Third Quarter 2005 Regulatory Report Filings
Q1: Hurricanes Katrina and
Rita (the Hurricanes) may affect the ability of financial institutions
to submit timely and accurate regulatory reports for September 30,
2005. These reports include bank Reports of Condition and Income (Call
Reports), Thrift Financial Reports, Thrift Holding Company Reports,
credit union 5300 and 5310 Call Reports, and bank holding company
Y reports. What approach do the member agencies of the Federal Financial
Institutions Examination Council expect to take in situations where
institutions affected by the Hurricanes expect to encounter difficulty
completing their September 30, 2005, regulatory reports?
A1: Institutions affected
by the Hurricanes that expect to encounter difficulty submitting
accurate and timely data for the September 30, 2005, report date
should contact their primary federal regulatory agency, as shown
below, to discuss their situation. The agencies do not expect to
assess penalties or take other supervisory action against institutions
that take reasonable and prudent steps to comply with regulatory
reporting requirements if those institutions are unable to fully
satisfy those requirements by the specified filing deadlines because
of the effects of the Hurricanes. The agencies’ staffs stand ready to work with affected institutions that may be experiencing problems fulfilling their reporting responsibilities, taking into account each institution’s
particular circumstances, including the status of its reporting
and recordkeeping systems and the condition of its underlying financial
records.
Appropriate offices of federal regulatory agencies
to contact:
Board: For Call and Y Reports, contact the Federal
Reserve Bank to which the bank or bank holding company submits its
reports. Alternatively, banks and bank holding companies may contact
Douglas Carpenter, Supervisory Financial Analyst, Federal Reserve
Board, at (202) 452-2205.
FDIC: For Call Reports, contact Data Collection
and Analysis Section, Washington, DC, at (800) 688-FDIC (3342).
NCUA: For 5300 Call Reports, contact the Atlanta Regional Office (Alabama,
Mississippi) at (678) 443-3000, the Austin Regional Office (Louisiana,
Texas) at (512) 342-5600, or Ashley Rowe, Department of Risk Management,
at (703) 518-6360. For 5310 Call Reports, contact the Office of Corporate
Credit Unions at (703) 518 6640.
OCC: For Call Reports, contact
the FDIC’s Data Collection and Analysis Section, Washington, DC,
at (800) 688-FDIC (3342).
OTS: For Thrift Financial Reports and Thrift
Holding Company Reports, contact Vikki Reynolds, Financial Reporting
Division, Dallas, TX, at (972) 277-9595. For securities filings sent
directly to the OTS: For accounting issues, contact Lynnwood Campbell,
Director, Securities Filings, Washington, DC, at (202) 906-5713; for
legal issues, contact Kevin Corcoran, Deputy Chief Counsel, Washington,
DC, at (202) 906-6962.
Third Quarter 2005 Allowance for Loan and Lease Losses
Q1: How should financial institutions with borrowers
affected by the Hurricanes determine the appropriate amount to report
for their allowance for loan and lease losses (ALLL) in their third
quarter regulatory reports (e.g., Call Report, Thrift Financial Report,
5300 and 5310 Call Reports, Y Reports)?
A1: For financial institutions
with loans to borrowers in the affected area, it may be difficult
at this time to determine the overall effect that the Hurricanes will
have on the collectibility of these loans. Many of these financial
institutions will need time to evaluate their individual borrowers,
assess the condition of underlying collateral, and determine potential
insurance proceeds and other available recovery sources.
For its third
quarter regulatory reports, management should consider all information
available prior to filing this report about the collectibility of
the financial institution’s loan portfolio in order to make its best estimate of probable losses within a range of loss estimates, recognizing that there is a short time between the storms’ occurrence
and the required filing date for the third quarter regulatory report.
Consistent with generally accepted accounting principles (GAAP),
the amounts included in the ALLL in third quarter regulatory reports
for estimated credit losses incurred as a result of the Hurricanes
should include those amounts that represent probable losses that
can be reasonably estimated. As financial institutions are able
to obtain additional information about their loans to borrowers
affected by the Hurricanes, the agencies would expect that estimates
of the effect of the Hurricanes on loan losses could change over
time and that the revised estimates of loan losses would be reflected
in financial institutions' subsequent regulatory reports.
Q2: Is there an ability for a financial institution
to disclose additional information in its regulatory reports about
the consequences of the hurricanes?
A2: Yes, the agencies note
that for banks, bank holding companies and thrifts that file Reports
of Condition and Income (Call Report), financial statements for
bank holding companies (Y-9 Report) or Statements of Condition and
Operations (Thrift Financial Report), the management of such financial
institutions may, if it wishes, submit a brief narrative statement
on the amounts reported in the Call Report, Y-9 Report or Thrift
Financial Report. This optional narrative statement will be made
available to the public, along with the publicly available data
in the Call Report, Y-9 Report or Thrift Financial Report. This
statement has long been available for the use of financial institutions
that are required to file a Call Report, Y-9 Report or Thrift Financial
Report. Financial institutions may wish to comment on certain financial
consequences to their institutions resulting from the effects of
the Hurricanes in the optional narrative statement. Please refer
to page RC-X-1 of the Call Report instructions for the “Optional Narrative Statement Concerning the Amounts Reported in the Reports of Condition and Income”, page BS notes 1 of the FR Y-9C instructions, page SP notes 1 of the FR Y-9SP instructions or to Schedule NS of the Thrift Financial Reporting Instructions for the “Optional Narrative Statement” for
further guidance.
Sales of Held-to-Maturity Securities
Q1: If a
financial institution affected by major-category hurricanes (such
as Hurricane Katrina and Hurricane Rita) sells investment securities
that were classified as "held to maturity" (HTM) to meet its liquidity
needs, will that financial institution's intent to hold other investment
securities to maturity be questioned?
A1: Under normal circumstances the sale of
any HTM investment would call into question an institution's intent
to hold its remaining HTM investments to maturity. However, paragraph
8 of FASB Statement No. 115, Accounting for Certain Investments in
Debt and Equity Securities, indicates that events that are isolated,
nonrecurring, and unusual for the reporting enterprise that could
not be reasonably anticipated may cause an enterprise to sell or transfer
an HTM security without necessarily calling into question its intent
to hold other HTM debt securities to maturity. The FASB staff believes
that the above provision encompasses the sales of HTM investment securities
by a financial institution that are required to meet the abnormally
increased liquidity needs of that financial institution that are directly
related to a major-category hurricane (such as Hurricane Katrina and
Hurricane Rita) that has caused extraordinary devastation over a wide
area affecting a vast number of the financial institution's customers.
Past Due and Nonaccrual Reporting
Q1: Some financial institutions
have engaged in programs to temporarily provide consumer borrowers
affected by Hurricane Katrina or Rita (the Hurricanes) additional flexibility
in repaying loans. For example, some institutions have encouraged
borrowers that were affected by the Hurricanes to contact the institution
to work out new repayment arrangements (e.g., waiving late fees and
deferring interest and principal payments for a short period of time,
such as 30 – 90 days). Other institutions have provided similar repayment
arrangements across-the-board to all consumer borrowers in the affected
area, unless a customer requests otherwise. How should financial institutions
report such loans in regulatory reports (e.g., Call Report, Thrift Financial
Report, 5300 and 5310 Call Reports, or Y Reports)?
A1: Each financial institution should consider
the specific facts and circumstances regarding its temporary payment
deferral program for consumer borrowers affected by the Hurricanes in
determining the appropriate reporting treatment in accordance with generally
accepted accounting principles (GAAP) and regulatory reporting instructions.
Past Due Reporting: Past due reporting status
in regulatory reports should be determined in accordance with the contractual
terms of a loan as its terms have been revised under a temporary payment
deferral program, either as agreed to with the individual customer or
provided across-the-board to all affected customers. Accordingly, if
all payments are current in accordance with the revised terms of the
loan, the loan would not be reported as past due. Furthermore, for loans
subject to a payment deferral program on which payments were past due
prior to the Hurricanes, the agencies have determined that the delinquency
status of the loan may be adjusted back to the status that existed at
the date of the applicable hurricane (i.e., “frozen”) for the duration of the payment deferral period. For example, if a consumer loan subject to a payment deferral program was 60 days past due on the date of a hurricane, it would continue to be reported in its regulatory reports as 60 days past due during the deferral period (unless the loan is reported in nonaccrual status or charged off as discussed below).
Nonaccrual Status, Allowance
for Loan and Lease Losses, and Charge-offs: Each financial institution should refer to
the applicable regulatory reporting instructions, as well as its internal
accounting policies, in determining whether to report loans to affected
customers on which payments have been temporarily deferred as nonaccrual
assets in regulatory reports. Furthermore, each institution should maintain
an appropriate allowance for loan losses for these loans, considering
all information available prior to filing its reports about their collectibility
(for further information, see answer 1 to “Third Quarter 2005 Allowance for Loan and Lease Losses”). As information becomes available indicating a specific loan will not be repaid (e.g., information related to the likelihood of collection on a specific loan or the inability of the institution to contact the borrower within a reasonable period), the institution’s charge-off policies should be applied.
Regulatory Reporting Disclosures: Each banking
organization or thrift institution is encouraged, but not required,
to disclose information related to its deferral programs (e.g., amount
and types of loans subject to the program) in the optional narrative
statements in the Call Report, Y-9 Report, or Thrift Financial Report
(for further information, see answer 2 to “Third Quarter 2005 Allowance for Loan and Lease Losses”).
Q2: Some financial institutions
are working with certain commercial borrowers affected by Hurricane
Katrina or Rita (the Hurricanes) to provide additional flexibility
in repaying loans (e.g., commercial and industrial loans, commercial
real estate loans, and certain small business loans). In this regard,
some institutions have renegotiated the repayment terms of specific
loans (e.g., deferring or waiving interest and principal payments)
with such borrowers, considering the borrower’s current situation and
overall ability to repay. How should financial institutions report
such commercial loans in regulatory reports (e.g., Call Report,
Thrift Financial Report, 5300 and 5310 Call Reports, or Y Reports)?
A2: Each financial institution should
consider the specific facts and circumstances regarding the renegotiated contractual
repayment terms for commercial borrowers affected by the Hurricanes in determining the
appropriate reporting treatment of these loans in accordance with generally accepted
accounting principles (GAAP) and regulatory reporting instructions. Institutions should
refer to GAAP and regulatory reporting instructions for further information. Some areas
to consider are summarized in the guidance below.
This guidance applies to commercial loans (including small business loans)
with terms that have been individually renegotiated. However, financial institutions offering
an across-the-board temporary deferral program to small business borrowers should refer to
answer 3 to “Past Due and Nonaccrual Reporting.”
Past Due (Delinquency) Reporting:
Past due reporting status in regulatory reports should be determined in accordance
with the contractual terms of a loan as its terms have been renegotiated with the borrower.
Troubled Debt Restructurings (TDRs): Financial institutions should
determine whether commercial loans to affected borrowers with renegotiated
repayment terms should be reported as TDRs in separate memoranda items for such
loans in regulatory reports. A TDR is a loan restructuring in which an institution,
for economic or legal reasons related to a borrower’s financial difficulties, grants
a concession to the borrower that it would not otherwise consider. However, a loan
extended or renewed at a stated interest rate equal to the current interest rate for
new debt with similar risk is not reported as a TDR. Financial institutions may refer
to Financial Accounting Standards Board (FASB) Statement No. 15 for additional guidance
on determining whether a loan with renegotiated terms should be accounted for as a TDR.
FASB Statement No. 114 also provides guidance on accounting for impairment losses on TDRs
(summarized below in “Allowance for Loan and Lease Losses and Charge-offs”).
Nonaccrual Status: Each financial institution
should refer to the applicable regulatory reporting instructions, as well as its
internal accounting policies, in determining whether to report commercial loans to
affected borrowers as nonaccrual assets in regulatory reports. In general, institutions
shall not accrue interest on any commercial loan: (1) which is maintained on a cash basis
because of deterioration in the financial condition of the borrower, (2) for which payment in
full of principal or interest is not expected, or (3) upon which principal or interest has been
in default for a period of 90 days or more, unless the loan is both well secured and in the
process of collection. Accordingly, if interest or principal has been waived on a commercial
loan, the loan generally should be placed on nonaccrual status. If interest or principal has
been deferred (i.e., no payments are required during the deferral period), but not waived,
judgment should be used to determine whether the loan should be placed on nonaccrual status
(e.g., by evaluating whether or not full payment of principal and interest is expected).
While a commercial loan is in nonaccrual status,
some or all of the cash interest payments received may be
treated as interest income on a cash basis as long as the
remaining book balance of the loan (i.e., after charge-off of
identified losses, if any) is deemed to be fully collectible. Guidance on restoring
nonaccrual loans to accrual status is provided in regulatory reporting instructions.
Allowance for Loan and Lease Losses and Charge-offs:
Each institution should maintain an appropriate allowance for loan losses for
all commercial loans to borrowers affected by the Hurricanes, considering all
information available prior to filing its reports about their collectibility.
In particular, for commercial loans whose terms have been modified in a TDR that
provides for a reduction of either interest or principal
(referred to as a modification of terms), financial institutions
should measure the impairment loss on the restructured loan in accordance
with GAAP (FASB Statement No. 114). In this regard, a credit analysis should
be performed in conjunction with the restructuring to determine the loan’s
collectibility and estimated impairment. The amount of this impairment should be
included in the allowance for loan and lease losses.
As information becomes available indicating a specific commercial loan,
including a loan that is a TDR, will not be repaid (e.g., information related to the
likelihood of collection on a specific loan or the inability of the institution to contact
the borrower within a reasonable period or, for a renegotiated loan, to make further contact
with the borrower within a reasonable period after revising the repayment terms),
the institution’s charge-off policies should be applied.
Regulatory Reporting Disclosures: Each banking
organization or thrift institution is encouraged, but not required,
to disclose information related to its efforts to work with commercial
borrowers affected by the Hurricanes in its optional narrative statements
in the Call Report, Y-9 Report, or Thrift Financial Report
(for further information, see answer 2 to “Third Quarter 2005 Allowance for Loan and Lease Losses”).
Q3: Some financial institutions
have engaged in programs to temporarily provide small business borrowers
affected by Hurricane Katrina or Rita (the Hurricanes) additional
flexibility in repaying loans, similar to the programs provided to consumer
borrowers. In this regard, some institutions have provided new repayment
arrangements (e.g., waiving late fees and deferring interest and principal
payments for a short period of time, such as 30-90 days) across-the-board
to small business borrowers in the affected area, unless a customer
requests otherwise. How should institutions report such small business
loans subject to across-the-board payment deferral arrangements in regulatory
reports (e.g., Call Report, Thrift Financial Report, 5300 and 5310
Call Reports, or Y Reports)?
A3: Each financial institution should
consider the specific facts and circumstances regarding its temporary payment deferral
program for small business borrowers affected by the Hurricanes in determining the
appropriate reporting treatment in accordance with generally accepted accounting principles
(GAAP) and regulatory reporting instructions. Institutions should refer to GAAP and
regulatory reporting instructions for further information.
Past Due (Delinquency) Reporting: For loans
subject to an across-the-board temporary payment deferral program on which payments were
past due prior to the Hurricanes, the agencies have determined that the delinquency status
of the loan may be adjusted back to the status that existed at the date of the applicable
hurricane (i.e., “frozen”) for the duration of the payment deferral period. For example,
if a small business loan subject to a payment deferral program was 60 days past due on the
date of a hurricane, it would continue to be reported in its regulatory reports as 60 days
past due during the deferral period (unless payments are received on the loan that alter its
delinquency status or the loan is reported in nonaccrual status or charged off as discussed below).
Nonaccrual Status: Each financial
institution should refer to the applicable regulatory reporting instructions in
determining whether to report small business loans to affected borrowers as nonaccrual
assets in regulatory reports. In general, institutions shall not accrue interest on any
small business loan: (1) which is maintained on a cash basis because of deterioration in
the financial condition of the borrower, (2) for which payment in full of principal or
interest is not expected, or (3) upon which principal or interest has been in default for
a period of 90 days or more, unless the loan is both well secured and in the process of
collection.
When interest and principal has been deferred
(i.e., no payments are required during the deferral period), judgment should be
used to determine whether the loan should be placed on nonaccrual status
(e.g., by evaluating whether or not full payment of principal and interest is expected).
While a small business loan is in nonaccrual status, some or all of
the cash interest payments received may be treated as interest income on a cash basis as
long as the remaining book balance of the loan (i.e., after charge-off of identified losses,
if any) is deemed to be fully collectible. Guidance on restoring nonaccrual loans to accrual
status is provided in regulatory reporting instructions.
Allowance for Loan and Lease Losses, and Charge-offs:
Each institution should maintain an appropriate allowance for loan losses
for small business loans to borrowers affected by the Hurricanes, considering
all information available prior to filing its reports about their collectibility.
As information becomes available indicating that a specific small business loan will
not be repaid (e.g., information related to the likelihood of collection on a specific
loan or the inability of the institution to contact the borrower within a reasonable period),
the institution’s charge-off policies should be applied.
Regulatory Reporting
Disclosures: Each
banking organization or thrift institution is encouraged, but not
required, to disclose information related to its efforts to work with
small business borrowers affected by the Hurricanes in its optional narrative
statements in the Call Report, Y-9 Report, or Thrift Financial Report
(for further information, see answer 2 to “Third Quarter 2005 Allowance for Loan and Lease
Losses”).
Credit Card Temporary Hardship and Workout Programs
The following Q&As provide additional guidance concerning the Account Management and Loss Allowance Guidance for Credit Card Lending issued by the federal banking agencies on January 8, 2003 (“Credit Card Guidance”) and the Uniform Retail Credit Classification and Account Management Policy, issued by the federal banking agencies on June 6, 2000 (“Retail Credit Policy Statement”) that may be relevant for institutions that have customers affected by Hurricane Katrina and Hurricane Rita (“the hurricanes”).
Note: The timeframes for reestablishing communications
with customers in the comments below may not be appropriate for institutions
physically located in the disaster area. These institutions should work
with their primary supervisor to determine appropriate timeframes.
Q1: May an institution place an
account in a temporary hardship program before contact with the customer
occurs?
A1: An institution may place
a customer in a temporary hardship program before making contact with
the customer. However, placing a customer in a long-term hardship program
without communication with the customer generally would not be appropriate.
Institutions should work to reestablish communications with customers
within 90 days to determine if a temporary hardship program is appropriate
for the customer’s circumstances. When contact is made, the elements of the hardship program can be modified based on the consumer’s
situation.
Q2: What should an institution
do if communication with a customer isn’t reestablished within a
reasonable timeframe, such as within 90 days?
A2: Institutions should continue
to assess their exposure to such customers. Lack of communication with
a customer for an extended period heightens the level of risk for the
account. Strategies should be developed to determine actions that will
be taken if communication is not reestablished, including ensuring that
interest and fee income is not overstated, appropriate loss allowances
are established, and losses are recognized as appropriate for these accounts.
Q3: May an institution extend the 12-month timeframe
for temporary hardship programs or the 60-month timeframe for accounts
in workout programs as set forth in the Credit Card Guidance?
A3: Temporary hardship programs
of up to 18 months may be appropriate for some customers in the affected
areas. Institutions should reevaluate the account prior to granting extensions
beyond 12 months to determine if an extension of the hardship program
is necessary for the customer. For customers in the affected areas with
accounts already enrolled in workout programs, an institution may extend
repayment timeframes for 12 months beyond the 60-month repayment target
set forth in the Credit Card Guidance to accommodate payment deferrals
and the need to lower payment amounts. Institutions should maintain appropriate
loss allowances for accounts needing the extended timeframes.
Q4: The Retail Credit Policy
Statement states that “open-end accounts should not be re-aged more
than once within any twelve-month period and no more than twice within
any five year period.” Does this policy continue to apply to accounts
of customers located in the affected areas at the time of the hurricanes?
A4: The policy statement, including the limits
described above, would continue to apply to such accounts. However,
if an institution has agreed to defer customer payments as a result
of the hurricanes, the institution may make delinquency bucket adjustments
back to the customer’s
payment status at the time of the hurricanes, which may preclude the need to
re-age the account.
Delinquency and Credit Bureau
Reporting
Q1: Should an institution temporarily
suspend reporting adverse information to the consumer reporting agencies
for customers in the affected areas?
A1: While financial institutions
are not required to report information to consumer reporting agencies,
those institutions that do furnish information are encouraged to avoid
reporting adverse information to the consumer reporting agencies for
customers located in the affected areas until conditions stabilize
and borrowers can reasonably be expected to resume payment activity.
For example, to prevent reporting adverse information to the consumer
reporting agencies, some institutions have temporarily suspended reporting
and/or maintained accounts in their payment status at the time of the
event even though payments have not been received.
Q2: If an institution cannot contact
a customer due to the hurricanes, may an institution maintain the
payment status of the customer’s account at the time of the hurricanes
until contact is reestablished?
A2: Freezing an affected account’s payment status as of the time of the hurricanes is an acceptable action to prevent the account from rolling through the delinquency buckets and to prevent fee assessments. If communication with the customer is not reestablished within 90 days of the event, the institution should evaluate whether this strategy remains appropriate, and should ensure that interest and fee income is not overstated, that appropriate allowances are established, and that losses are recognized as appropriate for this segment of the institution’s
accounts.
Retail Credit
Q1: The agencies previously provided
clarification on how the June 6, 2000 FFIEC Uniform Retail Credit
Classification Policy (“Retail Credit Policy Statement”) and the January
8, 2003 Account Management and Loss Methodology for Credit Card Lending
(“Credit Card Guidance”)
apply to credit card temporary hardship and workout programs. See
the four Q&A’s (three dated October 7, 2005 and one dated October 13,
2005) under "Credit
Card Temporary Hardship and Workout Programs." Does this guidance also
apply to other forms of retail credit, including residential mortgage
lending?
A1: Yes, with one exception. The
Retail Credit Policy Statement applies to credit cards as well as
other types of retail credit, including mortgages. Therefore, the four
Katrina Q&A’s interpreting this guidance with respect to credit cards are
also applicable to other types of retail credit. However, that portion
of question 3 of the Katrina Q&A under "Credit Card Temporary Hardship
and Workout Programs" providing
clarification on the 60 month timeframe for credit card workout programs
refers to the Credit Card Guidance and does not apply to other forms of
retail lending.
FEMA Funds
Q1: Can funds received by customers for disaster assistance under FEMA’s Individuals and Households Program (IHP) be used to reduce negative balances in deposit accounts?
A1: The Agencies encourage financial institutions to establish programs that allow affected borrowers to waive or defer monthly payments until a repayment plan can be resumed and to work with deposit customers affected by Hurricane Katrina. The Agencies recognized the importance of such flexibility in the interagency statement that was issued on September 2, 2005 (also on this website). These measures could help customers recover their financial strength and contribute to the health of the local community and the long-term interest of financial institutions and their customers. For example, institutions may need to offer temporary hardship programs that waive fees and lower interest rates and payment amounts on overdrafts for a defined period of time.
Under the regulations implementing the IHP, funds disbursed by FEMA are required to be used by applicants for specified eligible expenses relating to the disaster. FEMA requires that applicants keep receipts or bills for three years to demonstrate that the money was used in meeting the disaster-related need. Any person who knowingly misapplies the proceeds of a loan or other cash benefit under the IHP may face civil penalties (42 U.S.C. 5157). However, the IHP does not address whether financial institutions are obligated to try to segregate or track IHP funds in their customers’ accounts. Thus, under preexisting account agreements, financial institutions may have the ability to apply funds in an account, which may include IHP assistance, to reduce negative balances in the account. Nevertheless, the Agencies strongly advise financial institutions, where advised by their customers or where IHP assistance is otherwise known to the institution, not to apply such funds to reduce negative balances resulting from fees or expenses charged by the financial institution.
Municipal Bond
Obligations
Q1: How will the agencies treat
bonds issued or backed by state or local governments in the areas
affected by Hurricane Katrina and Hurricane Rita (the Hurricanes)
for supervisory classification purposes?
A1: In assessing asset quality
for supervisory purposes, the agencies generally assign an adverse
classification to bonds when ratings assigned by nationally recognized
statistical ratings organizations (NRSROs) are below investment grade.
Many bonds issued or backed by state or local
governments in the areas affected by the Hurricanes (Alabama, Louisiana,
Mississippi and Texas) have bond insurance from companies such as MBIA
and Ambac. Although the ratings agencies have, as of this date, downgraded
the stand-alone ratings of certain of the underlying issuers, the majority
of such bonds nevertheless retain their Aaa/AAA ratings because of
the bond insurance. The agencies will not assign an adverse classification
to these bonds. Insured bonds represent the bulk of debt issued by
areas impacted by the Hurricanes.
For the smaller population of non-insured
bonds, the agencies will generally classify bonds as “Substandard” when their ratings
are below investment grade. If a bond has a “split” rating
(i.e., investment grade by one rating service and non-investment grade
by another), the agencies will generally classify the holding “Substandard.” An
examiner does have limited flexibility to “pass” a non-investment
grade security holding when the institution has a robust credit risk
management framework and can document, based upon a comprehensive financial
analysis, that the security holding represents a “pass” asset
under its internal credit review program. For any bond, if impairment
(i.e., depreciation) is deemed “other than temporary” in
accordance with generally accepted accounting principles, the agencies
will classify it as “Loss.”
For non-rated bonds, the institution’s
management should monitor their exposures to assess whether these
bonds are the credit equivalent of investment grade (CEIG). If management
can document that the bonds are CEIG, the banking agencies will not
classify them.
Summary of Security Classification Policy
Bond Status |
Supervisory Classification |
Insured |
Not classified based upon Aaa/AAA
overall ratings. |
Uninsured |
Classified substandard if bonds are
rated below investment grade. Split-rated bonds generally will
be classified substandard. |
Non-Rated |
Not classified if institution can
show the bonds are credit equivalent of investment grade; if
not, then classified substandard. |
Q2: How should financial institutions
holding municipal bonds from issuers in the Hurricane-affected areas on which fair
value is less than amortized cost, assess these bonds for “other-than-temporary”
impairment for purposes of their third quarter regulatory reports (e.g., Call Report,
Thrift Financial Report, 5300 and 5310 Call Reports, Y Reports)?
A2: Under GAAP, when the fair value of a
municipal bond has declined below its amortized cost, the financial institution
holding the bond must assess whether the decline represents an “other-than-temporary”
impairment and, if so, write the cost basis of the municipal bond down to fair value
through earnings. When making this assessment, financial institutions should apply
relevant “other-than-temporary” impairment guidance as required by existing authoritative
literature which includes Financial Accounting Standards Board (FASB) Statement No. 115 and
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 59, Other
Than Temporary Impairment of Certain Investments in Debt and Equity Securities (Topic 5.M. in the
Codification of Staff Accounting Bulletins).
In this regard, if a financial institution decided prior
to the end of the third quarter that it would sell a municipal bond after quarter-end
and management did not expect the fair value of the bond, which is less than its
amortized cost, to recover prior to the expected time of sale, a write-down for
“other-than-temporary” impairment should be recognized in earnings in the institution’s
third quarter regulatory reports. Otherwise, for third quarter regulatory reports,
management should consider all information available prior to filing this report when
assessing Hurricane-affected municipal bonds for “other-than-temporary” impairment.
In each subsequent reporting period, financial institutions should continue to assess
whether any declines in fair value below amortized cost of these municipal bonds are
“other-than-temporary” impairments.