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Federal R eserve B ank OF DALLAS W IL L IA M H. WALLACE DALLAS, TEXAS 7 5 2 2 2 F IR S T V IC E P R E S ID E N T A N D C H IE F O P E R A T IN G O F F IC E R February 9, 1988 Circular 88-13 TO: The Chief Executive Officer of all member banks, bank holding companies and others concerned in the Eleventh Federal Reserve District SUBJECT Slip sheet with amendments to Regulation H — Membership of State Banking Institutions in the Federal Reserve System DETAILS The Board of Governors of the Federal Reserve System has published amendments in slip-sheet form to Regulation H, effective November 1987. The new slip sheet should be inserted in Volume 2 of your Regulations Binders. ENCLOSURES Enclosed is the slip sheet to Regulation H. MORE INFORMATION For more information on Regulation H, please contact Dean A. Pankonien at (214) 651-6228. For additional copies of the Regulation H slip sheet, please contact the Public Affairs Department at (214) 651-6289. Sincerely yours This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800) 527-9200 (interstate). Board of Governors of the Federal Reserve System Amendment to Regulation H Membership of State Banking Institutions in the Federal Reserve System November 1987* 1. Effective M ay 15, 1985, section 208.13 is added to read as follows: SECTION 208.13— Capital Adequacy The standards and guidelines by which the capital adequacy of state member banks will be evaluated by the Board are set forth in appendix A to the Board’s Regulation Y, 12 CFR 225. 2. Effective January 27, 1987, section 208.14 is added to read as follows: SECTION 208.14— Procedures for Monitoring Bank Secrecy Act Compliance (a) Purpose. This section is issued to en sure that all state member banks establish and maintain procedures reasonably de signed to ensure and monitor their compli ance with the provisions of subchapter II of chapter 53 of title 31, United States Code, the Bank Secrecy Act, and the im plementing regulations promulgated there under by the Department of Treasury at 31 CFR part 103 requiring recordkeeping and reporting of currency transactions.13 (b ) Establishment o f compliance program. On or before April 27, 1987, each bank shall develop and provide for the continued administration of a program reasonably de signed to ensure and monitor compliance with the recordkeeping and reporting re13 Recordkeeping requirem ents contained in this sec tion have been approved by the Board under delegated au thority from the Office of Management and Budget under the provisions o f chapter 35 o f title 44, U nited States Code, and have been assigned OM B No. 7100-0)96. * The complete regulation, as am ended effective January 27, 1987, consists of— • the regulation pamphlet dated M ay 1982 (see inside cover) and • this slip sheet. Items 1 and 2 were included in the February 1987 slip sheet. Item 3 is new. quirements set forth in subchapter II of chapter 53 of title 31, United States Code, the Bank Secrecy Act, and the implement ing regulations promulgated thereunder by the Department of Treasury at 31 CFR part 103. The compliance program shall be reduced to writing, approved by the board of directors, and noted in the minutes. (c) Contents o f compliance program. The compliance program shall, at a mini mum— (1) provide for a system of internal con trols to ensure ongoing compliance; (2) provide for independent testing for compliance to be conducted by bank per sonnel or by an outside party; (3) designate an individual or individu als responsible for coordinating and mon itoring day-to-day compliance, and (4) provide training for appropriate personnel. 3. Effective November 9, 1987, section 208.15 is added to read as follows: SECTION 208.15— Agricultural Loan Loss Amortization (a) Definitions. For purposes of this sec tion— (1) “Agricultural bank” means a bank— (i) the deposits of which are insured by the Federal Deposit Insurance Corporation; (ii) which is located in an area of the country the economy of which is de pendent on agriculture; (iii) which has total assets of $100,000,000 or less as of the most re cent Report of Condition; and (iv) which has— (A ) at least 25 percent of its total loans in qualified agricultural loans; or Regulation H (B ) less than 25 percent of its total loans in qualified agricultural loans, but which bank the Board or the Re serve Bank in whose District the bank is located or its primary state regulator has recommended to the Federal De posit Insurance Corporation for eligi bility under this part. (2) “Qualified agricultural loan” means— (i) loans qualifying as “loans to fi nance agricultural production and oth er loans to farmers” or as “loans se cured by farm land” for purposes of Schedule RC-C of the FFIE C Consoli dated Report of Condition; (ii) other loans or leases that a bank proves to be sufficiently related to agri culture for classification as an agricul tural loan by the Board or the Reserve Bank in whose District the bank is lo cated; and (iii) the remaining unpaid balance of any loans, as described in (i) and (ii), that have been charged off since Janu ary 1, 1984, and that qualify for defer ral under this regulation. (3) “Accepting official” means— (i) the Reserve Bank in whose Dis trict the bank is located; or (ii) the director of the Division of Banking Supervision and Regulation in cases in which the Reserve Bank cannot determine that the bank quali fies under the regulation. (b) Loss amortization and reappraisal (1) Provided that there is no evidence that the loss resulted from fraud or crimi nal abuse on the part of the bank, its offi cers, directors, or principal shareholders, a bank that has been accepted under this section may, in the manner described be low, amortize in its Reports of Condition and Income— (i) any loss on any qualified agricul tural loan that the bank reflected in its annual financial statements for any year between and including 1984 and 1991; and (ii) any loss reflected in its financial statements resulting from a reappraisal or sale of currently owned property, real or personal, that it acquired in connection with a qualified agricultur al loan and that it owned on January 1, 1983, and any such additional property that it acquires on or before December 31, 1991. (2) Amortization under this section shall be computed over a period not to exceed seven years on a quarterly straight-line basis commencing in the first quarter after the loan was or is charged off so as to be fully amortized not later than December 31, 1998. (c) Accounting fo r amortization. Any bank which is permitted to amortize losses in accordance with paragraph (b ), above, may restate its capital and other relevant accounts and account for future authorized deferrals and amortizations in accordance with the instructions to the FFIEC Consol idated Reports of Condition and Income. Any resulting increase in the capital ac count shall be included in primary capital as per section 208.13 of this part. (d ) Eligibility. A proposal submitted in accord with paragraph (f) shall be accept ed, subject to the conditions described in paragraph (e), if the accepting official finds— (1) the proposing bank is an agricultural bank; (2) the proposing bank’s current capital is in need of restoration, but the bank re mains an economically viable, fundamen tally sound institution; (3) there is no evidence that fraud or criminal abuse by the bank or its officers, directors, or principal shareholders led to significant losses on qualified agricultural loans and related assets; and (4) the proposing bank has submitted a capital plan approved by the accepting official that will restore its capital to an acceptable level. (e) Conditions on acceptance. All accept ances of proposals shall be subject to the following conditions: (1) the bank shall fully adhere to the ap proved capital plan and shall obtain the Regulation H prior approval of the accepting official for any modifications to the plan; (2) with respect to each asset subject to loss deferral under the program, the bank shall maintain accounting records ade quate to document the amount and tim ing of the deferrals, repayments and amortizations; (3) the financial condition of the bank shall not deteriorate to the point where it is no longer a viable, fundamentally sound institution; (4) the bank agrees to make a reason able effort, consistent with safe and sound banking practices, to maintain in its loan portfolio a percentage of agricul tural loans not lower than the percentage of such loans in its loan portfolio on Jan uary 1, 1986; and (5) the bank shall agree to provide the accepting official, upon request, with such information as the accepting official deems necessary to monitor the bank’s amortization, its compliance with condi tions, and its continued eligibility. (f) .Submission o f proposals. (1) A bank wishing to amortize losses on qualified agricultural loans or other related assets shall submit a proposal to the appropriate accepting official. (2) The proposal shall contain the fol lowing information: (i) name and address of the bank; (ii) information establishing that the bank is located in an area the economy of which is dependent on agriculture; the information could consist of a de scription of the bank’s location, domi nant lines of commerce in its service area, and any other information the bank believes will support the conten tion that it is located in such an area. (iii) a copy of the bank’s most recent Report of Condition and Income; (iv) if the Report of Condition and Income fails to show that at least 25 percent of the bank’s total loans are qualified agricultural loans, the basis upon which the bank believes that it should be declared eligible to amortize losses; (v) a capital plan demonstrating that the bank will achieve an acceptable capital level not later than the end of the bank’s amortization period. The plan should provide for a realistic im provement in the bank’s capital, over the course of the amortization period, from earnings retention, capital injec tions, or other sources; and include specific information regarding divi dend levels, compensation to directors, executive officers and individuals who have a controlling interest and in turn to their related interests, and payments for services or products furnished by affiliated companies. (vi) a list of the loans and reappraised property upon which the bank propos es to defer loss, including for each such loan or property the following information: (A ) the name of the borrower, the amount of the loan that resulted in the loss, and the amount of the loss; (B) the date on which the loss was declared; (C ) the basis upon which the loss resulted from a qualifed agricultural loan; (vii) a certification by the bank’s chief executive officer that there is no evi dence that the losses resulted from fraud o r criminal abuse by the bank, its officers, directors, or principal shareholders; (viii) a copy of a resolution by the bank’s board of directors authorizing submission of the proposal; and (ix) such other information as the ac cepting official may require. (g) Revocation o f eligibility. The failure to comply with any condition in an accept ance or with the capital restoration plan is grounds for revocation of acceptance for loss amortization and for an administrative action against the bank under 12 USC 1818(b). Additionally, acceptance of a bank for loss amortization will not fore close any administrative action against the bank that the Board may deem appropriate. 3
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