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. March 1993








News and Views
for the Eig,hth District

,J -

l'S s

Why Examiners ,Emphasize Loan

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.,
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
Federal Reserve Bank of St. Louis


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

(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

(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
• 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
• environmental study, as
• lien waivers for construction
Examiners are <;>bligated to judge .loa_n s
without the benefit
of borrower contact.

\ 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
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
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
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.
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.


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? .





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.


- - -.. ;
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
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
' The,refore, thf
When reporting Home Mort•
, new designations will bec6me
, -. gage Disclosure Act (HrylDA)
data gathered in 1992, lenders effective for .data gathered
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.
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
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
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.


Federal Reserve Bank of St. Louis

Identification of
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.

(Section 18j of the Federal
Deposit Insurance Act).

Allocation of fees
among subsidiary

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
on a bank's asset size
market value of the specific
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
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
to either Dennis W. Blase at
or Timothy A.
Management fees should ,
Bosch at 3l 4-A44-8440.
be paid in a reasonable and
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




Exploring Coverage of Nonperforming
sofSep.tember30, '/
1992,' (Coverage _,
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
, - ,
, ,





IDjstrict/ ~.S. Compa;ison

160 r - - - - - - - - . . ; . . . __ _ _ _ _ _ _ _____,
140 .,___ _ _ _ _ _ __ _ __ _ __

r--- - ---.-.....,-------,,..,..,.,.....r----





U.S. Peer







" ,-

District Peer Trend

160 --. - - - - - - - a . - - - - - - - - - - - - - - - .

l - - - ' - --


- -- -- -- - - - -- -



Federal Reserve Bank of St. Louis

. 0












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







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 - '




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.


_~_r_~_,_19_~_·_ _ _ _ ,:

- '



, ,_








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.- •
'Additionally, a video of the I
• The new real estate lending
,infqrmati,onal meeting held
guidelines, and , '
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:






If you would like copies I
of either booklet or the video,
please calLJanice Harris at
(314) 444-8439.



t,ube 09 -

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.
Federal Reserve Bank of St. Louis


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