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November 1994

UPERVISORY
I

ss u

E

s

Board Streamlines Nonbanking
Applications Procedures
The Board of Governors has
amended Regulation Y to
implement the section of the
Community Development
and Regulatory Improvement
Act of 1994 (CDRIA) which
streamlines the approval
process for bank holding
companies seeking to engage
in nonbanking activities.
The amendments provide
simplified 30- and 60-day

acquisition of a going concern,
are now made by a 30-calendar
day notice. The new regulation
contemplates action by the
Reserve Bank within 30 caJenda,r da,ys of receipt of a notice
containing all core information. Also, the Federal Register
public comment period for these
proposals has been reduced from
30 to 15 days.
The Reserve Bank may request
additional information within
five business days after receiving
a notice. Clearly deficient
notices may be returned
~, ' ~ within 15 calendar days
• ~ after receipt. This 30-day
Q...~~
processing period may
~~
be extended 15 calendar
~ days by the Reserve Bank
~
if the notificant is advised
r< ~
,, of the reasons.
prior notice periods. In most
The current procedure for
cases, pre-acceptance review
"small acquisitions" of comof notices has been eliminated. panies engaged in listed
activities has been retained.
30-Day Notice
The maximum size limitation
for a small acquisition, howProposals to engage in
ever, has been increased from
nonbanking activities listed
in Section 225.25(b) of Regula- $100 to $300 million in total
tion Y, either de novo or through assets.
1

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Federal Reserve Bank of St. Louis

Supervisory
News and Views
for the Eighth District

60-Day Notice
Proposals by holding companies to engage in nonbanking
activities not listed in Section
225.25(b) of Regulation Y
(unlisted activities) are now
also made by prior notice.
The new regulation contemplates action by the Board of
Governors within 60 e,alenda,r
da,ys after receiving a notice
containing all core information. This procedure also
applies to proposals involving
listed nonbank activities that,
because of other issues, are
not eligible for delegated
processing. Requests for
information, in addition to
that which is required by the
regulation, will be sent to
the notificant within 10 business days after receiving a
notice. Clearly deficient
notices may be returned
within 15 calendar days.
The initial processing period
can be extended for 30 calendar
days, and the Board may extend
an additional 90 calendar days
for a total extension equaling
120 calendar days as long as
the institution is advised of the
reasons for the extension.
(continued on next page)

Applications Procedures
(continuedfrom front page)

If 60 calendar days elapse
after receipt of a complete
notice, and the Board has not
issued an order of disapproval
or the processing period has
not been extended, the notice
will be deemed approved by
operation of law. For this provision only, a complete notice
is defined as containing all
information required by the
regulation and all other
r(3{/uested information.

Core Information
Anotice to engage de novo
in a listed nonbanking
activity, either directly or
through a subsidiary, must
contain at least the following
information:

1) a description of the pro-

posed activity;
2) the identity of the company
to conduct the activity; and
3) a description of existing
activities of the subsidiary,
if the institution proposes to
conduct activities through
an existing subsidiary.
Anotice to acquire a going
concern engaged in a listed
nonbanking activity must
also include these items:
1) a discussion of competitive
effects of the proposal
among entities currently
engaged in the activity;
2) a statement of public benefits
reasonably expected to result
from the proposal; and

3) a description of the terms
and sources of funds for the
transaction supported by
the following:
(a) a copy of any pertinent
purchase agreements;
(b) current financial statements for the company
to be acquired;
(c) parent company only
and consolidated pro
forma balance sheets
for the notificant as
of the most recent
quarter-end; and
(d) proforma consolidated risk-based and
leverage capital ratios
for the notificant as
of the most recent
quarter-end.

Finally, for a bank holding
company seeking to engage in
an unlisted nonbanking activity, either on a de novo basis or
through acquisition of a going
concern, the notice must
include two additional items:
1) evidence that the proposed
activity is closely related to
banking; and
2) a commitment to comply
with all conditions and
limitations that have been
established by the board
of directors governing the
proposed activity.

If you have questions, please
call Supervisory Officer Dennis
Blase at (314) 444-8435.

Board Streamlines Formation Procedures
The Community Development
and Regulatory Improvement
Act of 1994 (CDRIA) streamlined procedures for bank
holding company formation
transactions that are corporate
reorganizations involving
substantially the same shareholders. Effective September 23,
1994, a holding company formation proposal which meets
the following criteria may be
approved 30 days following
written notice to the Reserve
Bank and consummated
immediately upon receipt
of notice of approval.
• Shareholders who controlled at least 80 percent of
the bank's shares, following
the reorganization, control
at least 80 percent of the
holding company's shares
in substantially the same
proportion.


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Federal Reserve Bank of St. Louis

• The reorganization does
not result in a change in
control under the Change
in Bank Control Act.
• The company demonstrates
that any debt incurred in
the transaction will not
burden the company or its
subsidiary bank.
• No nonbank activities result
from the holding company
formation.
• At its last examination,
the bank received a 1 or 2
composite CAMEL rating.
• The bank is adequately
capitalized under prompt
corrective action guidelines.
• Neither the bank nor any
of its officers, directors or
shareholders is involved in
any unresolved supervisory
or enforcement matters
with any federal banking
agency.

Written notice for qualifying
transactions must include the
following five items:
• board of directors' certification that each of the seven
notice criteria is met by the
proposed transacti9n;
• shareholder lists for the
bank and the holding company, showing ownership
before and following the
proposed reorganization;
• a description of resulting
management of the proposed holding company
and its bank, including
biographical information
for new senior officers or
directors who were not
senior officers or directors
of the bank prior to the
reorganization; detailed
history of involvement of
officers, directors or shareholders of the holding com-

pany in any administrative
or criminal proceeding;
• pro forma financial statements for the holding company; description including
amount, source and terms
of debt related to the transaction; financial projections showing debt service
and retirement; and
• verification that notice of
the formation, providing
a 15-calendar day public
comment period, has been
published in anewspaper
of general circulation in
the bank's community.
Proposals that do not meet
this criteria will continue
to be subject to the regular
applications procedures. If
you have questions, please
call Supervisory Officer Dennis
Blase at (314) 444-8435.

Examiners Review Large Dollar Llfe Insurance Policies

R

;i~e~t~~=:that some banks
and bank holding
companies have
purchased large dollar life
insurance policies on bank
management officials. Many
of these policies are structured as
split-dollar insurance arrangements where different entities
pay the premiums, own the
policy and receive the death
benefits. Because they normally
obligate the bank to pay large
premiums for
policies

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Federal Reserve Bank of St. Louis

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for which
the bank is
not the owner or the
beneficiary, these policies
are of supervisory concern.

Examiner Evaluation
When evaluating a life insurance arrangement structured
to compensate a bank official,
examiners will focus on the
following issues:
1) Was the compensation
program reviewed and
approved by the bank's
board of directors?
2) Did the board:
• determine the cost of
the program either by

calculating the income
lost by not investing in
an asset that provides a
market rate of return, or
by calculating the bank's
direct funding cost to pay
and carry the accumulated
premiums, including the
cost of maintaining the
cash value as an asset if
it is capitalized on the
bank's books;
• determine that the total
compensation to the
officer, including salary
and other benefits, is
comparable to compensation paid to a similar
officer at a peer institution in the same region;
• appropriately account for
and report all payments
as compensation on call
and tax filings?
3) Are the earnings performance and capital position
of the bank at or above peer
averages?
4) Do documents support the
bank's right to receive death
benefit proceeds equal to the
bank's premium payments,
plus interest?

Supervisory Concerns
If capitalized, the resulting
asset is subject to a review for
quality based on the financial
viability of the insurance
company and underwriter.
Non-earning assets are
normally adversely classified
or deducted for purposes of
calculating capital.
If a subsidiary bank funds
the purchase of a large dollar
policy and the parent company
is the primary beneficiary, the
bank may violate the collateral
requirements and possibly the

quantitative limitations of Section 23A of the Federal Reserve
Act if the bank's premium
payments are viewed as an
unsecured extension of credit
to an affiliate and that extension exceeds 10 percent of the
bank's capital. The transaction
may also violate provisions of
Section 23B of the Act if the
economic return derived by the
bank for its lump sum payment
is not commensurate with a
market rate of return.

Assessment Criteria
Because the purpose, structure and financial impact of
each arrangement is unique;
examiners will assess situations
individually, considering:
1) the purpose of the arrangement and whether it represents a self-serving practice;
2) the size of the transaction
and its effect on the financial
stability of the institution;
3) whether the transaction
complies with applicable
banking laws and regulations; and
4) whether the bank or holding
company asset is properly
accounted for and accurately
valued.
Examiners recognize that
there are legitimate business
reasons to carry life insurance
on key management officials.
Nevertheless, they will require
that policies which disadvantage a supervised institution or
threaten its financial stability
be discontinued.

Bankers' Comments Reshape CRA Small Institution
Assessment Option

T

he September CRA proposal
reflects the views of over
1,000 community bankers
who commented to the Board
of Governors on the small
institution assessment option
proposed last December. Over
half criticized the proposed
60 percent loan-to-deposit ratio
as a proxy for satisfactory CRA
performance. In addition,
community bankers expressed
concern about the vagueness
of other assessment criteria
and wanted more certainty
about examinations.
In response, the Board eliminated the 60 percent test and
clarified the separate assessment standards for small
banks. It also clarified that
all small banks will receive a
streamlined examination,
unless the bank elects another
assessment method. The
current proposal retains the
definition of a small bank as
one with total assets less than
250 million that is either
independent or an affiliate
of a holding company with
total banking and thrift
assets less than $250 million.
Approximately 819 Eighth
District institutions qualify
for this option.

Delineation of Service
Area
Each bank must define a
service area which includes
only whole census tracts or
block numbering areas. In
addition, it must include
all areas equidistant from
those branches and deposittaking ATMs around which
the bank has originated or
had outstanding a significant


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Federal Reserve Bank of St. Louis

number and amount of home
mortgage, small business and
small farm loans.

Assessment Standards
The small bank standards
rely heavily on lending
performance. To receive a
satisfactory rating, a bank
must demonstrate:
The Board has
eliminated the
60 percent test
and clarified assessment standards.

• a reasonable loan-to-deposit
ratio (considering seasonal
variations) given the bank's
size, condition and the
credit needs of its service

• a record of responding to
written complaints
about performance in
meeting credit needs in
its service area, and
• a reasonable geographic
distribution of loans, given
its service area.
Eligibility for an outstanding
rating will include an evaluation
of whether performance exceeds
each of the standards for a
satisfactory rating. It will also
include the bank's performance
in making qualified investments
(as defined in the regulation)
and its performance in providing branches, ATMs or other
services and delivery systems
that enhance credit availability
in its service area.

Assessment Context

in an assessment context
that includes:
• demographic information
on income levels, housing
costs and other information
regarding the credit needs
in its service area;
• product offerings and business strategy;
• financial condition, the
economic climate and other
factors that affect its ability
to lend;
• past performance and the
performance of similarly
situated lenders; and
• comments in the bank's
public file and those submitted to the Reserve Bank
following announcement of
the examination schedule.

BANK PERFORMANCE
Strong Loan Growth Drives Changes
in Assets and Funding
ighth District loans
grew at a consistent 9.5 percent
annual rate from
year-end 1992
through June 30, 1994, outpacing the 4. 7 percent growth in
total assets during the period.
Lending activity has increased
across all loan categories.
The largest contributor is real
estate-secured loans, which
accounted for 54 percent of
loan growth for the 12-month
period endingJune 30.
Consumer lending has
also increased significantly,
accounting for 26 percent
of loan growth for the
same period.
As of June 30, loans represented 58 percent of District
banking assets. This compares
with a low of 54.1 percent at
year-end 1992 and nearly
approaches the pre-recessionary

E

8th District Banks
Purchased Overnight Funds Position
Billions of Dollars
a-.----------------s,-.1--.1a

4---+---

0

-$0.272

.7........__ _ _ _ _ _ _ _ _ _ _ _ _ ____.
12/92

3/93

6/93

-

Net FFP


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Federal Reserve Bank of St. Louis

9/93
-

12/93

3/94

Net Loan Losses

6/94

8th District Banks
Cumulative Quarterly Growth
Billions of Dollars
14-----------------12-+------------------,...-f
1 0 - + - - - - - - - - - - - - --

L------t

8 - t - - - - - - - - - - ~- ----iiiiiiiii;;;--1
6 - + - - - - - - - - - - - - - - :-a,,.'---- - -- ~

4-t-----:--~

=-------=~

, . C i_,.----:::-;jjjjiiilJ1~----1

O - + - - - - ---=-- - - - - - - - - _ _ _ _ ; : - - - - - i

-2---------........--------........12/92

3/93
- -

6/93
9/93
Loans
Temp. Inv.
-

level of 58.2 percent as of
September 30, 1990.
With loan growth exceeding
asset growth, it might be
expected that securities holdings
would decline. To the contrary,
District banks have increased
their holdings by 5.2 percent
since year-end 1992. Although
the second quarter of this year
reflected a slight drop in securities, the amount is not a
significant factor in that quarter's increase in loan growth.
Instead, most loan growth
was offset by a reduction in
temporary assets, principally
federal funds sold.
On the liability side of the
balance sheet, funding reflected
a shift to short-term borrowings.
While District deposits have
grown a modest 2.3 percent
since 1992, District bank balance sheets reflected significantly higher positions in
purchased overnight funds

12/93
3/94
Deposits
- Borrowings

6/94

and short-term borrowings
of less than one year. Indeed,
since 1992 the District has
been a net purchaser of federal
funds and short-term borrowed
funds have doubled.
All District peer groups,
particularly banks with more
than $1 billion in assets,
reported increases in interestbearing funds and declines in
core deposits relative to assets.
The net loan-to-core deposits
ratio for all District banks is
now at 78.2 percent, up from
69.6 percent in 1992. District
banks over $1 billion reported
net loans to core deposits at
84.2 percent as of June 30.
Bank performance during
the second half of 1994 will
indicate whether this increased
use of nondeposit funding
sources will adversely affect
net interest margins and liquidity, particularly with the
recent rise in short-term rates.

CORIA Extends Safety and Soundness
Examination Cycles
ecause of the Community
Development and Regulatory Improvement Act of
1994 (CDRIA), significantly
more banks are eligible for
an 18-month examination
cycle. CD RIA expands the
18-month cycle to include
all banks with total assets
under $100 million with a
satisfactory rating. Also,
banks with assets between
$100 and $250 million with
CAMEL ratings of 1 will
now qualify for the extended
examination cycle.

Based on current ratings,
approximately 470 more
District banks are eligible for
the extended cycle under these
new criteria.
The extended cycle will be
phased in over the next year
for newly eligible state member
banks in alternate examination
programs as the Reserve Bank
works with state supervisors to
adjust the 1995 schedule.
In addition, two years after
enactment, CDRIA allows
bank regulators to further
expand the $100 million

asset ceiling for satisfactory
banks to $175 million, expanding further the number of
institutions whose cycles
can be extended.
The statute requires federal
supervisors to coordinate
examinations with each other
and with state supervisors.
Within two years, the federal
agencies must designate
which agency will take the
lead in coordinating unified
examinations.

Indebtedness
Reports Due
January 31

Executive officers and principal shareholders of member
banks are required by Regulation Oto annually disclose
their indebtedness and the
indebtedness of their related
interests to the correspondent
banks of the member bank.
FFIEC Form 004 or a similar
form must be submitted to the

board of directors by January
31, 1995. ForcopiesofFFIEC
Form 004, call Donna Rigdon
at (314) 444-8437.

B

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Post Office Box 442
St. Louis, Missouri 63166

Supervisory Issues 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. Questions
regarding this publication should
be directed to Sarah F. Casanova,
editor, 314-444-4634.

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12A ACCOUNTING
HILLARY DEBENPORT

1993 HMDA Data
The 1993 HMDAdata are
nowavailable for public
inspection at a central
depository in each MSA
HMDA data are available
in various formats (paper,
magnetic tape, diskette, and
CD-ROM). Orderformscan
be obtained by calling
(202) 452-2016 and selecting option three. For information on the location of
central depositories call
Joyce Campbell at the
FFIEC at (202) 634-6526.

FFIEC Seminars
The FFIEC will conduct
two Risk Management
Planning seminars in
1995 for chief executive
officers, directors and other
executive officers of bank
and thrift institutions.
• February 13- 14,
Orlando, FL
• May 16-17, Seattle, WA
For registration materials
and futher information,
call Sarah Casanova at
(314) 444-4634.