1) The cumulative gain or loss on the derivative from inception of
the hedge, less (a) amounts excluded consistent with the bank's defined
risk management strategy and (b) the derivative's gains or losses previously
reclassified from accumulated other comprehensive income into earnings
to offset the hedged transaction, or
(2) The portion of the cumulative
gain or loss on the derivative necessary to offset the cumulative
change in expected future cash flows on the hedged transaction from
inception of the hedge less the derivative's gains or losses previously
reclassified from accumulated other comprehensive income into earnings.
Accordingly, the amount reported
in this item should reflect the sum of the adjusted balance (as described
above) of the cumulative gain or loss for each derivative designated and
qualifying as a cash flow hedge. These amounts will be reclassified into
earnings in the same period or periods during which the hedged transaction
affects earnings (for example, when a hedged variable-rate interest receipt
on a loan is accrued or when a forecasted sale occurs.)
RI-A, Item 11.b, Change in accumulated net gains (losses) on cash flow
hedges. Report the change during the calendar year to date in Schedule
RC, item 26.c, "Accumulated net gains (losses) on cash flow hedges." If
the amount represents a reduction in the bank's equity capital, enclose
it in parentheses.
of Nonmortgage Servicing Assets
In August 1998, the banking agencies
amended their capital standards to revise the regulatory capital treatment
of servicing assets. Under this amendment, nonmortgage servicing assets
began to be recognized (rather than deducted) for regulatory capital purposes.
However, nonmortgage servicing assets are subject to the 25 percent of
Tier 1 capital sublimit that previously applied only to purchased credit
card relationships. The overall limitation on the amount of servicing
assets (when combined with purchased credit card relationships) that can
be recognized for regulatory capital purposes increased to 100 percent
of Tier 1 capital.
To date, banks have reported their
nonmortgage servicing assets as part of "All other identifiable intangible
assets" in item 6.b.(2) of Schedule RC-M -- Memoranda. This is because,
prior to the August 1998 amendment, these identifiable intangibles generally
were deducted in full from Tier 1 capital and from assets in regulatory
capital calculations. On the other hand, banks have reported their purchased
credit card relationships in item 6.b.(1) of Schedule RC-M. As a result
of the revised regulatory capital treatment of nonmortgage servicing assets,
the FFIEC is changing the item in which these assets are reported. The
scope of item 6.b.(1) of Schedule RC-M will be expanded so that it includes
both "Purchased credit card relationships and nonmortgage servicing assets."
Distinguishing nonmortgage servicing assets from "All other identifiable
intangible assets" in this manner will enable the agencies to verify the
regulatory capital amounts that banks report in the Call Report and to
calculate their regulatory capital ratios.
The revised instructions for Schedule
RC-M, items 6.b.(1) and 6.b.(2), are presented below. Revisions to the
existing instructions (on page RC-M-5 of the Call Report instruction book)
are shown in italics.
Item 6.b.(1), Purchased credit card
relationships and nonmortgage servicing assets. Report the carrying
value of purchased credit card relationships plus the carrying value of
nonmortgage servicing assets.
Purchased credit card relationships
represent the right to conduct ongoing credit card business dealings with
the cardholders. In general, purchased credit card relationships are an
amount paid in excess of the value of the purchased credit card receivables.
Such relationships arise when the reporting bank purchases existing
credit card receivables and also has the right to provide credit card
services to those customers. Purchased credit card relationships may
also be acquired when the reporting bank purchases an entire depository
Purchased credit card relationships
shall be carried at amortized cost, not in excess of the discounted amount
of estimated future net cash flows. Management of the institution shall
review the carrying value at least quarterly, adequately document this
review, and adjust the carrying value as necessary. If unanticipated acceleration
or deceleration of cardholder payments, account attrition, changes in
fees or finance charges, or other events occur that reduce the amount
of expected future net cash flows, a writedown of the book value of the
purchased credit card relationships shall be made to the extent that the
discounted amount of estimated future net cash flows is less than the
asset's carrying amount.
The carrying value of nonmortgage
servicing assets is the unamortized cost of acquiring contracts to service
financial assets, other than loans secured by real estate (as defined
for Schedule RC-C, part I, item 1), that have been securitized or are
owned by another party, net of any related valuation allowances. For further
information, see the Glossary entry for "servicing assets and liabilities."
Item 6.b.(2), All other identifiable
intangibles. Report the unamortized amount (book value) of all other specifically
identifiable intangible assets such as core deposit intangibles and favorable
Computer Software Costs
In March 1998, the American Institute
of Certified Public Accountants (AICPA) issued Statement of Position (SOP)
98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. SOP 98-1 provides guidance on whether costs of internal-use
software should be capitalized (and then amortized) or expensed as incurred.
This SOP is effective for fiscal years beginning after December 15, 1998.
For Call Report purposes, banks must adopt this SOP upon its effective
date based on their fiscal year with early application permitted in accordance
with the transition guidance in the SOP. The Call Report instructions
are being revised to conform with SOP 98-1, including replacing the current
Glossary entry for "Internally Developed Computer Software" (located on
page A-50 of the Call Report instruction book) with the following new
Glossary entry for "Internal-Use Computer Software."
Internal-Use Computer Software:
Guidance on the accounting and reporting for the costs of internal-use
computer software is set forth in AICPA Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use. A summary of this accounting guidance follows. For further information,
see AICPA Statement of Position 98-1.
Internal-use computer software is
software that meets both of the following characteristics:
(1) The software is acquired, internally developed, or modified solely
to meet the bank's internal needs; and
(2) During the software's development
or modification, no substantive plan exists or is being developed
to market the software externally.
Statement of Position 98-1 identifies
three stages of development for internal-use software: the preliminary
project stage, the application development stage, and the post-implementation/
operation stage. The processes that occur during the preliminary project
stage of software development are the conceptual formulation of alternatives,
the evaluation of the alternatives, the determination of the existence
of needed technology, and the final selection of alternatives. The application
development stage involves the design of the chosen path (including software
configuration and software interfaces), coding, installation of software
to hardware, and testing (including the parallel processing phase). Generally,
training and application maintenance occur during the post-implementation/operation
stage. Upgrades of and enhancements to existing internal-use software,
i.e., modifications to software that result in additional functionality,
also go through the three aforementioned stages of development.
Computer software costs that are
incurred in the preliminary project stage should be expensed as incurred.
Internal and external costs incurred
to develop internal-use software during the application development stage
should be capitalized. Capitalization of these costs should begin once
(a) the preliminary project stage is completed and (b) management, with
the relevant authority, implicitly or explicitly authorizes and commits
to funding a computer software project and it is probable that the project
will be completed and the software will be used to perform the function
intended. Capitalization should cease no later than when a computer software
project is substantially complete and ready for its intended use, i.e.,
after all substantial testing is completed. Capitalized internal-use computer
software costs generally should be amortized on a straight-line basis
over the estimated useful life of the software.
Only the following application development
stage costs should be capitalized:
(1) External direct costs of materials and services consumed in developing
or obtaining internal-use software;
(2) Payroll and payroll-related
costs for employees who are directly associated with and who devote
time to the internal-use computer software project (to the extent of
the time spent directly on the project); and
(3) Interest costs incurred
when developing internal-use software.
Costs to develop or obtain software
that allows for access or conversion of old data by new systems also should
be capitalized. Otherwise, data conversion costs should be expensed as
incurred. General and administrative costs and overhead costs should not
be capitalized as internal-use software costs.
During the post-implementation/operation
stage, internal and external training costs and maintenance costs should
be expensed as incurred.
Impairment of capitalized internal-use
computer software costs should be recognized and measured in accordance
with FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of.
The costs of internally developed
computer software to be sold, leased, or otherwise marketed as a separate
product or process should be reported in accordance with FASB Statement
No. 86, Accounting for the Costs of Computer Software to Be Sold, Lease,
or Otherwise Marketed. If, after the development of internal-use software
is completed, a bank decides to market the software, proceeds received
from the license of the software, net of direct incremental marketing
costs, should be applied against the carrying amount of the software.
Costs of Start-Up Activities
In April 1998, the AICPA issued
SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5
requires costs of start-up activities, including organization costs, to
be expensed as incurred. This SOP is effective for fiscal years beginning
after December 15, 1998. Banks must adopt this SOP for Call Report purposes
upon its effective date based on their fiscal year. Early application
is permitted in accordance with the transition guidance in the SOP. The
Call Report instructions are being revised to conform with SOP 98-5, including
replacing the current Glossary entry for "Organization Costs" (located
on pages A-64 and A-65 of the Call Report instruction book) with the following
new Glossary entry for "Start-up Activities." Discussions of pre-opening
income and expenses elsewhere in the instructions for the Report of Income
would also be revised to conform with this new Glossary entry.
Start-Up Activities: Guidance on
the accounting and reporting for the costs of start-up activities, including
organization costs, is set forth in AICPA Statement of Position 98-5,
Reporting on the Costs of Start-Up Activities. A summary of this
accounting guidance follows. For further information, see AICPA Statement
of Position 98-5.
Start-up activities are defined
broadly as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer, or commencing some new
operation. Start-up activities include activities related to organizing
a new entity, such as a new bank, the costs of which are commonly referred
to as organization costs.4
Costs of start-up activities, including
organization costs, should be expensed as incurred. Costs of acquiring
or constructing premises and fixed assets and getting them ready for their
intended uses are not start-up costs, but the costs of using such assets
that are allocated to start-up activities (e.g., depreciation of computers)
are considered start-up costs.
For a new bank, pre-opening expenses
such as salaries and employee benefits, rent, depreciation, supplies,
directors' fees, training, travel, postage, and telephone are considered
start-up costs. Pre-opening income earned and expenses incurred from the
bank's inception through the date the bank commences operations should
be reported in the Report of Income using one of the two following methods,
consistent with the manner in which the bank reports pre-opening income
and expenses for other financial reporting purposes:
(1) Pre-opening income and expenses for the entire period from the bank's
inception through the date the bank commences operations should be reported
in the appropriate items of Schedule RI, Income Statement, each quarter
during the calendar year in which operations commence; or
(2) Pre-opening income and
expenses for the period from the bank's inception until the beginning
of the calendar year in which the bank commences operations should
be included, along with the bank's opening (original) equity capital,
in Schedule RI-A, item 5, "Sale, conversion, acquisition, or retirement
of capital stock, net." The net amount of these pre-opening income
and expenses should be identified and described in Schedule RI-E,
item 9. Pre-opening income earned and expenses incurred during the
calendar year in which the bank commences operations should be reported
in the appropriate items of Schedule RI, Income Statement, each quarter
during the calendar year in which operations commence.
Reporting of Investment Securities
In April 1998, the FFIEC and its
member agencies rescinded their 1992 Supervisory Policy Statement on
Securities Activities and approved in its place a Supervisory Policy
Statement on Investment Securities and End-User Derivatives Activities.
The new policy statement does not retain the section of the 1992 policy
statement addressing the reporting of securities activities, including
a description of practices considered unsuitable when conducted in an
institution's investment portfolio. When the FFIEC and the agencies published
the Supervisory Policy Statement on Investment Securities and End-User
Derivatives Activities, they stated an intent to separately issue
supervisory guidance on the reporting of investment securities. The FFIEC
is adding the following new Glossary entry to the Call Report instructions
to provide readily accessible guidance on this reporting matter to banks
as they prepare their Call Reports.
Securities Activities: Institutions
should categorize each security as trading, available-for-sale, or held-to-maturity
consistent with FASB Statement No. 115, Accounting for Certain Investments
in Debt and Equity Securities, as amended. Management should periodically
reassess its security categorization decisions to ensure that they remain
Securities that are intended to
be held principally for the purpose of selling them in the near term should
be classified as trading assets. Trading activity includes active and
frequent buying and selling of securities for the purpose of generating
profits on short-term fluctuations in price. Securities held for trading
purposes must be reported at fair value, with unrealized gains and losses
recognized in current earnings and regulatory capital.
Held-to-maturity securities are
debt securities that an institution has the positive intent and ability
to hold to maturity. Held-to-maturity securities are generally reported
at amortized cost. Securities not categorized as trading or held-to-maturity
must be reported as available-for-sale. An institution must report its
available-for-sale securities at fair value on the balance sheet, but
unrealized gains and losses are excluded from earnings and reported in
a separate component of equity capital.
If a decline in fair value of a
held-to-maturity or available-for-sale security is judged to be other
than temporary, the cost basis of the individual security shall be written
down to fair value as a new cost basis and the amount of the write-down
shall be included in earnings. For example, if it is probable that an
institution will be unable to collect all amounts due according to the
contractual terms of a debt security not impaired at acquisition, an other-than-temporary
impairment has occurred.
The proper categorization of securities
is important to ensure that trading gains and losses are promptly recognized
in earnings and regulatory capital. This will not occur when securities
intended to be held for trading purposes are categorized as held-to-maturity
or available-for-sale. The following practices are considered trading
(1) Gains Trading -- Gains trading is characterized by the purchase
of a security and the subsequent sale of the same security at a profit
after a short holding period, while securities acquired for this purpose
that cannot be sold at a profit are typically retained in the available-for-sale
or held-to-maturity portfolio. Gains trading may be intended to defer
recognition of losses, as unrealized losses on available-for-sale and
held-to-maturity debt securities do not directly affect regulatory capital
and generally are not reported in income until the security is sold.
(2) When-Issued Securities Trading
-- When-issued securities trading is the buying and selling of securities
in the period between the announcement of an offering and the issuance
and payment date of the securities. A purchaser of a "when-issued" security
acquires the risks and rewards of owning a security and may sell the
when-issued security at a profit before having to take delivery and
pay for it. Because such transactions are intended to generate profits
from short-term price movements, they should be categorized as trading.
(3) Pair-offs -- Pair-offs are
security purchase transactions that are closed-out or sold at, or prior
to, settlement date. In a pair-off, an institution commits to purchase
a security. Then, prior to the predetermined settlement date, the institution
will pair-off the purchase with a sale of the same security. Pair-offs
are settled net when one party to the transaction remits the difference
between the purchase and sale price to the counterparty. Pair-offs may
also involve the same sequence of events using swaps, options on swaps,
forward commitments, options on forward commitments, or other off-balance
sheet derivative contracts.
(4) Extended Settlements -- In
the U.S., regular-way settlement for federal government and federal
agency securities (except mortgage-backed securities and derivative
contracts) is one business day after the trade date. Regular-way settlement
for corporate and municipal securities is three business days after
the trade date. For mortgage-backed securities, it can be up to 60 days
or more after the trade date. The use of extended settlements may be
offered by securities dealers in order to facilitate speculation on
the part of the purchaser, often in connection with pair-off transactions.
Securities acquired through the use of a settlement period in excess
of the regular-way settlement periods in order to facilitate speculation
should be reported as trading assets.
(5) Repositioning Repurchase Agreements
-- A repositioning repurchase agreement is a funding technique offered
by a dealer in an attempt to enable an institution to avoid recognition
of a loss. Specifically, an institution that enters into a "when-issued"
trade or a "pair-off" (which may include an extended settlement) that
cannot be closed out at a profit on the payment or settlement date will
be provided dealer financing in an effort to fund its speculative position
until the security can be sold at a gain. The institution purchasing
the security typically pays the dealer a small margin that approximates
the actual loss in the security. The dealer then agrees to fund the
purchase of the security, typically by buying it back from the purchaser
under a resale agreement. Any securities acquired through a dealer financing
technique such as a repositioning repurchase agreement that is used
to fund the speculative purchase of securities should be reported as
(6) Short Sales -- A short
sale is the sale of a security that is not owned. The purpose of a
short sale generally is to speculate on a fall in the price of the
security. (For further information, see the Glossary entry for "short
One other practice, referred to
as "adjusted trading," is not acceptable under any circumstances. Adjusted
trading involves the sale of a security to a broker or dealer at a price
above the prevailing market value and the contemporaneous purchase and
booking of a different security, frequently a lower-rated or lower quality
issue or one with a longer maturity, at a price above its market value.
Thus, the dealer is reimbursed for losses on the purchase from the institution
and ensured a profit. Such transactions inappropriately defer the recognition
of losses on the security sold and establish an excessive cost basis for
the newly acquired security. Consequently, such transactions are prohibited
and may be in violation of 18 U.S.C. Sections 1001--False Statements or
Entries and 1005--False Entries.
Re-Booking Charged-Off Loans
"Re-booking" or "writing up" a loan
or lease on which a full or partial direct write-down has previously been
taken is not an acceptable practice under generally accepted accounting
principles (GAAP) and, therefore, is not acceptable for Call Report purposes.
To clarify this issue, the FFIEC is revising the Glossary entry for "Allowance
for Loan and Lease Losses" through the addition of the following new fifth
paragraph. The remainder of this Glossary entry (located on pages A-3
and A-4 of the Call Report instruction book) will not be changed.
Glossary entry for "Allowance for
Loan and Lease Losses," new fifth paragraph -- When a bank makes a full
or partial direct write-down of a loan or lease that is uncollectible,
the bank establishes a new cost basis for the asset. Consequently, once
a new cost basis has been established for a loan or lease through a direct
write-down, this cost basis may not be "written up" at a later date. Reversing
the previous write-down and "re-booking" the charged-off asset after the
bank concludes that the prospects for recovering the charge-off have improved,
regardless of whether the bank assigns a new account number to the asset
or the borrower signs a new note, is not an acceptable accounting practice.
Under GAAP, goodwill and similar
intangible assets ordinarily cannot be disposed of apart from an enterprise
as a whole. GAAP further states that an intangible asset such as goodwill
should not be written off in the period of acquisition. To provide additional
guidance on the proper accounting for goodwill, the FFIEC is revising
the instructions for Schedule RC-M, item 6.c, "Goodwill," (found on page
RC-M-6 of the Call Report instruction book) as well as a portion of the
Glossary entry for "Business Combinations" that discusses "Purchase acquisitions"
(found on page A-12 of the instruction book). These revisions are presented
below and highlighted in italics.
Schedule RC-M, item 6.c, Goodwill.
Report the amount (book value) of unamortized goodwill. Goodwill represents
the excess of the cost of a company over the sum of the fair values of
the tangible and identifiable intangible assets acquired less the fair
value of liabilities assumed in a business combination accounted for as
Goodwill and similar intangible
assets ordinarily cannot be disposed of apart from an institution as a
whole. Accordingly, a bank may not remove goodwill from its balance sheet
by "selling" or "dividending" this asset to its parent holding company
or another afFILiate. An exception
to the rule precluding the disposal of goodwill is made when a large segment
or separable group of assets of an acquired company or an entire acquired
company is sold or otherwise liquidated. In that case, some or all of
the unamortized goodwill recognized in the acquisition should be included
in the cost of the assets sold.
The amount of goodwill reported
in this item should not be reduced by any negative goodwill. Any negative
goodwill arising from a business combination accounted for as a purchase
must be reported in Schedule RC-G, item 4, "Other" liabilities, and in
Schedule RC, item 20, "Other liabilities."
Glossary entry for "Business Combinations,"
revised second paragraph of the section on "Purchase acquisitions" --
Any excess of the cost of the acquisition over the net fair value of the
identifiable assets and liabilities acquired or assumed is purchased goodwill.
Identifiable and unidentifiable intangible assets (i.e., goodwill) are
reportable in Schedule RC, item 10, "Intangible assets," and in Schedule
RC-M, item 6. An intangible asset such as goodwill should not be written
off in the year of its acquisition. Instead, consistent with Securities
and Exchange Commission guidance, all intangible assets should be amortized
over their estimated useful lives, generally not to exceed 25 years. The
amortization expense of purchased goodwill and any other intangible assets
shall be reported in Schedule RI, item 7.c, "Other noninterest expense,"
and in Schedule RI-E, item 2.a.
Reporting of Net Risk-Weighted Assets by Banks Subject to the Market Risk
Capital Guidelines (FFIEC 031 and 032 only)
Banks that are subject to the market
risk capital guidelines must report the amount of their "Market risk equivalent
assets" in item 3.d.(2) of Schedule RC-R -- Regulatory Capital. These
banks report their "Net risk-weighted assets" in item 3.d.(1) of this
schedule, but the current instructions for this item specifically tell
banks to exclude market risk equivalent assets. The sum of the amounts
reported in items 3.d.(1) and 3.d.(2) is the denominator of the bank's
total risk-based capital ratio.
In contrast, the instructions to
the Federal Reserve Board's FR Y-9C bank holding company report direct
these organizations to include market risk equivalent assets in "Net risk-weighted
assets." In order to achieve greater consistency between the two reports,
the FFIEC is revising the Call Report instructions for Schedule RC-R,
item 3.d.(1), "Net risk-weighted assets," to include market risk equivalent
assets. In addition, the caption for Schedule RC-R, item 3.d.(2), will
be modified to read "Market risk equivalent assets included in net risk-weighted
The revised first paragraph of the
instructions for Schedule RC-R, item 3.d.(1), is presented below. The
second and third paragraphs of the instructions for this item will not
be changed. Revisions to the existing instructions (located on page RC-R-13
of the Call Report instruction book) are shown in italics.
Schedule RC-R, item 3.d.(1), Net
risk-weighted assets. Report the amount of the bank's risk-weighted assets
net of all deductions. The amount reported in this item is the
denominator of the bank's total risk-based capital ratio and, thus,
should include any amount reported in Schedule RC-R, item 3.d.(2), "Market
risk equivalent assets."
Determining the Tier 2 Capital Limit on the Allowance for Loan and Lease
Losses for a Bank with Low Level Recourse Transactions
The instructions for reporting low
level recourse transactions in Schedule RC-R -- Regulatory Capital give
banks the option of using either the "gross-up method" or the "direct
reduction method." However, the instructions do not explain how banks
choosing the "direct reduction method" should calculate the amount of
the allowance for loan and losses that can be included in Tier 2 capital.
To clarify this matter, the FFIEC is adding guidance on the allowable
allowance calculation to pages RC-R-5 and RC-R-6 of the instructions for
Revised instructions on the "Treatment
of Low Level Recourse Transactions" in the General Instructions to Schedule
RC-R -- The first paragraph, the two bullet point paragraphs immediately
following the first paragraph, and the second paragraph will not be changed.
The remainder of this section of the General Instructions to Schedule
RC-R would be revised as shown in italics:
If the bank chooses to use the "direct reduction method," the "maximum
contractual dollar amount of recourse exposure," as defined above,
should be reported in Schedule RC-R, item 3.e. In addition, the bank
should report as a credit equivalent amount in Schedule RC-R, item
7.b, column B, an "institution-specific add-on factor" for its low
level recourse exposure. The amount of this factor also should be
included in the "net risk-weighted assets" that the bank reports in
Schedule RC-R, item 3.d.(1). The "institution-specific add-on factor,"
which is independent of the risk weight category of the assets to
which the recourse applies, is calculated as follows:
F = institution-specific add-on factor;
C = total risk-based capital (as reported in Schedule RC-R, item
A = net risk-weighted assets excluding low level recourse exposures;
R = maximum contractual dollar amount of recourse exposure in
low level recourse transactions (as reported in Schedule RC-R,
For purposes of calculating
the amount of the bank's total risk-based capital to be used in the
preceding formula (C in the formula) and to be reported in Schedule
RC-R, item 3.b, the bank should determine the Tier 2 capital limit
on the allowance for loan and lease losses by multiplying its "maximum
contractual dollar amount of recourse exposure" (R in the preceding
formula, as defined in these instructions) by 12.5 and adding this
product to its gross risk-weighted assets excluding low level recourse
exposures. This adjusted gross risk-weighted-assets figure multiplied
by 1.25 percent is the bank's Tier 2 limit on the allowance for loan
and lease losses. Once this limit on the allowance has been calculated,
the limit is fixed at this amount. This limit should not be changed
after the bank calculates the actual amount of its net risk-weighted
assets excluding low level recourse exposures (A in the preceding
formula) or its institution-specific add-on factor for low level recourse
under the "direct reduction method" (F in the preceding formula).
This means that a bank will measure its Tier 2 capital and its total
risk-based capital prior to its application of the "direct reduction
method" and will not recalculate these two amounts once the add-on
factor is known.
If the bank chooses to use the "gross-up method," the "maximum contractual
dollar amount of recourse exposure" for a transaction, as defined
above, should be multiplied by a factor of 12.5, 25, or 62.5 according
to whether the assets sold would be assigned to the 100 percent, 50
percent, or 20 percent risk weight category, respectively. The resulting
dollar amount should be reported as an off-balance sheet credit equivalent
amount in column B of Schedule RC-R in the item (item 7.b, 6.b, or
5.b) appropriate to the risk weight category of the assets sold.
For example, a bank has sold $2
million in first lien residential mortgages subject to two percent recourse.
The bank has removed the $2 million in mortgages from its Call Report
balance sheet and, in accordance with GAAP, has also established a recourse
liability account with a balance of $10,000. The maximum amount for which
the bank is liable is $40,000. The mortgages qualify for a 50 percent
risk weight and the bank's recourse exposure is less than the $80,000
minimum risk-based capital requirement for these assets sold with recourse.
Thus, the low level recourse rule applies. The "maximum contractual dollar
amount of recourse exposure" for this transaction is $30,000, the $40,000
maximum contractual amount of the bank's recourse exposure as of the report
date, less the $10,000 balance of the recourse liability account for this
transaction. The bank has gross risk-weighted assets excluding low
level recourse exposures of $100 million, Tier 1 capital of $8 million,
an allowance for loan and lease losses of $1.1 million, and other qualifying
Tier 2 capital components of $1.4 million.
If the bank chooses to use the "direct reduction method," the bank
would report $30,000 -- its "maximum contractual dollar amount of
recourse exposure" -- in Schedule RC-R, item 3.e, and would use this
amount to calculate its institution-specific add-on factor using the
formula provided above. To determine the Tier 2 capital limit for
the bank's allowance for loan and lease losses, the bank would first
add $375,000 ($30,000 - its "maximum contractual recourse exposure"
- multiplied by 12.5) to its $100 million of gross risk-weighted assets
excluding low level recourse exposures. Its Tier 2 capital limit for
the allowance would be $1,254,688 ($100,375,000 - its adjusted gross
risk-weighted assets - multiplied by 1.25 percent limit -- the limit
for the allowance). Since the bank's $1.1 million allowance is less
than its Tier 2 capital limit for the allowance, the bank would report
an "excess allowance for loan and lease losses" of $0 in Schedule
RC-R, item 3.c. The bank's total risk-based capital is $10.5 million
and its net risk-weighted assets excluding low level recourse exposures
are $100 million. Based on the facts in the example, the bank
calculates that its institution-specific add-on factor is $286,533.
The bank would report the amount of this add-on factor as a credit
equivalent amount in Schedule RC-R, item 7.b, column B, and also include
this amount in the "net risk-weighted assets" that it reports in Schedule
RC-R, item 3.d.(1).
If the bank chooses to use the "gross-up method," the bank would
report $750,000 as a credit equivalent amount in Schedule RC-R, item
6.b, column B ($30,000 -- its "maximum contractual dollar amount of
recourse exposure" -- multiplied by 25 -- the factor for assets that
qualify for a 50 percent risk weight). Because the $2 million in mortgages
sold have been removed from the balance sheet, the difference between
the $750,000 credit equivalent amount and the $2 million is not reported
in Schedule RC-R. In addition, because the $750,000 credit equivalent
amount is assigned to the 50 percent risk category, the bank would
include $375,000 ($750,000 multiplied by 50 percent) in its gross
risk-weighted assets for purposes of determining the Tier 2 capital
limit for the allowance for loan and lease losses and in the "net
risk-weighted assets" that it reports in Schedule RC-R, item 3.d.(1).