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FINANCIAL STATEMENTS

[12 CFR 18]

Sec. 18.1 Scope and application. 18.2 Definition of terms. 18.3 Accrual accounting. 18.4 Consolidated statements. 18.5 Reporting of securities transactions. 18.6 Reconciliation of capital accounts and

valuation reserves. 18.7 Rules of general application. Appendix A-Balance Sheet. Appendix B-Statement of Earnings. Appendix C--Reconcilement of Capital Ac

counts. Appendix D-Reconcilement of Valuation

and Contingency Reserves.

AUTHORITY: The provisions of this Part 18 issued under R.S. 324 et. seq., as amended, 12 U.S.C. I, et seq., sections 12(g) and 13(a) (2), Securities Exchange Act of 1934, as amended.

HISTORY: Part 18 was first effective on May 1, 1967 and appeared in 32 Fed. Reg. no. 90, May 10, 1967.

(a) Valuation Reserve. A "valuation reserve” is an account established through an appropriate charge representing management's judgment as to possible loss or value depreciation in a specific class of assets, such as loans or investment securities. Loan loss reserves established pursuant to the Treasury tax formula should be separately disclosed and may be considered valuation reserves; where reported as a liability, these reserves should not be included in the capital accounts.

(b) Reserve for Contingencies. A “reserve for contingencies” is an account which represents capital reserves set aside for possible or unforeseen decreases or shrinkages in book values of assets or for other unforeseen or indeterminate liabilities, not ntherwise reflected on the bank's books. Reserves for possible security losses, reserves for possible loan losses, and other contingency reserves that are established as precautionary measures only shall be included in the capital accounts, as they represent segregations of undivided profits.

(c) Significant Subsidiary. The term "sig. nificant subsidiary" means a subsidiary meeting either of the following conditions:

(1) The investments and advances in the subsidiary by its parent plus the parent's proportion of investment and advances in such subsidiary by the parent's other subsidiaries, if any, exceed 5 percent of the equity capital accounts of the parent (bank); or

(2) The parent's proportion of the gross operating revenues of the subsidiary exceeds 5 percent of the gross operating revenue of the parent (bank).

(d) Material. The term “material” when used to modify any item of assets or liabilities means an item exceeding 3 percent of total assets; when used to modify any income or expense item, it means an item exceeding 5 percent of gross operating revenue.

(e) Significant. The term "significant" refers to information which would be considered necessary to evaluate the condition and operations of a bank.

§ 18.1 Scope and application.

(a) This part (unless otherwise noted) together with any subsequent interpretative statements specifies the form and minimum content of all financial statements required by regulation of this Office to be distributed to stockholders for fiscal years ending after June 30, 1967.

(b) The term “financial statements" as used in this part should be deemed to include all supporting schedules, instructions, and related forms.

(c) This part incorporates by reference all instructions and interpretations of this Office relating to financial reporting to stockholders which are presently outstanding and as may be amended hereafter.

(d) Certain instructions which assume a basis of full accrual accounting apply only to those banks within the scope of § 18.3(a), (b), and (c).

§ 18.2 Definition of terms.

§ 18.3 Accrual accounting.

Unless the context otherwise requires, the following terms shall have the meaning indicated in this section:

(a) For all fiscal years beginning after December 31, 1967, any bank subject to the jurisdiction of this Office, with total resources of $ 100 million or more shall prepare all its financial statements subject to this part on the basis of accrual accounting. Where the results would be only insignificantly different for particular accounts, a cash basis of reporting may be used.

(b) For all fiscal years beginning after December 31, 1968, any bank subject to the jurisdiction of this Office, with total resources of $50 million or more shall prepare all its financial statements subject to this regulation on the basis of accrual accounting. Where the results would be only insignificantly different for particular accounts, a cash basis of reporting may be used.

(c) For all fiscal years beginning after December 31, 1969, any bank subject to the jurisdiction of this Office, with total resources of $25 million or more shall prepare all its financial statements subject to this regulation on the basis of accrual accounting. Where the results would be only insignificantly different for particular accounts, a cash basis of reporting may be used.

(d) For all fiscal years beginning after December 31, 1967, any bank subject to the jurisdiction of this Office and not subject to the reporting requirements of paragraphs (a), (b), or (c) of this section, shall prepare all of its financial statements subject to this regulation so that its installment loan function and related tax provisions are on the basis of accrual accounting, or alternatively, such bank, as a footnote to the balance sheet, must disclose the amount of unearned income on installment loans carried in the undivided profits or other capital accounts.

(e) Notwithstanding the foregoing paragraphs (a), (b), and (c) of this section, income items of tsust department functions may be reported on a cash basis.

immediately following the “bank premises and equipment" account in the Balance Sheet, Appendix A.

(d) Nonsignificant subsidiaries may also be consolidated.

(e) Minority interests in the net assets of consolidated subsidiaries shall be shown in each consolidated balance sheet as a liability. The aggregate amount of profit and loss accruing to minority interests may be stated separately in the consolidated profit or loss statement. Alternatively, net income (less minority interest) may be reported in "other income".

(1) Income from foreign subsidiaries and foreign branches shall be reported only when remittable to the parent bank: such income shall be reported

under Item 1(f), Appendix B. (f) In general, intercompany items and transactions shall be eliminated. If significant items are not eliminated, a statement of the reasons and methods of treatment shall be made.

$ 18.5 Reporting of securities transactions.

(a) Amortization of securities. When an investment security is purchased at a price exceeding par or face value, the bank shall provide for the amortization of the premiums paid by a charge to operating income so that such premium shall be entirely extinguished at or before maturity of the security.

(b) Accretion of bond discount. The accretion of bond discount is at the option of the bank. When discount is accreted and amounts to 5 percent or more of the annual bond income, appropriate notation should be made in statements of net operating income indicating the amount of net operating income after taxes resulting from the accretion of discount. If accretion is followed, discount on bonds acquired should be accreted from date of purchase to maturity, and a provision for applicable deferred income taxes should be made.

(c) Trading account securities. Banks that are dealers in securities should report their trading account securities at the lower of cost or market value. If either the reporting value of securities or income therefrom meer the test of materiality, the trading account and trading account income should be reported separately. The income account should include coupon interest, profit and losses,

§ 18.4 Consolidated statements.

(a) All majority-owned significant subsidiaries shall be consolidated with the parent.

(b) All majority-owned bank premises subsidiaries-- whether or not significant subsidiaries--shall be consolidated with the parent.

(c) Any lien on bank premises owned by the bank or its majority-owned bank premises subsidiary, which has not been assumed by the bank or its subsidiary, should be reported in a parenthetical item, “(Bank premises owned are subject to $--------- -------liens not assumed by bank or its subsidiaries)",

revaluation adjustments and any other incidental revenue or expenses related to the purchase and sale of such securities, but salaries, commissions and other expenses should be excluded. If materiality is not met, unless management wishes to report separately, trading account securities should be included with portfolio securities in the respective classifications. In the earings statement coupon interest should then be reported with interest on securities and other income with other operating income.

(d) Securities profits and losses. Securities profits and losses should be reported after applicable income taxes as a nonoperating addition in the base of a net profit and nonoperating deductions in the event of a net loss.

§ 18.6 Reconciliation of capital accounts

and valuation reserves.

(a) Banks shall report a comparative reconciliation of capital accounts for the latest fiscal year and the preceeding fiscal year in the format illustrated in Appendix C.

(b) Banks shall report a comparative reconciliation of valuation reserves and contingency reserves for the latest fiscal year and the preceding fiscal year in the format illustrated in Appendix D.

further material information as is necessary to make the required statements not misleading. For example, information on nonsubsidiary organizations or trusteeships operated for the benefit of bank stockholders should be disclosed. The reporting bank may add any additional information it deems desirable.

(c) Changes in accounting principles and practices and retroactive adjustments initiated by the bank. (1) Any changes in accounting principles or practices or in the method of applying any accounting principles or practices, made during any period for which financial statements are filed which affects comparability of such financial statements with those of prior or future annual periods, and the effect thereof upon the net operating earnings for each period for which financial statements are filed, should be disclosed in a note to the appropriate financial statement where significant.

(2) Any significant retroactive adjustment made during any period for which financial statements are filed, and the effect thereof upon net operating earnings and nonoperating additions and deductions of prior periods shall be disclosed in a note to the appropriate financial statement.

(d) Balance sheet and statement of earnings. (1) Banks shall report a balance sheet and a statement of earnings. The format illustrated in Appendices A and B represents the minimum disclosure consistent with this part. However, banks with resources of less than $5 million, may, in lieu of Appendix B, report their statement of earnings in the format of the Report of Income and Dividends prepared for the Office of the Comptroller of the Currency. The earnings statement of banks choosing this option should be identical to Items I through 8 of said Report.

(2) If a cash basis of accounting has been used, it should be so stated.

(3) All fixed assets acquired subsequent to June 30, 1967, shall be stated at cost less accumulated depreciation or amortization.

§ 18.7 Rules of general application.

(a) Earnings. All banks subject to the jurisdiction of the Office of the Comptroller of the Currency shall be required to report: (1) Net operating earnings, total and per share, after deductions for income taxes applicable to operating earnings; (2) net amount, after nonoperating additions and deductions and applicable income taxes, which was transferred to capital accounts.

(b) Additional information. The information required with respect to any financial statement shall be furnished as a minimum requirement to which shall be added such

APPENDIX A-BALANCE SHEET

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Resources:

1. Cash and due from banks -. 2. U.S. Government obligations 3. Obligations of States and political subdivisions 4. Obligations of Federal agencies 5. Other securities 6. Investments in unconsolidated subsidiaries 7. Trading account securities 8. Securities purchased under agreements to resell 9. Federal funds sold ... 10. Loans 11. Direct lease financing 12. Bank premises and equipment 13. Customer's acceptance liability 14. Other assets 15.

Total Liabilities: 16. Deposits:

(a) Demand deposits

(b) Time deposits - 17. Securities sold under agreements to repurchase 18. Federal funds purchased 19. Funds borrowed 20. Mortgages payable 21. Acceptances outstanding 22. Other liabilities 23.

Total liabilities -.. 24. Minority interests in consolidated subsidiaries Capital accounts: 25. Capital notes and debentures

Rate

Maturity 26. Equity capital:

(a)

Capital stock:
Preferred stock-total par value
Number shares outstanding -
Commonstock--total par value -
Number shares authorized ..

Number of shares outstanding
(b) Surplus -
(c) Undivided profits - -

(d) Reserve for contingencies and other capital reserves 27.

Total capital accounts 28.

Total liabilities and capital

NOTES

(1) A bank, for purposes of the preparation of its reports to shareholders, may use options permitted or specifically authorized. It may also combine the various lines as indicated below, if the line figure is less than 3 percent of total assets.

Line 4 into Line 5. Line 6 into Line 14. Line 7 into Lines 2, 3, 4, 5 as appropriate. Line 8 into Line 10. Line 9 into Line 10. Line 11 into Line 14. Line 13 into Line 14. Line 17 into Line 19. Line 18 into Line 19. Line 20 into Line 19. Line 21 into Line 22. Line 24 into Line 22.

(2) The reserve for loan losses may be shown either as a deduction from gross loans or as a noncapital liability item.

APPENDIX B-STATEMENT OF EARNINGS

19- 19. 1. Operating income:

(a) Interest and fee on loans --
(b) Interest and dividends on:

(1) U.S. Government obligations
(2) Obligations of States and political subdivisions

(3) Other securities -
(c) Trading account --
(d) Service charges on deposit accounts
(e) Trust department
(f) Other -

...

Total -
2. Operating expenses:

(a) Salaries and bonuses - -
(b) Pensions, profit sharing, and other employee benefits
(c) Interest on deposits ---
(d) Interest on borrowed money
(e) Net occupancy-bank premises
(f) Equipment rentals, depreciation, maintenance
(g) Other -

(h) Total
3. Operating earnings before income tax
4. Income taxes applicable to operating earnings
5. Minority interest in net operating earnings -
6. Net operating earnings per share (State share basis of computation)
7. Nonoperating additions, net after tax effect:

(a) Net security profits -
(b) Transfers from reserves -
(c) Loan recoveries (not credited to reserve for bad debts)
(d) Other -.
(e) Minority interest applicable thereto

(f) Total nonoperating additions -
8. Nonoperating deductions, net after tax effect:

(a) Net security losses
(b) Transfers to reserves
(c) Loan chargeoffs (not charged to reserve for bad debts)
(d) Other -
(e) Minority interest applicable thereto

(f) Total nonoperating deductions
9. Net nonoperating additions (deductions)

10. Transferred to undivided profits ... NOTE: Any operating income or expense item which is not material may be combined with 1(f) or 2(g), as appropriate.

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