6. Mail the CTR to the IRS Data Center, P. O. Box 32621, Detroit, MI 48232 ATTN: CTR Processing. ORIGINATING OFFICE Chief National Bank Examiner's Office, Commercial Examinations John F. Danny Jon F. Downey Chief National Bank Examiner April 9, 1986 Page 2 of 2 Comptroller of the Currency Washington, D. C. 20219 COMPTROLLER NOTIFICATIONS: A TIGHT HAND Within the past month, the Comptroller's Office has issued sev eral Banking Issuances to drive home the point that national banks-and especially their senior management-are at risk in the future if they claim lack of awareness of several important rules. The issuances cover a variety of issues: 1. Reworked (and somewhat tightened) Change-In-Control disclosure policy. 2. Prudent controls for securities lending (reflecting joint Federal agency agreement on recordkeep CONCENTRATIONS OF CREDIT The OCC has collected infor mation on concentrations of credit in national banks since January 1984. This data is collected through the Statistical Data Sheet (SDS). Compiled information is available on the National Bank Surveillance Video Display System (NBSVDS). A recent review of the database noted the existence of 3,991 concentrations of credit in 1,928 national banks. Surprisingly, 2,317 banks, which constitute 55 percent of the 4,245 examinations available in the Bank Supervision Newsletter ing, credit analysis, concentration limits, and reporting). 3. Strict guidance on the purchase of "junk bonds" either in a fiduci ary role or as investments (or their eligibility as borrower collateral). 4. The Federal Reserve's final rule implementing the FTC's Credit Practices Rule (no pyramiding late charges, prohibited credit, obligation provisions, written notice of cosigner liability); 5. Direct policy guidance on the accounting for gains and losses on foreign loan "swaps"-including a presumption that "..the estimated fair values (of such loans) will be less than the respective face values...result(ing) in a loss on the swap". Bank Supervision 1 ADC LOANS A new accounting buzz word in financial institutions (primarily savings and loan associations) is "ADC loans." The acronym stands for real estate “acquisition, develop ment and construction loans." Calling them loans may be a misnomer. Some ADC loans provide the same risks and rewards as ownership, they could be considered real estate investments. The distinction, for banks, could have implications in evaluating risk and compliance with 12 US.C. 29. Examiners should review these ADC arrangements carefully to determine whether the ADC arrange ment is a loan or an investment. The assessment should be based upon the risks and rewards involved in each specific case. The determinawhether the bank is primarily act tion should be made on the basis of ing as a lender or investor. If the examiner concludes the ADC ar rangement is a real estate invest ment, the examiner should cite a 12 USC 29 violation. In a true loan arrangement, the bank usually requires the borrower to have a substantial equity investment in the venture. Additionally, the bank may have recourse against other assets of the borrower. Fur ther, there may be a take-out commitment or noncancelable sales contract or lease commitment that protect the bank. guarantees sufficient cash flow to An ADC arrangement that may In This issue... ADC Loans • Training Team Coup National Banks' OperationsFirst Quarter 1985 • Bank Secrecy Act • ATRR Accounting Treatment • Employee Benefit Plans be considered an investment has most of the following characteristics: • The bank participates in the expected residual profit of the venture, (12 CFR 7.7312 allows a national bank to take as consideration for a loan a share in the profit from a business en(continued on page 2) (AGRICULTURAL from page 3) are: less than 40 percent, greater than 40 percent but less than 70 percent, greater than 70 percent but less than 100 percent, and over 100 percent. Information is being collected by both product line and indebtedness level so the OCC can identify banks which are the most susceptible to changing economic events. These banks will then be selected and/or targeted for ongoing analysis, closer scrutiny or examination. The OCC will be able to identify and analyze agricultural trends by geographical areas, by concentrations in par ticular commodities or livestock, and the borrowers' debt/asset ratio This information will allow the OCC to make informed decisions on agricultural banks. The OCC will also be better able to develop policies and procedures to respond to developing situations. Tom Watson National Bank Examiner Community Bank Analysis Division BANK SECRECY ACT AND TRUST National bank trust departments are required to comply with the recordkeeping and reporting requirements contained in both the Bank Secrecy Act (Act) and Section 21 of the Federal Deposit Insurance Act (FDIA), 12 USC 1829b. in excess of $5,000 on any one occasion must file certain reports with the Secretary of the Treasury. It is clear from the definitional provisions of the Act that bank trust departments are included within its requirements. In order to ensure compliance with the Act and its implementing regulations, the Trust Examinations Division is developing examination procedures for inclusion in a supple ment to the Comptroller's Hand book for National Trust Examiners Until the procedures are developed, examiners should be familiar with Section 201.1 and appropriate examination procedures in the Comp troller's Handbook for National Bank Examiners prior to examining trust departments for compliance with 31 CFR 103. Arthur W. Steele NONINTEREST INCOME A combination of causes (such as deregulation, increased competition and economic factors) have put pres sure on bank earnings in recent years. One possible strategic response to this pressure has been to increase noninterest income. National banks have been very successful in generating additional fee income. Total noninterest income in national banks has more than doubled between 1980 (88.4 billion) and 1984 ($17.3 billion). The Act requires that whoever knowingly transports or causes to The 5-year growth rate for noninbe transported "monetary interest income between 1980 and struments" into or out of the 1984 at 107 percent is significantly United States or receives "monetary greater than the growth rates in instruments" in the United States other financial accounts. The growth rate for net interest income was 53 percent, 48 percent for total operating income and 70 percent for overhead expense. Noninterest income in national banks has risen from 0.84 percent of average assets in 1980 to 1.23 percent in 1984, a 39 basis point increase. This increase in noninterest income has not resulted in a commensurate increase in earnings. The costs of providing fee generating services have caused overhead expenses to grow more rapidly than assets. Increased provisions to the Allowance for Loan and Lease Losses have also slowed earnings growth. above are similar for banks of all While the growth rates noted sizes, noninterest income is a more significant account in the largest banks. Noninterest income repre sents 1.33 percent of average assets in national banks with assets over $1 billion. This is not surprising. considering the higher levels of offbalance sheet fee generating activity (such as fee paid loan commitments) in these banks. There are significant differences in the composition of noninterest in come in the various size banks. De posit service charges account for over 56 percent of fee income in banks with assets under $100 million, but represent only 17 percent of noninterest income in billion dol lar banks. Income from trading accounts, foreign exchange and other foreign transactions is almost all generated by the billion dollar banks. Alan J. Wachter Bank Supervision BANK SECRECY ACT Several amendments to the Bank Secrecy Act, 31 CFR 103, have been enacted in 1985. So that examiners will be familiar with the changes, a synopsis of the major amendments is provided below: • Amendment effective May 7 in-⚫ • Amendment effective May 31 in- • Amendment effective May 31 changes the ceiling on civil penalties from $1,000 to $10,000. (31 CFR 103.47(a)) • Amendment effective May 31 adds a new paragraph which ATRR ACCOUNTING An Allocated Transfer Risk Reserve (ATRR) must be established for each asset, when required, in the amount specified by the Federal banking agencies. The ATRR is established by a charge to current income and the amounts charged are not included in the banking institution's total capital. The ATRR is separate from the AL lowance for Loan and Lease Losses (ALLL), and is deducted from gross loans and leases. The ATRR is established for banks, bank holding companies, and Edge and Agreement cor porations, as required, on a consolidated basis in accordance with the procedures and tests of significance set forth in the instructions for preparation of Call Reports or other Federal states: "Any person who willfully A new section effective May 31 • Amendment effective August 7 regulatory recordkeeping re- A banking institution need Leon S. Tarrant, Manager credit, securities, gold, or a transaction in money, credit, securities or gold." • Amendment effective August 7 establishes a regulatory procedure through which the Secretary of the Treasury can require financial institutions in the United States to submit reports of financial transactions with foreign financial agencies (31 CFR 103.25). • Sections 103.25 (Filing of Reports) and 103.26 (Identification Required) were renumbered 103.26 and 103.27, respectively. NOTE: Please record this change immediately since it will affect the violation of law cites and the OCC's quarterly report to the Department of Treasury. These new cites should be used for transactions occurring on or after August 7. 1985. An update to the Comptroller's Manual For National Banks incor porating all changes to the Bank Secrecy Act is being compiled and will be distributed in the near future. Thomas C. Lehmkuhl Bank Supervision |