TO: Chief Executive Officers of All National Banks, Deputy Comptrollers,
District Administrators, Division Directors, and All Examining Personnel

##### PURPOSE

The Federal Financial Institutions Examination Council (the \"FFIEC\")
has approved a reporting requirement, effective October 1, 1989, to use
push down accounting in certain acquisitions of national banks, state
member banks and insured state nonmember banks. This reporting
requirement is an addition to the Glossary to the Instructions to the
Consolidated Reports of Condition and Income (\"Call Report\"). This
banking circular explains the policy and provides an illustration of the
application of push down accounting.

##### BACKGROUND

Push down accounting establishes a new accounting basis for the
financial statements of an acquired bank. Under push down accounting,
when a bank is acquired by another entity either directly or indirectly
(e.g., a bank holding company) in a purchase acquisition, yet retains
its separate corporate existence, the assets and liabilities of the
acquired bank are restated to fair value as of the acquisition date. In
addition, the equity accounts of the acquired bank are restated to equal
the purchase price paid by the buyer.

##### POLICY

A bank is required to use push down accounting in preparing its Call
Report if an unaffiliated arm\'s-length purchase acquisition of at least
95 percent of its voting stock has occurred, and it does not have an
outstanding issue of publicly traded debt of preferred stock.

In these circumstances, a bank must use push down accounting if it has
been acquired in a business combination accounted for as a purchase
acquisition in accordance with Accounting Principles Board Opinion 16,
\"Business Combinations\". Banks acquired in business combinations
accounted for as a pooling of interests are prohibited from using push
down accounting because there is no adjustment to the historical cost
basis under generally accepted accounting principles. Reference should
be made to the glossary entry in the Call Report entitled \"Business
Combinations\" for additional information on a purchase acquisition
versus a pooling of interests.

Push down accounting will also be required for Call Reports if the
bank\'s financial statements are presented on a push down basis in
reports filed with the Securities and Exchange Commission.

In addition, push down accounting may be used in an arm\'s-length
purchase of at least 80 percent of the voting stock of an acquired bank,
where the OCC and the bank\'s independent accountant concur that the use
of push down accounting is appropriate.

To apply push down accounting, capital accounts of the acquired bank
must be adjusted to equal the purchase price. The purchase price is the
total cash, stock, debt and other consideration paid to acquire the
voting stock of the bank. After the push down adjustments, total capital
\-- stock and surplus \-- of the bank will equal the price paid by the
purchaser. Undivided profits must be recorded at zero as in the
formation of a new bank.

Asset and liability accounts of the acquired bank are adjusted to equal
their fair value amounts. To the extent the purchase price exceeds those
fair value amounts, the excess should be recorded on the books of the
acquired bank as intangible assets. However, in no case should the net
assets recorded at fair value exceed the purchase price. An illustration
of the application of push down accounting is attached.

For Call Reports, a bank will report the initial increase or decrease
occurring in its equity capital from the application of push down
accounting on Schedule RI-A, \"Changes in Equity Capital.\"

In purchase acquisitions not meeting the criteria above, purchase
adjustments would be recorded on the books of the consolidated company.
The acquired bank would retain its original historical based cost
account balances.

Push down accounting may be used to record acquisitions consummated
between December 31, 1988, and the date of this policy that meet the
criteria for push down accounting. In these circumstances, banks should
contact the Bank Accounting Division of the Office of the Chief National
Bank Examiner (202) 874-5180.

Originating Office:

Chief National Bank Examiner

Bank Accounting Division

Washington, D.C. 20219

Donald G. Coonley

Chief National Bank Examiner

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