Section 3.7 Other Assets and Liabilities

OTHER ASSETS AND LIABILITIES Section 3.7

INTRODUCTION .............................................................2

OTHER ASSETS...............................................................2

Accrued Income.............................................................2

Tax Assets......................................................................2

Interest-Only Strips........................................................3

Equities without Readily Determinable Fair Values......3

Bank-Owned Life Insurance Policies.............................3

Miscellaneous Assets.........................................................4

Prepaid Expenses ...........................................................4

Repossessed Personal Property......................................4

Suspense Accounts.........................................................5

Cash Items Not In Process Of Collection.......................5

Other Accrued Interest Receivables...............................5

Indemnification Assets...................................................5

INTANGIBLE ASSETS....................................................5

Goodwill and Other Intangible Assets...........................5

Accounting for Goodwill ...............................................6

Servicing Assets.............................................................6

Accounting.....................................................................6

Valuation........................................................................7

Regulatory Capital .........................................................8

Servicing Risk................................................................8

Examination Procedures.................................................8

OTHER LIABILITIES ......................................................8

Other Borrowed Money .................................................9

Accrued Expenses..........................................................9

Servicing Liabilities .......................................................9

Deferred Tax Liabilities.................................................9

Allowance for Off-Balance Sheet Exposures.................9

All Other Miscellaneous Liabilities ...............................9

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OTHER ASSETS AND LIABILITIES Section 3.7

INTRODUCTION

Assets and liabilities that are not reported in major balance

sheet categories are generally reported in other asset or

other liability categories. Although these items are listed

in "other" categories, it does not mean the accounts are of

less significance than items detailed in major categories.

Intangible assets lack physical substance and are also

reported separately on the balance sheet. The following

pages include descriptions of common other assets,

intangible assets, and other liabilities. Additional guidance

and information is included in the Call Report Instructions

and the Examination Documentation (ED) Module - Other

Assets and Liabilities.

OTHER ASSETS

Accrued Income

All banks, regardless of size, shall prepare the Call Report

on an accrual basis. Accrued income represents the

amount of interest earned or accrued on earning assets and

applicable to current or prior periods that has not yet been

collected. Examples include accrued interest receivable on

loans and investments. When income is accrued but not

yet collected, a bank debits a receivable account and

credits an applicable income account. When funds are

collected, cash or an equivalent is debited, and the

receivable account is credited.

The degree to which accrual accounts and practices are

reviewed during an examination should be governed by

the examination scope. When scoping examination

procedures, examiners should consider the adequacy of a

bank’s internal control structure and the extent to which

accrual accounting procedures are analyzed during audits.

When reviewing accrual accounts and practices, examiners

should assess the general accuracy of the accrual

accounting system and determine if accruals relate to items

in default or to items where collection is doubtful. If

accrued income accounts are materially overstated,

examiners should consider the impact to overall

profitability levels, classify overstated amounts as Loss,

and recommend management amend Call Reports.

Tax Assets

Banks must estimate the amount of the current income tax

liability (or receivable) to be reported on its tax returns.

Estimating this liability (or receivable) may involve

consultation with the bank's tax advisers, a review of the

previous year's tax returns, the identification of significant

expected differences between items of income and expense

reflected on the Call Report and on the tax returns, and the

identification of expected tax credits.

Deferred tax assets and liabilities represent the amount by

which taxes receivable (or payable) are expected to

increase or decrease in the future as a result of temporary

differences and net operating losses or tax credit

carryforwards that exist at the reporting date. When

determining the current and deferred income tax assets and

liabilities to be reported in any period, a bank’s income tax

calculation will contain an inherent degree of uncertainty

surrounding the realizability of the tax positions included

in the calculation.

A net deferred tax asset is reported if a debit balance

results after offsetting deferred tax assets (net of valuation

allowance) and deferred tax liabilities measured at the

report date for a particular tax jurisdiction. If the result for

a particular tax jurisdiction is a net credit balance, then a

net deferred tax liability is reported. A bank may report a

net deferred tax debit, or asset, for one tax jurisdiction,

such as for federal income tax purposes, and also report at

the same time a net deferred tax credit, or liability, for

another tax jurisdiction, such as for state or local income

tax purposes.

Temporary differences arise when an institution

recognizes income or expense items on the books during

one period, but records them for tax purposes in another

period. For example a deductible temporary difference is

created when a provision for loan and lease losses is

expensed in one period for financial reporting purposes,

but deferred for tax purposes until the loans are charged

off in a subsequent period.

A bank sustains an operating loss when deductions exceed

income for federal income tax purposes. An operating loss

in a year following periods when the bank had taxable

income may be carried back to recover income taxes

previously paid. Banks may carry back operating losses

for two years. Generally, an operating loss that occurs

when loss carrybacks are not available (e.g., when losses

occur in a year following periods of losses) becomes an

operating loss carryforward. Banks may carry operating

losses forward 20 years.

Tax credit carryforwards are tax credits that cannot be

used for tax purposes in the current year, but which can be

carried forward to reduce taxes payable in a future period.

Deferred tax assets are recognized for operating loss and

tax credit carryforwards just as they are for deductable

temporary differences. However, a bank can only

recognize the benefit of a net operating loss, or a tax credit

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carryforward, to the extent the bank determines that a

valuation allowance is not necessary. A valuation

allowance must be recorded, if needed, to reduce the

amount of deferred tax assets to an amount that is more

likely than not to be realized. Examiners should obtain

management’s analysis and support for any deferred tax

asset and valuation allowance reported for financial

reporting purposes. Examiners should refer to the Call

Report Glossary for guidance on income taxes and may

contact the regional accounting specialist for further

guidance in cases involving significant amounts of net

deferred tax assets.

Part 325 of the FDIC Rules and Regulations, Capital

Maintenance (Part 325), establishes limitations on the

amount of deferred tax assets that can be included in Tier

1 capital. The maximum allowable amount is limited to

the lesser of: the amount of deferred tax assets dependent

upon future taxable income expected to be realized within

one year of the calendar quarter-end date, based on

projected future taxable income for that year; or ten

percent of the amount of Tier 1 capital that exists before

certain deductions. Refer to Part 325 for more details.

Interest-Only Strips

Accounting standards for interest-only strips receivable are

set forth in ASC 860, Transfers and Servicing (formerly

FAS 140, Accounting for Transfers and Servicing of

Financial Assets and Extinguishments of Liabilities, as

amended by FAS 156, Accounting for Servicing of

Financial Assets, FAS 166, Accounting for Transfers of

Financial Assets, and certain other standards). ASC 860

defines interest-only strips receivable as the contractual

right to receive some or all of the interest due on a bond,

mortgage loan, collateralized mortgage obligation, or other

interest-bearing financial asset.

Financial assets such as interest-only strips receivable, that

can contractually be prepaid or otherwise settled in such a

way that the holder of the financial asset would not

recover substantially all of its recorded investment do not

qualify to be accounted for at amortized cost. Interest-

only strips subsequently measured at fair value like

available-for-sale securities are reported as other assets.

Alternatively, interest-only strips may be reported as

trading securities. Refer to the Call Report Instructions for

additional details.

Equities without Readily Determinable Fair

Values

An equity security does not have a readily determinable

fair value if sales or bid-and-asked quotations are not

currently available on a securities exchange registered with

the Securities and Exchange Commission and are not

publicly reported by the National Association of Securities

Dealers Automated Quotations or the National Quotation

Bureau. Equity securities that do not have readily

determinable fair values may have been purchased by a

bank or acquired for debts previously contracted, and may

include items such as paid-in stock of a Federal Reserve

Bank, stock of a Federal Home Loan Bank, and stock of a

bankers' bank. Refer to the Call Report Instructions for

additional details.

Bank-Owned Life Insurance Policies

The purchase of bank-owned life insurance (BOLI) can be

an effective way for institutions to manage exposures

arising from commitments to provide employee

compensation and pre- and post-retirement benefits, and to

protect against the loss of key persons.

Consistent with safe and sound banking practices,

institutions must understand the risks associated with

BOLI and implement a risk management process that

provides for the identification and control of such risks. A

sound pre-purchase analysis, meaningful ongoing

monitoring program, reliable accounting process and

accurate assessment of risk-based capital requirements are

all components of a comprehensive risk management

process.

The ability of state chartered banks to purchase life

insurance is governed by state law. The safe and sound

use of BOLI depends on effective senior management and

board oversight. An institution’s board of directors must

understand the complex risk characteristics of the

institution’s insurance holdings and the role this asset

plays in the institution’s overall business strategy.

Each institution should establish internal policies and

procedures governing its BOLI holdings, including

guidelines that limit the aggregate cash surrender value

(CSV) of policies from, any one insurance company, as

well as the aggregate CSV of policies from all insurance

companies. In general, it is not prudent for an institution

to hold BOLI with an aggregate CSV that exceeds 25

percent of its Tier 1 capital. Therefore, an institution that

plans to acquire BOLI in an amount that results in an

aggregate CSV in excess of this concentration limit, or any

lower internal limit, should gain prior approval from its

board of directors or the appropriate board committee. In

this situation, management is expected to justify that any

increase in BOLI resulting in an aggregate CSV above 25

percent of Tier 1 capital does not constitute an imprudent

capital concentration.

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Management should conduct a thorough pre-purchase

analysis to help ensure that the institution understands the

risks, rewards, and unique characteristics of BOLI. The

nature and extent of this analysis should be commensurate

with the size and complexity of the potential BOLI

purchases and should take into account existing BOLI

holdings.

A comprehensive assessment of BOLI risks on an ongoing

basis is especially important for an institution whose

aggregate BOLI holdings represent a capital concentration.

Management should analyze the financial condition of

BOLI insurance carriers, review the performance of BOLI

products, and report their findings to the board at least

annually. More frequent reviews may be necessary if

management anticipates additional BOLI purchases, a

decline in an insurance carrier's financial condition, policy

surrenders, or changes in tax laws that could affect BOLI

products or performance.

Examiners should review the Interagency Statement on the

Purchase and Risk Management of Life Insurance

(Interagency Statement) when assessing an institution’s

BOLI program. Examiners should closely scrutinize risk

management policies and controls associated with BOLI

assets when an institution holds BOLI in an amount that

approaches or exceeds 25 percent of Tier 1 capital. An

institution holding life insurance in a manner inconsistent

with safe and sound banking practices is subject to

supervisory action. Where ineffective controls over BOLI

risks exist, or the exposure poses a safety and soundness

concern, supervisory action against the institution, may

include requiring the institution to divest affected policies,

irrespective of potential tax consequences.

ASC 325-30, Investments-Other – Investments in

Insurance Contracts (formerly FASB Technical Bulletin

No. 85-4, Accounting for Purchases of Life Insurance, and

Emerging Issues Task Force Issue No. 06-5, Accounting

for Purchases of Life Insurance – Determining the Amount

That Could Be Realized in Accordance with FASB

Technical Bulletin No. 85-4) addresses the accounting for

BOLI. Only the amount that could be realized under an

insurance contract as of the balance sheet date (that is, the

CSV reported by the carrier, less any applicable surrender

charges not reflected in the CSV) is reported as an asset.

If a bank records amounts in excess of the net CSV of the

policy, then the excess should be classified Loss.

For risk-based capital purposes, an institution that owns

general account permanent insurance should apply a 100

percent risk weight to its claim on the insurance company.

If an institution owns a separate account policy and can

demonstrate that it meets certain requirements, it may

choose to apply a look-through approach to the underlying

assets to determine the risk weight. Refer to Call Report

Instructions, the ED Module - Bank-Owned Life Insurance

(BOLI), and the Interagency Statement for further details.

MISCELLANEOUS ASSETS

Miscellaneous assets that are not reported in major

Balance Sheet or Other Asset categories should be

reported separately under all other assets in the Call

Report. Examples include derivative instruments held for

purposes other than trading that have a positive fair value,

computer software, and bullion. Some of the more

common miscellaneous assets are described below.

Prepaid Expenses

Prepaid expenses are the costs that are paid for goods and

services prior to the periods in which the goods or services

are consumed or received. When the cost is prepaid, the

payment is recorded as an asset because it represents a

future benefit to the bank. In subsequent periods the asset

is reduced (expensed) as the goods or services are used or

rendered. At the end of each accounting period, the bank

makes adjusting entries to reflect the portion of the cost

that has expired during that period. The prepayment is

often for a service for which the benefit is spread evenly

throughout the year. As the service is provided, the

prepaid expense is amortized to match the cost to the

period it benefits. Examples of prepaid expenses include

premiums paid for insurance, advance payments for leases

or asset rentals, payments for stationery or other supplies

that will be used over several months, and retainer fees

paid for legal services to be provided over a specified

period.

Examiners should ensure management accurately adjusts

prepaid expenses to reflect exhausted purchased goods or

services. Prepaid expenses that are recorded and

amortized in accordance with generally accepted

accounting principles should not be adversely classified.

However, any prepaid expense that is overstated should be

classified Loss.

Repossessed Personal Property

Repossessed personal property such as automobiles, boats,

equipment, and appliances, represents assets acquired for

debts previously contracted. A bank that receives assets

from a borrower in full satisfaction of a loan, such as a

receivable from a third party, an equity interest in the

borrower, or another type of asset (except a long-lived

asset that will be sold), will account for the asset at its fair

value. An asset received in partial satisfaction of a loan

should be accounted for as described above and the

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recorded amount of the loan should be reduced by the

asset’s fair value less the cost to sell. .Examiners should

assess repossessed assets individually for possible adverse

classification.

Suspense Accounts

Suspense accounts, also known as interoffice or clearing

accounts, are temporary holding accounts in which items

are carried until they can be identified and their disposition

to the proper account is made. For example, items are

included in suspense accounts when a transaction is coded

incorrectly and cannot be processed immediately, when an

account number is missing on a loan or deposit

transaction, or when a check drawn on a deposit account at

the bank is not properly endorsed. Most suspense items

are researched and cleared the following day. The

balances of suspense accounts as of the report date should

not automatically be reported as Other Assets or Other

Liabilities. Rather, the items included in these accounts

should be reviewed and material amounts should be

reported appropriately in the Call Report. Moreover,

banks should regularly reconcile suspense accounts. Stale

suspense items should be charged off when it is

determined that they are uncollectible and should be

classified Loss in the report of examination.

Cash Items Not In Process Of Collection

In contrast to those cash items that are in process of

collection, cash items that are not paid when presented are

referred to as cash items that are not in the process of

collection. In general, cash items that are not in the

process of collection occur when the paying bank has

refused payment after being presented with the cash item.

Once payment has been refused, the cash item immediately

becomes not in process of collection and is reclassified as

an Other Asset. Cash items not in the process of collection

are frequently kept in a suspense account. Although

collection efforts will continue, when it becomes clear that

the cash item will not be paid, the bank should promptly

charge off the cash item. It is common for the payee bank

to refuse payment if the customer’s deposit account had

insufficient funds, the check was improperly endorsed, the

checking account on which the check is drawn has been

closed, or for some other acceptable reason.

Other Accrued Interest Receivables

Accrued interest on securities purchased (if accounted for

separately from accrued interest receivable in the bank’s

records) and retained interests in accrued interest

receivable related to securitized credit cards is reported in

all other assets in the Call Report. Accrued interest

receivable amounts that are overstated should be

classified Loss.

In a typical credit card securitization, an institution

transfers a pool of receivables and the right to receive the

future collections of principal (credit card purchases and

cash advances), finance charges, and fees on the

receivables to a trust. If a securitization transaction

qualifies as a sale, then the selling institution removes the

receivables that were sold from its reported assets and

continues to carry any retained interests in the transferred

receivables on its balance sheet. An institution should

treat this accrued interest receivable asset as a retained

(subordinated) beneficial interest. Accordingly, it should

be reported in all other assets in the Call Report and not as

a loan receivable.

For further guidance refer to the Interagency Advisory on

the Accounting Treatment of Accrued Interest Receivable

Related to Credit Card Securitizations and the Call Report

Instructions.

Indemnification Assets

Indemnification assets represent the carrying amount of

the right to receive payments from the FDIC for losses

incurred on specified assets acquired from failed insured

depository institutions or otherwise purchased from the

FDIC that are covered by loss-sharing agreements.

Despite the linkage between them, the acquired covered

assets and the indemnification asset, are treated as separate

units of account. Each covered asset is reported in the

appropriate category on the balance sheet. The

indemnification asset is recorded at its acquisition-date fair

value and is reported in all other assets in the Call Report.

Examiners should ensure the acquiring institution’s

financial and regulatory reporting is appropriate for the

covered assets and the indemnification asset. Refer to the

Call Report Instructions for further details.

INTANGIBLE ASSETS

Goodwill and Other Intangible Assets

Goodwill is an intangible asset that is commonly

recognized as a result of a business combination. .Other

intangible assets resulting from a business combination,

such as core deposit intangibles, purchased credit card

relationships, servicing assets, favorable leasehold rights,

trademarks, trade names, internet domain names, and non-

compete agreements, should be recognized as an asset

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separately from goodwill. This discussion will focus on

intangible assets acquired through business combinations.

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 in accordance with ASC 805, Business Combinations

(formerly FAS 141 (revised 2007), Business

Combinations).

Push down accounting is the establishment of a new

accounting basis for a bank in its separate financial

statements as a result of it becoming substantially wholly

owned via a purchase transaction or a series of purchase

transactions. When push down accounting is applied, any

goodwill is reflected in the separate financial statements of

the acquired bank as well as in any consolidated financial

statements of the bank's parent.

When measuring Tier 1 capital for regulatory capital

purposes, institutions generally must deduct goodwill and

other intangible assets (other than mortgage servicing

assets, nonmortgage servicing assets, and purchased credit

card relationships eligible for inclusion in core capital).

Refer to Part 325 for further information on the regulatory

capital treatment of goodwill and intangible assets.

Accounting for Goodwill

After initial recognition, goodwill must be accounted for

in accordance with ASC 350, Intangibles-Goodwill and

Other (formerly FAS 142, Goodwill and Other Intangible

Assets), which requires that goodwill be tested for

impairment at least annually.

Goodwill is considered impaired when the amount of

goodwill exceeds its implied fair value at the reporting unit

level. An impairment loss must be recognized in earnings.

After a goodwill impairment loss is recognized, the

adjusted carrying amount of goodwill shall be its new

accounting basis. Subsequent reversal of a previously

recognized goodwill impairment loss is prohibited once

the measurement of that loss is completed. Goodwill of a

reporting unit must be tested for impairment annually and

between annual tests if an event occurs or circumstances

change that would more likely than not reduce the fair

value of a reporting unit below its carrying amount.

Examples of such events or circumstances include a

significant adverse change in the business climate,

unanticipated competition, a loss of key personnel, and an

expectation that a reporting unit or a significant portion of

a reporting unit will be sold or otherwise disposed. In

addition, goodwill must be tested for impairment after a

portion of goodwill has been allocated to a business to be

disposed.

A bank may not remove goodwill from its balance sheet,

for example, by selling or upstreaming this asset to its

parent holding company or another affiliate.

Other intangible assets that have indefinite useful lives

should not be amortized but must be tested at least

annually for impairment. Intangible assets that have finite

useful lives must be amortized over their useful lives and

must be reviewed for impairment.

Refer to the Call Report Instructions for further details.

Servicing Assets

The right to service assets is represented by the contractual

obligations undertaken by one party to provide servicing

for mortgage loans, credit card receivables, or other

financial assets for another. Servicing includes, but is not

limited to, processing principal and interest payments,

maintaining escrow accounts for the payment of taxes and

insurance, monitoring delinquencies, and accounting for

and remitting principal and interest payments to the

holders of beneficial interests in the financial assets.

Servicers typically receive certain benefits from the

servicing contract and incur the costs of servicing the

assets.

Servicing is inherent in all financial assets; however, it

becomes a distinct asset or liability only when

contractually separated from the underlying financial

assets by sale or securitization with servicing retained or

by a separate purchase or assumption of the servicing

rights and responsibilities. Whenever an institution

undertakes an obligation to service financial assets, a

servicing asset or liability must be recognized unless the

institution securitizes the assets, retains all of the resulting

securities, and classifies the securities as held-to-maturity.

Accounting

Accounting and reporting standards for asset and liability

servicing rights are set forth in ASC 860-50, Transfers and

Servicing – Servicing Assets and Liabilities (formerly FAS

140, Accounting for Transfers and Servicing of Financial

Assets and Extinguishments of Liabilities, as amended by

FAS 156, Accounting for Servicing of Financial Assets,

and FAS 166, Accounting for Transfers of Financial

Assets), and ASC 948, Financial Services-Mortgage

Banking (formerly FAS 65, Accounting for Certain

Mortgage Banking Activities, as amended by FAS 140)..

Servicing assets result from contracts to service financial

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assets for which the servicing benefits (revenues from

contractually specified servicing fees, late charges, and

other ancillary sources) are expected to more than

adequately compensate the servicer. Contractually

specified servicing fees are all amounts that, per contract,

are due to a servicer in exchange for servicing the financial

assets and which would no longer be received by a

servicer if the contract for servicing were shifted to

another servicer.

A bank must recognize and initially measure at fair value a

servicing asset or a servicing liability each time it

undertakes an obligation to service a financial asset by

entering into a servicing contract in either of the following

situations:

 The bank’s transfer of an entire financial asset, a

group of entire financial assets, or a participating

interest in an entire financial asset that meets the

requirements for sale accounting; or

 An acquisition or assumption of a servicing obligation

that does not relate to financial assets of the bank or

its consolidated affiliates included in the Call Report.

If a bank sells a participating interest in an entire financial

asset, it only recognizes a servicing asset or servicing

liability related to the participating interest sold.

A bank should subsequently measure each class of

servicing assets and servicing liabilities using either the

amortization method or the fair value measurement

method. Once a bank elects the fair value measurement

method for a class of servicing, that election must not be

reversed.

Under the amortization method, all servicing assets or

servicing liabilities in the class should be amortized in

proportion to, and over the period of, estimated net

servicing income for assets (servicing revenues in excess

of servicing costs) or net servicing loss for liabilities

(servicing costs in excess of servicing revenues). The

servicing assets or servicing liabilities should be assessed

for impairment or increased obligation based on fair value

at each quarter-end Call Report date. The servicing assets

within a class should be stratified into groups based on one

or more of the predominant risk characteristics of the

underlying financial assets. If the carrying amount of a

stratum of servicing assets exceeds its fair value, the bank

should separately recognize impairment for that stratum by

reducing the carrying amount to fair value through a

valuation allowance for that stratum. The valuation

allowance should be adjusted to reflect changes in the

measurement of impairment subsequent to the initial

measurement of impairment. For the servicing liabilities

within a class, if subsequent events have increased the fair

value of the liability above the carrying amount of the

servicing liabilities, the bank should recognize the

increased obligation as a loss in current earnings.

Under the fair value measurement method, all servicing

assets or servicing liabilities in a class should be measured

at fair value at each quarter-end report date. Changes in

the fair value of these servicing assets and servicing

liabilities should be reported in earnings in the period in

which the changes occur.

Institutions that sell only a limited number of financial

assets with servicing retained and do not otherwise

actively purchase or sell servicing rights may determine

that the servicing activity is immaterial. Typically, these

institutions will have a relatively low volume of financial

assets serviced for others and the value of any servicing

assets and liabilities would likewise be immaterial.

Management must provide a reasonable basis for not

reporting servicing activity. Refer to the Servicing

Liabilities section below and the Call Report Instructions

for further details.

Valuation

The fair value of servicing assets and liabilities is

determined in accordance with ASC 820, Fair Value

Measurements and Disclosures (formerly FAS 157, Fair

Value Measurements) that defines fair value and

establishes a framework for measuring fair value. Fair

value is the price that would be received to sell an asset or

paid to transfer a liability in an orderly transaction between

market participants in the asset’s or liability’s principal (or

most advantageous) market at the measurement date. This

value is often referred to as an exit price. ASC 820

establishes a three level fair value hierarchy that prioritizes

inputs used to measure fair value based on observability.

The highest priority is given to Level 1 (observable,

unadjusted) and the lowest priority to Level 3

(unobservable).

Valuation techniques consistent with the market approach,

income approach, and/or cost approach should be used to

measure fair value, as follows:

The market approach uses prices and other relevant

information generated by market transactions involving

identical or comparable assets or liabilities. Valuation

techniques consistent with the market approach include

matrix pricing and often use market multiples derived from

a set of comparables.

The income approach uses valuation techniques to convert

future amounts (for example, cash flows or earnings) to a

single present amount (discounted). The measurement is

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based on the value indicated by current market

expectations about those future amounts. Valuation

techniques consistent with the income approach include

present value techniques, option-pricing models, and the

multi period excess earnings method.

The cost approach is based on the amount that currently

would be required to replace the service capacity of an

asset (often referred to as current replacement cost). Fair

value is determined based on the cost to a market

participant (buyer) to acquire or construct a substitute asset

of comparable utility, adjusted for obsolescence.

When the discounted cash flow approach is used to

measure the fair value of servicing assets, a number of

factors and assumptions are considered when projecting

the potential income stream (net of servicing costs)

generated by the servicing rights. This income stream is

present valued using appropriate market discount rates to

determine the estimated fair value of the servicing rights.

These factors and assumptions, which should be

adequately documented, include:

 Average loan balance and coupon rate,

 Average portfolio age and remaining maturity,

 Contractual servicing fees,

 Estimated income from escrow balances,

 Expected late charges and other possible ancillary

income,

 Anticipated loan balance repayment rate (including

estimated prepayment speeds),

 Direct servicing costs and appropriate allocations of

other costs, as well as the inflation rate effect, and

 Delinquency rate and estimated out-of-pocket

foreclosure and collection costs that will not be

recovered.

Regulatory Capital

Part 325 provides information on the regulatory capital

treatment of mortgage servicing assets and nonmortgage

servicing assets.

For purposes of calculating Tier 1 capital, the balance

sheet assets for mortgage servicing assets and

nonmortgage servicing assets will each be reduced to an

amount equal to the lesser of:

 90 percent of the fair value of these assets; or

 100 percent of the remaining unamortized book value

of these assets (net of any related valuation

allowances).

The total amount of mortgage servicing assets,

nonmortgage servicing assets, along with purchased credit

card relationships recognized for regulatory purposes (i.e.,

not deducted from assets and capital) is limited to no more

than 100 percent of Tier 1 capital. In addition to the

aggregate limitation on such assets, the maximum

allowable amount of purchased credit card relationships

and nonmortgage servicing assets, when combined, is

limited to 25 percent of Tier 1 capital. These limitations

are calculated before the deduction of any disallowed

servicing assets, disallowed purchased credit card

relationships, disallowed credit-enhancing interest-only

strips, disallowed deferred tax assets, and any nonfinancial

equity investments. In addition, banks may elect to deduct

disallowed servicing assets on a basis that is net of any

associated deferred tax liability.

Servicing Risk

Examiners should be aware of the risks that can affect an

institution from the failure to follow the servicing rules

related to securitized assets. While credit risk may appear

to be of little or no concern, the mishandling of procedures

in these transactions can affect a holder's ability to collect.

Financial institutions perform roles as sellers, buyers,

servicers, trustees, etc., in these types of transactions.

Examiners should evaluate the potential risks that might

arise from one or more of these roles. In most cases, the

government agency that provided the guarantee or

insurance against ultimate default will also impose

guidelines and regulations for the servicer to follow. If the

servicer or others involved in the servicing function fail to

follow these rules and guidelines, then the government

agency that is providing the guarantee or insurance may

refuse to honor its commitment to insure all parties against

loss due to default. It is necessary for the financial

institution to have adequate policies and procedures in

place to control and limit the institution's liability and

exposure in this regard.

Examination Procedures

When assessing asset quality during onsite examinations

and when reviewing merger applications, examiners and

supervisory personnel should review the valuation and

accounting treatment of servicing assets. The ED Module

- Mortgage Banking contains various examination

procedures and references for reviewing mortgage

servicing assets.

OTHER LIABILITIES

Other Assets and Other Liabilities (3/12) 3.7-8 RMS Manual of Examination Policies

Federal Deposit Insurance Corporation

OTHER ASSETS AND LIABILITIES Section 3.7

RMS Manual of Examination Policies 3.7-9 Other Assets and Other Liabilities (3/12)

Federal Deposit Insurance Corporation

Other Borrowed Money

Mortgages, liens, and other encumbrances on premises and

other real estate owned, and obligations under capitalized

leases, which the bank is legally obligated to pay, are

reported as other borrowed money in the Call Report.

Regardless of the mortgage amount outstanding on bank

premises, the asset should be carried on the general ledger

at historical cost net of accumulated depreciation. ASC

840 establishes generally accepted accounting principles

regarding lease transactions that must be accounted for as

a property acquisition financed with a debt obligation

Additional information on premises and leases is included

in the Premises and Equipment section of this Manual.

Accrued Expenses

Expenses are also reported in the Call Report on the

accrual basis of accounting that records revenues when

realized or realizable and earned, and expenses when

incurred. This attempt to match expenses incurred during

a period to the revenues that they helped generate is

known as the matching principle. At the end of each

reporting period, but no less frequently than quarterly,

bank management needs to make appropriate entries to

record accrued expenses. Interest on deposits accrued

through charges to expense during the current or prior

periods, but not yet paid or credited to a deposit account,

are reported as other liabilities in the Call Report.

Likewise, the amount of income taxes, interest on

nondeposit liabilities, and other expenses accrued through

charges to expense during the current or prior periods, but

not yet paid, are reported as other liabilities.

Servicing Liabilities

As noted under Servicing Assets, servicers typically

receive certain benefits from a servicing contract and incur

costs of servicing the assets. The accounting and reporting

standards addressing servicing rights (i.e., assets and

liabilities) are set forth in ASC 860-50. Servicing

liabilities result from contracts to service financial assets

for which the benefits of servicing are not expected to

adequately compensate the servicer. Banks must initially

measure a servicing liability at fair value and subsequently

measure each class of servicing liabilities using either the

amortization method or the fair value measurement

method. The election of the subsequent measurement

method should be made separately for each class of

servicing liabilities. Refer to the Call Report Instructions

for further details.

Deferred Tax Liabilities

As noted under Tax Assets, a net deferred tax liability is

reported if a net credit balance results after offsetting

deferred tax assets (net of valuation allowance) and

deferred tax liabilities measured at the report date for a

particular tax jurisdiction. A bank may report a net

deferred tax debit, or asset, for one tax jurisdiction, and

also report at the same time a net deferred tax credit or

liability, for another tax jurisdiction.

Deferred tax liabilities are recognized for taxable

temporary differences. For example, depreciation can

result in a taxable temporary difference if a bank uses the

straight-line method to determine the amount of

depreciation expense to be reported in the Call Report but

uses an accelerated method for tax purposes. In the early

years, tax depreciation under the accelerated method will

typically be larger than book depreciation under the

straight-line method. During this period, a taxable

temporary difference originates. Tax depreciation will be

less than book depreciation in the later years when the

temporary difference reverses. Other taxable temporary

differences include the undistributed earnings of

unconsolidated subsidiaries and associated companies and

amounts funded to pension plans that exceed the recorded

expense.

Allowance for Off-Balance Sheet Exposures

Each bank should maintain, as a separate liability account,

an allowance at a level that is appropriate to cover

estimated credit losses associated with off-balance sheet

credit instruments such as loan commitments, standby

letters of credit, and guarantees. This separate allowance

should be reported as an other liability, not as part of the

allowance for loan and lease losses. The allowance for

credit losses on off-balance sheet exposures should meet

the criteria for accrual of a loss contingency set forth in

generally accepted accounting principles.

All Other Miscellaneous Liabilities

Examiners will encounter other miscellaneous liabilities

not reported in major Balance Sheet or Other Liability

categories that should be reported separately in all other

liabilities in the Call Report. Examples include accounts

payable, deferred compensation payable, dividends

declared but not yet paid, and derivative instruments held

for purposes other than trading that have a negative fair

value.