offs and total average loans for the number of years beginning with 1969 and ending with the year of report. In 1973, banks which elect the forward moving average method will compute the minimum allocable credit loss expense on the same basis as banks which elect method (1).

NOTE: For purposes of Items 2(A) and (B), annual "average loans outstanding" (1) shall include Federal funds sold and securities purchased under agreements to resell and (2) may be computed on any reasonable schedule of frequency. In the absence of other procedures, "Other loans," and "Federal funds sold and securities purchased under agreements to resell", as reported in the Statements of Condition called by the supervisory authorities, shall be averaged.

(C) Actual net chargeoffs as experienced in the current year.

(3) An estimated amount for loan losses allocable to operating expense in excess of the minimum amount computed as instructed in subitem (2) should be provided when judged appropriate in the opinion of management.

(4) Furnish in a note to financial statements an explanation of the basis for allocating loan losses to operating expense including (A) the method followed, and (B) amount added at the discretion of management, if any.

(5) The amount may be expressed in even dollars or thousands of dollars.

NOTE: The amount reported for loan losses in operating expense shall be adjusted, if necessary, to the amount transferred to the allowance for loan losses recorded on the books of the bank by an entry to the undivided profits account in the statement of changes in capital accounts. For example, if the estimated loan loss expense reported in the statement of income is less than the amount transferred to the allowance for loan losses, the amount of difference, less related tax effect, should be charged against the undivided profits account. If the estimated loan loss expense reported in the statement of income (1) is more than the amount transferred to the allowance for loan losses, and (2) represents the minimum amount the bank is required to allocate under its elected method, the amount of difference, less related tax effect, should be credited to the undivided profits account.

(6) Banks which do not provide for loan losses on a reserve basis shall include the amount of actual net chargeoffs (losses less recoveries) for the current year.

(j) Other operating expenses. (1) Include all operating expenses not reported in Items 2(a) through 2(i).

(2) Include advertising, business promotion, contributions, cost of examinations by supervisory authorities, deposit insurance assessment, fees paid to directors and members

of committees, memberships, net cash shortages or overages, operating expenses (except salaries) of "Other real estate owned", postage, premium on fidelity insurance, publicity, retainer fees, stationery and office supplies, subscriptions, taxes not reported against other items, telegrams and cables, telephone, temporary agency help, travel, unreimbursed losses on counterfeits, forgeries, payments over stops, and all other recurring expenses and immaterial nonrecurring charges.

(3) Deposit insurance assessment expense shall be reported as a net figure—that is, all assessment credits during the period shall be applied against the assessment expense.

(4) Itemize all amounts that represent 25 percent or more of this item.

(k) Total operating expenses. State the sum of Items 2(a) through 2(j).

3. Income before income taxes and security gains (losses). State the difference of Item 1(h) minus Item 2(k).

4. Applicable income taxes. (a) State the aggregate of Federal and State taxes applicable to the amount reported in Item (3).

(b) Do not include taxes applicable to net security gains (losses) and extraordinary items. Such taxes (or tax reductions) shall be reported in Items 6 and 8.

5. Income before securities gains (losses). State the difference of Item 3 minus Item 4.

6. Net security gains (losses). State the net result of security gains and losses realized.. Related income taxes (or tax reductions) shall be shown parenthetically.

7. Net income. State the sum or difference. of Items 5 and 6.

NOTE: If extraordinary items are reported (See Item 8) the caption to this Item shall read, "Income before extraordinary items."

8. Extraordinary items. State the material results of nonrecurring transactions that have occurred during the current reporting period. Only the results of major events outside of the ordinary operating activity of the bank are to be reported herein. Such events would include, but not be limited to, material gain or loss from sale of bank premises, expropriation of properties, and major devaluation of foreign currency. Related income taxes (or tax reductions) shall be shown parenthetically. (Less than material results of nonrecurring transactions are to be included in Items 1(g) or 2(j), as appropriate.)

9. Net income. State the sum or difference of Items 7 and 8.

10. Earnings per common share. State the per share amounts applicable to common stock (including common stock equivalents) and per share amounts on a fully diluted basis, if applicable. The basis of computation, including the number of shares used, shall be furnished in a note to financial statements.

50-026-71-18

[34 F.R. 20312, Dec. 30, 1969]

INTERPRETATIONS

§ 206.101 Interpretation of definition of "officers."

(a) Section 206.2(o) defines the term "officer" to mean any person who occupies one or more of certain enumerated positions in a member State bank "and any other person who participates in major policy-making functions of the bank." Among the positions so enumerated is that of "Vice President", but it is also provided that a person bearing the title of "Vice President" who does not "participate in major policy-making functions of the bank" is not an officer for the purposes of this Part 206.

(b) When this Part 206 was adopted, an accompanying description in the FEDERAL REGISTER (30 F.R. 362; January 12, 1965), stated that "an 'officer' of a bank is defined to exclude persons who, regardless of title, do not participate in major policy-making functions." This statement has resulted in some confusion as to the scope of the definition of "officer". In order to clarifiy the matter, the Board of Govenors has made the following interpretation.

(c) All persons holding any position enumerated in § 206.2(o), except those

holding a position as "Vice President”, are officers for purposes of this Part 206 regardless of whether they participate in major policy-making functions. The second sentence of § 206.2(o), which provides that certain persons are not officers if they do not participate in major policy-making functions, applies only to persons with the title of "Vice President".

[30 F.R. 6731, May 18, 1965]

§ 206.102 Disclosure of loans to "insiders."

(a) The Board of Governors has recently been asked to clarify its position with respect to disclosure of loans to "insiders"—that is, officers, directors, and persons holding more than 10 percent of the bank's stock-in management proxy statements furnished in accordance with the requirements of §§ 206.5 and 206.51 (Form F-5). This interpretation is also applicable to disclosure of such transactions under comparable provisions relating to registration of bank securities (§ 206.41; Form F-1) under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781).

(b) Item 7(f) of Form F-5 and Item 12 of Form F-1 in effect require a de

scription of any material1 interest of any insider or any of his "associates" 2 in any material transaction to which the bank was, or is to be, a party. These items contain a number of specific exemptive instructions-for example, no disclosure is required where the only interlock is that a director of a bank is a director and/or officer of another corporation that is a party to the transaction. Generally, these items require disclosure of loans to a corporate borrower only where insiders, individually or with members of their immediate families, own at least 10 percent of the borrower's outstanding stock.

(c) The Board does not regard loans and other extensions of credit by a registrant bank in the ordinary course of its business as "material" for the purposes of this part (and therefore required to be disclosed unless otherwise specifically exempted by the instructions in these Items) if such loans (1) are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other than insiders, (2) at no time aggregate more than 10

1 "The term 'material', when used to qualify a requirement for furnishing of information as to any subject, limits the information required to those matters as to which an average prudent investor ought reasonably to be informed before buying or selling the security registered." (§ 206.2(n).)

2 "The term 'associate', when used to indicate a relationship with any person, means (1) any corporation or organization (other than the bank or a majority-owned subsidiary of the bank) of which such person is an officer or partner or is, directly or indirectly, either alone or together with one or more members of his immediate family, the beneficial owner of 10 percent or more of any class of equity securities, (2) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as a trustee or in a similar fiduciary capacity, and (3) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the bank or any of its parents or subsidiaries." (§ 206.2 (d).)

3 "The term 'immediate family' includes a person's (1) spouse; (2) son, daughter, and descendant of either; (3) father, mother, and ancestor of either; (4) stepson and stepdaughter; and (5) stepfather and stepmother. For the purpose of determining whether any of the foregoing relationships exist, a legally adopted child shall be considered a child by blood." (§ 206.2(k).)

percent of the equity capital accounts of the bank or $10 million, whichever is less, and (3) do not involve more than the normal risk of collectibility or present other unfavorable features.

(d) Item 7(e) of Form F-5 requires disclosure of indebtedness to the bank of each director or officer of the bank and each nominee for election as a director. An instruction to this item specifically excludes indebtedness resulting from transactions in the ordinary course of the bank's business. The effect of this instruction is to exempt the bank from reporting under item 7(e) normal extensions of credit to such persons, of types and amounts customarily made by the bank in the usual course of its operations. However, even if disclosure of indebtedness is not required by item 7(e), consideration must be given to whether it must be reported in the light of the provisions of item 7(f), referred to above.

(e) It should also be noted that item 7(e) requires disclosure of any liability to the bank that appears to have arisen under section 16 of the Securities Exchange Act of 1934 (15 U.S.C. 78p) as a result of "insider" transactions in the bank's stock (or other equity security). [30 F.R. 15089, Dec. 7, 1965]

§ 206.103 Financial statements to be included in annual reports to security holders.

(a) Since 1966 will generally be the first time that banks subject to the public disclosure requirements of the Securities Exchange Act of 1934 (15 U.S.C. 78) will be soliciting proxies in accordance with such requirements, the Board of Governors directs the attention of registrant banks to § 206.5 (c) (Reg. F). It is provided therein that a bank's proxy statement (or the statement that must be distributed where management does not solicit proxies) which relates to an annual meeting of security holders at which directors are to be elected, shall be accompanied or preceded by an annual report to such security holders "containing such financial statements for the last fiscal year as will, in the opinion of the management, adequately reflect the financial position and operations of the bank."

(b) Adherence to the following reporting standards, prescribed in Regulation F, is considered necessary to reflect adequately the financial position