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. March 1993 fflE FEDERAL RESER\E BAi"il\of Sf.WL'Ltii UPERVISORY I' 1\ - Supe!visory News and Views for the Eig,hth District ,J - l'S s J Why Examiners ,Emphasize Loan Documentation, value of a loan without the· Experience and j'udgment benefit of direct contact with of seasoned /credit officers remain the primary requisites the borrower. for sound loan portfolios. This is primarily why Fed Accordingly,.lenders who know examiners look for an effective their customers and territories system to maintain complete will prove the old axiom that and current information on all loans are go,od loans when· - b,arrower~. \The following ioformation provides specific they are bob~ed., ,, 1 Documentation of the loan guidance to1 clarify thk expectaprocess, however, becomes , tions examiners have when importantwhen the unexpected reviewing loan portfolios. happens and it becomes necessary to demonstrate to others What should loan documentation tell that an informed credit decision was made. Directors, loan you? reviewers, internal and external Loan documentation should auditors, and examiners have reveal why money is being an obligation to judge the borrowed, for how long and at last Minute Re.._inders · -~for Filing the FR Y·6 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A 11 b~K ho~ding. companies with a fiscal year ending December 31 shouldne ~ware that the Annual Report of Bank Holding Companies/ FR Y-6) is due no later than March 31. To assist you, examiners-have devel_oped-a list of common errors noted during the review of these repor~. Before·mailing this year's report, take-a few moments to review the following list to ensure that your report is accurate and complete. , what price. Good credit files document a primary and,· if secured or guaranteed, a 'secondary source of repayment. For secured loans, the pledged collateral will be identified and assigned a realistic value and the bank's lien position will be documented. Also periodic analyses of a borrower's financial statements enable the lender to monitor the b~rrower's repayment capacity anti can identify emer,ging cash flow deficiencies before the loai;i becomes d,ylinquent. 1 (continued on next page) • Item ·7, Insider Loans • Item-8,-Changes in Investments and Activities 1. Provide a complete response to each item and sub-item in When responding to Item 8, t_he report, even if the _either sign the confirmation response is "not applicable." statement included in the report instructions or retype The following items are most and sign a new statement. Sign a statement even if commonly left blank: • Item 4, Amendments to (continued on ne.rt page) Organizational Documents Documentation (continue¢ from front page) What do examiners expect to see in a credit file?✓ This varies depending on the type of loan. The following list identifies typical items required ,for an-y type of loan: • borrowing resolution', for , , ; corporations 1 _ • lo'ar:i application ; credit check or analysis of credit history • prorQissory note or other agreement evidencing indebtedness • current_balance sheet, income statement and cash flow statement If a loan is secured by personal property, the following should also be included:, • security agreement • UCC-1 filing • rece~vables aging; if included in collateral • periodic inspection of movable collateral • titles to vehicles • 'estimate of collateral value ,_ • collateral release certificate; -_as applicable , ' ' • hazard insurance policy, as - applicable ' If the-loan is secured by real estate, the following documents should be added t~ the file: • qualified appraisal • deed of trust or mortgage • title insurance policy or attorney's opinion • hazard/liability insurance policy • environmental study, as applicable • lien waivers for construction loans Examiners are <;>bligated to judge .loa_n s without the benefit of borrower contact. I \ I I • ' I Finally, if the loan is guaranteed, include the following: ' • guarantee agreement • current financial statements on guarantors the importance of creating files that support the credit. Loans with these and other items missing are notedjn the examination report as "Loans Not Supported by Proper Documentation." 'To,av6idJhaving documentation exceptions menti9ned in examination reports, credit officers should have systems in place to ensure that all necessary documents are maintained in the loan files. Although these lists are not all-inclusive, they emphasize Filing t,he FR Y-6 (continued ft·om front page) you do not need to file a Bank Holding Company Report of Changes in Investments and Activities (FR Y-6A). This verifies that the holding company either has no change in activities or has reported all required changes on the FR Y-6A. Item 6 is often incomplete. If a directe>r or officer has https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis another principal occupation, other than with the holding company, list the occupation. Also,disclose in(ormation on each director's or officer's holdings within the organization and other business companies. Itern 3is also often left incomplete. Be sure to indicate all direct and indirect subsidiary ownership relationships, including the percentage of ownership. Even if a subsidiary is inactive, it should still be on the chart. 2t·File two-year comparative 1 financial st:;ttem~nts, inciuding a balance sheet, income statement, state/ ment of changes in stockholders' equity and cash flow statement. Companies with more than one subsidiary bank or total consolidated assets of $150 mil- more, however, send the origilion or more are also required nal plus three copies. • to file these comparative statements on a consolidated basis. Additionally, companies that 4. Mail or deliver the report _ own non-bank subsidiaries in time for it to reach the Federal Reserve Bank on or must submit a two-year comparative balance sheet, income before March 31, 1993. ~tatement and statement of changes 'in stockholders' equity -If the reports are not received by the deadline, they must for each of these subsidiaries. either be postmarked no later Do not send a statement of changes in financial position than March 28, 1993, or .entered into an overnight as a substitute for the cash flow ~tatement or cppies of the delivery system no later than FR Y-9 series reports. Neither March 30, 1993. Please of these meet the reporting remember that extensions for filing reports _will be granted requirements for the FR Y-6. ' only in exigent circumstances. 'If you have questions regard·3. Sign the' cover page in.ct mail ~ng the FR Y-6, please call the appropriate number of Rita J. Rauba at 314-444-8850 complete copies wit_h the or Eugene J. Knopik at original report. 314-444-8438. Normally, the original plus , two copies are required. If the company's total consolidated assets afe $500 million or Answers to .Common Regulation OQuestions ankers continue to call this Reserve Bank with questiQns on Regulation.D, which was amended in May 1992. Therefore.Fed examiners and attorneys develr oped a question and answer booi51ef to help bankers comply with the new requirements. The following excerpts from this booklet highlight some of the changes and more complex issues. B What is the individual lending. limit? The amount a bank may lend to an individual insider is limited to 15 percent of the bank's unimpaired capital and surplus for loans that are not fully secured and an additional 10 percent for fully secured loans. State chartered banks, however, are subject to the lower-of this limit or the lending limit of their state. The individual lending limit incorporates the limits and exceptions of the concentration of credit rules under the National Bank Act. Are lo.ans to directors now subiect to the individual lending limit? . ~-~ I '-;;- t/1i 1/fr/4 B'.l'l',1' ~,,,~X\ payable if the officer becomes indebted to any other bank(s) in an aggregate amount greater than allowed for a particular category of credit in section 215.S(c). This condition must now be in writing. r - - -.. ; and for loans to P,Urthase, 1 construct, maintain or improve their residences. The general individual lending limit of Regulation 0 operates as the maximum that may be lent to executive officers and their related interests for any purpose, including loans What are the addi• tional restrictions on for residential and educational loans to executive purposes. In addition, loans officers? to executive officers must be reported to the bank's .board Banks cannot lend over $100,000 to an executive officer. , of directors and be subject to (If the higher of 2.5 per:cent of special conditions. the bank's unimpaired capital and surplus or $25,000 is lower What are the special than $100,000, the lower figure conditions for loans becomes the ceiling.) Executive to executive officers? officers may, however, borrow Extensions of credit to execuany amount for loans to finance tive officers must, at the option the education of their children of the bank, become due and Yes. Loans to directors and their related interests are now subject to th~ general 'individ- ; ual lending limit applicable to executive officers and principal shareholders. There are, however, additional restrictions on loans to executive officers. Do the additional , restrictions on loans ) to executive officers apply Jo state non· member banks? Yes. The provisions relating to executive officers were extended to restrict loans made by a non-member bank to its executive officers. The FDIC adopted the same limit contained in Regulation Oto avoid treatirtg any disparity of treatment among banks based on their membership, or lack of membership, in the Federal Reserve System. Updates for HMDA Reporters MSA Designation Change)s Delayed lenders need additional time to convert to the new MSA designations. ' The,refore, thf When reporting Home Mort• ,/ , new designations will bec6me , -. gage Disclosure Act (HrylDA) data gathered in 1992, lenders effective for .data gathered 1 should continue to use the in 1994. • , Additionally, lenders who metropolitan statistical _area were previously exempt from (MSA) designations that were HMDA reporting, but who-are in place for most of 1992, now covered because of the not the new ones issued by new MSA designations, will the Office of Management and Budget. be required to begin collecting According to the Federal HMDA data beginning Reserve Board of Governors, January 1, 1994. •1 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Timing for Availability Amended , Beginning March 31, 1993, lenders need to make their ' Loan Appl(cation Register (LAR) data available to the public within 30 days-of receiving a request. For privacy, lenders must modify the LAR before releasing it to the public by removing the application or loan number, the date the application was received, and the date of action taken. Additionally, disclosure statements received from the Federal Financi~l Instit~tions Examination Council (FFIEC) must be made available to the public within three business days of receipt. Fees Must Reflect Services everal Eighth District bank holding companies chargefees to their subsidiary banks for management services and other services. These services include data processing, marketipg, investment advi~e, legal counsel, loan review and auditing. This practice is acceptable as long as the fee charged is commensurate with the service provided. Fees cannof however be assessed as an alternative to paying dividends. Using-such fees to meet debt obligations or to cover general operational expenses is not permissible"under the Board of Governors' manag~ment fees policy. Recent bank holding company inspection reports reveal common exceptions to the Board's policy. To ensure that management and service fee assessments comply with the policy and do not constitute inappropriate diversions of bank income, the following guidelines should be used. S I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Identification of services When a fee is charged by a holding company for a management service, a corresponding tangible value must be received by each subsidiary bank. This however, makes it difficult to justify the receipt of management fees by a shell bank holding company. Unless the shell company is providing a specific and valuable service that benefits the bank directly, a managem~nt fee arrangement will normally be fnapptopriate. Operational costs of the parent should be funded with bqnk I. dividends. (Section 18j of the Federal Deposit Insurance Act). Allocation of fees among subsidiary banks In a multibank holding company, management fees allocated to eadi bank should : 1 be based qn the level ,of services provided tq,that bank. Charges should be determined by the Pricing of services time and resources expended In situations where manage- by the parent in providing the ment fees are justified, charges particular-service. In most cases an allocation based should be based on the fair simply on a bank's asset size market value of the specific is inappropriate. Asset size services. It is appropriate, could, however, be a reasonhowever, for the company to able criteriaJor allocating the cover its cost of providing the parent's advertising expense service plus a reasonable profit- no more than 10 per- among its banks. cent of cost - if no market Written Fee has been established for a Agreement particular service. All management fee arrangeDocumentation ments should be formalized Lack of adequate documenta- by a written agreement signed by the directors of both the tion has often been a problem holding company and the noted during inspections. banks. This document should Each service to be provided by identify specific services, assoa holding company to its ciated costs and the billing banks should be documented cycle. It should also specify with a detailed description of the service and the price struc- a review or renewal date. ture, including a comparative Any specific questions cost analysis. regarding the management Timing of service fees policy should be directed fees to either Dennis W. Blase at 314-444-8435 or Timothy A. Management fees should , Bosch at 3l 4-A44-8440. be paid in a reasonable and I ' timely manner. Prepayment for services to be provided in the distant future is inappropriate because it unnecessarily diverts income from the subsidiary bank and can be viewed as a violation of Section 23A of the Federal R€Serve Act I '\ ,,. -BANK PERFORMANCE Ce1111osition Exploring Coverage of Nonperforming Loans sofSep.tember30, '/ 1992,' (Coverage _, 7 of nonperforming ~ lo~ns had in~reased to a historically hig~ level. District ~anks have mqnaged to attain and then exGeed 100 percent coverage of nonperforming loans. Significantly, this occurred without disturbing the earnings stream. In fact, District bank earnings improved during each of the past three quarters. U.S. peer banks with total assets less than $15 billion by contrast have coverage ratios below 100 percent: ,While ,the coverage ratio varies among the five District b~nk- , peer groups noted on the chart , below, each peer group demonstrates an increase in its ratio and now exceeds 100 percent. By comparison,.only the Loa~ Loss Reserve~/~~nperforming Loans , - , , , I A I i ' IDjstrict/ ~.S. Compa;ison Percent 160 r - - - - - - - - . . ; . . . __ _ _ _ _ _ _ _____, 140 .,___ _ _ _ _ _ __ _ __ _ __ 120 r--- - ---.-.....,-------,,..,..,.,.....r---- 100 80 60 40 20 0 - <SS0MM SS0MM100MM U.S. Peer - SlO0MM300MM / '\ I ( " ,- District Peer Trend Percent 160 --. - - - - - - - a . - - - - - - - - - - - - - - - . 1---- l - - - ' - -- - - -- -- -- - - - -- - - 100 '80 \' https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 60 40 20 . 0 - < SS0MM SS0MMl00MM 12/31/90 - Sl00MM300MM 12/31/91 • S300MM1B 9/30/92 SlB1SB I Smallest natiqnal peer group ,. r,eports coverage in excess • of 100 percent as seen in the chart above. The coverage ratio measures loan loss -reserves as a percentage of _ Loan Loss Reserves/Nonperforming -Loans 120 S300MM1B District 1 140 ---- SlB- 15B , nonperforming loans (loans 90 days or more p~t due and loans placed ori-nonaccrual). The increase in District bank reserves results from slightly .lower loan losses cpmbined with stable provision expense. More important, nonperforming loans nave ·declined from a high of 1.9 percent of total loans in the first quarter of 1991 to 1.4 percent as-of September 3-0, 1992. U.S. peer banks have not experienced the sa111e combination of - ' positive~trends. \/ - - Mortgage Counseling Requirement Extended he requirement that fenders notify delinquent borrowers of the availa~ility of mortgage counseling within4:5 days of an initial loan -def~ult has been extended to This extension was part-0f the Housing and Co_mmynity Development Act of 1992, which was signed into lawon October 28, 1992. I T _~_E_~m _~_r_~_,_19_~_·_ _ _ _ ,: 1 - ' I - , ,_ -Informatiorial-Materials- I I I • ) Available Q uestion and answer • Prompt Corrective1ctjon booklets on regulations 0 applicable to well capitalized and DD, which were developed banks, _to complement the FDICIA • Regulation Oprovisions _ ~ inform~tional meetings recently relating to new lending Iimits, held throughout the Eighth District, an~ available to assist • Regulation Fwhich provides _ in complying with these " 1 limitations for interbank regulations.- • liabilities, 'Additionally, a video of the I • The new real estate lending ,infqrmati,onal meeting held guidelines, and , ' I ' \ in St. Louis on January 13 is , a~ailable fdr 130. In it, fed ' " • Rygu\ation DD whieh , implements the Truth in •-speakers pro\ide gui?anre Savings Act. ' • • OJ: the f9llowing provisions: ) > ■ . I I I If you would like copies I of either booklet or the video, please calLJanice Harris at (314) 444-8439. I I t,ube 09 - CAROL THAXTON ttcoples 2 Post Office Box 442 St. ·u~uis, _Miss?uri 63166 ' \ Supervisory ls~ues is publishedoi·-in-onthly by the Banking Supervision and Regulation Division of the -- (ederal Reserve Bank of St. Louis. Views expressed are not necessarily official opinions of the Fedezal Reserve System or the Federal Reserve Bank of St. Louis. Questions regarding this publication should be directed to Dawn C. Ligibel, editor, 314-444-8909. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ' -\ - \ ) I - _/I I
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