(f) 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(h), appendix B, unless the bank consolidates each item of revenue and expense.

(g) 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.

[32 F.R. 7071, May 10, 1967, as amended at 34 F.R. 20043, Dec. 23, 1969; 36 F.R. 4478, Mar. 6, 1971]

§ 18.5

Reporting of a loan loss factor in operating expenses.

(a) Computation of loan loss factor? (1) Banks which provide for loan losses on a reserve basis shall include an estimated amount for credit losses in operating expense." Beginning for the year end 1969 and consistently thereafter, a bank may elect one of the following methods for reporting a minimum loan loss factor in expenses.

(i) A charge equivalent to a 5-year average ratio of losses computed on the basis of net charge-offs to total loans over the past 5 years. Ratio of loss shall be determined based on the aggregate of total net charge-offs (losses less recoveries) and total average loans for the 5 most recent years, including the current year. This ratio shall be applied to the average of outstanding loans during the current year to arrive at a minimum dollar amount to be charged to operating expense.

(ii) A charge equivalent to an average ratio of losses computed on the basis of a forward moving average beginning with the year 1969. Ratio for 1969 would be determined based on the net charge-offs (losses less recoveries) and average of loans for the year 1969. This ratio would be applied to the average loans outstanding for 1969 to arrive at a minimum dollar amount to be charged to operating expense. For each successive year after 1969, up to and including 1973, the current year's average loans would be added to those of preceding years from 1969 forward. Net charge-offs would be

1 Once a bank has selected one of the three methods, it must continue to use that method.

2 An appropriate footnote will be made on the Statement of Earnings indicating which method has been employed to arrive at the dollar amount of credit loss charged to operating expenses.

handled in the same way. By 1973, banks choosing this option would be on the same basis as those initially choosing subdivision (i) of this subparagraph.

(iii) Actual net charge-offs as experienced in the current year.

(2) Banks which are not on the reserve basis for loan losses shall include in operating expenses the dollar amount of actual net charge-offs for the current year.

(b) Additional charge to operating expense. Based on management's judgment, an amount in excess of that computed by any method outlined under subparagraph (1) of paragraph (a) of this section may be taken. The amount so taken will have no effect on computing the loss ratio factor in the current or preceding years. Such action must be adequately disclosed in a referenced footnote.

(c) Adjustments on statement of earnings for conformity to bank's books. (1) When the amount reported in operating expenses is in excess of that allowed as a transfer to Reserve for Possible Loan Losses or exceeds actual net loan losses recorded on the bank's books, the amount of difference, less related tax effect, should be credited to the Undivided Profits Account in the Reconcilement of Capital Accounts.

(2) When the amount reported in operating expenses is less than that transferred to Reserve for Possible Loan Losses or is less than the actual net loan losses recorded on the bank's books, the amount of difference, less related tax effect, should be charged against the Undivided Profits Account.

(d) Annual average loans. To determine the annual average loans outstanding, the loans as reported in the Statement of Condition called for by the Comptroller of the Currency during the year will be averaged. Any schedule of frequency greater than the foregoing is permissible.

[34 F.R. 20043, Dec. 23, 1969]

§ 18.6 Reporting of securities transac

tions.

(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 ac

creted 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 on the same basis as is used for tax purposes. If either the reporting value of securities or income therefrom meets 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, 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 included. 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 statement of earnings coupon interest should then be reported with interest on securities and other income with other operating income.

(d) Securities profits and losses. Securities gains and losses should be reported after applicable income tax has been deducted from income. Net security gains and losses should be reflected in income in the period such results are realized and booked.

[32 F.R. 7071, May 10, 1967, as amended at 34 F.R. 20044, Dec. 23, 1969. Redesignated, 34 F.R. 20044, Dec. 23, 1969]

§ 18.7 Reconcilation of capital accounts and valuation reserves.

(a) Banks shall report a comparative reconciliation of capital accounts for the latest fiscal year and the preceding 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. [32 F.R. 7071, May 10, 1967. Redesignated, [34 F.R. 20044, Dec. 23, 1969]

§ 18.8 Rules of general application.

(a) One-bank holding companies. The financial statements, other than the

statement of earnings, of a bank owned by a one-bank holding company should be presented separately. The statement of earnings may be presented on a consolidated basis with the other units of the holding company. Appropriate disclosure of this consolidation should be made.

(b) Earnings. All banks subject to the jurisdiction of the Office of the Comptroller of the Currency shall be required to report: (1) A loan loss factor in its operating expenses; (2) net income, total and per share, which was transferred to the capital accounts.

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

(d) 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.

(e) 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.

(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

Temporary cease-and-desist orders. Effective date of temporary order. Representation and suspension. Notice of hearing.

Answer.

Subpenas.

the Comptroler of the Currency to determine whether to order a national bank or a District bank to cease and desist from practices and violations described in section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818), as amended, and enumerated in § 19.2. The procedures for issuing such orders prescribed in section 8 of such Act will be followed and hearings required thereunder will be conducted in accordance with the rules and procedures set forth in this part.

§ 19.2 Grounds for cease-and-desist

orders.

If, in the opinion of the Comptroller of the Currency, any national bank or District bank is engaging in or has engaged, or the Comptroller of the Currency has reasonable cause to believe that the bank is about to engage, in an unsafe or unsound practice in conducting the business of such bank, or is violating or has violated, or the Comptroller has reasonable cause to believe that the bank is about to violate, a law, rule, or regulation, or any condition imposed in writing by the Comptroller in connection with the granting of an application or other request by the bank, or any written agreement entered into with the Comptroller, the Comptroller may issue and serve upon the bank a notice of charges in respect thereof.

§ 19.3 Notice of charges and hearing.

The notice referred to in § 19.2 shall contain a statement of the facts constituting the alleged violation or violations or the unsafe or unsound practice or