Capital Adequacy: Deferred Tax Assets

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 95-02]

RIN 1557-AB14

Capital Adequacy: Deferred Tax Assets

AGENCIES: Office of the Comptroller of the Currency, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is

amending its capital adequacy rules with respect to deferred tax

assets. This final rule limits the amount of certain deferred tax

assets that a bank may include in Tier 1 capital for risk-based capital

and leverage capital purposes.

The OCC, in consultation with the Board of Governors of the Federal

Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC),

and the Office of the Thrift Supervision (OTS) (banking agencies),

developed this final rule in response to the Financial Accounting

Standards Board's (FASB) issuance of Statement of Financial Accounting

Standards No. 109, ``Accounting for Income Taxes'' (FAS 109), in

February 1992. The banking agencies adopted the provisions of FAS 109

for reporting in quarterly Consolidated Reports of Condition and Income

(Call Reports) beginning January 1, 1993. This reporting change

increased the amount of net deferred tax assets that a bank may record

on its balance sheet. This final rule will ensure that national banks

do not place excessive reliance on deferred tax assets to satisfy the

minimum capital adequacy requirements.

EFFECTIVE DATE: April 1, 1995.

FOR FURTHER INFORMATION CONTACT: Thomas G. Rees, Professional

Accounting Fellow, Office of the Chief National Bank Examiner, (202)

874-5180; Eugene W. Green, Deputy Chief Accountant, Office of the Chief

National Bank Examiner, (202) 874-5180; Roger Tufts, Senior Economic

Advisor, Office of the Chief National Bank Examiner, (202) 874-5070;

Ronald Shimabukuro, Senior Attorney, Legislative and Regulatory

Activities Division, (202) 874-5090, Office of the Comptroller of the

Currency, Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

Background

In February 1992, the FASB issued FAS 109. FAS 109 provides

guidance on how to account for income taxes, including deferred tax

assets, and was effective for fiscal years beginning on or after

December 15, 1992. FAS 109 generally allows a bank to report certain

deferred tax assets it could not previously recognize, which has the

effect of increasing bank capital levels. Consequently, the OCC and the

other banking agencies were concerned about the impact of the change on

the financial institutions they regulate, especially regarding their

reported capital levels.

FAS 109--Deferred tax assets are assets that reflect, for financial

reporting purposes, the benefits of certain aspects of tax laws and

rules. Under FAS 109, a bank reports deferred tax assets that arise

from: (1) Tax carryforwards, and (2) deductible temporary differences.

Tax carryforwards are deductions or credits that a bank cannot use for

current tax purposes, but may carry forward to reduce taxable income or

income taxes payable in a future period [[Page 7904]] or periods. For

example, when a bank's tax deductions exceed its tax revenues, the

result is a net operating loss. Such losses may be used to recover

taxes paid in prior years (the carryback period) or may be carried

forward to reduce a bank's taxable income in a future period. The

situation is similar for some tax credits that a bank cannot use in the

current tax period. The bank will realize the benefit of deferred tax

assets arising from tax carryforwards if it generates sufficient

taxable income in the permissible carryforward period.

Temporary differences arise when a bank records financial events or

transactions in one period on the bank's books and recognizes them in

another period, or periods, on its tax return. There are two types of

temporary differences--deductible and taxable. Deductible temporary

differences reduce a bank's future taxable income. When a bank records

an addition to its allowance for loan and lease losses, it records that

amount as an expense on its books. However, the bank may be unable to

take the tax deductions for such losses until it charges off the loans

and realizes the losses. The chargeoffs typically occur in subsequent

periods. Thus, a bank creates a deferred tax asset when it adds an

amount to the allowance on the books, but charges it off in a future

period.

Taxable temporary differences produce additional taxable income in

future periods. For example, a bank may depreciate its bank building

using an accelerated depreciation method on its tax return but may use

a straight-line method when recording depreciation on its books. As a

result, the bank's tax depreciation will be less than its book

depreciation in certain future periods. This taxable temporary

difference will cause the bank to have higher taxable income in those

future periods.

A bank may only realize deferred tax assets arising from deductible

temporary differences by: (1) Recovering taxes paid in prior years, (2)

offsetting taxable temporary differences, or (3) earning sufficient

future taxable income. Consequently, if deferred tax assets arise from

deductible temporary differences and exceed the amount of recoverable

taxes paid in prior years plus offsetting taxable temporary

differences, the bank will only realize such deferred tax assets if it

generates sufficient taxable income in the carryforward period.

Hereafter, these deferred tax assets, and deferred tax assets arising

from tax carryforwards, will be called ``deferred tax assets that are

dependent upon future taxable income.''

FAS 109 allows a bank to record deferred tax assets that are

dependent upon future taxable income. However, the bank must establish

a reserve to adjust the recorded deferred tax asset to the amount that

it is more likely than not (i.e., likelihood of more than 50 percent)

to realize. A bank assesses the probability of realization based on its

prospects of earning taxable income in the future. The statutory

carryforward period of 15 years provides a limit on the amount of the

assessment.

Supervisory Concerns Regarding Deferred Tax Assets

Before adoption of FAS 109, regulatory policy generally limited the

recognition of net deferred tax assets to the bank's potential tax

carryback amount. In other words, a bank could only record an asset to

the extent it potentially could file for a tax refund if all book and

tax timing differences reversed at the report date.

Because FAS 109 allows a bank to record a greater amount of

deferred tax assets than under previous policy, the OCC and the other

banking agencies were concerned about the effect of the accounting

standard on bank capital adequacy. Specifically, the OCC was concerned

that FAS 109 would allow banks to include excessive amounts of deferred

tax assets that are dependent upon future taxable income as part of

regulatory capital.

Whether a bank can realize such assets depends on whether it

generates enough taxable income during the carryforward period. As new

products evolve and market conditions change, a bank's current

financial condition and outlook for future income can change rapidly.

Such changes make predicting future taxable income more difficult. For

many banks, including sound and well-managed banks, the judgment about

the likelihood that the bank will realize deferred tax assets that are

dependent upon future taxable income is highly subjective. Inaccurate

estimates could cause a bank to overstate its deferred tax assets and

its capital position. Therefore, allowing banks to recognize

significant amounts of assets based on subjective estimates could pose

a risk to the deposit insurance funds.

Additionally, the OCC is concerned about the effect of these

changes on a bank that is experiencing financial difficulty. Such banks

often have net operating loss carryforwards. As a result, these

troubled institutions potentially could record deferred tax assets

under FAS 109, even though their realistic prospects for generating

sufficient future taxable income are uncertain. As a troubled bank's

condition deteriorates, it is less likely to realize the financial

benefit of deferred tax assets that are dependent upon future taxable

income. In such instances, FAS 109 generally requires the bank to

reduce its recorded net deferred tax asset by increasing the asset's

valuation allowance. The result is a charge to earnings that will

reduce the bank's regulatory capital at precisely the time it needs

capital the most.

To address these concerns, on August 3, 1992, under the auspices of

the Federal Financial Institutions Examination Council (FFIEC), the

OCC, along with the other banking agencies requested public comment (57

FR 34135) on alternative approaches for the regulatory capital and

reporting treatment of deferred tax assets. Based on the comments

received, the FFIEC agreed to adopt FAS 109 for regulatory reporting

effective January 1, 1993.

After discussing the comments and suggestions received, the OCC and

the other banking agencies remained concerned about the impact of

deferred tax assets that are dependent upon future taxable income on

regulatory capital. The OCC believes that many financially sound banks

will have net deferred tax assets arising from deductible temporary

differences that exceed their taxable temporary differences and the

bank's carryback potential. Since many of these deferred tax assets

will be realized, the OCC agreed that banks should recognize some

amount of these assets in regulatory capital. The OCC and the other

banking agencies concluded they could adequately address their

supervisory concerns by placing a limit on the amount of such assets

that a bank could include in regulatory capital. This approach

maintained consistency between generally accepted accounting principles

(GAAP) and regulatory reporting.

Proposed Rule--In December 1993, the OCC issued a proposed rule to

amend its capital adequacy rules with respect to deferred tax assets

(58 FR 68065, December 23, 1993). The FRB (58 FR 8007, February 11,

1993), and the FDIC ( 58 FR 26701, May 5, 1993) published similar

proposed rules.

The OCC proposed to limit the amount of deferred tax assets that

are dependent upon future taxable income that a bank may include in

regulatory capital to the lesser of:

(1) The amount of deferred tax assets expected to be realized

within one year of the quarter-end report date, based on a bank's

projection of future taxable income (exclusive of tax carryforwards and

reversals of existing temporary differences) for that year, including

the effect of tax-planning strategies [[Page 7905]] expected to be

implemented during that year, or

(2) 10 percent of Tier 1 capital net of goodwill and other

disallowed intangible assets.

Banks have been calculating and reporting the amount of ``Deferred

tax assets disallowed for regulatory capital purposes'' in the Call

Reports since March 31, 1993.

Comments Received on the Proposed Rule--The comment period for the

OCC's proposed rule closed on January 24, 1994. The OCC received a

total of 17 comments on the proposed rule. The commenters consisted of

13 banks, three trade groups, and one public accounting firm.

All but one commenter expressed opposition to some portion or all

of the proposed rule. Eleven of the commenters indicated that a limit

on the amount of deferred tax assets included in regulatory capital was

unnecessary. However, six commenters agreed that some form of limit on

deferred tax assets was appropriate.

The primary concern of the commenters is that the adoption of a

deferred tax limit could increase regulatory burden because regulatory

capital policy would be more restrictive than GAAP. Several commenters

indicated that no limit on deferred tax assets is necessary because FAS

109 only permits the reporting of deferred tax assets that have a

better than 50% probability of being realized. Other commenters

indicated that the proposed one year limit was too restrictive because

there is a 15-year carryforward period in which a bank could realize

the deferred tax assets.

After carefully considering the comments, the OCC believes that a

limit on deferred tax assets is necessary. Estimates of future taxable

income are very subjective. If a bank does not realize these estimates,

the bank insurance fund is exposed to losses because bank capital would

be overstated. Moreover, unlike certain types of intangible assets that

a bank can include in regulatory capital at a higher allowable

percentage, a bank cannot sell deferred tax assets.

The GAAP standard allows a bank to record deferred tax assets that

they may not realize for up to 15 years. The OCC believes that allowing

deferred tax assets to constitute a significant portion of a bank's

capital is inappropriate, since deferred tax assets may have only a

slightly better than 50% possibility of realization. Furthermore, other

than the likelihood of realization, there is no specific limit under

GAAP on the amount of deferred tax assets that a bank can record.

Without a limit on deferred tax assets, a bank could include

significant amounts of deferred tax assets in capital.

In addition, the OCC believes that GAAP should guide rather than

establish regulatory capital policy. When formulating GAAP, the

accounting policy makers do not consider the safety and soundness

objectives of the capital standards applicable to banks. Therefore,

differences between the GAAP and regulatory capital definitions are

justified.

Final Rule

The OCC believes that since banks can only realize deferred tax

assets that are dependent upon future taxable income when they achieve

positive taxable earnings, a limit based on estimated future earnings

is rational. In general, a bank's projections up to 12 months into the

future are reliable. However, the OCC believes the reliability of such

projections decreases significantly for periods further in the future.

Therefore, having a one year cutoff reduces the risk of a bank

misstating its deferred tax assets because its estimate of future

income is inaccurate. Furthermore, the one year cutoff increases the

likelihood of a bank achieving the earnings required to realize the

recorded deferred tax asset.

The OCC believes that this final rule will ensure that such

deferred tax assets do not make up an unduly large portion of a bank's

regulatory capital base. The upper limit of 10 percent of Tier 1

capital provides a ``backstop'' that addresses this concern. This

requirement also reduces the risk that an overly optimistic estimate of

future taxable income will cause the bank to significantly misstate the

deferred tax asset.

The OCC believes that the combination of the one year future income

approach and the 10% of Tier 1 capital approach will provide an

effective and efficient limit on deferred tax assets. Consequently,

under the final rule, the amount of deferred tax assets that are

dependent upon future taxable income that a bank may include in its

regulatory capital is limited to the lesser of:

(1) The amount of deferred tax assets the institution expects to

realize within one year of the quarter-end report date, based on its

projection of future taxable income (exclusive of tax carryforwards and

reversal of existing temporary differences for that year), or

(2) 10 percent of Tier 1 capital, net of goodwill and all

identifiable intangible assets other than purchased mortgage servicing

rights and purchased credit card relationships, and before any

disallowed deferred tax assets are deducted.

Banks should note that under this final rule there is no limit on

deferred tax assets that a bank can realize from taxes paid in prior

carryback years and from reversals of existing taxable temporary

differences. In addition, to determine the limit on deferred tax

assets, a bank should assume that all temporary differences fully

reverse as of the report date. Also, estimates of future taxable income

should include the effect of tax planning strategies the bank is

planning to implement within one year of the quarter-end report date to

realize net operating loss or tax credit carryforwards that will

otherwise expire during the year. With respect to the Call Reports,

banks will continue to report deferred tax assets according to GAAP.

The OCC believes that the limit on deferred tax assets will pose

little or no additional burden on banks. Banks already follow FAS 109

for Call Report purposes and already are making projections of taxable

income. Additionally, the OCC has revised the 10 percent Tier 1 capital

calculation to be more straightforward and less burdensome. Under the

proposed rule, the 10 percent of Tier 1 capital calculation is based on

Tier 1 capital net of goodwill and other disallowed intangible assets.

As proposed, the 10 percent of Tier 1 capital calculation would have

required banks to first determine the amount of disallowed intangible

assets. After consideration of this matter, the OCC believes that this

additional computation is not necessary. Consequently, the final rule

requires that the 10 percent of Tier 1 capital calculation be based on

Tier 1 capital net of goodwill and all identifiable intangible assets

other than purchased mortgage servicing rights and purchased credit

card relationships, and before any disallowed deferred tax assets are

deducted. While this calculation may result in a slightly higher Tier 1

capital base, the OCC believes that this calculation is simpler and

imposes less burden on banks.

In response to the comments received, the OCC has decided to

incorporate the following additional provisions to reduce the

regulatory burden of this final rule.

Method of Estimating Future Income--In Banking Bulletin 93-15,

Supplement 1 (BB 93-15), the OCC specified a method of estimating

future taxable income. BB 93-15 provided a specific method for treating

originating and reversing tax timing differences in the calculation of

one year's future taxable income. Several commenters

[[Page 7906]] stated that other less restrictive methods of estimating

future taxable income, which are acceptable under GAAP, should also be

allowed.

After considering these comments, the OCC concluded that banks may

calculate one year's future taxable income based on either the specific

method in BB 93-15 or another reasonable method that is consistent with

GAAP. Since banks routinely make their own projections of future

taxable income and have this information readily available, this

modification reduces regulatory burden.

Gross-up of Intangibles--FAS 109 requires a bank to record higher

amounts of intangible assets acquired in nontaxable purchase business

combinations than they would record under previous GAAP for the same

transaction. The OCC capital adequacy rules require banks to deduct

certain intangible assets from regulatory capital. Consequently, under

FAS 109, a bank acquiring such assets would reflect a lower amount of

regulatory capital after deducting these disallowed intangibles than it

would have under previous accounting standards even though there is no

additional risk to capital.

Several commenters indicated that the OCC should not require banks

to deduct the additional amounts of identifiable intangible assets

required by FAS 109. The OCC agrees with these commenters. Since the

higher intangible amounts occur simply because of an accounting rule

change, the higher amounts do not present additional risk to capital.

Therefore, because the increased value of the intangible assets pose no

additional risk to capital adequacy, this final rule permits a bank to

net the deferred tax liability associated with a disallowed intangible

asset against that intangible asset in the calculation of its limit on

deferred tax assets.

Under this approach, a bank would only deduct the net amount of the

disallowed intangible from Tier 1 capital. Netting is not allowed

against purchased mortgage servicing rights and purchased credit card

receivables since a bank deducts these assets for capital adequacy

purposes only if they exceed specified limits on intangible assets.

Consequently, this final rule results in the same treatment for

intangibles resulting from purchase business combinations as under

previous GAAP. However, to ensure this benefit is not double counted, a

deferred tax liability netted in this manner could not also be netted

against deferred tax assets when determining the amount of deferred tax

assets that are dependent upon future taxable income.

Leveraged Leases--Similar to the ``gross up of intangibles'' issue,

the OCC agrees with one commenter who recommended that the final rule

include a specific provision relating to the accounting treatment for

leveraged leases. The commenter noted the valuation of a leveraged

lease acquired in a purchase business combination gives recognition to

the estimated future tax effect of the remaining cash flows of the

lease. Therefore, any future tax liabilities related to acquired

leveraged leases are included in the valuation of the leveraged leases

and are not shown on the balance sheet as deferred taxes payable. This

artificially increases the amount of deferred tax assets for

institutions that acquire a leveraged lease portfolio. The commenter

suggested that banks treat the future taxes payable included in the

valuation of a leverage lease portfolio as a reversing taxable

temporary difference available to support the recognition of deferred

tax assets.

Although this situation will not affect many banks, the OCC agrees

with this commenter. Accordingly, when applying the limit on deferred

tax assets, a bank may use the deferred tax liabilities embedded in the

carrying value of a leveraged lease to reduce the amount of deferred

tax assets subject to the limit.

Tax Jurisdictions--In a response to the proposed rule, a commenter

suggested that a bank calculate one overall limit on deferred tax

assets to cover all tax jurisdictions in which the bank operates. This

provision would reduce burden on large banks that operate in numerous

jurisdictions because they would not need to separately calculate a

limit on deferred tax assets for each jurisdiction. FAS 109 already

requires a jurisdiction-by-jurisdiction approach. The OCC agrees with

the commenter that the separate tax jurisdiction requirement in the

overall limit on deferred tax assets is unnecessary. Therefore, to

reduce regulatory burden, a bank may calculate one overall limit on

deferred tax assets that covers all tax jurisdictions in which the bank

operates.

Timing--A bank may use the future taxable income projections for

its closest fiscal year (adjusted for any significant changes that have

occurred or are expected to occur) when applying the limit on deferred

tax assets at a report date other than year-end. Therefore, a bank will

not have to prepare a new projection each quarter. Several commenters

requested this treatment because it reduces the frequency that a bank

is required to revise their estimate of future taxable income.

Except for these provisions, banks should follow FAS 109 in

determining regulatory capital. Net deferred tax assets included in

bank Call Reports under FAS 109, that exceed the limit on deferred tax

assets, should be deducted from Tier 1 capital. Banks should also

deduct the amount of disallowed deferred tax assets from both total

assets and from risk-weighted assets in determining their leverage

capital and risk-based capital ratios. Deferred tax assets included in

risk-based capital continue to have a risk weight of 100%.

Other Considerations

Separate Entity Method--Consistent with the policy of applying GAAP

individually to banks of a holding company, each subsidiary bank must

determine its limit on deferred tax assets separately from the holding

company. Under this ``separate entity method,'' a subsidiary of a

holding company is treated as a separate taxpayer, and its tax

provision is calculated on this basis.

In some cases, a bank's holding company may not have the financial

capability to reimburse the bank for tax benefits derived from the

bank's carryback of net operating losses or tax credits. In these

cases, the amount of carryback potential the bank may consider in

calculating the limit on deferred tax assets is limited to the amount

which it could reasonably expect to have refunded by its parent.

Several commenters suggested that the OCC eliminate the separate

entity approach because GAAP does not require it and because the

approach ignores Federal tax law and binding intercompany tax

settlement agreements. The OCC considered these comments. However, the

banking agencies generally require banks to file regulatory reports

using a separate entity approach, and consistency between the reports

would be reduced if the OCC permitted a bank to use other methods for

calculating deferred tax assets. Therefore, the OCC decided that banks

must continue to report and calculate the limit on deferred tax assets

under the separate entity method.

Tax Effects of Financial Accounting Standard 115 (FAS 115)--The

OCC, along with the other banking agencies, adopted Statement of

Financial Accounting Standards No. 115, ``Accounting for Certain

Investments in Debt and Equity Securities'' (FAS 115), for regulatory

reporting purposes effective January 1, 1994. FAS 115 requires net

unrealized holding gains and losses on available-for-sale securities to

be recorded net of taxes. Consequently, when a bank recognizes

[[Page 7907]] the FAS 115 unrealized holding gains and losses on

available-for-sale securities in financial reports, it also must

include any deferred tax effects of these unrealized gains and losses

in its determination of the deferred tax asset.

For example, if a bank has an unrealized gain in the available-for-

sale portfolio, it must record a deferred tax liability for the taxes

that would be due if they sold the assets and realized the gain. On the

other hand, if a bank has an unrealized loss in the available-for-sale

portfolio, the bank should include the tax benefits from realizing that

loss when it records its deferred tax asset.

The OCC and the other banking agencies recently agreed that banks

should exclude the net unrealized holding gains and losses on

available-for-sale debt securities from regulatory capital

calculations. Therefore, it would be consistent to exclude the deferred

tax assets and liabilities relating to the FAS 115 gains and losses on

available-for-sale debt securities in the calculation of the allowable

amount of deferred tax assets for regulatory capital.

It has been argued that failure to eliminate these FAS 115 deferred

tax effects would cause a bank to overstate or understate the amount of

deferred tax assets disallowed for regulatory capital purposes. For

example, a bank with a net unrealized loss in its available-for-sale

account would report a related deferred tax asset in its Call Report.

If the bank does not remove the deferred tax asset relating to the net

unrealized loss, and has net deferred tax assets that exceed the

allowable amount stipulated in this final rule, the bank will overstate

the amount of deferred tax assets that it must deduct from regulatory

capital. Conversely, if the bank has a net unrealized gain on

available-for-sale securities, and does not remove its deferred tax

effect, the calculation of the limit on deferred tax assets will

understate the amount of deferred tax assets the bank must deduct from

regulatory capital.

The OCC believes that identifying and removing the deferred tax

components that specifically relate to FAS 115 may be very complicated,

and in some situations may place significant burden on banks.

Therefore, the OCC has decided to allow, but not require, banks to

eliminate the FAS 115 deferred tax items before calculating the limit

on deferred tax assets. Consequently, a bank that does not want to deal

with the complexity of the adjustment can reduce its implementation

burden. On the other hand, a bank that wants to achieve greater

precision may make such adjustments. Whether or not a bank chooses to

adjust for the FAS 115 deferred tax effects, it must apply that

approach consistently in future calculations of the limit on deferred

tax assets.

Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act, it is

hereby certified that this regulation will not have a significant

economic impact on a substantial number of small entities. Accordingly,

a regulatory flexibility analysis is not required. When considered with

the change in the reporting of deferred tax assets in the Call Report,

this final rule permits banks to include more deferred tax assets in

regulatory capital than under previous policy. However, this change

will not significantly impact banks of any size.

Executive Order 12866

The OCC has determined that this final rule is not a significant

regulatory action under Executive Order 12866.

List of Subjects in 12 CFR Part 3

Administrative practice and procedure, National banks, Reporting

and recordkeeping requirements.

Authority and Issuance

For the reasons set out in the preamble, part 3 of title 12,

chapter I, of the Code of Federal Regulations is amended as set forth

below.

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

1. The authority citation for part 3 continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n note,

3907, and 3909.

2. Paragraph (a) of Sec. 3.2 is revised to read as follows:

Sec. 3.2 Definitions.

* * * * *

(a) Adjusted total assets means the average total assets figure

required to be computed for and stated in a bank's most recent

quarterly Consolidated Report of Condition and Income (Call Report)

minus end-of-quarter intangible assets and deferred tax assets that are

deducted from Tier 1 capital. The OCC reserves the right to require a

bank to compute and maintain its capital ratios on the basis of actual,

rather than average, total assets when necessary to carry out the

purposes of this part.

* * * * *

3. In appendix A to part 3, section 1, paragraphs (c)(9) through

(c)(29) are redesignated as paragraphs (c)(10) through (c)(30) and a

new paragraph (c)(9) is added to read as follows:

Appendix A to Part 3--Risk-Based Capital Guidelines

Section 1. Purpose, Applicability of Guidelines, and Definitions.

* * * * *

(c) * * *

(9) Deferred tax assets means the tax consequences attributable

to tax carryforwards and deductible temporary differences. Tax

carryforwards are deductions or credits that cannot be used for tax

purposes during the current period, but can be carried forward to

reduce taxable income or taxes payable in a future period or

periods. Temporary differences are financial events or transactions

that are recognized in one period for financial statement purposes,

but are recognized in another period or periods for income tax

purposes. Deductible temporary differences are temporary differences

that result in a reduction of taxable income in a future period or

periods.

* * * * *

4. In appendix A to part 3, section 2, paragraph (c)(1) is

revised, a new paragraph heading is added to paragraph (c)(2),

paragraph (c)(3) is redesignated as paragraph (c)(4) and a heading

is added to newly designated paragraph (c)(4) and the introductory

text is revised, and a new paragraph (c)(3) is added, to read as

follows:

* * * * *

Section 2. Components of Capital.

* * * * *

(c) * * *

(1) Deductions from Tier 1 capital. The following items are

deducted from Tier 1 capital before the Tier 2 portion of the

calculation is made:

(i) All goodwill subject to the transition rules contained in

section 4(a)(1)(ii) of this appendix A;

(ii) Other intangible assets, except as provided in section

2(c)(2) of this appendix A; and

(iii) Deferred tax assets, except as provided in section 2(c)(3)

of this appendix A, that are dependent upon future taxable income,

which exceed thelesser of either:

(A) The amount of deferred tax assets that the bank could

reasonably expect to realize within one year of the quarter-end call

report, based on its estimate of future taxable income for that

year; or

(B) 10% of Tier 1 capital, net of goodwill and all intangible

assets other than purchased mortgage servicing rights and purchased

credit card relationships, and before any disallowed deferred tax

assets are deducted.

(2) Qualifying intangible assets. * * *

(3) Deferred tax assets--(i) Net unrealized gains and losses on

available-for-sale securities. Before calculating the amount of

deferred tax assets subject to the limit in section 2(c)(1)(iii) of

this appendix A, a bank may eliminate the deferred tax effects of

any net unrealized holding gains and losses on available-for-sale

debt securities. Banks report these net unrealized holding gains and

losses in their Call Reports as a separate component of equity

capital, but exclude them from the definition of common

stockholders' equity for regulatory capital [[Page 7908]] purposes.

A bank that adopts a policy to deduct these amounts must apply that

approach consistently in all future calculations of the amount of

disallowed deferred tax assets under section 2(c)(1)(iii) of this

appendix A.

(ii) Consolidated groups. The amount of deferred tax assets that

a bank can realize from taxes paid in prior carryback years and from

reversals of existing taxable temporary differences generally would

not be deducted from capital. However, for a bank that is a member

of a consolidated group (for tax purposes), the amount of carryback

potential a bank may consider in calculating the limit on deferred

tax assets under section 2(c)(1)(iii) of this appendix A, may not

exceed the amount that the bank could reasonably expect to have

refunded by its parent holding company.

(iii) Nontaxable Purchase Business Combination. In calculating

the amount of net deferred tax assets under section 2(c)(1)(iii) of

this appendix A, a deferred tax liability that is specifically

associated with an intangible asset (other than purchased mortgage

servicing rights and purchased credit card relationships) due to a

nontaxable purchase business combination may be netted against that

intangible asset. Only the net amount of the intangible asset must

be deducted from Tier 1 capital. Deferred tax liabilities netted in

this manner cannot also be netted against deferred tax assets when

determining the amount of net deferred tax assets that are dependent

upon future taxable income.

(iv) Estimated future taxable income. Estimated future taxable

income does not include net operating loss carryforwards to be used

during that year or the amount of existing temporary differences

expected to reverse within the year. A bank may use future taxable

income projections for their closest fiscal year, provided it

adjusts the projections for any significant changes that occur or

that it expects to occur. Such projections must include the

estimated effect of tax planning strategies that the bank expects to

implement to realize net operating losses or tax credit

carryforwards that will otherwise expire during the year.

(4) Deductions from total capital. The following items are

deducted from total capital:

* * * * *

Dated: February 3, 1995.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 95-3364 Filed 2-9-95; 8:45 am]

BILLING CODE 4810-33-P