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November 1992


News and Views
for the Eighth District

s s uEs

St. Louis Fed to Conduct

Schedule of Meetings

FDICIA Informational Meetings

Jan 12 Quincy; IL

Federal Reserve Bank of St. Louis

Beginning in January, the St.
Louis Fed will sponsor 12 informational meetings throughout
the Eighth District to clarify
changes in banking regulations
resulting from the Federal
Deposit Insurance Corporation
ImprovementAct (FDICIA).
During each half-day session,
Fed examiners and attorneys
will present practical guidance
on the changes of most concern
to bankers. The initial portion
of the program will include a
discussion of limitations resulting fro~ Prompt Corrective
Action, revisions to Regulation

0, the new real estate lending
guidelines and the new Regulation F relating to Interbank
Liabilities. The remainder
of the program will include
practical guidance on the
provisions of Regulation DD,
with which banks must comply
no later than mid-June 1993.
District bankers will receive
letters of invitation to these
meetings in the coming weeks.
If you do not receive a letter or
want to make sure you are
included in a meeting in your
area, please call Linda Moser at
(314) 444-8320.

ection 36 of the Federal
Deposit Insurance Corporation Improvement Act (FD ICIA)
requires insured depository
institutions with assets over
$150 million as of January 1,
1993, to have independent
audit committees and to file
annual audited financial
statements and reports on
compliance with safety and
soundness laws and regulations. This article discusses

the FDIC's proposed requirement for audit committees
composed entirely of outside,
independent directors.
The proposed regulation
defines "independent" as
someone who has not been an
employee, associate or affiliate
of the covered institution or
any of its affiliates within the
preceding three years.
Since this requirement will
become effective for fiscal


Jan JB Cape Girardeau, MO
Jan 13 St. Louist MO
Jan 14 Springfield, MO
Jan 19
Jan 20
Jan 21
Jan 26

Mt. Vernon, IL
Louisville, KY
Bowling Green, KY
Memphis, TN

Jan 27 Jonesboro, AR
Jan 28 St. Louis, MO
Feb 2 Little Rock, AR
Feb 3 Greenville, MS

years after December 31, 1992,
audit committees should be
established early in 1993.
Recognizing that the restructuring of existing audit committees may require some
time, the FDIC has indicated
that it will not object if audit
committees are first restructured at annual meetings
after which institutions first
(continued on next page)

Applications Issues: Fed Introduces
Pre-filing Notice
o address the
amount of information needed for
bank holding
company applications, the Federal Reserve
Board has introduced a notice
of intent to file an application.
This notice may be presented
to the Reserve Bank by letter or
in person and needs to contain
little more than a description
of the transaction.
The notice permits the Fed
to identify any issues that
may be unique to the proposed
transaction and clarify the
information that must be
submitted for an adequate
evaluation. After a brief review


Audit Committees
(continuedfrom front page)

become subject to Section 36.
Aholding company may
fulfill the audit committee
requirement for all covered
subsidiaries (those which
are insured and have over
$150 million in assets) as
long as it meets certain requirements. To do this, it must
perform appropriate functions
for the covered subsidiaries,
and the depository institutions
must either have less than
$5 billion total assets or have
CAMEL ratings of either 1 or 2
and assets greater than $5 billion but less than $9 billion.
Large institutions, with
assets of at least $500 million,
must have two audit committee members with banking
or financial management
Federal Reserve Bank of St. Louis

of the proposal, the Reserve
Bank will inform the applicant
of information, beyond what
is normally requested, that
After a brief review
of the proposal, the
Reserve Bank will
inform the applicant
of information needed in the formal

is needed in the formal application. This should enable
the applicant to address fully
the issues relevant to the review
of its proposed transaction.
The new procedure, which is

expertise. This expertise can
be obtained as follows:
• Jhrough five years of service
as a director of an insured
institution or a financial
services company;
• as an audit committee member of any corporation; or
• through three years of finance,
accounting or banking
related employment at an
executive or professional
level in education, business,
or a federal or state financial
regulatory agency.
Audit committee members
of large institutions may not
be large customers or representatives of large customers.
Such customers are defined
as those whose transactions
with the institution, including
loans, deposits or other transactions, exceed the lesser of

entirely voluntary, does not
prevent an applicant from
filing a draft application. In
some cases, however, a prefiling notice might more
effectively achieve the same
'goal with less burden.
With this new procedure,
the Fed confirmed its current
timetable for reviewing Section
3 and Section 4 applications
t~ ensure a complete record
on which to base its analyses
and decisions. The Reserve
Bank provides comments in
an exception letter 10 business
days after receipt of an application; the applicant then has
eight business days to respond
by providing supplemental
information. Five days after

receiving the supplemental
inform~tion, the Reserve
Bank will accept or return
the application.
The Reserve Bank takes action
on delegated applications 30
days after acceptance. Applications reviewed by the Board
of Governors are normally ,
decided within 60 days unless
time is needed to analyze a
policy issue or to address issues
raised by parties protesting an

15 percent of risk-based capital
or $50 million.
Audit committees of large
institutions must have access
to outside counsel. This
means that the committee
must have the authority to
hire and compensate its own
counsel without approval of
the company's management
or directors. Counsel must
not concurrently represent the
company, its management
or its board of directors.
The only duty of the audit
committee specified in the
proposal is to review the
required reports of managementandindependent
accountants. The proposed
regulation, however, suggests
a number of other optional
duties for the audit committee.
These include approving the
selection of the accountant,
approving the scope of the

audit, reviewing proposed
adjustments and disagreements, meeting with the
accountants before required
audited financial statements
are filed, reviewing the adequacy of internal controls and
management's handling of
deficiencies in compliance
with safety and soundness
laws, reviewing call reports
for accuracy and timeliness,
and supervising the internal
audit function.
The FD IC's summary of the
proposal indicates that the list of
optional duties are meant to be
examples and not requirements.
These duties may vary with the
nature of the institution.

Applications Issues: What to Do Before
Proposing an Expansion
n general, a bank
holding company
pursuing an expansionary proposal
should exhibit the
following characteristics:


• it should be in satisfactory
financial condition as reflected in a BOPEC composite


;~~:;r_,.~-. -
Federal Reserve Bank of St. Louis

rating of 1 or 2 at its most
recent inspection;
• a majority of its banking
assets should have been rated
CAMEL composite 1 or 2 based
on the subsidiary banks' most
recent examinations; and
•each subsidiary bank should
have received a satisfactory
CRA composite rating at its
last compliance examination.

If a prospective applicant
does not meet these criteria,
the Fed recommends that the
proposal be deferred until
appropriate ratings are
If an applicant chooses to
file such a proposal without
A bank holding
company pursuing
an expansionary
proposal should
be in satisfactory
financial condition.

meeting the above criteria,
however, it must be prepared
to address in writing the
following issues supported by
appropriate documentation:
• For any current or proposed
subsidiary bank assigned a
less-than-satisfactory CAMEL,
CRA or compliance rating
at its most recent examination, the discussion should
include the nature of the
violations and exceptions
disclosed and the corrective
measures taken that will
produce an improvement
in the rating to a satisfactory

level. Copies of significant
correspondence between
the bank and its regulators
that relate to compliance or
improvement efforts would
be helpful.
• For any current or proposed
subsidiary bank operating
under some form of supervisory action with its primary
regulator, the proposal should
include a discussion of the
corrective measures taken to
address each provision of
the action. This discussion
should be supplemented by
a copy of the supervisory
action and copies of any
correspondence between
the bank and its regulator
detailing compliance efforts
taken or planned.

If a company and its subsidiary banks are in satisfactory
condition but either the company or a subsidiary bank has
exhibited an adverse trend
since the last examination in
the areas of earnings, capital
or asset quality, the applicant
should provide a discussion
of the reasons for the trends
and the actions taken to
improve performance.
In addition, any application
that would result in a change
in control should be supplemented by background information on each proposed
officer, director and principal
shareholder of the acquiring
holding company.

New Program Monitors Timeliness of

Regulatory Reports
St. Louis Fed
~Accepts Sevet•I
. leporlt

·. -,...,••rcttlli

to ~fst institutf
submitting timely and
accurate regulatory
reports, the St Louis Fed
accepts reports electronically. Current~ electronic
data for the following
bank holding company
reports are accepted:
FR Y-9C, FR Y-9LP,
FR Y-9SP and FRY~llQ.

Electronic submission of
regulatory reports does
not relieve an institution
of the requirement to
maintain a hard copy
of the igned and attested
cover page in its file as
mandated by Operating
Letter o. 22.
Federal Reserve Bank of St. Louis

ank regulators
rely on accurate
and timely reports
of financial condition to carry out
their supervisory responsibilities.
The Fed recently formalized its
monitoring responsibilities by
implementing a Regulatory
Reports Monitoring Program.
Effective with the September
30, 1992, reporting period, the
program will identify banking
institutions supervised by the
Federal Reserve that file late
reports. The program will later
be expanded to include monitoring of inaccurately prepared
or false regulatory reports.


Which reports are
covered by the pro•
Reports covered by the program include all periodic
financial reports submitted
by commercial banks, bank
holding companies and nonbanking subsidiaries of bank
Reports must be
the complete and
signed originals
to be considered

holding companies (Call,
FR Y-6, FR Y-9 Series, and
FR Y-11 Series reports).
Reports submitted by Edge
Corporations and foreign
banking organizations are
also covered. Reports not
subject to the program include
those dealing with supervisory
actions, merger and acquisi-

tion applications and Federal
Reserve monetary aggregate
reports .

What is a timely
Atimely report is defined as
an official copy of a report that
is received by the Reserve Bank

or its designated electronic
collections agent in a "timely"
manner. Filing of original
reports will be considered
timely in the following cases:
• The report is received by the
end of the reporting day on
the submission deadline
(5 p.m. at each of the Reserve
•The report is mailed first
class and postmarked no
later than the third calendar
day before the submission
deadline, regardless of when
the report arrives at the
Reserve Bank.
•The report is put into an
overnight delivery system on
the day before the submission

• The report is received electronically by the end of the
reporting day on the submis~ion deadline (5 p.m. at
each of the Reserve Banks) ,
or for the Call Report, it is
received by the electronic
collections agent by the
submission deadline.

In any of the first three
cases, the reports must be
the complete and signed originals to be considered timely.
Facsimile copies will no longer
be accepted.

Are extensions
Reserve Banks will no longer
be able to grant grace periods
or extensions beyond the due
date unless exigent circumstances exist and staff at the
Federal Reserve Board concurs.
More information about the
program will be mailed to
banking organizations in the
coming weeks.

District Bank Earnings and Asset
Quality Improve
ey profitability and
asset quality measures for the first
half of 1992 indicate that District
banks are poised for a very
good year. Annualized ROM
for the first six months of 1992
demonstrates a substantial


loan losses and
loans as a
Percentage of
Total loans




6/90 9/90 12/90 3/91 6/91 9/91 12/91 3/92 6/92


Net loan losses


Nonperforming loans
Federal Reserve Bank of St. Louis

lower interest expense resulting
from the continuing decline
in short-term interest rates.
Level overhead expense and
modestly lower provisions were
also contributing factors.
Nonperforming loans and
loan losses have decreased to
their lowest levels in several
years (see chart at left). Both
measures declined for the
first two quarters of 1992.
Accompanying the decline in
nonperforming loans is an
increase in the coverage of
those loans. Coverage is
defined as the level of loan
loss reserves to nonperforming
loans. This ratio has increased
steadily over the last five quarters and as of June 30, 1992,
it stood at 117.6 percent.
The balance sheet restructuring that began in 1991 and
continued into the first quarter
of 1992 stalled in the second

quarter. During the second
quarter, loan growth exceeded
securities growth for the first
time in six quarters (see chart
below). This growth, combined
with a small decrease in
deposits, resulted in an increase
in the loan-to-deposit ratio.
In addition, the inverse relationship between large time
deposits and MMDAs tapered
off, which is characteristic of
the last five quarters
Finally, District banks experienced appreciable growth in
assets and equity. The District
banking assets base grew by
1.7 percent compared with a
growth rate for U.S. peers of
only .30 percent. Cumulative
equity growth of 5.5 percent
during the first half of 1992
provides additional strength
for future asset growth.

increase from both year-end
1991 and thefirst six months
of 1991. At 1.16 percent, ROM
is up almost 21 percent when
Growth of Investment Securities
compared to the same period
and loans
last year. Additionally, District (Quarterly dollar change)
ROM exceeded the national
Billions of dollars
peer (U.S. commercial banks
2.S t - - - - - - - - - - - - - - with total assets less than
$15 billion), which equaled
2-----------1.03 percent based on June 30, 1.s
1992, data.
The leading factor supporting
the improved earnings is the
net interest margin, which
-0.S - - - - - increased significantly by
-1 ._____ _ _ _ _ _ _ _ _ _ _ _ _ _ ____,
22 basis points during the first
6/90 9/90 12/90 3/91 6/91 9/91 12/91 3/92 6/92
half of this year. The wider
margin is the consequence of

RESPA Enforcement Program Now in Effect
istrict bankers
should be aware
that the Department of Housing
and Urban
Development (HUD) has established an enforcement program
for violations of the Real Estate
Settlement Procedures Act
(RESPA). As part of its compliance examinations, the Federal
Reserve notes violations of
RESPA and has recently established procedures for referring
certain violations to HUD.


Of particular concern to HUD
is a recent increase in compensated referrals of real estate
settlement business. Although
the payment of reasonable fees
for services actually performed
is not prohibited, HUD has
determined that a party must
perform some processing
service, beyond simply taking
a mortgage loan application
and referring the business to
a lender, in order to receive a
fee for services rendered.

In the previous issue, the section reference for Regulation D
was incorrectly printed. The


Post Office Box 442
St. Louis, Missouri 63166

Supervisory lssue,S is published bimonthly by the Banking Supervision
and Regulation Division of the
Federal Reserve Bank of St. Louis.
Views expressed are not necessarily
official opinions of the Federal
Reserve System or the Federal Reserve
Bank of St. Louis.
Federal Reserve Bank of St. Louis

correct reference for limitations
on savings accounts is Paragraph 204.2 of Regulation D.