Background
The
boards of directors of a group of banks, collectively, appealed to
the Ombudsman a decision rendered by the supervisory office to place
a group of loans on nonaccrual
status. The banks also
appealed the supervisory office's directive to re-file the
Consolidated Reports of Condition and Income (call reports).
The
various bank boards disagreed with the nonaccrual status because they consider the
loans "well secured" and "in the process of collection" within the
context of the call report instructions. The boards requested that
the Ombudsman's office review these loans to determine if accrual
status on the affected loans is appropriate, thereby negating the
need to re-file the call reports.
Discussion
The
Ombudsman conducted a review of the information submitted by the
bank and supporting documentation from the supervisory office. The review included
discussions with the banks' senior management as well as with
members of the supervisory office.
The
Ombudsman's analysis specifically focused on the issue of whether
the loans were "well secured" and "in the process of collection," as
defined in the call report instructions. While the affected loans
were collateralized by improved real estate, the value of the
collateral was not supported by current independent appraisals or a
comprehensive analysis that substantiated the banks' basis of
valuation. The
appraisals maintained by the banks were outdated and did not provide
full assurance that all principal, interest, and accruing fees would
be received.
Furthermore, the guarantor provided no significant financial
support to the credits due to an illiquid cash position and a high
level of contingent liabilities.
A
legal process was initiated by the borrower, with support from the
bank, to have a court appointed receiver control the liquidation of
the company. While the
Ombudsman acknowledged that a legal process was initiated as of a
given quarter, there was no assurance that the loans would be
restored to a current status within a reasonable time frame.
Conclusion
The
Ombudsman concluded that the nonaccrual
designation assigned by the supervisory office was appropriate. While the banks had taken
steps to support "in the process of collection," there was
inadequate support for "well secured." The banks were directed to
place the loans on nonaccrual as of the
same quarter the legal process was initiated and to reverse all
accrued and uncollected interest, and other fees. Any interest income recorded
since the particular quarter in question should be applied towards
principal until the remaining recorded investment in the asset
(i.e., after charge off of identified losses, if any) is deemed
fully collectible.
Additionally,
the banks were directed to make the adjusting accounting entries and
re-file the affected call reports.
