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Federal Reserve Bank of Dallas
2200 N. PEARL ST.
DALLAS, TX 75201-2272

February 14, 2006

Notice 06-10
TO: The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District

SUBJECT
Interagency Supervisory Guidance for Institutions
Affected by Hurricane Katrina
DETAILS
The federal financial institutions regulatory agencies and the Alabama, Louisiana, and
Mississippi state supervisory authorities have developed supervisory guidance to assist their
examiners in the examination of regulated institutions affected by Hurricane Katrina. The supervisory guidance outlines the factors that examiners should consider when assessing the condition
of a state member bank affected by the hurricane. Examiners are expected to assess the true
financial condition of the bank in accordance with current examination policies. While this may
result in a lower composite rating, examiners retain flexibility in assigning the management
rating, given this unprecedented disaster, and in determining an appropriate supervisory response.
The supervisory response should be tailored to the management’s capabilities and efforts in
resolving the institution’s problems, recognizing the extent to which weaknesses were caused by
problems arising from the hurricane and its aftermath.
ATTACHMENTS
Copies of the Board’s SR letter 06-3 and the interagency supervisory guidance are attached.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

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MORE INFORMATION
For more information, please contact Bobby Coberly, Banking Supervision Department,
(214) 922-6209. Previous Federal Reserve Bank notices are available on our web site at
www.dallasfed.org/banking/notices/index.html or by contacting the Public Affairs Department
at (214) 922-5254.

BOARD OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551

DIVISION OF BANKING
SUPERVISION AND
REGULATION

SR 06-3
February 3, 2006
TO THE OFFICER IN CHARGE OF SUPERVISION AND
APPROPRIATE SUPERVISORY AND EXAMINATION STAFF
AT EACH FEDERAL RESERVE BANK
SUBJECT: Interagency Supervisory Guidance for Institutions Affected by Hurricane Katrina
The federal financial institutions regulatory agencies and the Alabama, Louisiana,
and Mississippi state supervisory authorities have developed the attached supervisory
guidance to assist their examiners in the examination of regulated institutions affected by
Hurricane Katrina.
The supervisory guidance outlines the factors that examiners should consider
when assessing the condition of a state member bank affected by the hurricane. Examiners
are expected to assess the true financial condition of the bank in accordance with current
examination policies. While this may result in a lower composite rating, examiners retain
flexibility in assigning the management rating, given this unprecedented disaster, and in
determining an appropriate supervisory response. The supervisory response should be
tailored to the management’s capabilities and efforts in resolving the institution’s problems,
recognizing the extent to which weaknesses were caused by problems arising from the
hurricane and its aftermath.
Examiners are reminded that additional guidance is available on the FFIEC Katrina
webpage. This guidance has been organized in question and answer format by topic,
including past due and nonaccrual reporting, payment deferral arrangements, temporary
hardship programs for non-credit card retail lending, and treatment of municipal bond
obligations. The agencies will continue to update these questions and answers as necessary.
Reserve Banks are asked to provide this supervisory guidance to appropriate
supervision staff. Additional hurricane-related guidance is available on the Board’s Hurricane
Katrina webpage. Questions should be directed to Molly Wassom, Associate Director, at
(202) 452-2305 and Virginia Gibbs, Senior Supervisory Financial Analyst, at (202) 452-2521.
Richard Spillenkothen
Director

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Attachment:

Interagency Supervisory Guidance for Institutions Affected By
Hurricane Katrina (50 KB PDF)
Federal Deposit Insurance Corporation
Board of Governors of the Federal Reserve System
Office of the Comptroller of the Currency
Office of Thrift Supervision
National Credit Union Administration

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Interagency Supervisory Guidance for Institutions Affected
By Hurricane Katrina
(February 3, 2006)
PURPOSE
The federal financial institutions regulatory agencies1 and the state supervisory authorities in
Alabama, Louisiana, and Mississippi are jointly issuing this examiner guidance to outline
supervisory practices to be followed in assessing the financial condition of institutions directly
affected by Hurricane Katrina. This guidance also applies to examinations of institutions that
may be located outside the disaster area, but have loans or investments to individuals or entities
located in the disaster area. The guidance recognizes that examiners retain flexibility in their
supervisory response, given the unique and long-term nature of the problems faced by affected
institutions.
Hurricane Katrina had a devastating effect on the U.S. Gulf Coast region that will continue to
affect the business activities of the financial institutions serving this area for the foreseeable
future. Some of these institutions may face significant loan quality issues caused by business
failures, interruptions of borrowers’ income streams, increases in borrowers’ operating costs, the
loss of jobs, and uninsured or underinsured collateral damage. Further, as a result of the
significant loss in their tax and revenue base, state and local governments face major challenges
in paying their obligations, which could adversely affect financial institutions with large
investments in county/parish and municipal securities and loans.

OVERALL SUPERVISORY ASSESSMENT
It is critical that supervisory agencies are aware of the true condition of each affected financial
institution. Therefore, examiners should continue to assign the component and the composite
ratings in accordance with the definitions embodied in the Uniform Financial Institutions Rating
System. 2 When evaluating the CAMELS components at an affected financial institution,
examiners need to consider the reasonableness of management's plans for responding to the
hurricane’s ramifications on its business strategy and future operations, given the economic
conditions in its business markets. In particular, when assessing the management component,
examiners should consider management's effectiveness in responding to the changes in the
institution’s business markets caused by this unprecedented disaster and whether the institution
has addressed these issues in its long-term business strategy.

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This includes: the Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve
System, Office of the Comptroller of the Currency, Office of Thrift Supervision, and National Credit
Union Administration (collectively, the agencies).
Examiners of federally insured credit unions will use the guidance in NCUA Letter to Credit Unions
03-CU-04, CAMEL Rating System for assigning the CAMEL ratings.

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The examiner’s assessment of Hurricane Katrina’s effect on the CAMELS component ratings
may result in a lower composite rating for some affected institutions. However, in considering
the supervisory response for institutions accorded a lower composite rating, examiners should
give appropriate recognition to the extent to which weaknesses are caused by external problems
related to the hurricane and its aftermath.
Examiners should consult with their supervisors to determine what supervisory action, if any,
should be taken. Formal or informal administrative action that would ordinarily be considered
for lower-rated institutions may not be necessary, provided that prudent planning and policies are
in place and management is pursuing realistic resolution of the problems facing the institution.
In instances where a formal or informal supervisory response is warranted, supervisors should
tailor the response to management’s capabilities and efforts in resolving the institution’s specific
issues.
RISK ASSESSMENT
Examiners should expect affected institutions to have completed an initial risk assessment and
have a process for refining their assessments as more complete information becomes available
and recovery efforts proceed. In reviewing management’s assessment, examiners should
recognize that the issues faced by institutions are complex and may involve protracted
resolutions. The institution’s assessment should reflect management’s best estimate of its asset
quality, given the prevailing economic conditions in its business markets. Management should
be able to explain the disaster’s implications on the institution’s earnings and capital, as well as
its effect on liquidity and sensitivity to market risk.
As a part of the ongoing assessment process, examiners need to ensure that institutions are able
to identify all loans and investments significantly affected by the disaster and any potential loss
exposure. For secured loans, examiners should expect an institution to have a process for
tracking information on the condition of collateral and the collectibility and timing of
insurance. This analysis should be performed on an individual loan basis and supporting
documentation should be included for significant credits. This process may necessitate a
change in the institution’s loan review criteria to reflect the need to monitor credits affected by
the hurricane more frequently.
Institutions that experienced heavy damage to facilities or lost key personnel may still be
working on their assessments. However, examiners should expect the institution to
demonstrate its review methodology and reasonable progress given the circumstances.
Examiners should review management’s assessment to determine whether it is sufficient in
scope and content. The examiner-in-charge should adjust the scope of the examination
depending on the quality and thoroughness of the institution’s internal risk assessment and
consider the accuracy of this evaluation, as appropriate, in the CAMELS ratings.

CAMELS COMPONENTS
Examiners should evaluate the CAMELS components according to existing supervisory
guidance. In addition, examiners should consider the following examination guidelines:
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Capital Adequacy
When evaluating the capital component for an affected institution, examiners should consider
any extraordinary expenses, unexpected deposit growth, contingent liabilities and risks, and loan
losses that were incurred as a result of Hurricane Katrina. If significant declines in the affected
institution’s capital ratios have occurred or are projected, examiners should determine whether
the institution’s board of directors has developed a satisfactory capital restoration plan that
provides for capital augmentation in a timely manner.
Asset Quality
Loan Reviews. Examiners should expect an institution’s loan review practices to be sufficient
to verify that it is adequately identifying and reporting the risk in its loan portfolio. Examiners
also should identify any recourse arrangements with sold loans or other contractual agreements
that may involve risk to the institution from deteriorating asset quality. Examiners should
recognize that supporting file documentation may be limited due to unusual circumstances
caused by the disaster. Initially, examiners should verify the accuracy of the internal assessment
by transaction testing. Examiners should consider expanding the scope of the loan review if the
transaction testing indicates that the internal risk assessment is insufficient.
New Loans. Examiners should review a sample of loans originated after Hurricane Katrina to
determine whether the institution’s underwriting standards are appropriate. There may be a
number of legitimate reasons why management may have eased underwriting standards after
Hurricane Katrina to address the needs of its customer base. In addition, management may have
changed its business strategy to focus on new lines of business or expanded into new markets.
Examiners should note any significant changes in the financial institution’s lending practices and
ensure that these activities are consistent with the institution’s loan policies, the board of
director’s strategic plan, and prudent underwriting standards.
Credit Modifications. Examiners should recognize that the economic conditions in disasteraffected areas may influence an institution’s course of action as well as the timing of such action.
Examiners generally should not criticize an institution that is attempting to constructively work
with its borrowers in affected areas. Examiners should review an institution’s policies and
procedures for providing a borrower with a loan modification, extension, restructuring, or
workout.
Credit modifications, extensions, and restructurings (including capitalization of interest) do not
necessarily indicate imprudent lending practices. If a performing credit was appropriately
modified as a result of Hurricane Katrina, then absent any unusual circumstances, examiners
should not criticize these practices. Examiners should expect to see appropriate documentation
to support the institution’s agreement with the borrower, including the borrower’s recovery
plans, source of repayment, reliance on insurance proceeds, advancement of additional funds for
rebuilding, value of additional collateral, and the condition of existing collateral. Regardless of
the terms of the modification or workout agreement, examiners should expect the institution to
appropriately recognize credit losses as soon as a loss can be reasonably estimated. Moreover,
examiners should expect the institution to preserve the integrity of its internal loan grading
methodology and maintain appropriate accrual status on affected credits.
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Nonaccrual. Institutions may find it necessary to allow borrowers in affected areas to defer
payment of principal, interest, or both for a reasonable period of time with the expectation that
the borrower will resume payments in the future. Nevertheless, accrued interest should be
written off (reversed) when it is deemed uncollectible. Examiners should ensure that financial
institutions continue to follow applicable regulatory reporting requirements, as well as the
institution’s internal accounting policies, when reporting nonaccrual assets.
Insurance Claims. In many cases, repayment may be dependant on the collection of insurance
claims on covered properties. However, management may be experiencing some difficulty in
contacting the insurance carrier or may be uncertain regarding the timing and amount of any
potential insurance claims.
Examiners should consider the type, amount and timing of any proposed settlement offers. If an
insurance carrier indicates a valid claim on a mortgaged property has been accepted, then the
negotiated settlement amount normally would not be subject to adverse classification, barring
any unusual issues. If the validity of an insurance claim is in doubt or a protracted resolution is
likely, then examiners will need to exercise their judgement in classifying a loan based on its
individual facts and circumstances.
Classification Standards. Examiners should rely upon existing credit classification standards
for loans affected by Hurricane Katrina. The evaluation of each credit should be based upon the
fundamental characteristics affecting the collectibility of a particular credit. Examiners should
review management’s assessment of the borrowers’ repayment ability and financial condition as
well as the institution’s collateral protection to determine the appropriate credit classification.
Examiners should apply appropriate credit classification and charge-off standards in cases where
the information available indicates a loan will not be repaid, or contact with the borrower has not
been established. Examiners should also assess the reasonableness of management’s plans for
pursuing foreclosure of collateral on nonperforming assets, given the unknown environmental
risks and other factors. In some cases, the deferral of foreclosure may be the most prudent
course of action.
Allowance for Loan and Lease Losses (ALLL). Examiners should review the institution’s
methodology for calculating the ALLL. In determining an appropriate ALLL, management
should consider all information available about the collectibility of the institution’s loan
portfolio. Consistent with generally accepted accounting principles (GAAP), the amounts
included in the ALLL for estimated credit losses incurred as a result of Hurricane Katrina should
represent probable losses that can be reasonably estimated. As institutions obtain additional
information about loans to borrowers affected by the hurricane, management is expected to
reflect revised estimates of loan losses in its regulatory reports.
For loans to borrowers in the affected area, there may be a period of time where institutions may
find it difficult to accurately determine the collectibility of loans. Examiners should recognize
that management may need more time than in normal economic conditions to evaluate the effect
of the hurricane on the ability of the borrower to pay, assess the condition of underlying
collateral, and determine potential insurance proceeds. Examiners should ensure that
management has maintained the ALLL at an appropriate level based on its best estimate of
probable losses within a range of loss estimates.
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Obligations of Taxing Authorities. Examiners should review the institution’s loan and
investment portfolios to determine whether it has extended credit to taxing authorities via loans
or through the purchase of county/parish or municipal obligations in areas that sustained damage
during Hurricane Katrina. A significant number of communities located on the Gulf Coast are
heavily dependent on local sales, hotel, property, and income tax revenues. These sources of
income have fallen sharply since the disaster, and the ultimate collection of such loans and
investments may be adversely affected. Some loans and bonds also are tied to specific facilities,
such as hospitals, that may not resume operations for an extended period.
The agencies and the state supervisory authorities will continue to treat municipal bonds issued
by Hurricane Katrina-affected entities as investment quality debt securities, provided they were
investment quality before Hurricane Katrina and have not been downgraded subsequently to
below investment quality. For non-rated municipal bonds, management should monitor the
institution’s risk exposures in order to assess whether those bonds continue to be the credit
equivalent of an investment grade security. Many public obligors/issuers have insurance or have
access to debt payment and other reserve funds that may avert a downgrade in their quality
rating. Examiners generally should classify a bond according to existing guidance if its rating
falls below investment grade.
Real Estate Values. The disaster-affected areas and neighboring evacuee locations have
experienced significant fluctuations in real estate values. For both existing real estate loans and
new loans, examiners should assess the institution’s policies and practices with regard to
estimating values on collateral in real estate markets that have experienced a significant, but
possibly temporary, decrease or increase in real estate values as a result of the hurricane. When
reviewing an institution’s estimates of collateral values, examiners should ascertain whether the
values are based on assumptions that are both prudent and realistic.
Appraisal Waivers. The agencies granted a three-year waiver from their appraisal regulations
to institutions affected by Hurricanes Katrina (ending August 29, 2008) and Rita (ending
September 24, 2008). These appraisal waivers cover real estate-related transactions in certain
Alabama, Mississippi, and Texas counties and Louisiana parishes. To qualify for the waiver, a
financial institution needs to document that:
(1) the property involved was directly affected by these disasters or the transaction would
facilitate recovery from the disaster;
(2) there is a binding commitment to fund the transaction that is made within three years after the
date these disasters were declared; and,
(3) the value of the real property supports the institution’s decision to enter into the transaction.
When an institution decides to rely on the appraisal waiver for a particular real estate-related
transaction, the institution should provide sufficient documentation in the loan file to support its
credit decision and valuation of the collateral. Examiners should continue to review transactions
exempted from the appraisal regulations.

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Other Assets. Examiners should determine whether the institution has acquired other assets,
such as temporary office facilities to replace destroyed or unusable branches as well as
temporary lodging facilities for employees whose homes have become uninhabitable. Examiners
should assess the short- and long-term effect, including the asset’s disposal when no longer
needed, that these assets may have on the institution’s operations and earnings.
Management Capability
When rating management, existing supervisory policy stipulates that examiners should make a
distinction between problems caused by the institution’s management and those due to outside
influences. Management of an institution with problems related to external factors would
warrant a higher rating than management believed substantially responsible for an institution’s
problems, provided that prudent planning and policies are in place and that management is
pursuing realistic resolution of the institution’s problems.
Many of the financial institutions affected by Hurricane Katrina are being confronted with
unprecedented issues. Examiners should evaluate management based on the scope and
thoroughness of the institution’s internal risk assessment and, if necessary, its strategic plan for
business restoration. In assessing management, examiners should consider the institution's size,
complexity, and risk profile. While management of an affected institution should be rated upon
its ability to properly identify and manage these risks, examiners should give consideration to the
extraordinary circumstances surrounding many of the decisions made immediately after the
disaster as well as the actions subsequently taken to resume operations.
In light of this disaster, examiners should assess the adequacy of an institution’s disaster
recovery and business continuity plans and consider whether these plans need to be modified.
This review should include an assessment of management’s ability to:
•
•
•
•
•
•
•
•
•

Deal with extensive damage to facilities and equipment;
Operate with limited staffing;
Re-establish internal telecommunications capabilities;
Retrieve and restore data systems and electronic information;
Handle and reproduce contaminated loan files, legal documents, and collateral
documentation;
Locate and contact third party service providers and key suppliers;
Replace contaminated cash and coins;
Handle contaminated safe deposit boxes and their contents; and,
Locate and contact other key business partners.

Earnings
When evaluating the earnings component of an affected financial institution, examiners should
consider the duration or longevity of any reductions to core earnings caused by the hurricane.
Examiners should also assess the quantity and quality of prior earnings as well as the influence
that Hurricane Katrina may have on the institution’s future earnings potential. This assessment
also should consider the adequacy and reasonableness of any revisions to the institution’s budget
and strategic plan.
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Liquidity
Many financial institutions affected by Hurricane Katrina may experience sharp fluctuations in
liquidity resulting from the receipt of FEMA payments, insurance proceeds, or other disasterrelated funds, as well as outflows of municipal deposits, out-of-area funds, or other large
deposits. In addition, collateral requirements for secured funding sources (such as a line of credit
from a Federal Home Loan Bank) may be temporarily modified. Examiners should consider the
nature and timing of disaster-related inflows and outflows when reviewing the adequacy of an
institution’s liquidity and be cognizant of how management is employing any influx of liquid
resources.
Sensitivity to Market Risk
Many institutions affected by Hurricane Katrina may experience temporary shifts in their interest
rate risk profiles from changes in cash flows associated with the short-term impact of the
disaster. For example, the amount or timing of cash flows may be altered by deterioration in
loan and bond portfolios or by the prepayment of mortgages via insurance proceeds.
Examiners should recognize that management may require a reasonable period of time to fully
assess any changes to the institution’s interest rate risk profile, and to distinguish between
permanent structural changes versus short-term fluctuations during a transitional period.
Examiners should ensure that the institution’s asset and liability management models are being
reviewed and updated for any unusual fluctuations in deposit balances, adjustments to loan
payments, changes in interest rates, and other modifications to ensure the integrity, accuracy, and
reasonableness of the models.

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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102