bhc inspection program (general) section 5000 · bhc inspection program (general) section 5000.0...

BHC Inspection Program(General) Section 5000.0

This part of the manual presents policies andprocedures for the inspection process, the col-lection and presentation of data, and coordina-tion of inspection activities of bank holdingcompanies (BHCs).

5000.0.1 INSPECTION OF NONBANKSUBSIDIARIES OF BHCS

Notwithstanding the risk assessment that is tobe performed for each nonbank subsidiary, anon-site review is required for the following non-bank subsidiaries:1

1. Any individual subsidiary that meets eitherof the following two significance criteria orthat is otherwise deemed by the Reserve Bankto have a significant impact on the BHC’scondition or performance:2

• The subsidiary has total assets equal to 10percent or more of the BHC’s consolidatedtier 1 capital.

• The subsidiary’s total operating revenueequals 10 percent or more of the BHC’sconsolidated total operating revenue.3

2. Nonbank subsidiaries that are issuing debt tounaffiliated parties or relying to a significantdegree on affiliated banks for funding. “Sig-nificant” is defined as debt that exceeds thelesser of $10 million or 5 percent of theBHC’s consolidated tier 1 capital.

3. Those mortgage banking subsidiaries andother nonbank subsidiaries involved in assetsecuritization, and all nonbank subsidiariesthat generate assets and sell them to affili-ated parties. Examiners involved in the on-site review of these subsidiaries should con-sider the appropriate examination guidelines

for asset securitization, for example, thoseset forth in SR-90-16 (May 25, 1990). (Seesection 2128.02.)

4. All nonbank subsidiaries that broker or dealin derivative instruments, as a principal oragent, to unaffiliated parties.

Furthermore, for each credit-extending non-bank subsidiary that meets the above on-sitereview criteria, examiners are to review suffi-cient credit files through either judgmental orattribute sampling to assess the adequacy andaccuracy of internal risk-identification systems.

5000.0.1.1 Off-Site Review of NonbankActivities

Reserve Banks should review reports submittedto the Federal Reserve to monitor the conditionand performance of significant nonbank subsidi-aries between inspections. FR Y-series reportson individual and combined nonbank subsidi-aries should be used for this purpose and, whenavailable, financial statements on nonbank activi-ties that are included with the FR Y-6 annualreports of BHCs should also be reviewed.4

When warranted by (1) a deterioration in thecondition and performance of nonbank subsidi-aries, (2) the significance of the nonbank subsid-iaries (including those selected for on-site reviewas discussed above), or (3) other reasons, ReserveBanks should require BHCs to submit addi-tional information (for example, balance sheets,income statements, and schedules on nonper-forming assets and off-balance-sheet activities)obtained from a company’s internal systems.Furthermore, on an exception basis, ReserveBanks will be expected to obtain, from a BHC’sinternal systems, information on the off-balance-sheet exposures of nonbank subsidiaries. Whenexposures are considered significant, ReserveBanks will be expected to monitor the risksposed by these exposures. If the Reserve Bankdetermines that a situation warrants materialdeparture from these procedures, it should bediscussed with Board staff.

1. See SR-93-19 for more information. The on-site reviewfor these nonbank subsidiaries should be performed with thesame frequency as required for a full-scope inspection butmay be performed as a targeted review that is not concurrentwith the full-scope inspection.

2. Generally, examiners would not be required to conductan on-site review of those nonbank subsidiaries that holdpremises that are necessary for the operation of the banks orother affiliates. Furthermore, these criteria are not intended toinclude nonbank subsidiaries that have been subject to recenton-site review by another federal or state banking agency inaccordance with interagency agreements or Reserve Bankagreements with state banking supervisors (for example, theInteragency EDP Examination, Scheduling, and DistributionPolicy). These criteria also should not limit Reserve Bankflexibility in coordinating supervisory efforts with functionalregulators at the federal or state level.

3. For BHCs, “total operating revenue” is the sum of totalinterest income and total noninterest income (before extraor-dinary items).

4. See the Board’s public website for more information onreport forms and reporting requirements.

BHC Supervision Manual February 2020

https://www.federalreserve.gov/boarddocs/srletters/1993/SR9319.HTM


https://www.federalreserve.gov/apps/reportforms/default.aspx

5000.0.2 MULTI-TIER BHCINSPECTIONS

The Federal Reserve has had longstanding super-visory guidance addressing the coordination ofsupervisory activities among the Reserve Banks.For banking organizations that operate in morethan one district, it is particularly important that(1) all relevant and significant supervisory find-ings are assessed and weighed when the consoli-dated banking organization is being evaluatedand (2) a consistent and coordinated supervisorymessage is communicated to the organization.

Many multi-tier BHC structures exist in whichthe top-tier and second-tier institutions (as wellas other lower-level tiers) are in different Fed-eral Reserve Districts. The System has longoperated under the principle that there is oneresponsible Reserve Bank (RRB) for each fullyconsolidated banking organization (i.e., eachtop-tier consolidated banking organization). Fordomestic banking organizations, the RRB typi-cally will be the district where the head office ofthe top-tier organization is located and its over-all strategic direction is established and over-seen. For foreign banking organizations, theRRB typically will be the district where theFederal Reserve has the most direct involve-ment in the conduct of day-to-day supervisionof the U.S. banking operations of the organiza-tion. The RRB is accountable for all aspects ofsupervision of the fully consolidated bankingorganization, including all subsidiaries and affili-ates (domestic, foreign, and Edge corporations)of the organization for which the Federal Reservehas supervisory oversight responsibility. (SeeSR-05-27/CA-05-11.)

5000.0.3 INTERAGENCYINSPECTION OR EXAMINATIONAGREEMENTS

To ensure continuing close coordination andconsistency in the examination and supervisionof banking organizations, the three federal bankregulatory agencies, that is, the Federal ReserveSystem, Office of the Comptroller of the Cur-rency (OCC) and the Federal Deposit InsuranceCorporation (FDIC), have adopted expectationsintended to enhance the interagency supervisionof BHCs and their bank and nonbank subsidi-aries.

5000.0.3.1 Interagency Policy Statementon Examination Coordination

On June 10, 1993, an interagency policy state-ment was developed to strengthen coordinationand cooperation among the federal banking agen-cies responsible for examining and supervisingdepository institutions and their holding compa-nies, thus minimizing the disruptions and bur-dens associated with the examination process.The policy expands on existing interagencyagreements. (See SR-93-30.)

5000.0.3.1.1 Primary Supervisory andCoordination Responsibility

Examinations or inspections of a particular legalentity are to be conducted by the federal regula-tory agency that has primary supervisory author-ity for that entity. In carrying out its supervisoryresponsibilities for a particular entity within abanking organization, each regulatory agency,to the extent possible, is to rely on examinationsor inspections conducted by the primary regula-tor of the affiliate, thereby avoiding unnecessaryduplication and unnecessary disruption of thebanking organization. In certain situations, how-ever, it may be necessary for a regulatory agencyother than the entity’s primary supervisory author-ity to participate in the examination or inspec-tion in order to fulfill its regulatory responsibili-ties.

Primary supervisory authority and coordinationresponsibilities are organized as follows:

OCC national banks, federal savings associa-tions

FDIC state nonmember banks, state savingsassociations

FRB parent BHCs, nonbank subsidiaries ofBHCs, the consolidated BHC, FHCs,SLHCs, and state member banks

The primary federal regulator is responsible forscheduling, staffing, and setting the scope ofsupervisory activities, including coordinatingformal and informal administrative actions, asnecessary. In fulfilling these responsibilities, theprimary regulatory agency is to consult closelywith the other appropriate agencies when thereis need for coordination.

BHC Inspection Program (General) 5000.0


https://www.federalreserve.gov/boarddocs/srletters/2005/SR0527.htm


5000.0.3.1.2 Overview of ExaminationCoordination and ImplementationGuidelines

The agencies are to make every effort to coordi-nate the examinations and the inspections ofbanking organizations. Coordinated examina-tions and inspections may not be practical in allcases because of resource constraints, seriousscheduling conflicts, or geographic consider-ations; however, particular emphasis will beplaced on coordinating examinations and inspec-tions of banking organizations with over $10billion in consolidated assets and those bankingorganizations (generally, with assets in excessof $1 billion) that exhibit financial weaknesses.

5000.0.3.1.3 Coordinating the Planning,Timing, and Scope of Examinations andInspections

When multiple regulators have authority over alegal entity, representatives from the appropriatesupervisory offices should, if necessary, meetquarterly to discuss supervisory strategies forspecific banking organizations. They should meetat least annually to review and establish exami-nation and inspection schedules, to plan for thenext year, and to consider the need for coordina-tion in the following areas:

1. sharing the strategy and scope of each exami-nation or inspection

2. determining if agencies other than the pri-mary regulator of a particular entity shouldparticipate in the examination or inspectionof that entity

3. determining whether a consolidated requestletter should be prepared to avoid duplicativeinformation requests

4. sharing workpapers and resultant findingsand conclusions from prior examinations andinspections

5. other areas as necessary

5000.0.3.1.4 Interagency Review ofBank, Nonbank, and Parent-CompanyActivities

Certain functions and procedures—such as inter-nal audit, credit review, and the procedures fordetermining the allowance for loan and leaselosses—transcend the boundaries that distin-guish legal entities. Such functions and proce-dures may be located at the bank or holdingcompany level. The primary regulator of the

depository institution and the holding companyboth may have supervisory responsibility toassess such functions. In these cases, coordi-nated and concurrent examinations or inspec-tions should be conducted to avoid duplicativereviews and unnecessary disruption.

The primary regulator of the entity beingexamined or inspected should take the lead in acoordinated examination or inspection, unlessthere is an agreement that another agency willserve as the lead agency. The responsibilities ofthe lead agency, in consultation with other appro-priate agencies, include developing the scope ofthe examination or inspection and determiningthe staff requirements. The lead agency will alsocoordinate scheduling of the examination orinspection and the presentation of examinationor inspection findings to the appropriate man-agement.

5000.0.3.1.5 Joint Meetings BetweenRegulators and Bank or BHCManagement

At the conclusion of examinations or inspec-tions conducted under the guidelines, the agen-cies should coordinate and plan joint meetingswith the board of directors to discuss the find-ings and conclusions. The agencies will coordi-nate responsibility as outlined in the guidelines.

5000.0.3.1.6 Significant Differences inAgencies’ Findings, Conclusions, andRecommendations

Before examination or inspection results areforwarded to management or boards of direc-tors, every effort should be made to resolve anysignificant differences in major findings, conclu-sions, and recommendations. These differencesshould be resolved by examiners or officials atthe regional level within 10 business days ofidentification. If the regional offices cannot re-solve the matter, it should be referred to thenational level, where it will be resolved within areasonable time frame.

5000.0.3.1.7 Inspection and ExaminationReports

The primary regulator should prepare the formalreport of examination or inspection covering the



entity for which it is the primary federal regula-tor. The primary regulator will also prepare thereport when it serves as the lead agency. Thereport should be addressed and transmitted tothe directors of the entity for which the regula-tor is the primary federal supervisory authority.The report may also be sent to the directors ofother entities that have a need for the informa-tion. The agencies may agree, if necessary andappropriate, to prepare a joint report.

5000.0.3.1.8 Coordinating InformationRequests

Any request for information to be obtained froman entity for supervisory purposes should nor-mally be made through the entity’s primaryregulator. The primary regulator should alsoshare relevant supervisory information with theother appropriate regulatory agencies.

5000.0.3.1.9 Coordinating EnforcementActions

When one or more regulatory agencies are con-templating an enforcement action, the agenciesshould consider initiating a joint enforcementaction to address and correct deficiencies withina banking organization. At a minimum, eachagency considering enforcement action shouldinform the other agencies. This provision reaf-firms the existing interagency enforcement agree-ment. (See SR-18-4 / CA-18-5.)

5000.0.3.1.10 State BankingDepartments

The agencies will endeavor to coordinate withstate banking departments, when appropriateand feasible.

5000.0.4 POLICY FORCOMMUNICATING PROBLEMS OFSUPERVISORY CONCERN TOMANAGEMENT AND BOARDS OFDIRECTORS

5000.0.4.1 Introduction

On October 7, 1985, the Board announced asecond policy to strengthen and formalize prac-tices for communicating the findings of exami-nations or inspections to management and boardsof directors and to set out guidelines for suchmeetings. The policy—

1. establishes specific criteria for determiningwhich examination findings require follow-upmeetings with boards of directors and setsout guidelines for such meetings,

2. requires that, in addition to providing a com-plete examination or inspection report to thebank or BHC, a written summary of findingsbe sent to the bank or BHC for distribution toeach director, and requires that senior ReserveBank officials become more involved in pre-senting examination findings to boards ofdirectors, and

3. requires that senior Reserve Bank officialsbecome more involved in presenting exami-nation findings to boards of directors.

The policy was effective immediately, withinitial implementation on January 1, 1986.

5000.0.4.2 Meetings with Directors

The decision to hold a meeting with the board ofdirectors at the conclusion of a state memberbank examination or a BHC inspection is to bedetermined on the basis of the organization’sfinancial condition, its size, the type of examina-tion or inspection conducted, and other factorsthat, in the judgment of the Reserve Bank, indi-cate the need for a meeting. To the extent pos-sible, meetings with the boards of directors ofstate member banks should include representa-tives of the state banking department. Whenappropriate, meetings with the boards of BHCsmay be held jointly with the meeting of the leadbank subsidiary’s board of directors and thebank’s primary federal or state bank supervisor.



https://www.federalreserve.gov/supervisionreg/srletters/SR1804.htm

5000.0.4.2.1 Criteria for ConductingMeetings

5000.0.4.2.1.1 Condition

For those BHCs with consolidated assets of$1 billion or more, a meeting with the board ofdirectors is to be held at the conclusion of anyfull-scope inspection in which a BHC is ratedcomposite 4 or 5. A meeting between ReserveBank staff and the board of directors to commu-nicate findings is not required for—

1. complex holding companies with consoli-dated assets of less than $1 billion; and

2. noncomplex holding companies with con-solidated assets of less than $1 billion thathave a subsidiary depository institution inless-than-satisfactory condition, or with aless-than-satisfactory risk-management rat-ing, or where a material supervisory issue isotherwise indicated.

However, a meeting should be conductedbetween Reserve Bank staff and the board ofdirectors to communicate findings when super-visory concerns warrant such action.

Except for the above situation, meetings arerequired if an organization is rated composite 3and its condition appears to be deteriorating orhas shown little improvement since the previousexamination or inspection in which it received acomposite 3 rating.5 A meeting should also beheld with all these organizations following alimited-scope or targeted examination or inspec-tion, if deemed appropriate and desirable by theReserve Bank. (See SR-95-19.)

5000.0.4.2.1.2 Size

A meeting will be required at the conclusion ofa full-scope examination or inspection of allmultinational organizations and major regionalorganizations with assets in excess of $5 billion.Reserve Banks are also encouraged to conductsuch meetings at the conclusion of a full-scopeexamination or inspection of regional institu-tions with assets of $1 billion or more.

5000.0.4.2.1.3 Guidelines for Meetings

Meetings with boards of directors will have tobe tailored to meet the needs of each specificsituation. In general, meetings with the fullboard are preferred, but in certain cases theReserve Bank may determine that a meetingwith a committee of the board of directors, suchas the executive or audit committee, will serveadequately. In all cases, however, the writtensummary of examination or inspection findingsis to be provided to each member of an organi-zation’s board of directors.

For BHCs with consolidated assets of $1 bil-lion or more, the Reserve Bank’s presentation tothe board should ordinarily be chaired by aReserve Bank official, with the examination staffin attendance. The larger the organization or themore serious its problem, the more senior theFederal Reserve official should be.

Reserve Bank presidents are expected tobecome directly involved in the supervision ofmultinational organizations and regional institu-tions with more than $5 billion in assets thathave been rated composite 3, 4, or 5. ReserveBanks have the discretion to determine the cir-cumstances under which the participation ofReserve Bank presidents is appropriate and nec-essary. It may be necessary for the ReserveBank president to meet with the board of direc-tors and become involved in other ways; theprecise nature of involvement will depend onthe situation.

A meeting with the board of directors shouldinclude a formal, structured presentation con-taining a clear statement that an institution isconsidered a “problem” institution or is about tobecome a problem institution if existing condi-tions deteriorate.6 The use of slides, other visualaids, and hard-copy handouts is encouraged.Information should also be presented on finan-cial trends and peer-group comparisons. Thepresentation should make clear the nature ofproblems uncovered, such as—

1. deficiencies in capital, asset quality, earn-ings, or liquidity;

2. violations of law;3. inadequacies in policies, practices, and report-

ing systems necessary for the proper admin-istration of the organization;

5. Reserve Banks also are encouraged to hold a meeting atthe conclusion of a full-scope inspection (1) for an organiza-tion with assets of $1 billion or more rated composite 2 if itscondition appears to be deteriorating and (2) for an organiza-tion rated composite 3, even if showing some improvement.

6. As has been long-standing Federal Reserve practice, theexact composite or component ratings assigned in the exami-nation or inspection are not to be disclosed to persons otherthan the directors or senior management.



https://www.federalreserve.gov/boarddocs/srletters/1995/sr9519.htm

4. the lack of well-documented lending, collec-tion, investment, and liability-managementpolicies;

5. the failure of management to address previ-ously discussed deficiencies;

6. the lack of reporting systems sufficient tokeep senior management and the board ofdirectors fully informed; and

7. the failure of the board of directors to partici-pate in the active management of the organi-zation.

5000.0.5 COMBINEDEXAMINATION/INSPECTION REPORTFOR BHCs WITH LEAD STATEMEMBER BANKS

Reserve Banks are permitted, under the circum-stances and procedures specified in SR-94-46,to issue a combined report for a BHC and itslead state member bank subsidiary. A lettershould be sent to the qualified holding compa-nies that explains their option of receiving acombined report. The combined report may beissued when—

1. a BHC’s lead bank subsidiary is a state mem-ber bank,7 and

2. the holding company’s board of directorsformally approves, by board resolution, acombined report being released to its leadstate member bank subsidiary.

A combined examination/inspection reportformat is attached to SR-94-46. At a minimum,a combined report will contain all examinationreport pages required by the interagency bankexamination report instructions as well as infor-mation on the parent holding company, its bankand nonbank subsidiaries, and the consolidatedBHC organization. For detailed information onrequired and optional report pages, see the Com-mercial Bank Examination Manual.

Separate examination and inspection Supervi-sory Information System (SIS) entries are re-quired for each combined report. The combinedreport’s cover page is to be green, must provideBHC and Bank RSSD numbers, and must clearlyindicate that the report is a combined report.8

7. In cases in which the company has more than one statemember bank, separate examination reports should be pre-pared for all other state member bank subsidiaries.

8. Research, Statistics, Supervision and Regulation, andDiscount and Credit (RSSD)



https://www.federalreserve.gov/boarddocs/srletters/1994/SR9446.htm

Procedures for Inspection Report Preparation(Inspection Report References) Section 5010.0

Manual ReportSection PageNo. No. Report Page Title

FR 1225:

5010.2 Cover5010.3 i. Table of Contents5010.4 1. Examiner’s Comments and Matters Requiring Special Board Attention5010.5 2. Scope and Abbreviations of Inspection5010.6 3. Analysis of Financial Factors5010.7 4. Audit Program5010.8 5. Parent Company Comparative Balance Sheet5010.9 6. Parent Company Comparative Statement of Income and Expenses5010.10 7. Summary of Consolidated Classified and Special Mention Assets, and

Other Transfer Risk Problems5010.11 8. Consolidated Comparative Balance Sheet5010.12 9. Comparative Consolidated Statement of Income and Expenses5010.13 Consolidated Capital Structure5010.14 Policies and Supervision5010.15 Violations5010.16 Other Matters5010.17 Classified Assets and Capital Ratios of Subsidiary Banks5010.18 Organization Chart5010.19 History and Structure5010.20 Investment in and Advances to Subsidiaries5010.21 Commercial Paper5010.22 Lines of Credit5010.23 Commercial Paper/Lines of Credit (including questions)5010.24 Contingent Liabilities and Schedule of Balance-Sheet Accounts Not

Detailed Elsewhere (Parent)5010.25 Statement of Changes in Stockholder’s Equity5010.26 Income from Subsidiaries (Fiscal and Interim)5010.27 Cash Flow Statement (Parent) (including questions)1

5010.28 Parent Company Liquidity Position5010.29 Parent Company and Nonbank Assets Subject to Classification5010.30 Bank Subsidiaries5010.31 Nonbank Subsidiaries5010.32 Nonbank Subsidiary Financial Statements5010.33 Fidelity and Other Indemnity Insurance5010.34 (Reserved for future use)5010.35 Other Supervisory Issues5010.36 Extensions of Credit to Bank Holding Company Officials and Their

Related Interests and Investments in and Loans on Stock orObligations of Their Related Interests

5010.37 Interest Rate Sensitivity—Assets and Liabilities5010.38 Treasury Activities/Capital Markets5010.40 A Principal Officers and Directors5010.41 B Condition of the Bank Holding Company5010.42 C Liquidity and Debt Information5010.43 D Administrative and Other Matters

1. This page is required to be included in the inspectionreport for bank holding companies with consolidated assets inexcess of $1 billion or those companies that have substantivefixed charges or debt outstanding, as well as selected others atthe option of the Reserve Bank.

BHC Supervision Manual June 1995Page 1

Manual ReportSection PageNo. No. Report Page Title

FR 1241:

5010.13 Capital Structure (lead bank subsidiary)5020.1 Bank Subsidiary5020.2 Other Supervisory Issues

Procedures for Inspection Report Preparation (Inspection Report References) 5010.0


Procedures for Inspection Report Preparation(General Instructions to FR 1225) Section 5010.1

WHAT’S NEW IN THIS REVISEDSECTION

This section was revised to include a new sub-section regarding community holding compa-nies rated composite ‘4’ or ‘5,’ which discussesthe Federal Reserve’s adoption of a flexible,letter-format report in lieu of the standard,longer-form report. (Refer to SR-13-10.)

The full-scope report is designed to be used asa minimum standard in reporting the results of abank holding company inspection. The reportto be provided to the bank holding companyconsists of a core section and an appen-dix section, the latter consisting of certainrequired financial statements. Supporting sched-ules are added to the core or appendix sec-tions when an area of concern or problem isaddressed. Such schedules provide detailedinformation relevant to a particular activity area.

The core section contains a table of contents,a summary of the scope of the inspection, and apage that presents the examiner’s comments anddiscusses matters requiring special Board atten-tion. The core section should also contain ananalysis of financial factors, including an assess-ment of the quality of assets and a completeanalysis of thebankholdingcompany’sRFI/C(D)components. Specifically, the core section ismade up of the pages described in the followingsubsections.

5010.1.1 CORE SECTION

The inspection report format contains the fol-lowing pages in the core section:

Pageno. Page title

Standard Report Coveri. Table of Contents1. Examiner’s Comments and Matters

Requiring Special Board Attention2. Scope of Inspection and Abbreviations3. Analysis of Financial Factors4. Audit Program

5010.1.2 APPENDIX SECTION

The appendix section will consist of a manda-tory section that presents the following financialstatements for the organization:

1. Parent Company Comparative Balance Sheet2. Parent Company Comparative Statement of

Income and Expenses3. Consolidated Comparative Balance Sheet4. Consolidated Comparative Statement of

Income and Expenses

Bank holding company inspections should beconducted as of the latest fiscal quarter. Allfinancial statements should be presented as ofthe most recent calendar quarter. The dollaramounts are reported in thousands.

Financial statements prepared by the bankholding company may be used to meet theappendix requirements, provided the statementsare prepared in accordance with generallyaccepted accounting principles and are, in theexaminer’s judgment, suitably detailed, clear,and accurate. Any adjustments to any financialstatements made by the examiner should befootnoted. Any other supporting schedules orvisual aids (for example, graphs or charts) canbe included in the core section to communicateor support the examiner’s findings. Percentagesshould be rounded to the nearest tenth of 1 per-cent, unless finer detail is necessary.

5010.1.3 OPTIONAL PAGES TO BEINCLUDED IN THE CORE ORAPPENDIX SECTIONS

Supporting Report Pages for AllInspections

The listed optional supporting report pages areto provide support to the core or appendix sec-tion of the report.1 They will normally be

1. ‘‘Supporting report pages’’ refers to information gath-ered in essentially the same format as when the page is beingprepared by the examiner for inclusion in the report. How-ever, certain supporting information may not provide suffi-cient value to address an area of concern in the report butshould be retained in workpaper form to provide evidentialmatter for the inspection report. For example, the Statementof Changes in Stockholders’ Equity may be summarized in anaudit report or may be included with the company’s auditedannual financial statements. The examiner would review the

BHC Supervision Manual July 2013Page 1

sequenced as listed below. If a problem area iscited within the core section, the respectivetyped supporting report pages need to be includedto support the critical comments. The optionalsupporting pages listed are to be included by theexaminer in the report when they convey signifi-cant findings in the core section or when theysupport the discussion in the core section withan appendix page. If appropriate standardizedreport pages do not exist to address a particulararea of concern, the relevant analytical supportcan be included on the ‘‘Other Matters’’ page aspart of the inspection report. Any or all support-ing report pages and workpapers should beavailable to be forwarded immediately to Boardstaff, if requested.

The designated optional supporting reportpages are—

Policies and SupervisionSummary of Consolidated-Classified and

Special-Mention Assets, and OtherTransfer-Risk Problems

Consolidated Capital StructureCapital Structure (lead bank subsidiary)Treasury Activities/Capital MarketsViolationsOther MattersClassified Assets and Capital Ratios of

Subsidiary Banks2

Organization ChartHistory and StructureInvestment in and Advances to SubsidiariesCommercial Paper (Parent)Lines of Credit (Parent)Commercial Paper/Lines of Credit (Parent)

(including questions)Contingent Liabilities and Schedule of

Balance-Sheet Accounts Not DetailedElsewhere (Parent)

Statement of Changes in Stockholders’ EquityIncome from Subsidiaries (Fiscal and

Interim)Cash Flow Statement (Parent) (including

questions)3

Parent Company Liquidity PositionParent Company and Nonbank Assets Subject

to ClassificationBank SubsidiariesNonbank SubsidiariesNonbank Subsidiary Financial StatementsFidelity and Other Indemnity InsuranceOther Supervisory IssuesExtensions of Credit to Bank Holding

Company Officials and Their RelatedInterests and Investments in and Loanson Stock or Obligations of Their RelatedInterests

Interest Rate Sensitivity—Assets andLiabilities

In addition to the FR 1225 report pages, a fewreplacement report pages are designated asFR 1241 pages. The following pages weredesigned to be used for smaller bank holdingcompanies having less than $150 million inassets:

Capital Structure (lead bank subsidiary)Bank SubsidiaryOther Supervisory Issues

5010.1.4 CONFIDENTIAL SECTIONFOR ALL INSPECTION REPORTS

The confidential section for bank holding com-pany inspection reports is reserved for confiden-tial comments that will be limited to staff of theFederal Reserve System. The confidential sec-tion of the inspection report will consist of thefollowing pages:

Page Page title

A. Principal Officers and DirectorsB. Condition of the Bank Holding CompanyC. Liquidity and Debt InformationD. Administrative and Other Matters

Discussion in the confidential section shouldbe kept to a minimum. As much information aspossible should be incorporated in other sec-tions of the report that are available to the bankholding company. The complete analysis of theholding company organization (that is, bankholding company RFI/C(D) components) is toappear in the front of the report on the ‘‘Analysisof Financial Factors’’ page. The informationreported on the confidential pages should beprinted on yellow paper.

statement to conclude whether the information is reliable andcomplete and that it agrees with the respective balancesreported in the inspection report. A photocopy of the informa-tion could be used to provide evidence of the examiner’sreview, including any related notes.

2. Included if assets are classified or written up as required.3. This page is required to be included in the inspection

report for bank holding companies with consolidated assets inexcess of $1 billion or those companies that have substantivefixed charges or debt outstanding, as well as select otherorganizations at the option of the Reserve Bank.

Procedures for Inspection Report Preparation (General Instructions to FR 1225) 5010.1


5010.1.5 GENERAL COMMENTS FORALL REPORT PAGES

The specified format of the report pages shouldbe used whenever possible, but when flexibilityis necessary, additions and limited deletions canbe made. Examiners are required to include inthe core section only a relatively small numberof report pages and, in the appendix section,only financial statements for the organization.These pages will normally be sequenced aslisted previously. At the same time, examinershave the discretion to decide whether to includeother standard pages in a report and whether toinclude them in the core or the appendix sec-tions. This choice should be made on the basisof whether the content of the page will highlighta significant inspection finding (in which case,the finding should be included in the core sec-tion) or whether the content will provide sup-port for comments offered in the core section (inwhich case, the finding should ordinarily beplaced in the appendix section).4 Given the dis-cretion being accorded examiners to tailor reportsto accurately convey inspection findings, reportsprepared for large and small companies alikeshould be prepared to achieve that objective.

Another important objective is to avoidexcessive length in the report, particularly in theopen section. Including comments that may pro-vide directors and management with informa-tion of marginal importance or including infor-mation that repeats findings and conclusionsfrom different pages of the report diverts thereader’s attention from the areas of concern thatmust be corrected.5 In addition, reports shouldbe understandable and readable. A further objec-tive is for examiners to determine precisely whatshould be conveyed in their reports to boards ofdirectors and management and then to presentthat information in clear and concise language.

All reports are to be on 81⁄2- by 11-inch paperand bound on the left margin. Responses toquestions should be provided below the lastquestion in the section or, if necessary, on anadditional page. Do not repeat the question inthe response. Indicate the question number inthe response.

All credit-extending nonbank subsidiaries willbe subject to asset classification. The examinershould recommend that management maintain a

loan-loss reserve that is adequate tooffset 100per-cent of assets classified loss and still have abalance sufficient to absorb normal unidentified,unanticipated future losses from operations. Theexaminer and BHC management should con-sider the guidance provided in section 2065.2 onthe determination of an adequate level for theallowance for loan and lease losses. Examinersshould also review the organization’s loan-losshistory to determine trends and to help evaluatethe adequacy of the existing reserve.

5010.1.6 FORMAT FORSAFETY-AND-SOUNDNESS REPORTSOF INSPECTION FOR COMMUNITYHOLDING COMPANIES RATEDCOMPOSITE ‘‘4’’ OR ‘‘5’’

The Federal Reserve has adopted a flexible,letter-format report in lieu of the standard, longer-form report for communicating the findings ofon-site inspections of community banking orga-nizations6 that result in composite supervisoryratings of ‘‘4’’ or ‘‘5.’’ Examiners may use aletter-format report for inspections of commu-nity banking organizations rated ‘‘4’’ or ‘‘5,’’provided all mandatory and any applicable op-tional information is in the report. Refer toSR-13-10.

Examiners are to continue to follow the reportguidance provided in SR-01-19, ‘‘Reports ofExamination of Community Banking Organiza-tions,’’ for full-scope examinations of commu-nity banking organizations rated ‘‘1,’’ ‘‘2,’’ or‘‘3.’’7 That guidance provides for some flexibil-ity in the structuring of the examination reportsso long as all mandatory and applicable optionalcontent is covered. Examiners have flexibility inwriting the narrative portion of reports.

5010.1.6.1 Letter-Format Report ofInspection Content

Similarly, a letter-format report of inspectionprepared in support of on-site bank and savingsand loan holding company8 inspections that

4. If a problem area is cited within the core section, inclu-sion of the listed and typed supporting report pages will benecessary to support the critical comments.

5. While brevity is an important goal, examiners shouldnote that, when an enforcement action is contemplated, theinspection report must fully support the proposed provisionsof the enforcement document.

6. Community banking organizations are those bank hold-ing companies and savings and loan holding companies withassets of $10 billion or less.

7. The flexible letter-format may also be used on targetexaminations of 3-rated community banking organizations, asapplicable.

8. See SR-11-11 /CA-11-5, ‘‘Supervision of Savings and



result in a rating of ‘‘4’’ or ‘‘5’’ should betailored to each company and should fully addressthe areas typically covered in the core section ofthe standard inspection report format.9 Theseareas include

• scope of the inspection,• matters requiring board attention,• analysis of consolidated, parent company, non-

bank and bank subsidiary financial factors,and

• conclusions regarding the internal and exter-nal audit program.

In addition, any applicable areas that aredescribed as optional pages in the standardreport of inspection instructions and are neces-sary to support examiners’ findings should beincluded.

5010.1.6.2 Communication ofSupervisory Findings

The letter-format reports must notify a bankingorganization and its board of the organization’ssupervisory rating and the confidential nature ofthe letter. The letter-format report should alsoset forth the deadline by which the organizationmust reply to the Reserve Bank, including theorganization’s plans to address any matters re-quiring immediate attention or matters requiringattention that are noted in the report.

Loan Holding Companies (SLHCs),’’and SR-13-8 /CA-13-5,‘‘Extension of the Use of Indicative Ratings for Savings andLoan Holding Companies,’’ concerning indicative ratings ofSLHCs.

9. See section 5010.0, ‘‘Procedures for Inspection ReportPreparation (Inspection Report References),’’ which is a list-ing of report pages and instructions available for inclusion ina report.



Procedures for Inspection Report Preparation(Cover) Section 5010.2

The official name, location, and the RSSD IDnumber of the bank holding company beinginspected is to be provided. Also provide thedates the inspection commenced and concludedas well as the inspection date. The coverincludes a notice that its content is strictlyconfidential.

The cover must include the official seal of theBoard of Governors of the Federal Reserve Sys-

tem. It may also include the names and seals ofthe Reserve Bank and the state bank supervisoryagency that participated in the inspection as partof a cooperative inspection agreement. The covermust also include a reference to the Board’s rulepertaining to confidential supervisory informa-tion made available to supervised financial insti-tutions and financial institution supervisory agen-cies, which is 12 C.F.R. 261.20.


FR 1225–Cover

(Revised 7/08)

REPORT OFBANK HOLDING COMPANY

INSPECTION

Name:

Location:

RSSD ID Number:

Inspection Commenced:

Inspection Concluded:

Inspection Date:

THIS REPORT OF INSPECTION IS STRICTLY CONFIDENTIAL

This report has been prepared by an examiner selected or approved

by the Board of Governors of the Federal Reserve System. The report

is the property of the Board of Governors and is furnished to directors

and management for their confidential use. The report is strictly

privileged and confidential under applicable law, and the Board of

Governors has forbidden its disclosure in any manner without its

permission, except in limited circumstances specified in the law (12

USC 1817(a) and 1831m) and in the regulations of the Board of

Governors (12 CFR 261.20). Under no circumstances should the

directors, officers, employees, trustees or independent auditors dis-

close or make public this report or any portion thereof except in

accordance with applicable law and the regulations of the Board of

Governors. Any unauthorized disclosure of the report may subject

the person or persons disclosing or receiving such information to the

penalties of Section 641 of the U.S. Criminal Code (18 USC 641).

Each director or trustee, in keeping with his or her responsibilities,

should become fully informed regarding the contents of this report.

In making this review, it should be noted that this report is not an

audit, and should not be considered as such.

FEDERAL RESERVE BANK OF

Procedures for Inspection Report Preparation (Cover) 5010.2


Procedures for Inspection Report Preparation(Page i—Table of Contents) Section 5010.3

The table of contents indicates the report pagesincluded in the report and the sequential num-bering of pages within the report. All pre-numbered Core Section inspection report pagesare included in each table of contents along withany other supporting report pages. Supportingreport pages will be numbered sequentially inFR 1225, starting with page number ‘‘11’’.If included, individual subsidiaries may be

listed with their respective page numbers, orthey may be grouped such as ‘‘Nonbank Subsid-iaries’’ with a page reference such as ‘‘26–26c’’to indicate the number of such subsidiaries. Atthe bottom of the page, insert the commence-ment date of the previous inspection followedby the date of the financial statements inparentheses.

BHC Supervision Manual December 1992Page 1

Procedures for Inspection Report Preparation (Core Page 1—Examiner’sComments; Matters Requiring Special Board Attention) Section 5010.4


Effective July 2013, this section was revised toincorporate and reference the revised guidancefound in SR-13-13/CA-13-10,‘‘Supervisory Con-siderations for the Communication of Supervi-sory Findings,’’ which may involve the prepara-tion of this inspection report page or section(continuous flow reporting). To improve the con-sistency and clarity of written communications,Federal Reserve staff is to use the prescribedstandardized terminology and definitions, to dif-ferentiate among (1) Matters Requiring Immedi-ateAttention,and (2)MattersRequiringAttention.

5010.4.1 SUMMARY OF EXAMINER’SFINDINGS

The report page or section (continuous flowreporting) is to include a summary of the exam-iner’s findings relating to—

1. violations,2. criticisms,3. special comments,4. matters requiring special board attention, and5. recommendations.

In addition, it will include the RFI/C(D) compo-nent ratings (see SR-04-18 and section4070.0.2.3). Component ratings for the currentinspection and the two prior inspections will bereported at the top of the page, as illustratedbelow (see SR-96-26).

Bank Holding Company RFI/C(D) RatingSystem

Inspectionrating for:

Currentinspection

Priorinspection

Priorinspection

Date: 09-03-X7 10-19-X6 8-22-X5

[R]iskman-

agement 2 2 2

[F]inancialcondition 2

[I]mpact 2

[C]ompositerating 2 2 2

[D]epositoryinstitu-

tion(s) 2

This listing should be followed by the uni-form definition of the assigned ratings. The uni-form definitions of the component and subcom-ponent ratings assigned need not be included inreports; however, they should be made availableto management and directors upon request.

When a combined examination/inspectionreport format is used, similar matrices for eachcomponent and subcomponent rating assignedshould be included in the report. Numeric rat-ings should also be included on the pages ofreports that discuss findings related to the com-ponents and subcomponents.

The purpose of the report page or section is tocommunicate to the holding company’s board ofdirectors and its management the examiner’sviews on the overall condition of the company,significant problems that have been identified inthe inspection, and actions the company’s boardof directors and management need to take tocorrect the company’s problems and strengthenits condition. The comments should summarizeonly material concerns, criticisms, analyses, orviolations, referring the reader to an appropriateoptional report page for additional detail. Theuse of subcaptions to identify and separate theareas subject to comment is encouraged.

The comments are generally written on anexception basis. Avoid laudatory comments. Theexaminer may, however, comment on improve-ments initiated by management.

Items suitable for discussion within the


‘‘Examiner’s Comments and Matters RequiringSpecial Board Attention’’ report page include,but are not limited to—

1. policies and supervision of subsidiaries,2. earnings,3. cash flow or liquidity,4. level of classified assets,5. adequacy of capital,6. borrowings,7. condition of subsidiaries,8. violations of the Bank Holding Company

Act and Regulation Y,9. violations of section 23A or section 23B of

the Federal Reserve Act and the Board’sRegulation W and other statutes,

10. fees and dividends being paid to the parentby subsidiaries,

11. audit function, and12. information that serves as an alternative to

issuing a separate Summary to Directors ofInspection Findings.

Any substantive recommendations containedelsewhere in the inspection report should bepresented briefly in the core page ‘‘Examiner’sComments and Matters Requiring Special BoardAttention.’’ A summary comment relative to theadequacy of the BHC’s oversight of its subsidi-aries may be provided. Any comments that referspecifically or indirectly to details presentedelsewhere in the report should be consistentwith that information. All inspection report pagesentitled ‘‘Examiner’s Comments and MattersRequiring Special Board Attention’’ will bewritten to accomplish these objectives: give anoverall assessment of the condition of the com-pany, discuss significant problems, and specifyneeded corrective action. See the subsection5000.0.9.3 on the ‘‘Communication of Supervi-sory Findings.’’ To achieve consistency and clar-ity in written communications, Federal Reservestaff is to use prescribed standardized terminol-

ogy and definitions, to differentiate among(1) Matters Requiring Immediate Attention(MRIAs), and (2) Matters Requiring Attention(MRAs). (See also SR-13-13/CA-13-10.)

The Matters Requiring Board Attention reportpage or section should label the comments thereinas being either MRIAs or MRAs. As a generalrule, examiners should expect fewer MRIAs orMRAs in stronger organizations than in weakerones. However, the presence of MRIAs or MRAsdoes not preclude a strong or satisfactory rating.For example, while correction of any violationof law is essential, the presence of inadvertentviolations that do not expose the organization tosignificant risk (such as insufficient FederalReserve stock shortly after a capital injection ora technical exception) would not preclude astrong rating if all other factors supported thatrating. Conversely, the presence of a large num-ber of inspection findings that give rise to MRIAsor MRAs that represent a threat to the safety andsoundness of the organization or that signify anelevated consumer compliance risk exposurewould generally preclude a satisfactory ratingand may require consideration of an enforce-ment action. For institutions between these ex-tremes, examiners should determine the impactof MRIAs and MRAs on ratings and assess theneed for an enforcement action by consideringthe severity of these weaknesses and their rela-tive importance in light of all the factors influ-encing the assessment of the organization. TheFederal Reserve examiner’s use of this commonterminology is designed to enhance the focusand efficiency of communicating supervisoryexpectations and overseeing their implementa-tion.

In cases of composite ratings of 3, 4, and 5,the text of this page will also be used for thesummary report. The signature of the examiner-in-charge should appear below the comments.

Procedures for Inspection Report Preparation (Core Page 1—Examiner’s Comments; Matters Requiring Special Board Attention) 5010.4


Procedures for Inspection Report Preparation (Core Page 2—Scope of Inspection and Abbreviations) Section 5010.5

The scope of the inspection describes generallythe coverage parameters of the inspection. Whendetermining the scope of the inspection, theexaminer must consider the Board’s policy state-ment on the examination and inspection of statemember banks and bank holding companies(October 7, 1985, S-2493). See sections 5000.0.7to 5000.0.9.

The scope generally includes a presentationof the following:

• the purpose for the inspection• which subsidiaries were inspected on-site and

which were done from the parent’s location• the depth of inspection coverage1

• an identification of the peer group(s) and thebank holding companies used for comparisonwith thebankholdingcompanybeing inspected

• the source of information regarding theadministration of policies and the supervisionover subsidiaries

• comments as to the extent examiners relied oninternal classification systems or classifica-tions of other bank regulatory agencies

• the senior officers with whom the overallinspection findings were discussed

• the sources upon which the examiner basedhis conclusions and/or recommendations

The opening paragraph of the scope shouldinclude authority under which the inspectionwas conducted (section 5(c) of the Bank Hold-ing Company Act of 1956, as amended), andmay include the dates the inspection com-menced and closed, and the date(s) of financialstatements used as the basis for the inspection.

In brief paragraphs, the examiner should alsoindicate what minute books were read, whichnonbank subsidiaries were examined, what sizeloans were reviewed in credit-extending subsid-iaries, with whom corporate policies were dis-cussed, and to what extent banking subsidiarieswere reviewed.

The report page will also include explana-tions of abbreviations used in the report. Gener-ally, abbreviations familiar to the BHC shouldbe used. However, efforts should be made toincorporate at least a part of the name into theabbreviation as opposed to relying strictly oninitials which tend to become confusing. Also, itis desirable that abbreviations of bank subsidi-aries include the word ‘‘bank’’ to distinguishthem from the parent company and/or nonbanksubsidiaries with similar names.

1. This includes a statement as to the percentage of loansreviewed in each credit-extending nonbank subsidiary, with-out consideration to statistical sampling or any form ofextrapolation. The ratio will include loans actually reviewedby Federal Reserve examiners divided by total loans in eachnonbank subsidiary. When different categories of loans arehoused in a nonbank subsidiary, it may be relevant to providea breakdown by percentage of loans reviewed for each cate-gory of loans, further segregated by current and delinquentcategories. See SR-90-26.


Procedures for Inspection Report Preparation(Core Page 3—Analysis of Financial Factors) Section 5010.6

The ‘‘Analysis of Financial Factors’’ page pre-sents a complete financial analysis of the com-ponents (nonconfidential bank holding companyRFI/C(D) comments) of the holdingcompany—parent, bank subsidiaries, nonbanksubsidiaries, and consolidated (as applicable).The page is supported and followed by parentand consolidated financial statements, informa-tion on consolidated asset quality, and consoli-dated capital ratios. See the 4000 sections forspecific information on analyzing financialfactors.

The analysis serves the informational needsof both senior management of the holding com-pany and the supervisory authorities by present-ing positive and negative factors affecting thecondition of the major components and the con-solidated company. The analysis helps to iden-tify problems or potential problems and mea-sures the holding company’s ability to be asource of financial strength to its subsidiaries.Therefore, the ‘‘Analysis of Financial Factors’’page is considered one of the most importantparts of the report.

The information for the analysis is availablefrom discussions with management; financial-statement data within the report; published state-ments, such as the SEC Form 10-K; and unpub-lished information that is sometimes availablefrom the officer in charge of finance, the trea-surer, or the comptroller.

5010.6.1 PARENT COMPANY

For the parent company, present an analysis ofeach of the financial factors in narrative form.Tables may be used to support the narrativeanalysis.

The analysis of the parent should include adiscussion of the following: debt structure (withindications of how debt proceeds are used),debt/equity ratios (with comparisons to previousyears), sufficiency of cash flow, sources andstability of income, interest coverage, dividend-payout ratios, classifications of parent companyassets, changes in dividend policy, comparisonsof the actual levels and results to the respectivepeer group, and a conclusion about whether theholding company is considered to be a source offinancial strength to its subsidiaries.

Within the analysis of the parent, the exam-iner should also include comments on whetherdividend payments to stockholders have beenreasonable, considering the parent’s leveragedposition, debt servicing, cash flow, and capital

needs. The examiner should describe how divi-dend policy is formulated and what the policyis. See the Board’s policy on cash-dividendpayments in section 2020.5.1.

Dividends paid by subsidiaries, both bankand nonbank, to the parent company are themeans by which a cash return is realized on theinvestment in subsidiaries, thus enabling theparent to pay dividends to its shareholders andto meet its debt-service requirements and otherobligations. The examiner will need to concludeand discuss in the report whether dividendassessments of any subsidiary are excessive.The examiner can draw conclusions aboutexcessive dividends from discussions with man-agement about dividend policies and from infor-mation that may be contained elsewhere in thereport, such as—

1. peer-group averages,2. the condition and capitalization of each

subsidiary,3. the type of subsidiary (credit-extending sub-

sidiaries need more capitalization than ser-vice subsidiaries),

4. the bank holding company’s reasons forextracting proportionately more or less fromeach subsidiary,

5. past policy and payments, and6. compliance with regulatory policy and

guidelines.

5010.6.2 BANK SUBSIDIARIES

A summary write-up should be prepared foreach bank subsidiary comprising 10 or morepercent of the bank holding company’s consoli-dated assets or for bank subsidiaries evidencingmaterial financial deficiencies or other charac-teristics that should be brought to the attentionof the bank holding company’s board of direc-tors.1 These write-ups should summarize note-worthy examiner comments from the open sec-tion of the latest reports of examination of thesubsidiary bank(s) and should comment on anyactions taken to correct significant weaknessesor violations. The summary should also includean analysis of the level and trend of earnings

1. In determining the subsidiary banks that require write-ups, examiners should be mindful of the effect that the cross-guarantee provisions of FIRREA can have on nontroubledbank subsidiaries.


and classified assets and of the adequacy ofcapital (for example, tier 1, total capital, andleverage ratios).

For the other bank subsidiaries, the examinershould provide an overall summary that includesthe number of subsidiaries, by composite rating;an overall analysis of the level and trend ofearnings; classified assets; capital (that is, capi-tal adequacy); and any other financial-analysisindicators.

5010.6.3 NONBANK SUBSIDIARIES

The examiner should present an analysis of thecondition and an analysis of the risk assessmentof nonbank subsidiaries. The analyses presentedwithin this report page should support the Icomponent of the RFI/C(D) rating without mak-ing the reader refer to other report pages.

Because of the number of nonbank subsidi-aries a bank holding company may have, it maynot be possible or reasonable to discuss thecondition, risk assessment, and impact of eachnonbank subsidiary on the BHC’s banking andother depository institution subsidiaries. Theanalysis presented on this page should, there-fore, be based on the combined performance ofthe nonbanking activities. However, if the com-pany has significant or troubled credit-extendingnonbank subsidiaries, individual analyses of eachof these subsidiaries should be included.

The analysis of nonbank subsidiaries shouldinclude information on these subsidiaries’ fi nan-cial condition, including the level, trend, andquality of earnings; composition of the loanportfolio; level and trend of classified, past-due,and nonperforming assets; and adequacy of theloan-loss reserve, capital, financial managementof debt-to-equity ratios, and funds management.The combined risk assessment should addressthe funding risk, earnings exposure, operationalrisks, asset quality, capital adequacy, contingentliabilities and other off-balance-sheet exposures,management information systems and controls,transactions with affiliates, growth in assets, andthe quality of oversight provided by the manage-ment of the bank holding company and nonbanksubsidiary. (See SR-93-19.) Conclude with ageneral statement on the condition and overallrisk assessment of the nonbank subsidiaries.

5010.6.4 CONSOLIDATED

Present an analysis of the consolidated balancesheet, including levels and trends of debt; theadequacy of capital (tier 1, total capital, andleverage ratios); growth in loans, assets, andliabilities; and peer-group comparisons. Alsopresent an analysis of the consolidated earningstrends, asset quality, and the adequacy of valua-tion reserves. Such analysis should include com-ments on performance results based on net inter-est margins, return on average assets, return onaverage equity, factors influencing earnings, andpeer-group comparisons. Include a statement onthe condition of the company, including its reli-ance on interest-sensitive funds and its ability toborrow additional short- or long-term funds orto issue new capital stock.

5010.6.5 GENERAL INSTRUCTIONS

The examiner should make certain that—

1. the figures and comments related to the par-ent are consistent with the various parentcompany financial statements;

2. the analysis of bank subsidiaries is consistentwith data included on the ‘‘ Bank Subsidi-aries’’ and the ‘‘ Classified Assets and CapitalRatios of Subsidiary Banks’’ pages;

3. the analysis of nonbank subsidiaries is con-sistent with data on the ‘‘ Nonbank Subsidi-ary,’’ ‘‘ Nonbank Subsidiary Financial State-ments,’’ and ‘‘ Nonbank Company AssetsSubject to Classification’’ report pages;

4. the consolidated analysis is consistent withinformation presented throughout the report,primarily with the consolidated financial state-ments and the unaffiliated borrowings on the‘‘ Liquidity and Debt Information’’ confiden-tial page C;

5. all names are the same as those on the‘‘ Scope and Abbreviations’’ core page 2, the‘‘ Organization Chart’’ page, and other reportpages and tables; and

6. all debt figures agree with the unaffiliatedborrowings of the ‘‘ Liquidity and Debt Infor-mation’’ confidential page C.

Procedures for Inspection Report Preparation (Core Page 3—Analysis of Financial Factors) 5010.6


Procedures for Inspection Report Preparation(Core Page 4—Audit Program) Section 5010.7

This page presents the adequacy of the internalaudit program, the effectiveness and quality ofthe overall audit program, and the BHC’s rela-tionship with its external auditor. See section2060.1 for related information.

The examiner’s review of the BHC’s internalaudit program will establish whether the pro-gram is adequate to effectively audit the BHC’soperations regularly. It will also help determinewhether the audit function provides the directorswith sufficient information on the corporation’sconditions and operations. The review will allowthe examiner to determine the external auditor’srole and relationship with the internal auditor.

The information on the audit program is avail-able from the auditor, audit committee, the auditstaff, and the internal audit reports. Informationon the external auditor should be available fromthe management letter, the internal auditor, andthe audit committee minutes.

Comments on the internal audit program mayinclude an appraisal of the effectiveness of theprogram at meeting the frequency guidelines forauditing subsidiaries, information on the recipi-ents of audit reports, and the party to whom theauditor is responsible. The examiner’s com-ments on the external auditor may include thename of the firm, the scope of the audit, thedegree of interface with the internal auditors,any ‘‘qualified opinion’’ submitted by the inde-pendent auditors in certifying the most recentyears’ financial statements, and any pertinentcomments regarding relations with the directors’audit committee. The comments should con-clude with an appraisal of the quality and effec-tiveness of the overall audit program.

The following is a list of suggested questionsfor the internal auditor in developing commentsfor this section:

5010.7.1 INTERNAL AUDITOR

1. How is the audit staff organized? To whomdo they report?

2. What are the educational backgrounds andexperience of the staff?

3. What is the size of the staff and the lengthof time that most of the staff have been in audit?Is the staff large enough to meet the functionalrequirements of the job under the guidance andleadership of the auditor? Is the departmentused as a training ground for other departments?

4. What is the schedule for the audit of bank-ing and nonbanking subsidiaries and for particu-lar departments therein?

5. Are copies of audit programs and reportsavailable for the Federal Reserve’s review?

6. Are audit programs coordinated with andworkpapers reviewed by outside accountants?

7. Are qualified EDP auditors on the staff?Althoughmore information isobtained through

interviews with the auditor, as opposed toreceiving responses to written questions, thesequestions represent a general framework onwhich the conversation may develop.

5010.7.2 EXTERNAL AUDITORS

1. Have independent public accountantsaudited the bank holding company’s consoli-dated financial statements for the FR Y-6 annualreport if the BHC’s consolidated assets exceed$500 million or more?

2. Does the external auditor work with theinternal auditor in establishing the scope andfrequency of audits?

3. In addition to performing some of thebasic functions of the internal auditor, did theexternal auditor review the internal auditing pro-gram to assess its scope and adequacy?

4. When the BHC does not have sufficientearnings to employ an internal audit staff, yetthe complexities of the organization necessitatethe need for an audit, has an external auditorbeen engaged for this purpose?

5. Does the external auditor have the abilityto conduct surprise audits and sufficient flexibil-ity for establishing the scope of the audits and inmaking recommendations on internal controlchanges?

6. Have the BHC’s insured depository insti-tutions furnished their independent auditors withthe required call reports, memorandums ofunderstanding, written agreements, and otherdesignated supervisory information required bysection 7(a) of the FDIC Act (see section2060.1.1)?

The comments detailed on this report must beconsistent with summarized comments on thePolicies and Supervision page and the OtherSupervisory Issues page (item 8). Any notewor-thy deficiencies in the audit program may beincluded on the Examiner’s Comments and Mat-ters Requiring Special Board Attention, corepage 1, at the examiner’s discretion.


Procedures for Inspection Report Preparation (Appendix Page 5—Parent Company Comparative Balance Sheet)Section 5010.8

The comparative balance sheet presents the com-position of the parent company’s balance sheetas to assets, liabilities, and capital and should berepresentative of the functions and activities ofthe company. The comparative balance sheetallows the reader to compare changes in accountson a line-by-line basis from one period to an-other. It aids and gives written support to thefinancial analysis.The parent company balance sheets may be

requested in the officer’s questionnaire or maybe obtained from the accounting department.Fiscal statements can also be found in the mostrecent SEC Form 10-K and the FR Y-6 andY-9 LP.The detail on the most recent balance sheet

accounts should be reconciled to subsidiaryledgers or a detailed trial balance. The state-ments should be adjusted to reflect generallyaccepted accounting principles. Adjustmentsshould be footnoted. The statements should bepresented in four columns with two interims andtwo fiscals except for year-end inspections whenonly two fiscals are required. The presentationshould be (from left to right) current interimperiod, prior interim period, current fiscal, andprior fiscal. The statement may be formattedlike the FR Y-9 LP.The parent company comparative balance

sheet should have specific detail or schedulessupporting balance-sheet accounts and amountsas follows.1. Show investments in and advances to

subsidiaries as separate accounts, with separatesubtotals for banks and nonbanks.2. Provide supplementary schedules on the

‘‘Contingent Liabilities and Schedule ofBalance-Sheet Accounts Not Detailed Else-where (Parent)’’ page showing a breakdown ofaccounts not detailed in the report, such as mar-ketable securities, CDs, and other investmentswhenconsideredappropriate orwhen theaccountexceeds 25 percent of total footings.2. Break out goodwill and other intangibles

from ‘‘Other Assets’’ or ‘‘Investments in Sub-sidiaries,’’ and detail on the ‘‘Contingent Liabili-ties and Schedule of Balance-Sheet AccountsNot Detailed Elsewhere (Parent)’’ page.3. Break out ‘‘other real estate owned’’ from

‘‘Other Assets,’’ and detail on the ‘‘ContingentLiabilities and Schedule of Balance-SheetAccounts Not Detailed Elsewhere (Parent)’’page.

4. ‘‘Other Assets’’ and ‘‘Other Liabilities’’should be broken down and detailed on the‘‘Contingent Liabilities and Schedule ofBalance-Sheet Accounts Not Detailed Else-where (Parent)’’ page if any item in the accountis considered significant.5. Mandatory convertible debt instruments

should be shown separate from subordinatedcapital notes and debentures and detailed on theunaffiliated borrowings on the ‘‘Liquidity andDebt Information’’ confidential page ‘‘C.’’6. Stockholder’s equity should contain the

following categories, as applicable: commonstock, perpetual preferred stock, limited life pre-ferred stock, capital surplus, retained earnings(undivided profits), reserves for contingenciesand other capital reserves. Limited life preferredstock should be shown separate from stockhold-ers’ equity. For all capital stock issues indicatein a footnote the par value and the number ofsharesauthorizedandoutstanding foreachperiod.If there is more than one type of stock, indicatethe voting rights, preferential dividend rights,and conversion rights, where applicable.The examiner should make certain that the—1. investments in subsidiaries equals the

investments detailed on the ‘‘Investment in andAdvances to Subsidiaries’’ page,2. advances to subsidiaries equals advances

detailed on the ‘‘Investment in and Advances toSubsidiaries’’ page,3. commercial paper total equals the com-

mercial paper totals detailed on the CommercialPaper (Parent) page and the ‘‘Liquidity and DebtInformation’’ confidential page ‘‘C,’’4. totalofshort-termand long-termdebtequals

the same totals for unaffiliated borrowings onthe ‘‘Liquidity and Debt Information’’ confiden-tial page ‘‘C,’’5. ‘‘Other Assets’’ and any other accounts

detailedon the ‘‘ContingentLiabilitiesandSched-ule of Balance-Sheet Accounts Not DetailedElsewhere (Parent)’’ page reconciles to the cor-responding items on the page (the ‘‘ContingentLiabilities and Schedule of Balance-SheetAccounts Not Detailed Elsewhere (Parent)’’page may show only significant items in thecategories without totals), and6. parent’s equity accounts equal those on

the ‘‘Statement of Changes in Stockholder’sEquity’’ and on the ‘‘Consolidated ComparativeBalance Sheet’’ page.


Inspection Report Preparation (Appendix Page 6—ComparativeStatement of Income and Expenses (Parent)) Section 5010.9

The comparative income statement presentsincome of the parent available to satisfy ex-pense requirements. It also can be an indicatorof the structure of services and activities pro-vided at the parent level.The purpose of the statement is to

determine—

• the levels and types of intercompany income,• that the sources of external income are consis-tent with authorized activities,

• the changes in corporate policy via changes inintercompany income, and

• that the types and levels of the parent’sexpenses are appropriate for the parent’sactivities.

All statements of income and expenses shouldbe requested in the officer’s questionnaire. Fiscalinformation can be found in the holding compa-ny’s annual report to shareholders, FR Y-6,and/or SEC Form 10-K. Interim results are gen-erally requested from the corporation’s account-ing or comptroller department.Two interims and two fiscals should be pre-

sented unless the inspection is as of fiscal year-end, when only two fiscals are required. Thereport page should show all significant catego-ries of operating income and expense. A supple-mentary schedule should be provided breakingdown any category of other income or expense

that equals or exceeds 25 percent of its respec-tive total.If possible, insurance commission income is

to be shown net of premiums collected, and,when available, commissions should be brokendown to show those directly related to creditextended within the bank holding companyorganization. The various income componentsfrom internal and external sources need to bedetailed separately to allow cross checking withthe ‘‘Income from Subsidiaries’’ pages.Equity in undistributed earnings of subsidi-

aries should be listed below net operating incometo derive ‘‘net income.’’ Where applicable, showseparately the equity in undistributed earningsof subsidiary banks and nonbanks.The examiner should make certain that—

• dividends, interest, management, and servicefees and equity in undistributed earnings ofsubsidiaries equal the totals on the ‘‘Incomefrom Subsidiaries’’ pages and

• net income equals the amounts reported onthe ‘‘Statement of Changes in Stockholders’Equity (Parent)’’ and ‘‘Comparative State-ment of Income and Expense (Consolidated)’’pages. In those cases where the figures do notagree, the difference should should be foot-noted and detail should be provided for thedifference.


Inspection Report Preparation (Appendix Page 7—ConsolidatedClassified & Special-Mention Assets) Section 5010.10

Classified assets and off-balance-sheet transac-tions are summarized by organizational level,whether at the parent company, banking subsid-iaries, or nonbank subsidiaries, and comparedwith valuation reserves established to absorbknown and potential losses. For banking subsid-iaries, the classified items are derived from themost recent federal and state examinations forthe individual bank subsidiaries.

Report the classification, reserve, noncurrent,and loan/lease-level ratios as detailed on thereport page. The ratio of consolidated classifiedassets to tier 1 capital should be included. The‘‘continued’’ page should contain commentsregarding the sources of information and meth-ods used by the examiner for determining con-solidated asset quality.

For the parent company, the classificationtotals should be broken down into the majorasset categories (for example, ‘‘Loans,’’ ‘‘OtherReal Estate,’’ and ‘‘Other Assets’’). The leadbank subsidiary’s classification should be bro-ken out along with any other bank that hasclassified assets representing 20 percent or moreof total consolidated classified assets. The assetsof a nonbank credit-extending subsidiary shouldbe broken out if the nonbank subsidiary hadclassifications greater than 5 percent of consoli-dated classified assets or other large problemcredits or classified assets.

There may be occasions when one or moresubsidiary banks may not have been subject toan asset-quality review by a bank supervisoryagency within the last two years, which impedesthe bank holding company examiner frommaking an accurate judgment on the com-pany’s asset quality. The examiner may acceptthe internal criticized assets of the bank holdingcompany only if the internal system was testedby the examiner and deemed to be valid. Gen-erally, such testings should be conducted asnecessary in order to make an informed judg-ment on consolidated asset quality. Commentsshould be provided about whether the examinerwas able to rely on information depicting assetquality or that such information was notavailable.

Classification totals of off-balance-sheet trans-actions, if any, should be broken out separatelyand summarized for each level of the organiza-tion (parent company, bank subsidiaries, andnonbank subsidiaries).

The source for reporting classified asset totalsshould be stated (FRB, OCC, FDIC, internaloperations, or internal audit review) along withthe respective as-of date. As an alternative, clas-

sified asset totals may be listed for individualbank and nonbank subsidiaries. The purpose ofpreparing this summary is to—

1. determine the amount and degree of risk andpotential loss associated with on- and off-balance-sheet transactions and activities (Thisis accomplished by summarizing the amountof classified assets and losses and otherpotential losses that may result from on- andoff-balance-sheet activities, including off-balance-sheet risk at the consolidated orga-nizational level, as well as the generalcomposition of such potential losses at theparent company, bank subsidiaries, or non-bank subsidiaries);

2. analyze ratio trends in consolidated assetquality for the current and previous twoinspections;

3. determine the extent to which such classifiedassets and off-balance-sheet risk influencethe overall financial condition of the consoli-dated organization;

4. determine the adequacy of reserves (Thepage alerts management about the need forincreasing the valuation reserve accounts);

5. disclose problem assets and off-balance-sheettransactions requiring management’sattention;

6. show in summary form all classifications andcriticisms assigned by examiners in deter-mining asset quality and the adequacy ofrespective reserves; and

7. aid in the identification of existing and poten-tial problems in the banks that may have anoverall effect on the bank holding company.

The information for the report page is derivedfrom two other completed pages or workpapers,‘‘Parent Company and Nonbank Assets Subjectto Classification’’ and ‘‘Classified Assets andCapital Ratios of Subsidiary Banks.’’ Theinformation is obtained by determining thecollectibility or forced-sale value of assets orpotential losses that may arise from certainon- and off-balance-sheet transactions. Forbanks, the information is to be generatedfrom bank examination reports that are availableat the Reserve Bank. (The holding companymay have copies of the open sections of thereports.)

Investments in and advances to bank andnonbank credit-extending subsidiaries by the

BHC Supervision Manual January 2013Page 1

parent are not to be classified. The examinermay, however, classify the parent’s investmentsin and advances to non-credit-extending non-bank subsidiaries. For additional information onclassifying an investment to a non-credit-extending subsidiary, see section 4070.0.

The use of abbreviations for the subsidiarieswithin narrative comments, as presented on the‘‘Scope and Abbreviations’’ core page 2, is per-missible. The examiner may comment on andanalyze lending policies, documentation, collec-tion procedures, and past-due volume in theaggregate. Such comments should be consistentwith comments in other report pages andworkpapers.

The examiner should provide comments onthe adequacy of the valuation reserves and anyrecommendations to management to provide foradditional loan-loss provisions. The examinershould also recommend that management main-tain a level of loan-loss reserves that is adequateto offset 100 percent of assets classified loss andstill have a balance sufficient to absorb normalunidentified, unanticipated future losses fromoperations.

Weighted classified assets includes 100 per-cent of loss, 50 percent of doubtful, 20 percentof substandard, and, when applicable, valueimpaired (net of adjusted transfer-risk reserve).It is appropriate to comment on weighted classi-fied assets on the ‘‘Analysis of Financial Fac-tors’’ core page 3.

Noncurrent loans and leases refers to theend-of-period dollar amount of loans and lease-financing receivables past due 90 days or moreand still accruing, plus those carried in nonac-crual status, as reported for each loan category.This report page should not be included inthe core section of the report for one-bank hold-ingcompanies.For thosebankholdingcompanies,the examiner will include the classifications onthe ‘‘Parent Company and Nonbank Assets Sub-ject to Classification’’ and the ‘‘Bank Subsidi-aries’’ report pages when assets are classified orwritten up as required.

The examiner should make certain that theaggregate classifications and reserve amountsagree with those reported for the parent, thebanking subsidiaries, and the nonbank subsidi-aries on the ‘‘Parent Company and NonbankAssets Subject to Classification’’ and the ‘‘Clas-sified Assets and Capital Ratios of SubsidiaryBanks’’ pages or workpapers. If classificationsare discussed on the ‘‘Examiner’s Comments

and Matters Requiring Special Board Atten-tion’’ page, the totals should be confirmed.

5010.10.1 CLASSIFICATION OFASSETS

The Uniform Agreement on the Classification ofAssets and Appraisal of Securities Held byBanks and Thrifts1 (the uniform agreement), asrevised June 15, 2004, sets forth the definitionsof the classification categories and the specificexamination procedures and information that areto be used for classifying bank assets, includingsecurities. (See SR-04-9.) The revised uniformagreement amends the examination proceduresthat were established in 1938 and then revisedand issued on July 15, 1949, and May 7, 1979.The uniform agreement’s classification of loansremains unchanged from the 1979 revision. Theclassification categories are designated as Sub-standard, Doubtful, and Loss. The June 15,2004, uniform agreement changes the classifica-tion standards applied to banks’ (and bank hold-ing companies’) holdings of debt securities by—

1. eliminating the automatic classification ofsub-investment-grade debt securities when abanking organization has developed an accu-rate, robust, and documented credit-risk man-agement framework to analyze its securitiesholdings;

2. conforming the uniform agreement to currentgenerally accepted accounting principles bybasing the recognition of depreciation on allavailable-for-sale securities on the bank’sdetermination as to whether the impairmentof the underlying securities is ‘‘temporary’’or ‘‘other than temporary’’;

3. eliminating the preferential treatment givento defaulted municipal securities;

4. clarifying how examiners should addresssecurities that have two or more differentratings, split or partially rated securities, andnonrated debt securities;

5. identifying when examiners may diverge fromconforming their ratings to those of the rat-ing agencies; and

6. addressing the treatment of Interagency Coun-try Exposure Review Committee ratings.

The uniform agreement’s classification catego-ries also apply to the classification of assets held

1. The statement was issued by the Board of Governors ofthe Federal Reserve System, the Office of the Comptroller ofthe Currency, the Federal Deposit Insurance Corporation, andthe Office of Thrift Supervision (the agencies).

Inspection Report Preparation (Appendix Page 7—Consolidated Classified & Special-Mention Assets) 5010.10


by the subsidiaries of banks and bank holdingcompanies. Although the classification catego-ries for bank and bank holding company assetsand assets held by their subsidiaries are thesame, the classification standards may be diffi-cult to apply to the classification of certainsubsidiary assets because of differences in thenature and risk characteristics of the assets.Despite the differences that may exist betweenassets held directly by a bank or bank holdingcompany and those held by its subsidiaries, thestandards for classifying investment securitiesare to be applied directly to securities held by abank or bank holding company and itssubsidiaries.

5010.10.1.1 Substandard Assets

A substandard asset is inadequately protected bythe current sound worth and paying capacity ofthe obligor or the collateral pledged, if any.Assets so classified must have a well-definedweakness or weaknesses that jeopardize theliquidation of the debt. They are characterizedby the distinct possibility that the bank willsustain some loss if the deficiencies are notcorrected.

5010.10.1.1.1 SubstandardClassification—Guidelines for an AssetWhen a Substantial Portion Has BeenCharged Off

In some cases, credit-extending subsidiaries withloans to financially troubled borrowers havecharged off substantial portions of these credits.Consistent with long-standing supervisory prac-tice, the evaluation of each extension of creditshould be based on the fundamentals of theparticular credit. That is, the evaluation of eachcredit should be based on the borrower’s (or thecollateral’s) current and stabilized cash flow,earning and debt-service capacity, financial per-formance, net worth, guarantees, and futureprospects and on other factors relevant to theborrower’s ability to service and retire its debt.

Based on the consideration of all relevantfinancial factors, the evaluation may indicatethat a credit has well-defined weaknesses thatjeopardize repayment in full but that a portionof the loan may be reasonably assured of repay-ment. When a charge-off has been taken in asufficient amount so that the remaining recordedbalance of the loan is being serviced (based onreliable sources of cash flow) and is reasonablyassured of repayment, this remaining recorded

balance would generally be classified no moreseverely than substandard.2 Consistent with long-standing classification guidelines, a Substandardclassification of the remaining recorded balancewould only be appropriate when well-definedweaknesses continue to be present in the credit.For example, when the remaining recorded bal-ance of an asset is secured by readily market-able collateral, the portion that is secured by thiscollateral would generally not be classified. (SeeSR-91-18.) This approach would generally beappropriate when an organization maintains suf-ficient controls over its lending function andmaintains adequate current documentation tosupport the credit analysis of the loan. Thisclassification approach could not be used forloans for which the loss exposure cannot bereasonably determined, for example, loans col-lateralized by properties subject to environmentalhazards. This approach would also not be justi-fied when sources of repayment are consideredunreliable.

5010.10.1.2 Doubtful Assets

An asset classified Doubtful has all the weak-nesses inherent in one classified Substandard.However, it has the added characteristic that theweaknesses make collection or liquidation infull, on the basis of currently existing facts,conditions, and values, highly questionable andimprobable.

5010.10.1.3 Loss Assets

Assets classified Loss are considered uncollect-ible and of such little value that their continu-ance as bankable assets is not warranted. Thisclassification does not mean that the asset hasabsolutely no recovery or salvage value, butrather that it is not practical or desirable to deferwriting off this basically worthless asset eventhough partial recovery may be effected in thefuture. Amounts classified Loss should bepromptly charged off.

2. The accrual/nonaccrual status of the loan must continueto be determined in accordance with the glossary to thecurrent Call Report or bank holding company reportinginstructions. Thus, while these partially charged-off loans mayqualify for nonaccrual treatment, cash-basis recognition ofincome will be appropriate when the criteria specified in thereport guidance are met.



5010.10.2 APPRAISAL OFSECURITIES IN BANKEXAMINATIONS

In an effort to streamline the examination pro-cess and achieve as much consistency as pos-sible, examiners can use the published ratingsprovided by nationally recognized statistical rat-ings organizations (NRSROs) and other creditquality assessment information as a proxy forthe supervisory classification definitions. Exam-iners may, however, assign a more- or less-severe classification for an individual security,depending on a review of applicable facts andcircumstances.

5010.10.2.1 Investment-Quality DebtSecurities

Investment-quality debt securities are market-able obligations in which the investment charac-teristics are not distinctly or predominantly specu-lative. This group generally includes investmentsecurities in the four highest rating categoriesprovided by NRSROs and includes unrated debtsecurities of equivalent quality.

Because investment-quality debt securities donot exhibit weaknesses that justify an adverseclassification rating, examiners will generallynot classify them. However, published creditratings occasionally lag demonstrated changesin credit quality and examiners may, in limitedcases, classify a security notwithstanding aninvestment-grade rating. Examiners may usesuch discretion, when justified by credit infor-mation the examiner believes is not reflected inthe rating, to properly reflect the security’scredit risk.

5010.10.2.2 Sub-Investment-Quality DebtSecurities

Sub-investment-quality debt securities are thosein which the investment characteristics are dis-tinctly or predominantly speculative. This groupgenerally includes debt securities, includinghybrid equity instruments (for example, trustpreferred securities), in grades below the fourhighest rating categories; unrated debt securitiesof equivalent quality; and defaulted debtsecurities.

To reflect asset quality properly, an examinermay in limited cases ‘‘pass’’ a debt security that

is rated below investment quality. Examinersmay use such discretion when, for example, theinstitution has an accurate and robust credit-risk-management framework and has demonstrated,based on recent, materially positive credit infor-mation, that the security is the credit equivalentof investment grade.

5010.10.2.3 Rating Differences

Some debt securities may have investment-quality ratings by one (or more) rating agenciesand sub-investment-quality ratings by others.Examiners will generally classify such securi-ties, particularly when the most recently assignedrating is not investment quality. However, anexaminer has discretion to ‘‘pass’’ a debt secu-rity with both investment-quality and sub-investment-quality ratings. The examiner mayuse that discretion if, for example, the institu-tion has demonstrated through its documentedcredit analysis that the security is the creditequivalent of investment grade.

5010.10.2.4 Split or Partially RatedSecurities.

Some individual debt securities have ratings forprincipal but not interest. The absence of arating for interest typically reflects uncertaintyregarding the source and amount of interest theinvestor will receive. Because of the speculativenature of the interest component, examiners willgenerally classify such securities, regardless ofthe rating for the principal.

5010.10.2.5 Nonrated Debt Securities

The agencies expect institutions holding indi-vidually large nonrated debt security exposures,or having significant aggregate exposures fromsmall individual holdings, to demonstrate thatthey have made prudent pre-acquisition creditdecisions and have effective, risk-based stan-dards for the ongoing assessment of credit risk.Examiners will review the institution’s programfor monitoring and measuring the credit risk ofsuch holdings and, if the assessment process isconsidered acceptable, generally will rely onthose assessments during the examination pro-cess. If an institution has not established inde-pendent risk-based standards and a satisfactoryprocess to assess the quality of such exposures,examiners may classify such securities, includ-ing those of a credit quality deemed to be theequivalentof subinvestmentgrade, asappropriate.



Some nonrated debt securities held in invest-ment portfolios represent small exposures rela-tive to capital, both individually and in aggre-gate. While institutions generally have the samesupervisory requirements (as applicable to largeholdings) to show that these holdings are thecredit equivalent of investment grade at pur-chase, comprehensive credit analysis subsequentto purchase may be impractical and not costeffective. For such small individual exposures,institutions should continue to obtain and reviewavailable financial information, and assign riskratings. Examiners may rely on the bank’s inter-nal ratings when evaluating such holdings.

5010.10.2.6 Foreign Debt Securities

The Interagency Country Exposure Review Com-mittee (ICERC) assigns transfer-risk ratings forcross-border exposures. Examiners should usethe guidelines in this uniform agreement ratherthan ICERC transfer-risk ratings in assigningsecurity classifications, except when the ICERCratings result in a more severe classification.

5010.10.2.7 Treatment of Declines in FairValue Below Amortized Cost on DebtSecurities

Under generally accepted accounting principles(GAAP), an institution must assess whether adecline in fair value3 below the amortized cost

of a security is a ‘‘temporary’’ or an ‘‘other-than-temporary’’ impairment. When the declinein fair value on an individual security represents‘‘other-than-temporary’’ impairment, the costbasis of the security must be written down tofair value, thereby establishing a new cost basisfor the security, and the amount of the write-down must be reflected in current-period earn-ings. If an institution’s process for assessingimpairment is considered acceptable, examinersmay use those assessments in determining theappropriate classification of declines in fair valuebelowamortizedcoston individualdebt securities.

Any decline in fair value below amortizedcost on defaulted debt securities will be classi-fied as indicated in the table below (section5010.10.3). Apart from classification, forimpairment write-downs or charge-offs onadversely classified debt securities, the exist-ence of a payment default will generally beconsidered a presumptive indicator of ‘‘other-than- temporary’’ impairment.

5010.10.2.8 Classification of Other Typesof Securities

Some investments, such as certain equity hold-ings or securities with equity-like risk and returnprofiles, have highly speculative performancecharacteristics. Examiners should generally clas-sify such holdings based on an assessment ofthe applicable facts and circumstances.

3. As currently defined under GAAP, the fair value of anasset is the amount at which that asset could be bought or soldin a current transaction between willing parties, that is, otherthan in a forced or liquidation sale. Quoted market prices arethe best evidence of fair value and must be used as the basisfor measuring fair value, if available.



5010.10.3 SUMMARY TABLE OF GENERAL DEBT SECURITYCLASSIFICATION GUIDELINES

The following table outlines the uniform classification approach the agencies will generally usewhen assessing credit quality in debt securities portfolios:

Type of security Classification

Substandard Doubtful Loss

Investment-quality debt securities with‘‘temporary’’ impairment

— — —

Investment-quality debt securities with‘‘other-than-temporary’’ impairment

— — Impairment

Sub-investment-quality debt securitieswith ‘‘temporary’’ impairment 1

Amortizedcost

— —

Sub-investment-quality debt securitieswith ‘‘other-than-temporary’’ impair-ment, including defaulted debtsecurities

Fairvalue

— Impairment

Note. Impairment is the amount by which amortized costexceeds fair value.

1. For sub-investment-quality available-for-sale (AFS) debtsecurities with ‘‘temporary’’ impairment, amortized cost ratherthan the lower amount at which these securities are carried onthe balance sheet, i.e., fair value, is classified Substandard.This classification is consistent with the regulatory capitaltreatment of AFS debt securities. Under GAAP, unrealized

gains and losses on AFS debt securities are excluded fromearnings and reported in a separate component of equitycapital. In contrast, these unrealized gains and losses areexcluded from regulatory capital. Accordingly, the amountclassified Substandard on these AFS debt securities, i.e.,amortized cost, also excludes the balance-sheet adjustment forunrealized losses.

The general debt security classification guide-lines do not apply to private debt and equityholdings in a small business investment com-pany or an Edge Act corporation. The uniformagreement does not apply to securities held intrading accounts, provided the institution dem-onstrates through its trading activity a short-term holding period or holds the security as ahedge for a customer’s valid derivative contract.

5010.10.4 CREDIT-RISK-MANAGEMENT FRAMEWORKFOR SECURITIES

When an institution has developed an accurate,robust, and documented credit-risk-managementframework to analyze its securities holdings,examiners may choose to depart from the abovegeneral debt security classification guidelines infavor of individual asset review in determiningwhether to classify those holdings. A robustcredit-risk-management framework entails

appropriate pre-acquisition credit due diligenceby qualified staff that grades a security’s creditrisk based on an analysis of the repaymentcapacity of the issuer and the structure andfeatures of the security. It also involves theongoing monitoring of holdings to ensure thatrisk ratings are reviewed regularly and updatedin a timely fashion when significant new infor-mation is received.

The credit analysis of securities should varybased on the structural complexity of the secu-rity, the type of collateral, and external ratings.The credit-risk-management framework shouldreflect the size, complexity, quality, and riskcharacteristics of the securities portfolio; therisk appetite and policies of the institution; andthe quality of its credit-risk-management staff,and should reflect changes to these factors overtime. Policies and procedures should identifythe extent of credit analysis and documentationrequired to satisfy sound credit-risk-management standards.



Procedures for Inspection Report Preparation (Appendix Page 8—Consolidated Comparative Balance Sheet) Section 5010.11

This Core report page is to present the consoli-dated balance sheet as of the financial statementdate, the comparable date for the previous year,and the last two fiscal year-end statements.When the inspection is conducted at fiscal year-end, only two fiscal year-end statements need bepresented. The comparative statement allowsthe reader to analyze any changes in asset, liabil-ity, and capital structure and to determine thecondition of the consolidated organization onthe specified dates.The financial statements should be requested

in the officer’s questionnaire. Fiscal financialstatements can also be obtained from theFR Y-6, FR Y-9, the SEC Form 10-K, andpublished reports to shareholders.The balance sheets should be presented in

columnar form with the current interim first,prior interim period, current fiscal and priorfiscal. They may be formatted like the FR Y-9.In preparing the comparative balance sheet,

the following should be done.1. Gross loans should be shown and then

netted of unearned discount and reserve for loanlosses.2. Federal funds sold and securities pur-

chased under resale agreements may be shownas one amount or separately, depending on howthe company prepares its statements. Similartreatment should be given to federal funds pur-chased and securities sold under repurchaseagreements on the liability side.

3. Total deposits should be broken downor footnoted to show interest-bearing andnoninterest-bearing deposits in domestic andforeign offices.4. Mandatory convertible debt instruments

should be shown separate from subordinatedcapital notes and debentures and detailed on the‘‘Liquidity and Debt Information’’ ConfidentialPage ‘‘C.’’5. Stockholder’s equity should be detailed

using the following categories, as applicable:common stock, perpetual preferred stock, capi-tal surplus, retained earnings (undivided prof-its), and reserves for contingencies and othercapital reserves.The amount of total consolidated debt should

agree with unaffiliated debt for the current pe-riod on the ‘‘Liquidity and Debt Information’’Confidential page ‘‘C.’’ Any exceptions shouldbe footnoted.Equity capital should agree with the indi-

vidual components shown on the ‘‘Statement ofChanges in Stockholders’ Equity (Parent)’’ pagefor the respective periods and with stockhold-ers’ equity on the ‘‘Parent Company Compara-tive Balance Sheet’’ Core page 5. Any excep-tions should be footnoted.Figures used in the analysis on the ‘‘Analysis

of Financial Factors’’ Core page 3 and the‘‘Capital Structure (Consolidated)’’ pages shouldagree with this statement.


Inspection Report Preparation (Appendix Page 9—ComparativeConsolidated Statement of Income and Expenses)Section 5010.12

This report page is to present aconsolidatedstatement of income and expense as of the finan-cial statement date, the comparable date for theprevious year, and the last two fiscal year-endstatements. When the inspection is conducted atfiscal year-end, only two fiscal year-end incomeand expense statements need be presented. Thestatement aids the reader in an analysis of corpo-rate earnings performance on a consolidatedbasis and provides the ability to further analyzechanges in income and expense accounts fromone period to another.Statements of income and expenses should be

requested in the officer’s questionnaire. State-ments for fiscal periods can also be obtainedfrom the FR Y-6, FR Y-9, the SEC Form 10-Kand published reports to stockholders.The statement of income and expenses should

be presented in columnar form with the currentinterim first, prior interim period, current fiscal,

and prior fiscal. They may be formatted like theFR Y-9.Any detail available that breaks down ‘‘inter-

est income’’ for the most recent fiscal year intocomponents should be presented either on thestatement as a footnote or on a supplementalpage, the ‘‘Comparative Statement of Incomeand Expenses (Consolidated)’’ page, if consid-ered appropriate by the examiner.Provisions for loan losses should be shown

asa line itemandnotgrouped in ‘‘otherexpenses.’’‘‘Other income’’ and ‘‘other expenses’’ shouldbe broken down to provide additional detail atthe discretion of the examiner.Net income should normally agree with net

income of the parent on the ‘‘Comparative State-ment of Income and Expenses (Parent)’’ pageand the ‘‘Statement of Changes in Stockholders’Equity (Parent)’’ page. Footnote differences.


Procedures for Inspection Report Preparation(Capital Structure) Section 5010.13

The risk-based capital guidelines apply on aconsolidated basis to bank holding companieswith consolidated assets of $150 million ormore. For these BHCs, the designated FR 1225report page will be used. For BHCs with con-solidated assets of less than $150 million, therisk-based capital guidelines apply on a bank-only basis unless (a) the parent holding com-pany is engaged in nonbank activity involvingsignificant leverage (e.g. engaged in significantoff-balance sheet activity); or (b) the parentcompany has a significant amount of outstand-ing debt that is held by the general public. ForBHC with total assets of less than $150 millionthe Capital Structure (FR 1241) report page isused.

5010.13.1 BHCS WITHCONSOLIDATED ASSETS OF$150 MILLION OR MORE—[CORE PAGE 10—CONSOLIDATEDCAPITAL STRUCTURE (FR 1225)]

The consolidated capital structure report pagesummarizes the various components of the BHCrisk-based capital ratios. Two report pages areprovided to allow for risk-based capital compu-tations during transition and at year-end 1992for final implementation. The pages provide thevarious limitations for the respective compo-nents of Tier 1 and Tier 2 capital. For bothreport pages, the first page summarizes ‘‘TotalQualifying Capital’’ comprised of Tier 1 andTier 2 capital, adjusted for investments inunconsolidated financing subsidiaries and recip-rocal holdings of capital.Tier 1 capital consists of permanent core cap-

ital elements (common equity, noncumulativeperpetual preferred stock, a limited amount ofcumulative perpetual preferred stock, andminority interest in the equity of consolidatedsubsidiaries). Tier 1 capital is derived by sub-tracting goodwill from the sum of Tier 1 capitalelements.Tier 2 capital consists of: (a) a limited amount

of the allowance for loan and lease losses;(b) auction rate perpetual preferred stock plusany cumulative perpetual preferred stockexceeding its Tier 1 limitation; (c) perpetualdebt, mandatory convertible securities, and otherhybrid capital instruments; (d) long-term perpet-ual preferred stock; and (e) limited amounts ofterm subordinated debt, intermediate-term pre-ferred stock, andunsecured long-termdebt issuedprior to March 12, 1988.For Tier 2 capital, the amount of mandatory

convertible securities that have the proceeds ofcommon or perpetual preferred stock dedicatedto retire or redeem them should be treated asterm subordinated debt subject to the estab-lished limit of 50 percent of Tier 1 capital.Mandatory convertible securities, net of the per-petual preferred or common stock dedicated toredeem or retire the issues, are included withinTier 2 on an unlimited basis. Tier 2 capital maynot exceed Tier 1 capital.Investments in unconsolidated financial sub-

sidiaries and reciprocal holdings of capital aresubtracted from the combined total of Tier 1 andTier 2 capital to determine the amount of totalqualifying capital.Core page 10–1 provides a summary of risk

weighted on- and off-balance sheet assets, ad-justed (reduced) for the excess of the allowancefor loan and lease losses not included in Tier 2capital and the allocated transfer risk reserve(ATRR). In addition, it provides a comparativepeer and historical summary of risk-based capi-tal ratios, growth rates, and dividend payoutratios.Core page 10–2 provides a summary com-

ments section to discuss any pertinent aspects ofthe institution’s capital structure not evidentfrom the schedule.The information on the capital structure page

will give support to the examiner’s evaluationof the bank holding company’s capital ade-quacy. The most convenient method to obtainthe information is to request it in the officer’squestionnaire, or through direct contact with theaccounting department.The amounts on the risk-based capital sched-

ules should be shown as of the same date as the‘‘Consolidated Comparative Balance Sheet’’ ofthe inspection report. Refer to the Risk-basedCapital Guidelines in Appendix A of RegulationY and Manual sections 4060.3 and 4060.4 for adiscussion of the Capital Adequacy Guidelinesand the minimum risk-based capital and lever-age ratios for BHCs.Use the instructions and guidance found on

the report page and worksheets. When complet-ing the supplementary capital section, insert theaggregate amount of each component in thespace provided. If more than one issue of aparticular Tier 2 capital component is outstand-ing, a range of rates should be shown in theappropriate space, giving the lowest and thehighest rates paid.


Commentsunder theRisk-basedCapital sched-ule should include:

• Any unusual terms and conditions relatingto issues of supplementary capital that theexaminer feels should be mentioned;

• An indication ofwhether a subsidiary bank’sequity represents the proceeds from theissuance of parent debt (double leverage);

• A presentation or description of risk-basedcapital components for statutory purposesif there is a violation for which the statutorydefinition is relevant.

• A situation whereby the levels of risk war-rant significantly higher risk-based capitalratios than the minimums.

The amounts of Tier 1 and Tier 2 used in thisanalysis of consolidated risk-based capital onthe ‘‘Analysis of Financial Factors’’ page shouldbe consistent with the amounts on this page.

5010.13.2 WORKSHEETS

In addition to the report pages, BHC Risk-BasedCapital Calculation Worksheets have beendeveloped for examiner use with year-end 1992final implementation. The worksheets are to be

retained with the examiner’s workpapers. If thebhc generated data was validated by the exam-iner and accepted to support or partially substi-tute for the computation of the elements, itshould also be retained with the worksheets.The worksheets provide more detail as to thecomposition of core capital elements and sup-plementary capital elements. In addition, thefootnotes provide more detailed explanations ofthe various components than are found on theactual report pages.

5010.13.3 BHCS WITH LESS THAN$150 MILLION IN CONSOLIDATEDASSETS—[PAGE—CAPITALSTRUCTURE (LEAD BANK OROTHER BANK SUBSIDIARY(FR 1241)]

The FR 1241 report page is used primarily forthe lead bank. Report pages have been devel-oped for year-end 1992 final implementation.The report pages are nearly identical to thoseused for state member bank examinations(FR 1460). If there is no one lead bank, thereport pages should be prepared for each com-parable lead bank.

Procedures for Inspection Report Preparation (Capital Structure) 5010.13


Procedures for Inspection Report Preparation(Page—Policies and Supervision) Section 5010.14

This report page provides a summary of thepolicies formulated by the board of directors bywhich active management supervises holdingcompany operations. The objective is to deter-mine whether there are adequate formal policiesdevelopedand supervised, either directly throughthe board of directors, or by a delegation of theauthority, for the parent company and its subsid-iaries. Another objective is to evaluate manage-ment’s performance in carrying out those poli-cies for the entire organization. These policiesaid in giving insight into the operations of theholding company. The policies should ensurethat all statutory and regulatory requirementsare met and that proper controls (managementinformation systems) are in place to minimizerisk. Examiners should encourage BHCs todevelop formal written policies on all itemspresented.The report page is to provide an analysis of

the adequacy of supervision exercised by theholding company over its subsidiaries, and poli-cies concerning intercompany relationships.Alsoincluded is a discussion of deficiencies in thepolicy-making process, any noncompliance withexisting policies, and the plans for correctingany deficiencies.In the officer’s questionnaire, the examiner

may request some of the information pertainingto policies. Insight into policies may also begained by reviewing the holding company’sannual reports to stockholders and through dis-cussions with management. If the holding com-pany does not have any formal written policies,the organization’s operating procedures shouldbe discussed with officers responsible for thevarious areas.Compliance with policies may be determined

by reviewing recent internal and external auditreports, recent bank examinations, and discus-sions with management at the subsidiary level,and by conducting tests to determine the extentof compliance with policies. Discussions withmanagement are necessary to obtain a thoroughunderstanding of management and supervisorypractices, policy-development techniques, thedegree to which management information is uti-lized to monitor subsidiaries, and overall man-agement philosophy.The policies should be summarized as suc-

cinctly as possible in narrative form. If the hold-ing company has no formal policies the exam-inermay use an introductory statement indicatingthat comments were derived from discussionswith senior management. Absence of any for-mal policies may require the examiner to make

a recommendation on the ‘‘Examiner’s Com-ments’’ Core page 1 that the holding companystrongly consider the establishment of formalwritten policies in order to supervise its subsidi-aries more effectively.This report page should address existing poli-

cies and the level of control and supervisionexercised over subsidiaries. How effectivelypolicies are carried out should be shown in therespective sections of the report. Where policiesresult in violations of law or regulation, com-ments should be made on the ‘‘Examiner’sComments’’ Core page 1 and detailed on the‘‘Violations’’ page. If any policy is consideredinconsistent with safe and sound banking prac-tices, the matter should be presented on Corepage 1 and detailed elsewhere in the report.Comments on policies that are on other pages

in the report should be consistent with thisreport page. Those comments and report pagesare:1. Dividends and fees from subsidiaries—on

the ‘‘Statement of Changes in Stockholder’sEquity,’’ ‘‘Income from Subsidiaries,’’ and the‘‘Cash Flow Statement (Parent)’’ pages.2. Dividends paid to shareholders—on the

‘‘Statement ofChanges inStockholder’sEquity,’’and the ‘‘Cash Flow Statement (Parent).’’3. Budgeting and tax planning—on the

‘‘Other Supervisory Issues’’ page.4. Internal audit—on the ‘‘Audit Program’’

page.5. Insider transactions—on the ‘‘Extensions

of Credit to BHC Officials’’ page.

5010.14.1 QUESTIONS TO BEADDRESSED ON THE POLICIES ANDSUPERVISION REPORT PAGE

5010.14.1.1 Level of Control andSupervision Exercised over Subsidiaries

1. Do subsidiaries operate autonomously?What is the degree of overlap between BHC andbank management?2. Who sets major policies of the corpora-

tion?3. How does the holding company monitor

the operations of its subsidiaries (reports, direc-tors, etc.)?4. Are the subsidiaries involved in formulat-

ing the holding company’s budget and tax plan-


ning? How is the holding company’s budgetdeveloped and at what corporate level is incometax planning coordinated?5. Describe the intermediate and long-term

strategic planning process and whether the sub-sidiaries are integrated into a consolidated plan-ning process. Does the consolidated plan includetheminimumelementsdiscussed insection2010.4of this manual? Is the plan effective and is itconsistently applied?6. How is the internal audit of subsidiaries

performed?

• Does an audit team audit each subsidiaryon a periodic basis?

• What is the frequency of the audit cycle?• To whom does the audit department report?• Is there an audit committee of directors?

7. Is the control and supervision of subsidi-aries deficient?

5010.14.1.2 Loans and Investments ofSubsidiaries (See sections 2010.2 and2010.3.)

1. Does the parent company’s policies ad-dress the minimum elements of a lending policyas listed and described in section 2010.2 of thismanual?2. Does each subsidiary have its own loan

policy or does the holding company establishpolicy for all subsidiaries? Are lending policiesconsidered adequate and is there generalcompliance?3. Does each subsidiary handle its own in-

vestment portfolio or are investments managedat the holding company level? Are investmentpolicies adequate and is there general compli-ance? Are investment-authorization proceduresadequately detailed to prevent circumvention ofinvestment-policy directives?4. Does the holding company have a credit

review team or is credit review handled by eachsubsidiary?5. Does the BHC have a policy establishing

limits on consolidated concentrations of credit?

5010.14.1.3 Funds Management and theAdequacy of Existing Policies (Seesection 2010.1.)

1. Does the parent-company managementhave policies in place to prevent funding prac-

tices that put at risk the welfare of the subsidiarybanks or the consolidated organization?2. Does the parent company maintain for

itself and its subsidiaries policies that provideguidance and controls for funding practices?3. To what extent do the subsidiaries follow

the funding policies and how effective are theyin reducing risk to the entire organization?4. At a minimum, do the parent company’s

funding policies address:a. Capitalization levels for bank subsidi-

aries, the nonbank subsidiaries, and the con-solidated organization as to whether the policyfor:

• Bank and consolidated capital are consis-tent with the Board’s capital adequacyguidelines;

• Nonbank capital includes maintaining thecapital level at industry standards;

• The holding company specifies thedesired range of capital for each entity,and the measures that should be taken inthe event that capital falls below thatlevel;

• The parent company specifies the degreeof double leverage that it is willing toaccept;

• Each entity specifies the method for cal-culating dividends?

b. Asset/liability management includinginterest rate sensitivity matching, maturitymatching, and the use of interest rate futuresand forwards and other financial derivativeinstruments?

c. How nonbank subsidiaries fund theiractivities?

5010.14.1.4 Loan Participations AmongSubsidiaries (See sections 2010.2 and2020.2.)

1. Under what circumstances are loansparticipated?2. Who determines the type of loans that may

be participated? Does the BHC have policies inthat regard? Are credit standards included in thelending policy for purchased loan participationsand does the policy require complete loandocumentation.3. Does the lending policy place limits on the

amount of loans purchased from any one sourceand does it place an aggregate limit on suchloans?4. Are low-quality loans allowed to be

participated?

Procedures for Inspection Report Preparation (Page—Policies and Supervision) 5010.14


5010.14.1.5 Dividends and Fees FromSubsidiaries

1. What is the policy for assessing dividendsfrom subsidiaries?2. Does the policy take into account statutory

and regulatory restrictions on bank dividends aswell as subsidiary asset quality, earnings, theability to service debt and growth prospects?3. What is the policy for determining fees

charged to subsidiaries in relation to manage-ment and other services rendered?4. Are service fee arrangements supported by

contracts and are the subsidiaries actuallyreceiving the services?5. Are the fees charged to subsidiaries rea-

sonable and justifiable in relation to the fairmarket value of the services provided? If nomarket exists for the services provided, are feesbased on their cost plus a reasonable profit? Hasthe BHC directly or indirectly through othersubsidiaries burdened its banking subsidiarieswith excessive fees or unreimbursed charges tofund its debt service, dividend payments or sup-port of other subsidiaries?

5010.14.1.6 Risk Evaluation and Control

1. Has the bank holding company formalizedpolicies and procedures in identifying, evaluat-ing, and controlling risk?2. What has management done to limit its

risk exposure in relationship to the amount ofthe organization’s capital, or earnings?3. Do audit procedures include a determina-

tion as to whether management’s risk evaluationand control procedures are being followed asprescribed?4. Has the bank holding company taken steps

to identify and control its exposure to lossesresulting from contingent liabilities and off-balance sheet activities such as standby lettersof credit, interest rate swaps, foreign exchangecontracts, currency swaps, options, securitieslending and borrowing, insider transactions, andcommitments to lend?

5010.14.1.7 Management InformationSystems

1. How effective and timely are the parentcompany’s policies and procedures with respectto its management information systems as to:

• Audit• Budget• Reporting• Insurance

2. Does the board of directors receivesufficient information about key areas of itsoperations?

5010.14.1.8 Internal Loan Review

1. Is an internal loan review program in exist-ence for bank and/or nonbank subsidiaries? Ifno program exists, does the size and complexityof the organization warrant implementation of aformal process?2. Will the internal loan review procedures

adequately identifydeteriorations incredits, loansthat do not comply with written loan policiesand loans with technical exceptions in a timelymanner?3. Is the loan review function independent of

the loan approval function, with written findingsreported to a board committee or senior man-agement committee not directly involved inlending?4. Are the quality and size of the internal

loan review staff sufficient in relation to theorganization’s size and complexity?5. Are the scope and frequency of the loan

review procedures adequate?

5010.14.2 DISCUSSION ANDAPPRAISAL OF OTHER PARENTCOMPANY POLICIES

Another parent company policy that should bediscussed and appraised, in addition to thoselisted on the ‘‘Policies and Supervision’’ page isthe Consolidated Planning Process whereby thesubsidiaries are integrated into a consolidatedplan. See Manual section 2010.4.

Procedures for Inspection Report Preparation (Page—Policies and Supervision) 5010.14


Procedures for Inspection Report Preparation(Page—Violations) Section 5010.15


This section has been revised to provide clarify-ing instructions on the reporting of violations orapparent violations in the inspection report. The‘‘Violations’’ section or page should include allBHC and nonbank subsidiary violations of theFederal Reserve Act (the act), Regulation Y, andother applicable statutes and regulations. Sec-tion 23A and 23B violations of the act shouldonly be included if they have been cited by theprimary regulator of the subsidiary banks. If thebank’s primary regulator has not cited a viola-tion of Section 23A and 23B of the act, apparentviolations should be noted in the ‘‘Other Mat-ters’’ page of the inspection report.

This report page or section is used to presentinformation on all violations discussed in theinspection report. The objective of the reportpage is to bring violations to the attention of theboard of directors for corrective action and toalert the supervisory agencies to the need forsupervisory attention.

The information reported should center onviolations by the holding company uncoveredduring the course of the inspection and thosethat are discovered through a review of reportsfiled with supervisory authorities. Informationon violations by the subsidiary bank(s) in itsdealings with the holding company or affiliatesmay be obtained from the most recent bankexamination reports or uncovered during theholding company inspection.

This page should include all BHC and non-bank subsidiary violations of the Act, Regula-tion Y, and other applicable statutes and regula-tions. Section 23A and 23B violations of theFederal Reserve Act should only be included ifthey have been cited by the primary regulator ofthe subsidiary banks. If the bank’s primary regu-lator has not cited a violation of Section 23Aand 23B of the Federal Reserve Act, apparentviolations should be noted in the ‘‘Other Mat-ters’’ page of the inspection report. A complete

write-up is necessary if the violation is notdetailed on another page (including the date ofthe violation or transaction, a description of thetransaction or act, the reason for the violation,the amount of the transaction, and the amount ofany potential or actual loss). When the informa-tion is presented elsewhere, a brief summaryand a reference to that page is sufficient.

Violations of the holding company should bepresented first, followed by the nonbank subsid-iaries and then bank subsidiaries. Bank viola-tions not involving the holding company or non-bank subsidiaries should not be detailed here.

If violations of sections 23A and 23B of theFederal Reserve Act (transactions with holdingcompany affiliates) are disclosed in a subsidiarybank’s examination report, comments should belimited to a brief summary on the ‘‘Violations’’page with a reference to the intercompany trans-action(s) under ‘‘Other Supervisory Issues.’’ Thislatter page will contain additional detail on theviolation. (Note: only bank subsidiaries can becited for the violations of sections 23A and 23Bof the Federal Reserve Act, with the BHC beingcited if the violation has been cited by thebank’s primary regulator and resulted from hold-ing company or nonbank subsidiary actions).The examiner may also criticize management inthe ‘‘Examiner’s Comments and Matters Requir-ing Special Board Attention’’ page of the inspec-tion report for causing the bank to be in viola-tion of sections 23A and 23B provisions.

Apparent violations should be presented onthe ‘‘Other Matters’’ page, and may be pre-sented on the ‘‘Examiner’s Comments and Mat-ters Requiring Special Board Attention’’ page ifconsidered appropriate by the examiner. Viola-tions will be reviewed on a case by case basisfor possible follow-up administrative action(s).

Violations must be presented in brief on the‘‘Examiner’s Comments and Matters RequiringSpecial Board Attention’’ page referring thereader elsewhere for detail. The examiner shouldensure that information contained on these relatedpages is consistent.


Procedures for Inspection Report Preparation(Page—Other Matters) Section 5010.16

This page presents nonconfidential informationor issues which would not be suitable for pre-sentation on any other page in the report. BHCplans may be discussed here in order to antici-pate any regulatory or supervisory consider-ations.Apparentviolations are also presentedhere and may be referred to on ‘‘Examiner’sComments’’ page or on other report pages at theexaminer’s discretion. BHC plans for futureactivities may be presented.The information might be derived from min-

utes of the corporation and/or subsidiaries, dis-cussions with management, and examiner obser-vations during the inspection.Other information that may be summarized

can include:

1. Corporate plans (debt or equity issues,acquisitions, sale of assets). Be certain manage-ment has no objection to the reference to theseplans. Otherwise, present such information onpage C;2. Any unfunded pension liabilities;3. Overall condition of corporate records;

and4. Any other comments deemed appropriate

by the examiner and not noted elsewhere in thereport.Any reference that involves dollar amounts,

ratios, or other information contained in sched-ules or comments elsewhere in the report shouldbe cross-checked.


Procedures for Inspection Report Preparation (Page—ClassifiedAssets and Capital Ratios of Subsidiary Banks) Section 5010.17

This report page provides a summary of assetclassifications and capital ratios as of the mostrecent federal and state examinations for theindividual bank subsidiaries. The objective ofthe page is to aid in the identification of existingor potential problems in the banks which mayhave an overall effect on the holding company.

The information is to be derived from bankexamination reports which are available at theReserve Bank. (The holding company may havecopies of the open sections of the reports.)

The banks are to be listed in the same order asthey appear on the Organization Chart or Invest-ments in and Advances to Subsidiaries reportpages. Total assets or total average assets shouldbe shown as presented in the examination report.Do not adjust total assets by adding back valua-tion reserves.

For bank holding companies, tier 1 capitalincludes common equity and qualifying cumula-tive and noncumulative perpetual preferred stock,less goodwill and other designated intangibleassets. Common stockholders equity includescommon stock; related surplus; and retainedearnings, including capital reserves and adjust-ments for the cumulative effect of foreign-currency translation, net of any treasury stock,less net unrealized holding losses on available-for-sale equity securities with readily determin-able fair values.

Qualifying cumulative perpetual preferredstock is limited within tier 1 to 25 percent ofthe common stockholders equity and minorityinterest. Total capital includes tier 1 plus tier 2capital.

Weighted classified assets includes 100 per-cent of loss, 50 percent of doubtful, and 20 per-cent of substandard and value-impaired (whenapplicable), net of allocated transfer risk reserves(ATRR).1 It is appropriate to comment onweighted classified assets on the Analysis ofFinancial Factors page.

When determining supervisory asset-qualityratings (the [A]sset rating in ‘‘CAMELS’’) forthe BHC’s subsidiary banks, an asset-qualityratio is used based on a comparison of weightedclassified assets to tier 1 capital (as defined forleverage purposes) plus the allowance for loan

and lease losses. Examiners should use this ratioand the accompanying benchmarks in conjunc-tion with all the other factors normally evalu-ated when assessing asset quality for eachinstitution.

The allowance for loan and lease losses isdefined as the bank’s total ALLL. The ALLL isnot subject to the 1.25 percent limitation onsupplementary capital elements for this calcula-tion (that is, all of the ALLL is included in thedenominator of the ratio).

The ratio of these assets to tier 1 capital plusthe allowance for loan and lease losses is thencompared to the existing asset-quality bench-mark table to determine the asset-quality rating.

Asset-Quality Table

Asset-Rating Asset-Quality RatioRanges

1 under 5%2 5% to 15%3 15% to 30%4 30% to 50%5 over 50%

Examiners should use the asset-quality tableandotherpertinent factors, including loanpolicies,credit administration, portfolio concentrations,and past-due levels, to determine the final asset-quality rating. While individual bank ratios maychange slightly, depending on the amount ofcumulative preferred stock, mandatory convert-ible debt, and other supplementary elements, thechange in the ratio itself should not result in achange in the bank’s asset-quality rating.

This page should not be prepared for one-bank holding companies. The examiner mayshow this data on the Bank Subsidiaries page.However, the examiner may use this page toreflect successive examination data for severalyears to indicate trends. The examination datesshould be cross-checked to those shown on theBank Subsidiaries page.

1. See SR-92-2 regarding the treatment of value-impairedclassifications for asset-quality purposes.


Procedures for Inspection Report Preparation(Page—Organization Chart) Section 5010.18

This report page presents an organization chart,giving a schematic description of the structureof the organization, the intercompany relation-ships and the degree of control of subsidiaries.An organization chart provided by the hold-

ing company for various regulatory filings maybe used, with revisions made for new or di-vested subsidiaries. The information requiredbelow may simply be added to the existingchart.The organization chart may be pictorial (box

format) or linear (listing format). The parentshould be presented at the head of the page.Banks should be presented individually in thesame area. Nonbanks should be presented indi-vidually in the same area (if possible).Each subsidiary should be shown by its offi-

cial name; however, there is no need to indicatethe address unless necessary to distinguish iden-tity. Subsidiaries of banks and second tier non-bank subsidiaries may be omitted or shown atthe examiner’s discretion. Abbreviated chartsshould be so footnoted.Abbreviations used throughout the report

should be presented on the ‘‘Structure andAbbreviations’’ Report page and also on the

bottom of this page or following the chart. Gen-erally, abbreviations familiar to the BHC shouldbe used. However, efforts should be made toincorporate at least a part of the name into theabbreviation as opposed to relying strictly oninitials which tend to become confusing. Also, itis desirable that abbreviations of bank subsidi-aries include the word ‘‘Bank’’ to distinguishthem from the parent company and/or nonbanksubsidiaries with similar names.Indicate the percentage of ownership to the

nearest tenth of one percent and include direc-tors’ qualifying shares. Where all, or nearly allof the subsidiaries are wholly-owned, detail theexceptions and provide a footnote to the effectthat unless shown, ownership is 100 percent.The names and/or abbreviations shown on the

organization chart are to be consistently usedthroughout the report (for example, the ‘‘Incomefrom Subsidiaries,’’ ‘‘Investment in and Ad-vances to Subsidiaries,’’ and the ‘‘Nonbank Sub-sidiary’’ and the ‘‘Bank Subsidiary’’ pages).Where applicable, the order established on

this page should be used in all tables of thereport.


Procedures for Inspection Report Preparation(Page—History and Structure) Section 5010.19

The report page provides an abbreviated historyof the organization including name changes,acquisitions, mergers, reorganizations and dives-titures. The objective is:1. To present the chronological development

of the bank holding company.2. To list nonbank activities engaged in by

the parent company and its subsidiaries.3. To provide a measure of size relative to

competing institutions.The information that is included in this report

page may be obtained from documents filedwith the Federal Reserve System. For lines 1through 3, refer to reports filed with the FRBsuch as the registration statement and FR Y–6.In response to item 3, one bank holding compa-nies formed before December 31, 1970, firstbecame subject to the Act on December 31,1970, with the passage of the 1970 Amend-ments to the Act. A multibank company formedbetween 1956 and December 31, 1970, becamesubject to the Act on the date of controlling itssecond subsidiary bank. All BHCs formed afterDecember 31, 1970, became subject to the Act

on the date of controlling their first bank subsid-iary. For response to item 4, history is availablein applications to FRB and in public documentssuch as annual reports to stockholders and SECForm 10-K. For additional information contactthe corporate secretary.Comments responding to item 4 are to be in

narrative and/or list form and should include:1. The present number of banking subsidi-

aries, the percent of State deposits on an aggre-gate basis and size ranking in the State. For amoney-center holding company, also provide itsranking on a national basis.2. The date and outline of any acquisitions,

mergers, reorganizations, or name changes.3. A list and brief description of activities in

which the nonbanking subsidiaries are engaged.4. A discussion of any permanent or limited

grandfather rights, and any plans for divestmentof shares or termination of nonbank activities.The activities shown on this page should be

consistent with those shown on the nonbanksubsidiary pages.


Procedures for Inspection Report Preparation (Page—Investment in and Advances to Subsidiaries) Section 5010.20

5010.20.1 INVESTMENT IN ANDADVANCES TO SUBSIDIARIES

This schedule details the parent’s financial rela-tionships with its subsidiaries. It will be used tosupport comments or analyses in other sectionsof the report, or to clarify answers to the ques-tions on the continued page, ‘‘Investment Inetc.—continued.’’The objectives of the report page are:1. To determine the percent of the parent’s

assets comprised of investments in and advancesto each subsidiary.2. To help determine the dependency of sub-

sidiaries on advances from parent.The parent’s investments in and advances to

each subsidiary are usually detailed in ledgersmaintained by the accounting department. Eachsubsidiary is listed individually beginning withbanks, providing subtotals for banks and non-banking subsidiaries.The investment in each subsidiary is to include

any related unamortized goodwill. Provide a‘‘total’’ in the ‘‘investment’’ column. From thistotal subtract the aggregate unamortized good-will in all subsidiaries and detail the ‘‘goodwill’’on the ‘‘Contingent Liabilities’’ page.Totals for investments and advances should

agree with the ‘‘Comparative Balance Sheet’’page. The Parent’s investment should be equalto its proportionate interest in each subsidiary’sequity as presented in financial statements onthe ‘‘Nonbank Subsidiary Financial Statementand Condition’’ and the ‘‘Bank Subsidiaries’’pages plus any unamortized goodwill. Parent’sadvances should also equal ‘‘loans from parent’’as detailed on the ‘‘Nonbank Subsidiary Finan-cial Statement and Condition’’ and the ‘‘BankSubsidiaries’’ pages.

5010.20.2 INVESTMENT IN ANDADVANCES TO SUBSIDIARIES(continued)

For this continuation page, the answers to ques-tions 1 through 6 provide information on thefunding of subsidiaries.The objectives of each question are as

follows:Question 1—To determine the amount of

goodwill in the investment in each subsidiary.Question 2—To determine if the parent ‘‘for-

gave’’ the indebtedness of any of its subsidiarieswhich might indicate an inability to service itsdebt properly or other financial difficulties in thesubsidiary.Question 3—To determine the extent of the

parent’s borrowings invested as equity since thelast inspection. The subsidiary’s enlarged capi-tal base might provide additional debt capacity.Question 4—To determine if the advances are

on a preferential rate basis, to help in analyzingthe subsidiary’s earnings proficiency.Question 5—To determine if there is any

difficulty in the subsidiary regarding its abilityto service its debt properly.Question 6—To determine if the parent lends

its credit and debt capacity to its subsidiary andto aid in the analysis of the parent’s contingentliabilities.The answers to all questions should be veri-

fied against company records and discussed withthe comptroller, the treasurer or the finance offi-cer. Details on some questions can come fromcompany’s latest SEC Form 10-K or the annualreport to stockholders. All questions shouldbe answered; if not applicable, so state. It is notnecessary to repeat the questionwhen answering.Any guarantees should also be included as

contingent liabilities.


Procedures for Inspection Report Preparation(Page—Commercial Paper (Parent)) Section 5010.21

Commercial paper is a source of funds for theparent and its subsidiaries. This schedule pre-sents the maturity and placement of commercialpaper in use in the parent’s operations and/or forback-up to the commercial paper. The page isrequired if the parent issues commercial paper.The objectives of this report page are:1. To summarize the extent of the parent’s

use of commercial paper and its ability to con-tinue the use of this funding tool.2. To help determine the overall liquidity

position of the parent company.3. To determine the volatility of commercial

paper issued, including average turnover rate.4. To determine whether any subsidiary bank

is providing compensating balances for the bene-fit of the parent or nonbank affiliate.

The informationrequired in thescheduleshouldbe requested in the officer’s questionnaire or canbe obtained from the accounting or treasurer’sdepartments and verified with the general ledger.If at all possible, the data should be as of thefinancial statement date. (An alternate date isacceptable for the Maturity Schedule but shouldbe specified.) The schedule should also be pre-pared for each nonbanking subsidiary whichissues its own commercial paper.The total commercial paper should equal

amounts on ‘‘Parent Company Comparative Bal-ance Sheet’’ (Core Page 5) and the confidential‘‘Liquidity andDebt Information’’ pageC, unlessan alternate date is used.


Procedures for Inspection Report Preparation(Page—Lines of Credit (Parent)) Section 5010.22

Lines of credit are a source of funds for theparent and its subsidiaries. This schedule pre-sents the lines of credit available for the parent’soperations and/or for back-up to commercialpaper.The purpose of the report page is to be able to

determine the degree of use of the lines of creditand the availability of these lines to back-upcommercial paper borrowings. It is also intendedto help determine the overall liquidity positionof the parent company.The informationrequired in thescheduleshould

be requested in the officer’s questionnaire or canbe obtained from the accounting or treasurer’sdepartments and verified with the general ledger.If at all possible, the data should be as of thefinancial statement date.The exact names and locations of line banks

should be shown in the ‘‘Lines of Credit’’ sec-tion and totals calculated for the dollar amount

columns. If a BHC has an extensive number ofline banks, the detail for each line of credit maybe eliminated at the discretion of the examinerwith aggregate amounts and ranges included inthe appropriate columns. In this instance, thetotal number of line banks involved and a gen-eral commentas togeographicdistributionshouldbe included.If any subsidiary bank maintains compensat-

ing balances on behalf of the parent, the exam-iner should place an asterisk in the column anddetermine that the bank is compensated so thatit does not incur a loss of income. Any resultingloss of income should be commented upon. SeeManual sections 2020.4 and 2080.1.The total lines of credit in use should equal

amounts reported on ‘‘Parent Company Com-parative Balance Sheet’’ (Core page 5) and theconfidential ‘‘Liquidity and Debt Information’’page C.


Procedures for Inspection Report Preparation (Page—Questionson Commercial Paper and Lines of Credit) Section 5010.23

The answers to questions 1 through 13 shouldprovide information about the quality of thecommercial paper and the procedures for itsissuance. They should also discuss fundinginvolving the issuance of commercial paperbacked by lines of credit. Examiners shouldrefer to sections 2080.05 and 2080.1 beforecompleting this report page.

The purpose of the report page is—

1. to determine the quality of commercial paperand to appraise the company’s ability to raiseadditional funds in the marketplace;

2. to determine how the proceeds from com-mercial paper sales will be used;

3. to decide whether the use of commercialpaper is in keeping with statutory require-ments and regulatory requirements such asthose of the Securities and Exchange Com-mission (SEC);

4. to determine whether the use of commercialpaper satisfies liquidity needs (see section2080.1);

5. to determine if policies in the commercial-paper funding system are safe and sound;

6. to determine if backup sources of funds areavailable and adequate to meet the liquidityneeds of the parent; and

7. to address the examiner’s concerns aboutcommercial paper policies, controls, and mar-keting methods.

The information needed to complete this reportpage is usually available from the holding com-pany’s investment or funds-management depart-ment. It may also be obtained through discus-sions held with management responsible for theholding company’s funding program. The infor-mation may also be available from rating agen-cies and in contractual agreements with lendingbanks.

Question 1 asks for any changes in the com-mercial paper rating that may show a changingfinancial condition. See appendix A of this sec-tion, which lists rating indicators used by com-mercial paper rating companies. Determine thecause for any change in the rating.

Bank holding companies with lower creditratings may issue commercial paper by obtain-ing credit enhancements. Such credit supportmay be obtained from letters of credit (LOCpaper) or a surety bond issued by an insurancecompany having a high credit rating (calledcredit-supported commercial paper). Bank hold-ing company commercial paper with a lower

credit rating can also be backed by other high-quality assets serving as collateral (called asset-backed commercial paper), thus allowing thebank holding company to enter the market asan issuer. (See section 2128.03 for inspectionguidance about such commercial paperenhancements.)

Question 1 further instructs the examiner toreport the range of current rates paid on allcommercial paper. By presenting the range ofcurrent rates paid on different maturities of com-mercial paper, the examiner can compare ratespaid with those of the bank holding company’speers. This will aid in determining the ‘‘market-place’s’’ impression of the company’s condi-tion, as reflected by the rates the company mustpay to attract funds.

The yields on commercial paper track thoseof other money market instruments. Like U.S.Treasury bills, a commercial paper instrument isa discount instrument. Because of exposure tocredit risk, the yields on commercial paper areusually higher than those of U.S. Treasury bills.As in the case of Treasury bills, interest oncommercial paper is computed on a 360-dayyear. Treasury bills, in contrast to commercialpaper, are exempt from state and local taxes andare more liquid than commercial paper.

When responding to question 2, if any subsid-iary sells commercial paper for its own use orfor the parent, indicate why the bank holdingcompany chooses to structure its funding in thisway. For example, a commercial finance non-bank subsidiary of a bank holding company wasauthorized by the Board to underwrite (pur-chase) and deal in (resell or place with institu-tional investors) commercial paper as agent forthe issuers (see section 3600.21.1). A section 20subsidiary also can underwrite and deal in, oract as riskless principal in the placement of,commercial paper, if authorized by the Board byorder.

A parent company could issue commercialpaper directly or through a broker. The exam-iner therefore needs to be aware of the differ-ence between direct paper and dealer paper.Direct paper is sold by the issuing firm directlyto investors without using a securities dealer oran intermediary. Direct-paper issuers generallyrequire continuous funds and therefore find itmore cost-effective to establish their own salesforce to sell their commercial paper directly toinvestors. In the case ofdealer-placed commer-


cial paper, the issuer uses the services of asecurities firm to sell its commercial paper.

If the subsidiary’s name is similar to theparent’s, note whether an investor can tell, by itsname or through other means, that the issue isassociated with the parent.

With regard to question 3, the commercialpaper specimen should clearly state that it is notan FDIC-insured obligation of any bank subsid-iary. (See section 2080.1.)

The minimum round lot in commercial papertransactions is usually $100,000, although someissuers sell commercial paper in denominationsas low as $25,000. With regard to question 4,bank holding companies generally should notsell commercial paper in denominations ofless than $25,000. This is to ensure that thecommercial paper instrument is suitable forinvestment by sophisticated investors as op-posed to the general public. Commercial paperinvestors are typically institutional investors.

Rollover of commercial paper proceeds onmaturity is common. The SEC has stated thatobligations that are payable on demand or haveprovisions for automatic rollover do not satisfythe nine-month (270 days) maturity standard.SEC staff, however, has issued no-action lettersfor commercial paper master-note agreements.1These agreements allow eligible investors tomake daily purchases and withdrawals (subjectto a $25,000 minimum) as long as the maturityof the note and each investor’s interest therein

do not exceed nine months. Such master-noteagreements may allow prepayment by the issuerany time, or upon demand of the investor.

Commercial paper and commercial papermaster-note agreements can result in a potentialsource of funding mismatch from the use ofwhat is commonly called ‘‘ deposit sweeps.’’This practice is based upon an agreement with asubsidiary bank’s deposit customers (typicallycorporate accounts). Such agreements allow thesecustomers to reinvest amounts in their depositaccounts above a designated level in overnightobligations of the parent bank holding company.

In view of the extremely short-term maturityof these sweep arrangements, banking organiza-tions should be advised to exercise great carewhen investing the proceeds. Appropriate usesof the proceeds of such deposit-sweep arrange-ments are limited to short-term bank obliga-tions, short-term U.S. government securities, orother highly liquid, readily marketable,investment-grade assets that can be disposed ofwith minimal loss of principal. (See also sec-tions 2080.05 and 2080.1 when reviewing com-mercial paper activities.)

Concerning question 5, investing in the bankholding company’s commercial paper by a sub-sidiary bank’s trust department is generallyregarded as self-dealing and a violation of trustregulations, absent express written authority andthe consent of all of the trust’s beneficiaries.Bank holding company examiners finding suchtrust department holdings should discuss thematter in detail with Reserve Bank trust examin-ers or the Board’s Trust Activities Section, Divi-sion of Banking Supervision and Regulation.

In response to question 6, the examiner shouldindicate the use of the proceeds and whethersuch use is considered long-term or short-term.(See also sections 2080.05 and 2080.1.)

Question 7, on concentration of holdings, isintended to aid in determining if any party canexert influence on the bank holding companydue to its commercial paper holdings. If anyindividual, organization, or industry holds morethan 10 percent of the commercial paper, indi-cate if the holder(s) exerts any influence on thebank holding company’s management.

In response to question 8, if there is anyindication of difficulty in refinancing commer-cial paper at maturity, discuss this in significantdetail. Indicate the reasons for the difficulty, theproblems it poses for management, and manage-ment’s plans to rectify those problems. This is aparticularly sensitive issue because of the finan-cial exposure that could be created by an inabil-ity to refinance.

1. A master note is a negotiated agreement or contract(negotiated as to size, maturity, and price) between a borrowerand investor that permits the investor to place cash, up to astated amount, with the borrower over a designated period oftime. Such unsecured credit agreements (no note is actuallyissued, only an agreement is signed at the beginning of thearrangement) are limited to borrowers with the highest creditratings and large investment institutions.

Master notes have characteristics similar to those ofa revolving-credit arrangement. The outstanding amountallowed may vary daily but is limited by a stated cap imposedby the issuer. Investors in such agreements control the amountinvested in the note on the basis of the amount of surplus cashthat is on hand. Either party can terminate the agreement withonly 24 hours’ notice. In reality, it is a longer-term fundingvehicle because the parties generally are interested in main-taining a long-term relationship.

Unlike commercial paper, master notes are indirectly acces-sible to a wider array of investors. Investment firms groupinvestments from small investors with investments made by afew large institutional investors and place the funds in masternotes. The master note, unlike commercial paper, avoids thetask of writing daily individual tickets for each customer.Disadvantages of the master note are the potential for dailyvariation in the amount invested and the potential for suddenredemption.

Inspection Report Preparation (Page—Commercial Paper and Lines of Credit) 5010.23


Question 9 is intended to aid in determiningthe degree to which the bank holding companycan rely on its line banks. Lines that have notbeen confirmed in writing or for which no con-tractual obligation exists are less certain to beavailable than those that are confirmed andcontractual.

As question 10 implies, lines of credit areoften specifically established solely to back upcommercial paper borrowings. Such linesimpart a measure of security to the bank holdingcompany. Evaluate the adequacy of the totalamount of these lines in relation to the volumeof outstanding commercial paper.

In asking about systematic rotation, question11 is intended to help the examiner determine ifthe bank holding company routinely uses theproceeds from a line of credit to pay off another,and whether the bank holding company has everbeen in an aggregate nonborrowing position

during a given year. If the bank holding com-pany routinely and continuously relies on itsability to repay its lines with other line borrow-ings, discuss the potential effects on the bankholding company’s ability to service its debtproperly.

Question 12 asks for information on recipro-cal lines that reveals the relationship betweenthe lender and the bank holding company. Aline’s reciprocity may have a bearing on thedegree to which the borrower may rely on thelender.

Question 13 is intended to help the examinerevaluate the relationship between the parent andits nonbank subsidiary. In those cases in which asubsidiary is authorized to borrow directly onthe parent’s lines, the examiner should evaluatethe parent’s internal controls and managementinformation systems for supervising the subsid-iary’s borrowings.

5010.23.1 APPENDIX A—COMMERCIAL PAPER RATINGS

Rating Notations by Commercial Paper Rating Companies*(Highest- to Lowest-Quality Rating)

Rating Company†

Standardand Poor’s Moody’s Duff and

Phelps Fitch

Investment grade:

A-1/A1+ Prime-1 Duff-1 F-1/F-1+(P-1) (D 1−/1/1+)

A-2 Prime-2 Duff-2 F-2(P-2) (D-2)

A-3 Prime-3 Duff-3 F-3(P-3) (D-3)

Non–investment grade:

B NP Duff-4 F-S(Not prime) (D-4)

C(Doubtful)

In default:

D Duff-5 D(D-5)

* The definition of ratings varies by rating agency.†This list of rating companies is for the examiner’s infor-

mation only. The list is not an endorsement of these compa-nies by the Federal Reserve.

Inspection Report Preparation (Page—Commercial Paper and Lines of Credit) 5010.23


Procedures for Inspection Report Preparation (Page—Contingent Liabilities and Other Accounts) Section 5010.24

Listed on this page are any material assets andliabilities (actual and contingent) not detailed onthe parent company’s balance sheet or otherschedules in the report. Contingencies includeguarantees, lease or loan commitments, lettersof credit, interest rate swaps, futures and for-wards transactions and pending litigation.The purpose of this report page is:1. To determine the extent of the parent’s

potential obligations and the related strain on itsfinancial capacity resulting from contingencies.2. Todetermine thequality of ‘‘OtherAssets.’’

These assets are subject to evaluation and classi-fication, if appropriate. ‘‘Other Assets’’ is some-times found to include assets acquired in viola-tion of section 4 of the Act (particularly section4(c)(2)).3. To detail ‘‘Other Liabilities’’ which may

indicate external funding relationships other-wise not presented.The information should be derived directly

from the BHC’s financial statements and theboard of directors’ and executive committee’s

minutes. Management should be asked to verifyand explain any contingent liabilities. A reviewof all ‘‘Other Assets’’ and ‘‘Other Liabilities’’ inthe general ledger and subsidiary ledgers shouldbe conducted and analyzed for appropriate typesand amounts of accounts. Suspense accountsshould be aged, particularly if shown as a netamount.If there are no contingent liabilities state

‘‘None reported.’’ Normally only items appear-ing on the balance sheet as of inspection datewill be listed. If prior periods’ items are listed,columns with dates corresponding to those onthe balance sheet should be used.Refer to Manual section 5010.8 for guidelines

on presentation of details of ‘‘Other Assets’’ or‘‘Other Liabilities.’’The parent’s guarantees on the ‘‘Investment

In and Advances To Subsidiaries’’ page shouldbe included as contingent liabilities. ‘‘OtherAssets’’ and ‘‘Other Liabilities’’ totals shouldreconcile to the line items on the ‘‘Parent Com-pany Comparative Balance Sheet’’ page.


Procedures for Inspection Report Preparation (Page—Statementof Changes in Stockholders’ Equity (Parent)) Section 5010.25

The reconciliation of capital accounts provides asummary of transactions which have causedchanges in each of the equity accounts for theperiods indicated. There should be no chargesagainst paid-in capital that are properly charge-able to income.The report page is used to record and analyze

changes in stockholders’ equity and to deter-mine the effects on the financial condition of theholding company.The information should be requested in the

officer’s questionnaire. Sources for prior periodsinclude the FR Y–6, FR Y–9 LP, the annual andquarterly reports tostockholders,previous reportsof inspection and the SEC Form 10-K. Currentperiod changes can be obtained from the corpo-ration’s accounting or comptroller’s department.The presentation should begin with the last

two fiscal years and include the most recentyear-to-date interim. The column heading ‘‘Cap-ital Stock’’ can include common and preferred

stock. However, it is necessary to distinguishthe type and amount which can be accomplishedby using (C) and (P), for common and preferred,beside the amounts. An appropriate legend canbe inserted in the column heading.Net income reported should agree with that

reported on the ‘‘Comparative Statement ofIncome and Expenses (Parent)’’ and the ‘‘Com-parative Statement of Income and Expenses(Consolidated)’’ pages. If net income reportedon this page does not agree with the income on aconsolidated basis (i.e. differences caused byminority interests), include a footnote to explainthe reason for the differences.Balancesat year-endand interimperiod should

agree with accounts on the ‘‘Parent CompanyComparative Balance Sheet’’ and the ‘‘Compar-ative Statement of Income and Expense (Con-solidated)’’ pages. Footnote and explain anydifferences.


Procedures for Inspection Report Preparation(Page—Income from Subsidiaries) Section 5010.26

These ‘‘Interim’’ and ‘‘Fiscal’’ pages can beused when the parent receives income frommore than one subsidiary, or where it is neededto support comments or analyses in other sec-tions of the report. Both the ‘‘Interim’’ and‘‘Fiscal’’ pages should be included in the reportwhen this situation is applicable. From the dataon these two pages, the examiner is able toanalyze the contribution to overall earningsmadeby each of the subsidiaries. The schedule alsoreflects the extent of the parent’s upstreamingincome from its subsidiaries.The purpose of these report pages is:1. To determine the relative share of the indi-

vidual subsidiary’s contribution to the holdingcompany operation;2. To analyze the dividend payout ratio and

to compare payouts between subsidiaries;3. To determine the proportion of each sub-

sidiary’s income paid to the parent as fees; and4. To determine the degree of interest cover-

age on advances to subsidiaries.For the interim and fiscal periods, some

items can be obtained from the parent’s incomestatement and from theBHC’sworkpapers show-

ing eliminations on the consolidating incomestatement. Additional information can be ob-tained from the holding company’s accountingdepartment or comptroller.

The banks should be presented first, thennonbanks. Subtotals should be provided.

The dividend payout ratio is calculated bydividing total dividends by net income aftertaxes and securities transactions. Show an aver-age payout ratio for banks and nonbanks,respectively, and an overall payout ratio. Do notshow negative percentages.5. Fees as a percentage of the subsidiary’s

operating income is calculated using total oper-ating income before expenses. No subtotals forbanks and nonbanks are required.

Equity in undistributed earnings, dividends,interest and total fees should equal that reportedfor each period on the ‘‘Comparative Statementof Income and Expenses (Parent)’’ page. Forwholly-owned subsidiaries, the sum of the‘‘Equity in Undistributed Earnings’’ and ‘‘Divi-dends’’ columns should equal its net income forthe related period.


Procedures for Inspection Report Preparation(Page—Cash Flow Statement (Parent)) Section 5010.27

The analysis is performed and the statement iscompleted for BHCs with consolidated assets inexcess of $1 billion, or when substantial fixedcharges exist or debt is outstanding, whenrequired by the Reserve Bank. This statementindicates the results of the parent’s managementof its cash position and identifies major sourcesof working capital and areas of disbursement.The statement also presents the cash earnings ofthe parent company. The cited ratios measurethe parent company’s ability to meet its fixedobligations and the ability of the residual earn-ings to cover common stock dividends. Whencombined with an analysis of the parent compa-ny’s cash income sources from subsidiaries, itserves as a partial basis for determining theparent company’s debt servicing capacity, andthus an assessment of its leverage. In addition,projected cash flow information aids in the anal-ysis of the BHC’s ability to properly service itsdebt.Only items affecting cash should be shown.

The ‘‘Next Fiscal Year’’ column completionis optional at the examiner’s discretion if theinspection occurs early in the current year(i.e. the inspection is in January 19X6 and thuswould require the data through the end of19x7).The objective of the report page is:1. To determine the ability of the parent to

manage its cash position and operate withindebt service and funding requirements;2. To measure the parent’s ability to meet its

fixed obligations and its dependency on bor-rowed funds to meet its cash needs;3. To determine if the parent company’s div-

idends to stockholders are covered by residualcash earnings;4. Toanalyzeanycashflowtransactionswhich

may adversely affect the financial stability ofthe parent;5. To discuss parent company deficit cash

flows provided by its own operations.6. To discuss any parent company borrow-

ings needed to sustain dividend payments toshareholders;7. To discuss the scope for increasing cash

flow to the parent company; and8. To discuss steps management has taken, or

plans to take, to restore adequate cash earningscoverage for fixed charges and dividend pay-ments, and whether such plans should be com-mensurate with the maintenance of adequateloan loss reserves and Tier 1 capital levels in thebank and major nonbank subsidiaries.The information may be requested in the

officer’s questionnaire and a copy of the‘‘Cash Flow Statement (Parent)’’ page may beincluded with the questionnaire.To complete the page refer to the holding

company’s cash receipts and disbursements jour-nal and its general ledger and income state-ment(s). Also refer to any cash flow and incomeprojections prepared by the organization.The statement should be verified and recon-

ciled, to the extent possible, to the BHC’s pub-lished statements. Any additional items not pro-vided for in the preprinted statement can beseparately listed in an appropriate space.Anydividendsconsideredunreasonableshould

be discussed in the comments section. Divi-dends paid with funds derived from new bor-rowings should be discussed in detail.Any significant cash flow transactions should

be discussed. Refer to section 4010 for exam-ples of such transactions.If shortfalls exist, discuss on the ‘‘Cash Flow

Statement (Parent)’’ page. For example, if theparent has a deficit cash flow provided by itsown operations (as is often the case), discusshow the parent offsets (or plans to offset) thedeficit. If the question is not applicable, state‘‘NA.’’If the BHC must incur additional debt in

order to sustain its dividend payments to share-holders, discuss this in detail on the ‘‘Cash FlowStatement (Parent)’’ page.To the extent that the accrual method of

accounting is used, income and expense itemsshould agree with the figures on the ‘‘Compara-tive Statement of Income and Expenses (Par-ent),’’ and between balance sheet periods, the‘‘Statement of Changes in Stockholder’s Equity(Parent)’’ pages and the ‘‘Income from Subsidi-aries’’ for the fiscal year are as follows:1. Dividends, and management and service

fees from subsidiaries should agree with thoseon the ‘‘Comparative Statement of Income andExpenses (Parent)’’ and the ‘‘Income from Sub-sidiaries’’ pages;2. Interest income should agree with the

amounts reported on the ‘‘Comparative State-ment of Income and Expenses (Parent)’’ and the‘‘Income from Subsidiaries’’ pages;3. Interest expense should agree with the

amounts reported on the ‘‘Comparative State-ment of Income and Expenses (Parent)’’ page;4. Salaries and employee benefits should be

the same as those reported on the ‘‘Comparative


Statement of Income and Expenses (Parent)’’page; and5. Dividend payments made by the parent

should agree with those reported on the ‘‘State-ment of Changes in Stockholder’s Equity (Par-ent)’’ page.Other increases and decreases in cash which

should agree with changes in balance sheetitems on the ‘‘Parent Company ComparativeBalance Sheet’’ page are:1. Increases in borrowed funds;2. Decreases or increases in advances to sub-

sidiaries; and3. Debt retirement or reductions.

Procedures for Inspection Report Preparation (Page—Cash Flow Statement (Parent)) 5010.27


Procedures for Inspection Report Preparation(Page—Parent Company Liquidity Position) Section 5010.28

The Parent Company Liquidity Position page isprepared for bank holding companies with con-solidated assets in excess of $1 billion and thosewith substantial debt outstanding, as well asselect others at the option of the Reserve Bank.The report schedule provides a structured analy-sis of all assets and liabilities within predeter-mined remainingmaturity categories. The sched-ule is designed to place emphasis on remainingmaturing assets and liabilities of less than oneyear.When the schedule is initially completed,

the examiner is provided with an indication ofwhether the parent company has an adequatecushion of short-term liquid assets within the0 to 30 days and the 0 to 90 days categories tocover short-term liabilities, or whether a patternof short-term funding gaps exist. Followingadjustments, if any, to maturing assets orliabilities, the resulting schedule sets forth aframework for observing funding mismatches,thus serving as tool for assessing the parentcompany’s overall liquidity position.A net positive gap is expected in the 0 to

30 days category to show the parent’s ability toride out a temporary market disarray. Similarly,a cumulative positive position is expected in the0 to 90 days categories, despite any deficiencywithin the first 0 to 30 days category. A failureto satisfy those conditions requires the examinerto address the deficiency within the ‘‘Examin-er’s Comments’’ page. Results of the analysisare to be discussed in the parent company sec-tion on the ‘‘Analysis of Financial Factors’’ pagein the inspection report.The report schedule is prepared:1. To determine whether the bank holding

company is avoiding funding strategies thatcould undermine public confidence in the liquid-ity or stability of their banks; and2. To evaluate the holding company’s ability

to meet its maturing obligations, covert its assetswithminimal loss,obtaincash fromothersources,or roll over or issue new debt obligations;3. To determine whether the level of the par-

ent’s liquid assets is sufficient to cover its short-term obligations;4. To analyze the contractual maturity struc-

ture of its assets and liabilities and to estimatethe underlying liquidity of the parent company’sliabilities and assets, giving particular attentionto interest bearing deposits in and advances tosubsidiaries (Note: Parent company advances tosubsidiariesshouldbeconsideredareliablesourceof liquidity only to the extent that they fundassets of high quality that can be readily con-

verted to cash);5. To identify funding surpluses or deficits

for specific maturity intervals;6. To provide an analytical framework for

observing funding mismatches in assessing theparent company’s overall liquidity position;7. To provide an analytical tool and a basis

for discussion of parent company liquidity withmanagement; and8. To provide a basis for developing or eval-

uating existing parent company contingencyplans, including any reliable unused back-uplines of credit. (Note: In the event that maturingliquid assets are not sufficient to satisfy short-term obligations, primarily in the 0 to 90 dayscategories, and the parent company has no con-tingency plan to cover mismatches (shortfalls)in the under 1 year categories, the parent com-pany must be requested to develop such contin-gency plans that must include standby facilitiesthat will be reliable during times of financialstress. For those BHCs with less than satisfac-tory parent or consolidated supervisory ratings(3 or worse), or any BHC subject to seriousliquidity or funding pressures, those BHC’smust include in their contingency plan specificplans to reduce or eliminate entirely their out-standing short-term obligations.)The information for the schedule should be

obtained from the parent company’s balancesheet for the contractual maturing amounts ofassets and liabilities, and slot the amounts intothe five maturity categories depicted.While analyzing the contractual maturities of

the assets and liabilities, the examiner mustconsider the underlying liquidity of the parent’sintercompany advances and deposits and theextent to which they fund high quality assetsthat can be readily converted into cash.The examiner should refer to the Manual’s

funding sections 2080.0 to 2080.6 and sections4010.0 to 4010.2 that address parent companycash flow and liquidity.The report page data should be entered as of

the inspection report financial statement date.The examiner may, at his or her option, incorpo-rate the schedule into the inspection report tosubstantiate or clarify particular judgements.Assets should be recorded net of any allowance(contra asset) accounts.The examiner should assess the contractual

maturity structure of the parent company’s bal-ance sheet by preparing the schedule according


to the parent’s maturing assets and liabilities.The scheduled can be adjusted to better appraisethe parent company’s liquidity position by ana-lyzing interest bearing deposits with bank sub-sidiaries and advances to subsidiaries. The‘‘Other Assets’’ may be sub-categorized withinthe additional space provided. The completedschedule may be used as a basis of discussingparent company liquidity with management. Theexaminer should comment on the findings onthe ‘‘Analysis of Financial Factors’’ page in theinspection report (whether or not the schedule isincluded in the report).

The total of each asset account should equalthe respective assets as listed on the ‘‘ParentCompany Comparative Balance Sheet’’ for theinspection report financial statement date, net ofany separately listed allowance or contra assetaccount balances or any adjustments for marketvaluations. The total of each liability accountshould equal the respective liabilities as listedon the ‘‘Parent Company Comparative BalanceSheet’’ as of the inspection report financial state-ment date.

Procedures for Inspection Report Preparation (Page—Parent Company Liquidity Position)5010.28


Procedures for Inspection Report Preparation (Page—ClassifiedParent Company and Nonbank Assets) Section 5010.29

This report page is included in all reports whenassets are classified and written up. For inspec-tions of bank holding companies with less than$150 million in total assets, it is to be includedin the Core section of the report. The informa-tion reported represents analyses and conclu-sions for the classification of the parent’s assetsand identifies all of the nonbank subsidiary’sclassified assets. Refer to the instructions for the‘‘Summary of Consolidated Classified and Spe-cial Mention Assets,’’ Core page 7, for a discus-sion of classification standards.

The purpose of the report page is to—

• determine the risk involved in the parent’sactivities,

• determine the adequacy of reserves,• disclose problem assets requiring manage-

ment’s attention, and• aid in the analysis of the condition of the

nonbank subsidiary(ies).

The information is obtained by an evaluationof the parent’s assets and the assets of nonbanksubsidiaries. For nonbank company assets, theinformation is obtained through examining theloan and lease portfolios, and reviewing creditfiles, loan reviews, past-due lists, credit analy-ses, and watch lists prepared by the holdingcompany.

Any asset classified doubtful or loss requiresa write-up unless the amount is insignificant tothe company’s operations. Where asset reviewsare undertaken, the examiner should note atwhich entities the asset reviews were performed,and their level of coverage. Any classified assetthat is challenged by management also requiresa write-up.

Loan write-ups may extend across the entirepage. At a minimum, show the total amount of

extension of credit booked by the parent, nameof debtor, name of guarantors, collateral, amountof classification in appropriate category, dateoriginated, maturity, purpose, and where deemednecessary, a short write-up giving the reason forthe classification. Also identify any participa-tion with a subsidiary, including the subsidiary’sname and amount held by the subsidiary.

Nonbank loans classified substandard may belisted alphabetically with no write-up required,unless the holding company management dis-agrees with the classification. For other nonbankassets classified substandard, some minimumcomment is necessary. For example, the exam-iner may make one general comment concern-ing the deficiencies of several credits or otherassets listed.

Any nonbank subsidiary loan classified doubt-ful or loss, where the amount classified exceedsthe lesser of $100,000 or 5 percent of the subsi-diary’s total assets, should include a brief write-upstating the reason(s) for classification. However,at the discretion of the examiner, any doubtfulor loss classification may be the subject of awrite-up.

In the case of nonbank subsidiaries such asconsumer finance companies where there arerelatively small amounts and a large volume ofaccounts involved, the use of ‘‘bulk classifica-tion’’ by degree of delinquency may be moredesirable than listing each loan individually.The examiner may provide write-ups on anyclassified nonbank subsidiary asset deemedappropriate.

The classification totals should agree with‘‘Examiner’s Comments,’’ and/or ‘‘Analysis ofFinancial Factors’’ pages. Any major asset prob-lems may be discussed on the ‘‘Examiner’sComments’’ or ‘‘Analysis of Financial Factors’’pages and should be cross checked.


Procedures for Inspection Report Preparation(Page—Bank Subsidiaries) Section 5010.30

This FR 1225 report page or section (continuousflow reporting basis) presents consolidated finan-cial statement data (a condensed balance sheetand income data) for the lead bank and anyother subsidiary bank or banks (that is, subsidi-ary banks that have consolidated assets of$500 million or more) or for those bank subsid-iaries that exhibit conditions warranting specialsupervisory attention (that is, rated composite 3,4, or 5 under the Uniform Interagency BankRating System). The summary of the examiner’scomments and other important data extractedfrom the latest report of examination are incor-porated into the analysis of the bank componentof the RFI/C(D) rating (see section 4070.0) onthe ‘‘Analysis of Financial Factors’’ page orsection. The summary is incorporated when abank subsidiary comprises 10 or more percentof consolidated assets and/or when a bank sub-sidiary evidences material financial deficienciesor other characteristics that should be brought tothe attention of the bank holding company’sboard of directors, including noted bank viola-tions.1 As banking assets make up the majorityof the assets of the holding company, the condi-tion of the larger banks and special supervisoryattention banks may have a significant impacton the condition of the consolidated organization.

The financial statements should be requestedin the officer’s questionnaire. Balance-sheet andincome data can be obtained from the reports ofcondition, income, and dividends of the subsidi-ary banks.

Provide a condensed balance sheet as of the

inspection date and a statement of income. Theincome data should be presented in a compara-tive columnar format and should include totaloperating revenue, total operating expenses, netoperating income, applicable income taxes, netsecurities gains or losses, and net income. Thebalance-sheet and income data, while con-densed, should provide detail to permit analysisof earnings and capital. Where any past orpotential problems exist, the examiner mayinclude more detailed statements to supportcomments presented.

All pages should bear the same ‘‘Bank Sub-sidiaries’’ page number, except that the numbershould be suffixed with a 21, 22, 23, etc., toreflect the subsequent ‘‘BankSubsidiaries’’pages.

The following items should be checked tomake certain that—

1. advances from the parent company agreewith the ‘‘Investment in and Advances to Sub-sidiaries’’ page;

2. the holding company’s proportionate shareof the capital accounts reconciles with theinvestment shown on the ‘‘Investment in andAdvances to Subsidiaries’’ page;

3. external (unaffiliated) debt shown agreeswith that on the ‘‘Unaffiliated Borrowings’’ page;

4. net income reconciles with the sum ofequity in undistributed earnings and dividendson the ‘‘Income from Subsidiaries’’ pages, inproportion to the holding company’s percentageof ownership; and

5. any relevant comments made on the ‘‘BankSubsidiaries’’ pages agree with Core page 1,‘‘Examiner’s Comments and Matters RequiringSpecial Board Attention.’’

1. In determining the subsidiary banks that require write-ups, examiners should be mindful of the effect that cross-guarantee provisions of can have on nontroubled bank subsid-iaries.


Procedures for Inspection Report Preparation(Page—Nonbank Subsidiary) Section 5010.31

For each direct nonbank subsidiary (and its sig-nificant subsidiaries not consolidated in its state-ments), a summary is to be provided of itshistory, activities, classifications, and risk expo-sure. Nonbank subsidiary pages consist of ‘‘Non-bank Subsidiary,’’ ‘‘Nonbank Subsidiary Finan-cial Statements,’’ and ‘‘Nonbank Assets Subjectto Classification.’’ Each subsidiary should bepresented as a ‘‘unit.’’ Successive subsidiariesshould be sequentially presented (for example,18a, 18b, etc.). The information provided on thereport page should aid in the determination ofpermissibility of activities and locations, and theevaluation of the subsidiary’s asset quality.

1. Provide the proper name of the organiza-tion, location, date of approval, date of acquisi-tion or establishment, date activity commenced,statutory authority, and approved branch officelocations should be obtained from Reserve Bankrecords, presented, and verified with the holdingcompany’s records. Note the date of approvalfor each activity and office, if applicable.

2. For going concerns acquired by the bankholding company, state the date acquired. Forde novo subsidiaries, state the date established .

3. For de novo subsidiaries, state the dateactivity commenced. Indicate if the BHC hasreceived approval for any de novo activity thathas not yet been commenced. Identify any ap-proved activity for which authority has expired.

4. Number 6 refers to the exemptive provi-sion (statutory authority) of the Bank HoldingCompany Act relied upon to continue to engagein the activity. If section 4(c)(8) of the act isindicated, also provide the corresponding refer-ence to section 225.25(b) of Regulation Y toindicate the specific activities.

5. Provide the city and state location for eachbranch; however, if the subsidiary has a greatnumber of branches (for example, a consumerfinance subsidiary), the examiner may presentonly the number of offices located in each stateor foreign location.

6. For the history and description section,

summarize the activities in which the companyis engaged and discuss how it has expanded itsoperations (de novo or by acquisition). Discussany violations that may have been uncovered.

7. Prepare a written risk assessment of eachactive nonbank subsidiary, addressing the finan-cial and managerial concerns outlined below.1This assessment is to identify subsidiaries witha risk profile that warrants an on-site presence.In formulating this assessment, the examinershould consider all available sources of informa-tion including, but not limited to—

• findings, scope, and recency of previousinspections;

• ongoing monitoring efforts of surveillance andfinancial-analysis units;

• information received through first-day lettersor other pre-inspection communications;

• regulatory reports and published financialinformation; and

• reports of internal and external auditors.

The risk assessment should address each non-bank subsidiary’s funding risk, earnings expo-sure, operational risks, asset quality, capitaladequacy, contingent liabilities and other off-balance-sheet exposures, management informa-tion systems and controls, transactions withaffiliates, growth in assets, and the quality ofoversight provided by the management of thebank holding company and nonbank subsidiary.Examiners are expected to document theirassessment of the overall risk posed by eachnonbank subsidiary on this report page or equiva-lent inspection workpaper. See SR-93-19.

The examiner should make certain that theclassifications and valuation reserves summa-rized for the nonbank subsidiaries agree withtotals on either the ‘‘Summary of ConsolidatedClassified and Special Mention Assets’’ page orthe ‘‘Parent Company and Nonbank Assets Sub-ject to Classification’’ page.

1. The assessment of nonbank activities in large, complexorganizations may be focused on an intermediate-tier com-pany with oversight responsibility for multiple nonbanksubsidiaries.


Procedures for Inspection Report Preparation (Page—NonbankSubsidiary Financial Statements) Section 5010.32

This page presents a condensed statement ofcondition for credit extending and special super-visory attention nonbank subsidiaries (and othersat the examiner’s discretion) as of the inspectiondate, and income data for the latest fiscal yearand the year-to-date. The purpose of the reportpage is to aid in the analysis of the condition ofeach nonbank subsidiary and in the analysis ofits effect on the consolidated company. Thepage is completed for all credit extending sub-sidiaries and may be completed for any othersubsidiary deemed appropriate.Financial statements should be requested in

the officer’s questionnaire. In the case of largersubsidiaries other financial information may beobtained from the F.R. Y–6, the SEC Form10-K, published reports to stockholders andreports filed with professional associations.Details relevant to the financial statements canbefoundbyreviewingvariousaccountingrecords.The balance sheet should be structured to

provide sufficient detail for meaningful analysis,including specifics on valuation reserves and

stockholders’ equity. Income data should alsobe provided for the latest fiscal year plus theyear to date (i.e., total revenue, net operatingincome, net income, rates of return). Provide acondensed income statement for the year to dateif considered necessary.The examiner should ascertain that:1. Advances from the parent agree with the

‘‘Investment in and Advances to Subsidiaries’’page;2. Theholdingcompany’sproportionate share

of the capital accounts reconcile to the invest-ment shown on the ‘‘Investment in and Advancesto Subsidiaries’’ page;3. External debt reported agrees with the in-

formation reported on the ‘‘Liquidity and Debt’’Confidential page ‘‘C’’; and that4. Net income reconciles with equity in un-

distributed earnings and dividends paid on the‘‘Income from Subsidiaries’’ pages, in propor-tion to the holding company’s percentage ofownership.


Procedures for Inspection Report Preparation (Page—Fidelity and Other Indemnity Insurance) Section 5010.33

This page presents the fidelity and other indem-nity insurance coverage of the holding companyand its subsidiaries. Refer to section 2060.5 forrelated information. The report page is used toprovide a summary as to whether:1. The parent and nonbank subsidiaries have

been insured against the potential for significantlosses by maintaining proper and sufficientinsurance;2. A comprehensive review of the insurance

program is conducted periodically by manage-ment and at least annually by the board ofdirectors and entered into the minutes;3. A determination can be made as to which

entity(ies) is responsible for paying the premi-ums and if the manner in which such paymentsare allocated is equitable among the affiliatesthat receive the coverage benefits; and4. Procedures are in place to assure that

claims are filed promptly.The information on insurance coverage is

usually available from an ‘‘insurance officer’’and from a review of insurance policies duringthe inspection. The examiner should conduct areview of insurance coverage with the ‘‘insur-ance officer.’’ In summarizing results, the exam-iner should indicate if any nonbank subsidiary iscovered under a separate policy or if it is notcovered. Also, it should be stated whether thepolicy is maintained by the bank and whetherthe BHC and nonbanks are covered by thebank’s policy. The method used to allocate thecost of insurance to the subsidiaries should alsobe provided.The comments detailed on the report page

should be consistent with summarized com-ments on the ‘‘Policies and Supervision’’ pageand the ‘‘Other Supervisory Issues’’ page,item 7, if included in the report. Any note-worthy deficiencies in the insurance programmay be included on the ‘‘Examiner’s Com-ments’’ page at the examiner’s discretion.


Procedures for Inspection Report Preparation(Reserved for Future Use) Section 5010.34


Procedures for Inspection Report Preparation(Page—Other Supervisory Issues) Section 5010.35

This report page consists of topics dealing withlitigation and commitments, the supervisoryreports, intercompany transactions and othertopics of supervisory concern.

The report page includes questions that areworded to evoke a ‘‘yes’’ response, or if thereare no problems in a particular area, a ‘‘no’’response. If there are any deviations therefrom,responses are required. Positive responses as toeither the adequacy of the insurance or auditprograms should only be accompanied by areference to the appropriate inspection reportpage that addresses the topic. For additionalguidance on answering the questions on thisinspection report page refer to the ‘‘OtherSupervisory Issues’’ FR 1241 report pageinstructions.

5010.35.1 INTERCOMPANYTRANSACTIONS (QUESTIONS 1)

This question inquires as to the existence ofsignificant intercompany transactions or diver-sions of bank income subject to adverse com-ments. This question guides the examiner whendocumenting the review of compliance withBoard policy, statutes and regulations regard-ing various kinds of intercompany transactions.

For information on diversion of bank income,review management and service fees chargedthe bank and any compensating balancesmaintained by the bank on behalf of affiliatesindicated on the ‘‘Comparative Statement ofIncome and Expenses (Parent)’’ and the ‘‘Com-mercial Paper (Parent)’’ pages, respectively.Comments on section 23A considerations maybe found by a review of bank examinationreports. The examiner may refer to Manual2020.6 (management and service fees) forinstructions on examining for diversions of bankincome. For information on examining for 23Aand 23B violations, see Manual section 2020.1(transactions between affiliates) and the otherManual intercompany transactions sections2020.2–2020.7.

Violations of section 23A and 23B of theFederal Reserve Act and section 106(b) of the1970 Amendments to the Bank Holding Com-pany Act may be summarized as ‘‘Examiner’sComments and Matters Requiring Special BoardAttention’’ or listed as ‘‘Other Matters’’ or ifappropriate as ‘‘Violations’’ with the readerreferred to these pages for more detail. If theexaminer includes comments concerning otherintercompany transactions on Core page 1,

‘‘Examiner’s Comments,’’ the information shouldbe cross-checked.

5010.35.2 COMPENSATINGBALANCES (QUESTION 2)

If a subsidiary bank is not adequately compen-sated for maintaining compensating balances atanother institution for debt advances to the hold-ing company, provide:

1. The average collected and book balance orthe range of the balance;

2. Any arrangement whereby the loan or lineof credit agreement between the creditor bankand parent contains a requirement to maintain acorrespondent account; and

3. Comments as to whether the subsidiarybank is reimbursed for maintaining the compen-sating balance.

Refer to Manual section 2020.4 (compensat-ing balances).

5010.35.3 INTERCORPORATEINCOME TAX PRACTICES(QUESTION 3)

Information on intercorporate tax practices maybe obtained from the accounting or comptrol-ler’s department. Manual section 2070.0 (taxes)may be referred to for information on examin-ing intercorporate tax transactions which includesthe Board’s intercorporate tax policy statementof September 20, 1978.

In addition to the above references, examin-ers should be aware that whenever there is aconsolidated income tax return filed, it is impor-tant that a formal tax agreement exists betweenthe parent and each subsidiary (approved byeach board of directors). Examiners shouldencourage management to prepare such an agree-ment if not already in place.

Board policy states that taxes paid by a sub-sidiary bank to its parent should not be in excessof what the bank would pay if it filed on aseparate entity basis. However, certain adjust-ments, in particular the allocation of tax benefitsin a consolidated return, may result in higherpayments than would have been made had thebank been unaffiliated (i.e., the surtax exemp-tion must be allocated between organizationsfiling a consolidated return whereas an entity


filing alone could use the entire exemption). TheBoard normally would regard such adjustments(that result in amounts in excess of filing alone)as acceptable. The Board does not wish to pre-scribe the tax accounting methods to be used byBHCs. However, the Board does require thatthose methods employed give bank subsidiariesequitable treatment.

The examiner should comment whenever anyof the following has occurred:

1. A subsidiary has been required to maketax payments to its parent that significantly pre-ceded the date the consolidated tax paymentsare paid to IRS. (In general, ‘‘significantly’’means not in excess of five business days.)

2. A subsidiary bank is due a tax refund dueto a fiscal net loss on a taxable basis (or due toother tax credits) and the parent has not refundedto the bank taxes paid by the bank to the parentin previous tax periods.

3. The subsidiary bank has passed up de-ferred income tax liabilities to the parent alongwith an equivalent amount of cash or earningasset. Such transactions must be reversed by areinstatement of the deferred tax on the books ofthe bank, along with the transfer by the parentof an equivalent amount of cash or appropriateearning asset.

5010.35.4 TIE-IN ARRANGEMENTS(QUESTION 4)

As for tie-in arrangements, see Manual section3500.0 (tie-in considerations). This Manual sec-tion provides information on examining forimpermissible tie-in arrangements. Informationon tie-in arrangements is available from BHCand nonbank subsidiary management and mayalso be found by reviewing standard lendingagreements and manuals.

5010.35.5 INSIDER TRANSACTIONS(QUESTION 5)

Consider:1. The policy in regard to extensions of credit

by a bank holding company or its nonbanksubsidiaries to the BHC officials (executive offi-cers, directors or ‘‘more than 10 percent’’ share-holders) or the BHC officials’ interests in theorganization;

2. Prohibitions on bank extensions of creditcontained in the Financial Institutions Regula-

tory and Interest Rate Control Act of 1978; and3. Whether the bank holding company has a

conflict of interest statement or business ethicspolicy that has been distributed to employees.

If there are insider transactions subject tocomment, list the parent and nonbank sub-sidiary extensions of credit to BHC officials.Also, comment on the compensation to the of-ficials. See Manual sections 2050.0, 2110.0, and5010.36.

5010.35.6 LITIGATION(QUESTION 6)

A ‘‘yes’’ response to this question would requirea summary of any litigation involving the parentbank holding company and the bank and non-bank subsidiaries, which could have a signifi-cant effect on the holding company. The pur-pose of this question is to aid the examiner inthe analysis of the financial condition of theholding company by determining if any pendinglitigation poses a threat to the financial condi-tion of the BHC.

Any information on law suits should berequested in the officer’s questionnaire. Infor-mation on litigation which may have a signifi-cant impact on the company is often included inthe published annual report to stockholders or inthe SEC Form 10-K.

Comments on litigation should be presentedin narrative form summarizing the details of thelawsuit, including, if possible, the opinion of theholding company’s counsel as to the possibleoutcome of the suit. Generally, include onlysuits representing more than 10 percent of theholding company’s stockholders’ equity capital.Discussion of immaterial litigation should beavoided.

Any litigation which may have a significanteffect on the bank holding company may besummarized on the Examiner’s Comments, Corepage 1, at the discretion of the examiner. Also,any litigation which, in the opinion of manage-ment or counsel, is expected to result in a sig-nificant liability should be noted on the ‘‘Contin-gent Liabilities (Parent)’’ page.

5010.35.7 INSURANCE PROGRAM(QUESTION 7)

See Manual sections 2060.5 and 5010.33.

Procedures for Inspection Report Preparation (Page—Other Supervisory Issues) 5010.35


5010.35.8 AUDIT PROGRAM(QUESTION 8)

A negative response to this question will resultfrom application of the inspection instructionsfound in Manual sections 2060.1 and 5010.34.Comments responding to this question shouldbe confined to briefly summarizing any auditprogram deficiencies and should reference anydetailed information provided on other reportpages.

5010.35.9 CREDIT QUALITY REVIEWPROGRAM (QUESTION 9)

This question refers to the examiner’s review ofthe BHC’s internal loan review program. Anegative response would result from the exam-iner’s use of the inspection instructions andprocedures found in Manual section 2060.6.

5010.35.10 SUPERVISORY REPORTS(QUESTION 10)

A ‘‘yes’’ response with regard to this topicwould result in providing information on thetimeliness and accuracy of the bank holdingcompany’s submittal of required reports, suchas the FR Y–6, Y–8 and the Y–9’s to theReserve Banks. If the bank holding company isconsistently late in filing its reports or if thereare repeated discrepancies that need correction,it could be indicative of operational deficienciesor a lack of managerial direction within thebank holding company.

Information on the timeliness and accuracy ofreports must be obtained from the Reserve Bank

unit handling the reports and by verifying selecteditems to corporate records. If reports are rou-tinely filed late or inaccurately, the reason andthe measures the bank holding company may betaking to eliminate the problem should be statedon this inspection report page.

5010.35.11 OUTSTANDINGCOMMITMENTS TO THE BOARD OFGOVERNORS (QUESTION 12)

This question reminds the examiner to appraisethe bank holding company’s compliance in ful-filling commitments made to the Board or theReserve Bank. Thus, if there are any commit-ments outstanding which the holding companyhas made to the Board or the Reserve Bank,appropriate comments should be provided onthe page.

Each Federal Reserve Bank is required toreport to the Board’s Division of BankingSupervision and Regulation on a semi-annualbasis the status of unfulfilled commitments. Theexaminer should review this Reserve Bank reportbefore beginning the inspection.

Commitments should be summarized present-ing the nature of the commitment, the date thecommitment was made, and, if applicable, thetime frame in which it must be fulfilled. If thetime frame has expired, or if an extension isdeemed necessary to fulfill the commitment,details must be presented. The examiner maychoose to make a reference to the unfulfilledcommitment on the ‘‘Examiner’s Comments’’Core page 1, if considered appropriate.

Procedures for Inspection Report Preparation (Page—Other Supervisory Issues) 5010.35


Procedures for Inspection Report Preparation (Page—Extensions of Credit to BHC Officials . . .) Section 5010.36

The Financial Institutions Regulatory and Inter-est RateControl Act of 1978 (FIRA), as amendedby FDICIA, accompanied by the Board’s com-plimentary Regulation O, governsbank exten-sions of credit to insiders. With the passage ofFDICIA and the complementary revision ofRegulation O, there is the possibility that therewill be an increase in the volume of parentcompany and nonbank subsidiary extensions ofcredit to BHC officials and their related inter-ests. The report page presents information onparent companyandnonbankextensionsof creditto insiders, as well as parent company and non-bank subsidiary investments in and loans onstock or obligations of BHC officials’ relatedinterests. Examiners must reference Manual sec-tion 2050.0 to complete this page.This report page is intended to identify exten-

sions of credit to BHC officials so that thosecredits may be reviewed for propriety and com-pliance with the policies of the BHC and Man-ualsection2050.0.AlthoughRegulationOappliesonly to bank extensions of credit, for BHCinspection purposes, definitions contained inRegulation O shall be used by System examin-ers in order to provide a uniform, comparableapproach to reviewing extensions of credit toBHC officials.The information requested on the report page

should be requested in the officer’s question-naire. Other sources may include the annualreport to shareholders, the FR Y–6 and filingswith the Securities and Exchange Commission.BHC examiners should review Manual sec-

tion 2050.0 and Regulation O, and should befamiliar with the definitions contained in theregulation. Examiners are asked to identify suchcredits for in-depth reviewandanalysis.AlthoughRegulation O applies specifically to extensionsof credit by banks, and not the parent or non-bank subsidiaries, examiners may criticize aBHC’s or nonbank subsidiary’s direct exten-sions of credit to BHC officials or their relatedinterests as an unsound practice or may criticizea specific loan for credit reasons.Such exten-sions of credit are not to be cited as violations ofRegulation O.DuringaBHCinspection,BHCofficialsshould

be made aware that information necessary forthe completion of this page is being collected toevaluate practices, policies, or particular credits,but that FIRA and Regulation O apply exclu-sively to bank extensions of credit.Section 215.4 of Regulation O entitled ‘‘Gen-

eral Prohibitions’’ sets forth various restrictionson bank extensions of credit to BHC officials. In

general, if the BHC examiner reviewing BHCand nonbank subsidiary direct extensions ofcredit to BHC officials and their related interestsconcludes, after consultation with counsel forthe Reserve Bank, that the extension of creditwould not have been in compliance with section215.4 had it been a bank extension of credit, theexaminer may conclude that it is appropriate tocriticize the practice or the loan. If it is con-cluded that the BHC or nonbank subsidiaryextended the loan in order to circumvent therestrictions on bank extensions of credit, com-ments to that effect should be incorporated ontothe ‘‘Other Supervisory Issues’’ page or a ‘‘Con-tinued’’ page. Such comments may be also sum-marized on page 1, ‘‘Examiner’s Comments’’,at the discretion of the examiner based on thedegree of materiality, severity and impact.Specifically, section 215.4 of Regulation O

(in part) requires bank extensions of credit toBHC officials not to be on preferential terms,not to have more than the normal risk of repay-ment, and over certain dollar amounts to beapproved by the bank’s directors. In addition, itrequires bank extensions of credit to executiveofficers, principal shareholders, and their relatedinterests not to exceed the bank’s legal lendinglimit to any such individual and his/her relatedinterests.In reviewing BHC and nonbank extensions of

credit to ‘‘related interests,’’ note that a relatedinterest is defined in section 215.2(k) of Regula-tion O as ‘‘a company that is controlled by aperson . . .’’ The definition of ‘‘company’’ forpurposes of Regulation O specifically excludesany ‘‘insured bank.’’ However, for purposes ofcompleting these report pages, and evaluatingthe propriety of BHC and nonbank extensionsof credit to (and investments in) ‘‘related inter-ests’’ of BHC officials, ‘‘related interests’’ shallinclude ‘‘banks.’’ Therefore, a BHC or nonbankdirect extension of credit to (or investment in) aBHC official’s ‘‘related interest’’ that is itself abank (other than a subsidiary bank of the subjectBHC), should be reported.For purposes of this page, ‘‘direct’’ exten-

sions of credit represent obligations of the BHCofficial or related interest, alone or as co-makerwhile an ‘‘indirect’’ extension of credit includesa BHC official’s or a related interest’s endorse-ment or guarantee of an extension of credit to athird party, and obligation’s to the BHC offi-cial’s immediate family (spouse, all minor chil-


dren, and all children, including adults, residingin the individual’s home). BHC and nonbankextensions of credit to a BHC official whoserves in two or more capacities, i.e., directorand executive officer, should only be presentedonce.In completing the ‘‘Schedule,’’ the examiner

may select the cut-off amount used to determinewhich items are listed individually based onmateriality. However, any extension of credit(or group of credits) to an individual BHC offi-cial and his/her related interests that would haveexceeded the subsidiary bank’s lending limithad it been made by the bank, should be listedindividually. (In multibank holding companies,use the banks’ aggregate lending limit.)

In listing ‘‘Terms’’ within the ‘‘Schedule,’’include at a minimum interest rate and date ofmaturity. ‘‘Comments’’ are intended to include abrief description of any collateral, endorse-ments, the purpose of the loan, the nature of theborrower’s relationship to the lender if not self-evident, and status of repayment if delinquent orclassified.Identify the source and cost of funds used by

the BHC to extend the loan. Any adverse affectto the BHCs net income should be commentedon.Extensions of credit should be consistent with

policies summarized on the ‘‘Policies andSupervision’’ page. Otherwise, additional com-ments might be warranted.

Inspection Report Preparation (Page—Extensions of Credit to BHC Officials) 5010.36


Procedures of Inspection Report Preparation (Page—InterestRate Sensitivity—Assets and Liabilities) Section 5010.37

The purpose of this report page is to present abrief analysis of the interest sensitivity of assetsand liabilities on the inspection date and tofurther support the analysis in the form of ratiossimilar to a current ratio and a net workingcapital to total assets ratio. Positive or negativegaps within maturity buckets are gathered in theform of cumulative gap totals. The analysis canbe prepared for each level of the organization.Such an analysis is designed to determine

whether maturing interest sensitive assets matchmaturing interest sensitive liabilities on a 1 to 1basis within specified maturity ranges and on acumulative basis over time.The information for the report page can be

gathered from financial management maturityanalyses and interest sensitivity reports preparedby the bank holding company’s management. Alimitedamountofmaturity informationon interestsensitive assets and liabilities may be obtainedfrom Bank Call Reports, Bank Holding Com-pany Y reports, Bank Performance Reports, andBHC Performance Reports, and can be used ifthe inspection ‘‘as of’’ date is the same as thedate of these reports.

From information collected, list interest sensi-tive asset totals and liability totals within thematurity buckets provided for the consolidatedentity. The maturity ranges may be adjusted toor expanded to coincide with interest rate sensi-tivity reports generated by the bank holdingcompany management.Next, subtract the liability totals from the

asset totals to get the ‘‘Gap’’ totals. For eachmaturity range beyond 91 days, add the nextrepricing interval ‘‘Gap’’ total to the previous‘‘Cumulative Gap’’ totals to obtain the repricinginterval’s cumulative gap.To determine the ratio of interest sensitive

assets to interest-sensitive liabilities, use the cu-mulative gap for the denominator. Extend thepercent out to at least two decimal places.Provide narrative analysis for any maturity

period or cumulative negative or positive gappositions, stating what measures will be takenby management to address any adverse gappositions.


Procedures for Inspection Report Preparation(Page—Treasury Activities/Capital Markets) Section 5010.38

This report page presents generalized questionsfor the examiner to answer on treasury activitiesand capital markets. This page must be includedin inspection reports prepared for bank holdingcompanies that have significant exposure in thecapital markets. Specific guidance can be foundin section 2125.0, in the Federal ReserveSystem’s Trading Activities Manual, and inSR-93-69, December 20, 1993. Procedures for

inspecting and preparing the written analysisshould be based on this supervisory guidance.In banking organizations with national or statenonmember lead banks and where capital mar-kets activities are conducted exclusively at thesubsidiary bank, examiners should coordinatethe collection of the information included onthis page with the lead bank supervisory agency.


Procedures for Inspection Report Preparation (ConfidentialPage A—Principal Officers and Directors) Section 5010.40

The purpose of this report page is to identifydirectors and principal officers and determinethe level of participation and responsibility inthe affairs of the holding company, and to iden-tify outside relationships in order to determineconflicts of interest. The page contains the namesof the principal officers of the company andtheir position with other subsidiaries. This pagealso presents the names of directors, the numberof years they have served in that capacity, theiryear of birth (to possibly assess management’splans for succession), regularity of their atten-dance at directors’ meetings, and principal out-side employment. Note if any director is also adirector of a Federal Reserve Bank or branch.The directors and principal officers’ fees,

compensation and other benefits information isalso to be obtained and retained in the work-papers. If desired by the Reserve Bank, suchsalary, bonus, benefits, and other remunerationinformation may be included on this page.Criticism of directors’ fees should be carefullyconsidered.The directors’ ownership information (i.e.

address of each director and the number ofshares owned) is also to be obtained and mayalso be reported or retained in the workpapers.If the holding company has an advisory board orhonorary directors, the data on these personsmay be included on the report page at the exam-iner’s discretion.All information on principal officers and

directors such as year of birth, responsibilityand compensation, etc. should be requested intheofficer’squestionnaire.Attendancedatashouldbe available from the board of directors’ min-utes. Such information may also be contained inreports to shareholders, FR Y–6, proxy state-ments and SEC filings.The directors and principal officers should be

listed alphabetically with their city and State ofresidence indented immediately below theirnames. If appropriate for mailing purposes, showeach director’s mailing address.The principal officers and directors are to be

listed in order of rank, and alphabetically whereofficers have identical titles. For directors andprincipal officers, membership on principal com-

mittees of the board should be coded and placedimmediately after the name on the same line(i.e., E = Executive, A = Audit). If a director hasbeen elected since the last inspection, the date ofelection should be shown immediately after hisname. For example:

John Smith elected 4-1-x1

The officer and director positions held withsubsidiaries should be kept as brief as possible,utilizing abbreviations established on the ‘‘Struc-ture and Abbreviations’’ Core Page 3. List onlymajor positions if routinely assigned to staff ofall subsidiaries.A brief summary of benefits provided to offi-

cers and employees (i.e., pension plans, life andhealth insurance) may be presented at the bot-tom. Such information can assist in determiningwhether the principal officers appear to be ade-quately or overly compensated.Special financial arrangements for specific

officers may also be noted. Such arrangementswould include salary contracts, unusual bonuses,fees or expense allowances, stock options,deferred compensation, and exclusive use ofreal estate, automobiles and airplanes.When indicating occupation or principal busi-

ness affiliation of directors, use concise, descrip-tive designations instead of general notationssuch as ‘‘merchant’’ or ‘‘industrialist.’’ If thedirector is an officer or principal in a firm, showalso the nature of the business in parentheses(e.g., law firm, CPA, pharmaceutical manufac-turer, etc.).The examiner should verify that the director-

ship is in compliance with Regulation L or Rand that the number of directors is consistentwith the corporations’ bylaws. The examinershould also indicate the regular schedule ofdirectors’ meetings at the bottom of the reportpage to provide the Reserve Bank withinformation needed to plan attendance at boardmeetings.Examiners should be careful to use the same

names and titles of officers when referring to theindividuals elsewhere in the report.


Procedures for Inspection Report Preparation (ConfidentialPage B—Condition of Bank Holding Company) Section 5010.41

In general, this report page or section (continu-ous flow reporting basis) presents pertinent infor-mation that is deemed confidential by the ReserveBank and available to regulatory authorities.The report page or section is used to discuss andassess, confidentially, the going-concernoperating results and the prospects for resolvingany problems or areas of concern. The reportpage or section should be also used to discusscompliance problems relating to statutory, regu-latory, or administrative provisions cited withinthe core or other open sections of the report. Thepotential for any improvement or weakening ineconomic conditions should also be discussed tothe extent they have a bearing on earningspotential.

The specific information to be provided onthe report page or section is—

1. information on the organization’s near-future financial prospects, giving particular con-sideration to debt servicing and the likelihood ofimproving any current problems;

2. an assessment of holding company man-agement as to the experience and qualificationsof principal personnel when relative to theassessment, and a listing of subsidiary bankratings, effective examination dates, and typeand scope of examinations;

3. the examiner’s concise assessment of man-agement’s oversight of the BHC’s policies andsupervision of subsidiaries with respect to thelevel of control and supervision exercised oversubsidiaries (see sections 2010.0 to 2010.13)should be discussed. (An evaluation of the bankholding company’s recognition and control ofexposure to risk should also be provided (seesection 2160.0) as well as an evaluation of man-agement information systems (MIS) based onthe guidance found in sections 2060.01 through2060.4.);

4. a discussion of the reasons for the compo-nent ratings and overall RFI/C(D) rating assigned(see section 4070.0);

5. an analysis of chain banking organiza-tional structure (The examiner must determinewhether the BHC is a member of a chain bank-

ing organization. A chain banking organizationmay be defined generally as a collection ofindependent banking organizations that are con-trolled by the same individual, family, or agroup of individuals closely associated in theirbusiness dealings.);

6. a listing of individuals or groups that con-trol more than 5 percent of the BHC’s outstand-ing stock (Discuss any significant changes inownership. A review of ownership is to include

a determination as to whether an individual orgroup of shareholders exercise significant influ-ence over the BHC. It should also include adiscussion of fiduciary holdings of the parentcompany’s stock and convertible debt of theBHC’s subsidiaries.);

7. a presentation of confidential informationrelating to the components of the BHC ratingsystem, avoiding repetition by cross-referencingreport pages in the open section; and

8. examiners’ comments on any other super-visory concerns or aspects of the BHC’s condi-tion warranting confidential treatment. Com-ments on any violation and/or a BHC’s unsafeand unsound practice should be included withany recommendations for Federal Reserveadministrative action. Any plans of the holdingcompany that are considered to be of a confiden-tial nature should also be discussed.

Financial-analysis comments on the bank hold-ing company organization (that is, RFI/C(D)components, not the ratings) that are not of aconfidential nature are to be discussed on theAnalysis of Financial Factors core page 3.

The date and type of examination and assignedrating can be obtained directly from the latestexamination report of each subsidiary bank. Theother information is to be derived from discus-sions with senior management.

The information pertaining to ratings(CAMELS) and ratios of the banks is to bepresented in columnar form with the bankslisted as they appear on the organization chart.Also include any comment on the bank(s) deemedto warrant confidential treatment.

The examiner is expected to review and usethe examination ratings of the other federalagencies where appropriate; however, if sub-stantive differences of opinion exist as to thebank’s composite rating, adjustments to the rat-ing may be made and footnoted accordingly.

The examiner should make certain that thebank names or abbreviations are consistent withthe organization chart and other tables in theinspection report. Any ratios or comments usedin the rating analysis should be checked to cor-responding areas in the open section.


Procedures for Inspection Report Preparation (ConfidentialPage C—Liquidity and Debt Information) Section 5010.42

This page provides a ‘‘snapshot’’ picture of theparent company’s short-term gap position as itrelates to the amount of commercial paper com-pared to net short-term GAP within repricingmaturity categories and also the cumulativeGAP position within the maturity buckets. Thepage provides summary information of aggre-gate data from the ‘‘Commercial Paper (Par-ent),’’ ‘‘Parent Company Liquidity Position’’and the ‘‘Unaffiliated Borrowings’’ pages orworkpapers.The lower portion of the schedule provides

details on unaffiliated borrowings such as theamount and types of external indebtedness ofthe parent and its subsidiaries. Informationregarding various debt covenants such as crossdefault clauses, collateral information and nega-tive covenants can be included.The purpose of the page is to aid in evaluat-

ing the company’s ability to service its debt andto operate within the constraints of debt restric-tive covenants. It also aids in evaluating theappropriateness of the uses of the proceeds ofthe organization’s borrowings.Information for the source report pages or

workpapers required for an analysis of parentcompany liquidity, commercial paper and othershort-term debt, and long-term unaffiliated bor-rowings should be requested in the officer’squestionnaire or can be obtained from the BHC’saccounting department. Totals should be broughtforth from the ‘‘Commercial Paper (Parent)’’and the ‘‘Parent Company Liquidity Position’’pages or workpapers, or reconciled to thegeneral ledger. Footnotes to financial statementsin published reports contain much of thisinformation.For the commercial paper information, derive

the totals from the total column on the ‘‘Com-mercial Paper (Parent)’’ report page, combiningthe totals for over 91 days maturity. Commercialpaper maturity totals should be presented as aline item showing the aggregate outstandingbalancenettedbyanyamountheldbysubsidiaries.

For the ‘‘Long-term Debt’’ portion of thereport page, present unaffiliated long-term bor-rowings in tabular form for (a) the parent,(b) each nonbank subsidiary, and (c) the banksubsidiaries (combined).For the parent company and each nonbank

subsidiary, show the borrower, lender, descrip-tion of the debt, original amount, originationdate, interest rate, maturity date, present out-standing balance, any significant repayment pro-visions, collateral, use of proceeds, majorrestrictive covenants and any requirements forcompensating balances. In addition, mandatoryconvertible debt instruments of the parent shouldbe identified and the conversion provisionsdetailed. In the case of large bank holding com-panies that have an extensive number of debtissues, detail for each issue may be eliminated atthe discretion of the examiner so long as aggre-gates for similar issues are shown along withranges for rates and maturities and summaryinformation regarding the other terms of thedebt.For the ‘‘Net GAP’’ and ‘‘Net Cumulative

GAP’’ use the respective total amounts (‘‘NetPosition’’ and ‘‘Cumulative Excess Deficien-cy)’’ on the ‘‘Parent Company Liquidity Posi-tion’’ report page. Bank mortgage indebtednessmay be aggregated at the discretion of the exam-iner, showing amounts only without other detail.Capitalized lease obligations may be included inthat total. For all other bank borrowings, includ-ing debentures issued to unaffiliated sources,provide complete detail.Debt amounts on this page should agree with

those shown for the ‘‘Parent Company Compar-ative Balance Sheet’’ for Core Page 5, the‘‘Bank Subsidiaries’’, the ‘‘Nonbank SubsidiaryFinancial Statements’’ pages or workpapers, andthe ‘‘Consolidated Comparative Balance Sheet’’Core page 8 (when adjusted to net intercompanyborrowings).


Procedures for Inspection Report Preparation (ConfidentialPage D—Administrative and Other Matters) Section 5010.43

This report page summarizes the examinerparticipants and their total workdays devoted tothe inspectionandprovidesclarificationoncheck-list items where appropriate. Other commentsshould be directed to planning arrangementsaffecting the scope of the inspection. When non-bank subsidiaries are inspected, describe theextent of the review of the records. The exam-iner should cite any special problems encoun-tered which would aid future inspections. Rec-ommendations, suggestions, and informationneeded to conduct the next inspection shouldalso be included for the next Examiner-in-Charge.Information regarding planning is limited to

the on-site planning of the work to be per-formed. Comments should be of a professionalnature and should be strictly devoted to provid-ing information that can be used in planning andperforming an inspection (location and access tospecific BHC records, inspection control prob-lems, availability of facilities for staff, key offi-cer and director contacts, information pertaining

to the Internal Audit Committee members, inter-nal and external auditors, and etc.)Information pertaining to the access to, and

the storage of, workpapers and any personalinformation such as lodging, travel arrange-ments and geographical directions should beconfined to the workpapers. Comments notdirectly related to the on-site conducting of theinspection should be avoided.The purpose of the confidential report page is

to present pertinent information to be used onlyby regulatory authorities. The page is reservedto summarize internal information derived fromReserve Bank inspection staff that would not beaddressed in other confidential report pages. Theinformation reported on this page may also bederived from discussions with senior bank man-agement, workpapers, accounting records, boardof directors’ minutes, and etc.Bank names or abbreviations should be con-

sistent with the organization chart and othertables in the inspection report.


bhc inspection program (general) section 5000 · bhc inspection program (general) section 5000.0...

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