National Bank Appeals Process:
Appeal of Policy on Accounting Treatment For Cash Received as Interest on Certain Nonaccrual Loans (Fourth Quarter 1994)
A bank requested a revision in OCC policy establishing the
appropriate accounting treatment for cash received as interest on certain
nonaccrual loans, to better recognize the true economic reality of those loans. Many
of the loans in question have been returned to accrual status, or the bank is
recognizing interest income on a cash basis. The
bank asked, "At what juncture may a national bank recover into income interest
collected and held in reserve as a result of loans being placed on nonaccrual?" The
bank also requested reconsideration of OCC's position that a borrower's entire
relationship must be paid in full before any contra-interest could be taken
into income on any loan forming part of that borrowing relationship.
Background
A few years ago, at the direction of the OCC, the bank changed
its accounting method for nonaccrual loans to the cost recovery method.
Previously, the bank had maintained a contra-account to capture interest collected on nonaccrual
loans. For financial reporting
purposes, this account was reflected as a credit balance netted against the
bank's reported loan totals. As
loans were returned to accrual status, all previously deferred interest was
reversed into income, and each loan continued its course going forward based
upon its contractual terms.
The loans were not written up beyond what management expected to ultimately collect nor were
they written up beyond the contractual amount of the bank's investment in the
loans. A significant amount of
contra-interest reserves associated with these loans remains on the bank's
books as a result of the previous accounting treatment. The
bank believes it is appropriate for them to recognize as income the interest in
the existing contra-reserve account on loans for which the remaining
contractual principal and interest are considered to be fully collectible.
A significant number of the loans in question have
demonstrated positive performance since inception, but because of certain loan
documentation deficiencies were previously designated nonaccrual upon the
direction of the OCC under the so-called "performing nonperforming"
classification concept. The bank
enhanced its documentation with respect to these loans, and subsequently the
loans were returned to accrual status. Management
feels that the ultimate collectibility of the full contractual amounts was
never in doubt. In the bank's
view, the contra interest reserves for these loans were created due to a lack
of clearly supportable loan file information. Now
that the file deficiencies have been addressed, the bank believes it is
reasonable to recognize the previously deferred income.
Management believes that the cost recovery method presents a
distorted view of their expectations regarding the realization of the bank's
investment in certain of these loans (primarily the accruing loans and to a
certain degree the cash basis loans.) Also,
this method presents the potential for significant earnings boosts at the tail
end of the credit relationship, which does not accommodate a matching of
revenue recognition with the relationship's economic life. Additionally,
management is concerned about the impact that such earnings fluctuations may
have on the shareholders and the reaction of the investment community.
Further, the bank believes the OCC-preferred accounting
treatment creates a series of anomalies. First,
it encourages the bank to request customers to refinance their loans with other
institutions. This contradicts the
bank's customer-oriented philosophy, which is paramount to the bank's success
and the foundation of its business strategy. A
second option is to wait until the entire credit relationship is terminated. However,
some of these relationships are very important to the bank and may never be
terminated.
Third, the bank could wait until each individual loan, devoid of a relationship, is repaid in
full. This could create a
distortion-the ultimate recovery of interest would have no bearing on the
economic life of the asset.
The bank's external accounting firm views these loans as
analogous to an over-reserved portfolio that requires credit provisions to
reduce an overstated loan loss reserve. If
the loans are viewed from this perspective, the firm believes that in theory
the bank could have recognized the previously deferred interest amounts into
income on a cash basis, with an offsetting provision for loan losses, resulting
in the same net income effect. If
this approach would have been taken, subsequent positive adjustments could have
been recorded to reduce the loan loss reserve to recognize the improved quality
of the underlying loans and management's true expectations of net recoveries
going forward.
Accordingly, the accounting firm believes the reversal of the contra account would be acceptable
under GAAP in all material respects, given the unique nature of this situation. The
bank's ultimate objective is to obtain a solution that will result in an
accounting treatment that more closely matches the economic substance of the
bank's investment in these loans, based on the specific facts and circumstances
involved.
Discussion
The AICPA Bank Audit Guide
requires payments received on nonaccrual loans to be applied to principal to
the extent necessary to eliminate doubt as to collectibility of the recorded
balance of the loan. Otherwise,
the interest payment may be recognized as interest income on a cash basis:
If amounts are received on a loan which the accrual of interest has been
suspended, a determination should
be made about whether the payment
received should be recorded as a
reduction of the principal balance or as
interest income. If the
ultimate collectibility of principal, wholly or
partially, is in doubt, any payment
received on a loan on which the accrual
of interest has been suspended
should be applied to principal to the extent
necessary to eliminate such doubt.
The OCC's Bank Accounting
Advisory Series (Topic 2B, Question 18) specifically prohibits
immediate recognition of interest payments that have been applied to principal.
Question 18: Can
the bank, either now or when the loan is brought
contractually current, reverse the
application of interest payments
to principal?
Staff Response: No. Application
of cash interest payments to
principal is based on a
determination that principal may not be
recovered. It
should not be reversed when that determination changes.
The staff believes that in these
situations, the previously foregone
interest is recognized as interest
income when received. If the loan
eventually returns to accrual
status, the accounting would follow
the guidance in Question 16. (Question
16 states that such accruals
should be limited to the
contractual rate on the recorded balance.
Any payments in excess of that
amount should be recorded as
recoveries of previous charge-offs,
if any, or cash-basis income.)
The staff also disagrees with reversing the application of interest
payments to principal in these cases because such treatment is
analogous to using a "suspense
account" to record interest payments
when there is doubt as to the
collectibility of
the recorded principal.
Use of this type of "suspense
account" was suggested several years
ago when interest payments were
received on past due loans from
Brazil
. However,
that accounting treatment was rejected as an un-
acceptable practice by accounting
standard setters.
While the bank used an "interest reserve" account, the
substance of the accounting is that the payments were applied to principal.
GAAP requires, where there is doubt as to the collectibility of the recorded balance, that the
payments be applied to principal, not to an "interest reserve."
OCC's position has been that the application of interest payments to principal as required by
the AICPA Bank Audit Guide is equivalent to a charge-off.
The OCC does not usually permit recoveries of previously charged-off amounts to be recognized
until the recovery has been received in cash or cash equivalents.
Conclusion
The Ombudsman's Office granted the bank's appeal. The
Office of the Chief Accountant is in process of revising Questions 15 through
18 of Section 2B of the Bank Accounting
Advisory Series to reflect the accounting treatment discussed herein. The
contra interest reserves associated with the bank's four categories of loans
should be given the following accounting treatment:
1)
Accruing loans for which full collection of contractual principal and interest was never in
doubt by bank management.
Accounting involves the use of many
estimates that may later be proven
incorrect. An
"error" occurs in those situations where the original estimate
was materially incorrect based on
the facts and circumstances that existed
at the time the estimate was made
(paragraph 13 of Accounting
Principles Board Opinion No. 20.)
In this case, because of the degree
of hindsight involved, it is
difficult to assess whether an
error occurred.
To conclude that
an error occurred, the bank must
demonstrate for each non-
accrual loan, based upon the facts
and circumstances existing
at the time the interest payments
were received, that there was
no doubt as to collectibility of
the recorded balance of the loan.
To the extent that interest
payments should have been recognized
as income instead of being credited
to the contra interest reserve
account, this represents an error. If
material, the error should be
treated as a prior period
adjustment. As a prior period
adjustment,
previously issued financial
statements should be restated.
2)
Accruing loans on which collection of principal and/or interest was once in doubt but
that doubt has since been removed.
One acceptable method of handling
the existing contra interest
reserves associated with these
loans would be to limit the
interest accrual to the result
achieved by applying the contractual
rate to the recorded balance (net
of the contra interest reserve.)
Any cash interest payments received
in excess of that amount
would be recorded as interest
income on a cash basis. The
contra interest reserve is not
recognized until the recorded balance
is paid off.
Another acceptable method of handling the contra interest reserves
associated with these loans would be to recognize interest
income based on the effective yield to maturity on the loan.
This effective interest rate is the discount rate that would equate
the present value of future cash payments (principal and
interest) to the recorded amount of the loan (net of the contra
interest reserve.)
This will result in accreting the amount of
interest that was applied to principal over the remaining term
of the loan.
3)
"Cash basis" loans for which bank management expects to receive full collection of
principal but there is doubt concerning full collection of contractual interest.
The contra interest reserves
associated with these loans may
not be recognized until the loans
pay off or they are returned
to accrual status per the call
report instructions.
4)
Other nonaccrual loans.
The contra interest reserves
associated with these loans
may not be recognized until the
loans pay off or they
are returned to accrual status per
the call report
instructions.
OCC does not require a borrower's entire loan relationship to
be paid in full before the previously foregone interest may be recognized as
income. Current OCC guidance does,
however, require repayment of the recorded balance of the individual loan. The
refinancing, extension, or renewal of a loan by the bank is not considered
repayment.
APPEAL OF VIOLATION (FOURTH QUARTER
1994)
This case was initially
summarized in the June 1994 issue of the Quarterly Journal. A
revised version is included in this issue to reflect additional actions taken
during the third quarter of 1994.
Background
The Office of the Ombudsman received an appeal letter on
behalf of a bank which was cited for a violation of 12 CFR 9.12 and Opinion
9.3900.
The bank invested trust funds into two mutual funds, which are advised by an investment advisory
firm in which a bank director, who also serves on the bank's trust committee,
holds a 5.23 percent interest. Neither
of the mutual funds nor the investment advisory firm is affiliated with the
bank. The funds were invested
without obtaining prior written authorization.
First, the bank does not believe that the relationship between
the bank and the minority investment by the bank director constitutes an
affiliation sufficient to create a problem under Part 9.
None of the interests delineated in OCC Regulation, Section 9.12(a) are affected in this case:
(1)
Investment of trust funds are not made in
stock or obligations of the advisor. Indeed,
the fund may terminate its
relationship
with the advisor upon 60 days notice
without penalty at any time.
(2)
No property is acquired from affiliates of
the bank or their directors,
officers, or
employees. The
adviser does not sell
fund shares; such shares are
distributed
directly by the funds.
(3)
The bank receives no advantage from the
sale of the funds nor does the
advisor.
The bank does not believe that the bank director's minority
interest of 5.23 percent is sufficient to create a conflict of interest or a
sufficient interest to fall within the prohibitions of Section 9.12.
The bank is not purchasing services of the advisor, it is purchasing shares of the funds, which
are not affiliated with the bank and in which no bank director has an interest. Neither
does the bank believe that the bank director's service on the bank's trust
committee, even where he does not participate in such trust investment
decisions, should weigh heavily in the decision. Even
where a director has a conflict of interest, traditional corporate practice,
which is recognized by OCC, holds that by abstaining from any participation in
the discussion of, or vote upon, a matter in which such director has an
interest, such director may thereby avoid an impermissible conflict of interest
under applicable law. The bank
cites Alabama Code 10-2A-63, 12 CFR 215.4(b)(i), Section 7.5217(a) and
Alabama
code, Section 10-2A-21(d).
Second, the bank believes that the provisions of the local
law, in this case the Alabama Code, were
expressly intended to and do permit the bank to rely on such provisions in
order to invest trust funds in mutual funds that are advised by the bank or its
affiliates.
Alabama
Code, Section
19-3-120.1, expressly governs trust investments in mutual funds, and expressly
authorizes investments in mutual funds advised by bank affiliates. In
the bank's view, Section 19-3-120.1 is more than sufficient for purposes of
Section 9.12(a). The absence of
any "affiliation" between the bank and the funds raises a question in the
bank's mind as to whether reliance on the statutory authorization is even
necessary. Although the terms
"connection" and "interest" from OCC Regulation, Section 9.12(a) are broad, the
bank believes that with respect to trust mutual fund investments by a trust
department, the connection or interest must be an "affiliation" in order to
even need the protection provided by Alabama
Code, Section 19-3-120.1 for purposes of OCC Regulation 9.12.
Finally, the bank believes that recent OCC decisions allowing
bank acquisitions of companies that act as advisers to mutual funds expressly
recognized that investment companies (mutual funds) are separate and distinct
from their advisers (decision to charter J. & W. Seligman Trust Company,
N.A., and decision to charter Dreyfus National Bank & Trust Company.) The
bank also cites First Union's acquisition of Lieber Asset Management
Corporation (93-ML-08-023 and Mellon Bank's acquisition of the Dreyfus
corporation (93-NE-08-043 and 93-NE-08-044.)
Discussion
The legal issue raised by this appeal involves the conflict of
interest that may exist given the investment of trust assets in mutual funds
advised by a company in which a bank director owns stock. In
pertinent part, the OCC Regulation, Section 9.12(a), provides:
(a)
Unless lawfully authorized by the instrument
creating the relationship, or by
court order or by
local law, funds held by a national
bank fiduci-
ary shall not be invested in stock or
obligations of
or property acquired from, the bank
or its direc-
tors, officers or employees, or
individuals with
whom there exists such a connection,
or organi-
zations in which there exists such a
connection, or
organizations in which there exists
such an interest,
as might affect the exercise of the
best judgement of
the bank in acquiring the property,
or in stock or
obligations of, or property acquired
from, affiliates
of the bank or their directors,
officers or employees.
The OCC's regulation is intended to reflect and require for
national banks the duty of undivided loyalty, a basic principle of trust law
followed throughout the
United
States
. Leading
commentators on trust law emphasize the importance of the duty of loyalty and
the expected adherence to the high standard. The
focus of the duty of loyalty is to deter fiduciaries from getting into
positions involving conflicts of interest.
In the present situation, while another company is investment
advisor to the mutual funds and not the bank, the relationship of the bank
director to the advisory company falls under the circumstances proscribed by
the language of 12 CFR 9.12. Here,
at least one bank director has some type of ownership in and/or control over
the advisory company.
The fees received by the investment advisor depend in part on the assets invested in the mutual
funds. As such, the owners of the
advisor have an interest in the investments in the mutual funds. As
directors of the bank, this individual is responsible for directing and
reviewing the fiduciary powers of the bank. Accordingly,
in the ombudsman's view this situation falls within the scope of the 12 CFR
9.12 prohibition regarding the investment of funds in stock or obligations of
organizations in which there exists such an interest as might influence the
best judgment of the bank.
As provided by the language of 12 CFR 9.12(a), a self-dealing
transaction generally is permissible only when specifically authorized by the
trust instrument creating the relationship, where a court order authorized the
specific transaction, or where local law allows the otherwise prohibited
practice. In this bank's
situation, it is not argued that the trust instruments specifically authorize
the investment of trust assets in mutual funds that are advised by a company
owned in part by directors of the bank. Nor
is there any court order authorizing the transactions in question. While
the ombudsman is not aware of any Alabama statute that expressly states that a
bank may invest trust monies in mutual funds that are advised by a company
owned in part by directors of the bank, Alabama
Code, Section 19-3-120.1 (1993) does authorize banks acting as
fiduciaries to invest in mutual funds that the bank or an affiliate advises or
provides other services:
The fact that such fiduciary or any affiliate thereof is providing
services to the investment company or investment trust as an
investment advisor, custodian, transfer agent, registrar or otherwise,
and is receiving reasonable remuneration for such services, shall
not preclude such fiduciary from investing in the securities of
such investment company or investment trust; provided, however,
that with respect to any fiduciary account to which fees are
charged for such services, the fiduciary shall disclose (by
prospectus, account statement or otherwise) to the current
income beneficiaries of such account or to any third party
directing investments the basis (expressed as a percentage
of asset value or otherwise) upon which the fee is calculated.
Arguably, this section thereby authorizes investment in the
mutual funds where a greater conflict exists than that in the bank's situation.
Since the
Alabama
legislature specifically authorized investment in mutual funds where the bank
or an affiliate acts as investment advisor or provides other services, it is at
least arguable that the statute may include the situation where bank directors
own shares in the advisor even though not enough shares to be an affiliate. If
the directors owned a greater percentage of the stock (creating an even more
direct conflict), and such ownership triggered affiliation between the bank and
the advisor, then the conduct would be expressly authorized by the language of
the statute. However, we are not
aware of any cases interpreting the meaning of the statute, and there is no
official legislative history.
Conclusion
Since this is a question of law without any precedential or
official legislative history, the Ombudsman's Office chose not to render an
immediate decision. The bank was
asked to seek a formal opinion from the
Alabama
attorney general regarding the meaning and intent of the statute. Although
not binding for this Office, under the rules of statutory construction, the
formal opinions of state attorneys general are normally given considerable
deference. While waiting for
receipt of that opinion, the bank was advised not to make any more investments
in the mutual funds in question and to notify the ombudsman of the attorney
general's opinion.
For reasons unique to the State of
Alabama
, the bank requested as an alternative, and the Ombudsman's Office
agreed to accept, a similar ruling from the Alabama Superintendent of Banks. Mr.
Kenneth R. McCartha, Superintendent of Banks for the State of Alabama,
confirmed the bank's position in a letter dated August 12, 1994, that provided
his official opinion regarding the meaning and intent of the Alabama statute.
In light of the history of the legislation and the language of
Alabama code, 19-3-120.1, Superintendent McCartha concluded that banks
located in Alabama, in the exercise of their fiduciary or trust powers, are
specifically authorized by 19-3-120.1 to invest in mutual funds where such
banks, or their respective officers, directors or shareholders have an
affiliation or lesser interest in a mutual funds, or investment advisor, or
other service providers to a mutual fund.
Therefore, the Ombudsman's Office concluded, after careful
consideration of all the facts, that the most reasonable interpretation of Part
9 provides an exception for the conflict in question.
This decision is unique to the facts and circumstances of this situation and local law and in no
way establishes OCC precedent regarding conflicts of interest. Notwithstanding
this conclusion, the
Alabama
statute requires the fiduciary to provide disclosure to the current income
beneficiaries and/or any third parties directing investment of the basis on
which any investment advisory fee or other fee is calculated. The
bank did not make these disclosures and therefore the cited violations must
stand. While the bank may continue
investing fiduciary monies in the mutual funds in question, the appropriate
disclosures must be made in accordance with the local law.
APPEAL OF CRA RATING (FOURTH QUARTER
1994)
Background
A formal appeal was received concerning a bank's Community
Reinvestment Act (CRA) rating of "Needs to Improve Record of Meeting Community
Credit Needs." The bank originally
appealed the rating to the district deputy comptroller in the district in which
the bank is located.
Although substantial changes were made to the content of the performance evaluation (PE), the
Needs to Improve rating was upheld during that appeal. The
bank's main office and branch are located in a large metropolitan area. The
bank's delineated community is made up of predominantly low-and moderate-income
census tracts.
The following statement was provided as the Basis for Appeal:
The Bank respectfully submits that the OCC erred
in assigning a Needs to Impove rating to the bank's
CRA performance by:
(1)
Placing undue emphasis on the bank's loan to
deposit ratio;
(2)
Placing undue emphasis on the absence of
classified loans;
(3) Not
placing sufficient weight on the unique
characteristics of the bank's
delineated
community; and,
(4)
Ruling that the referral mortgage applicants
to an unaffiliated mortgage
company does
not count toward the bank's
fulfillment
of its obligations under the CRA.
The bank asked for the following:
The bank respectfully requests that the revised PE
be amended to assign the bank a Satisfactory
CRA rating, and that the OCC provide the bank
with more specific and objective guidance con-
cerning the loan to deposit ratio the bank is ex-
pected to achieve and maintain.
The bank goes on to state that "the bank's appeal to the
district confirmed what the bank had thought was the case when it received the
initial PE - the Needs to Improve rating was driven almost exclusively by the
bank's loan to deposit ratio. The
OCC's position presently seems to be that the bank is too rigid, in that it
continues to use underwriting standards that were appropriate in the early
1980s after the bank's former owners had driven it to the brink of insolvency,
but which are no longer appropriate given the bank's current CAMEL 1 safety and
soundness rating."
Discussion
The four reasons the bank felt the Needs to Improve rating was
assigned were reviewed in detail. An
independent examiner, who is considered an expert in CRA, reviewed the
examination workpapers and the information presented in the bank's two appeals
and went to the bank to review data onsite. He,
along with the ombudsman, also toured the local community. Information
through the date when the second PE was issued was reviewed.
Each of the four reasons the bank cited for the rating is
discussed below.
Placing undue emphasis on
the bank's loan to deposit ratio: The
bank has historically had a loan to deposit ratio under 20 percent. In
the appeal letter, the bank lists the following as special circumstances
explaining why the bank has a low loan to deposit ratio:
(1) There
is low loan demand in the bank's delineated community;
(2) There is a low level of
owner-occupied housing in the bank's
delineated community;
(3) The competition for loans and
loan participations in the
bank's delineated community is substantial;
(4) The large banks are
aggressively seeking loans in the
bank's delineated community, thereby placing the bank
in
a difficult competitive posture;
(5) The
dollar amount of the loans that the bank has lost
to large banks has been difficult
to replace,
particularly in view of the small
size of the loans
that are being sought by the
bank's customers; and,
(6) The
banking relationships of the public and private
sector institutions in the bank's
community have to
a large extent been maintained
with the large banks,
not with small banks like this
bank.
Prior to the revised PE being issued by the district, the
board of directors amended the loan policy with the intent of making it more
flexible. The loan policy changes
included:
-
The minimum amount for an installment loan was
formally reduced to $500 from the
previous $2,000;
-
The requirement for installment loans that applicants
have lived at their current address
for at least 3 years
or moved fewer than 3 times in 5
years was eliminated;
-
The advance rate on new car loans was increased to
90 percent from 80 percent, and the
maximum term
increased from 48 months to 60
months;
-
The requirement that an applicant have a credit
bureau record at least 3 years old
was removed;
-
For unsecured credit, the requirement that an
applicant be an existing customer
of the bank
was removed;
-
The maximum loan-to-value on real estate loans
was increased as follows:
n
First mortgages on investor 1-4 family
properties from 70 percent to 75
percent;
n
Home equity lines from 70 percent to 80
percent;
n
Commercial real estate from 70 percent to 80
percent;
n
Cooperative loans from 70 percent to 80 percent;
n
Home improvement loans from 80 percent to 100
percent for loans less than $15M, and
from
80 percent to 95 percent for loans
greater than
$15M;
-
Thirty-year, fixed-rate mortgages were offered for
the first time (written to Federal
National Mortgage
Association guidelines to be sold
into the secondary
market.)
From reviewing loans it was found that greater flexibility
could have been used in evaluating the requests. It
is believed that with proper marketing of the changes that the board of
directors made in the recent revisions to the loan policy, there are additional
legitimate credit needs that can be met by the bank.
We agree too much emphasis was placed on the bank's loan to
deposit ratio in the PE. Formulating
conclusions on the ratio alone is inappropriate. One
must analyze the reasons why the ratio is low and assess the bank's performance
with that in mind.
Placing undue emphasis on
the absence of classified loans. Inordinate
emphasis was not placed on the bank's low level of classified loans. The
OCC would never expect a bank to originate extensions of credit that would in
any way compromise the overall financial condition of a bank. Such
a practice would contravene traditional principles of safe and sound banking. However,
the institution was told that based on their strong financial condition that
they are in the position to look at alternative methods to meet the credit
needs of their community in ways other than direct lending.
Not placing sufficient
weight on the unique characteristics of the bank's delineated community.
The bank is located in an area that possesses unique characteristics when compared to a
number of other community banks. The
bank was encouraged to use these unique characteristics to its advantage. The
bank had commissioned a consulting firm to code the locations of its loans and
deposits. It was found that most
were concentrated around the locations of the main bank and branch.
Therefore, it was determined that the bank's delineated community was too large.
Through further analysis, the bank should be able to fully evaluate its deposit and lending
trends in the smaller delineated community. This
should enhance the institution's effectiveness in marketing its products, and
its ability to communicate to the community the recently revised underwriting
standards and product mix. The
bank was encouraged to keep education of the bank's community a high priority.
Ruling that the referral
of mortgage applicants to an unaffiliated mortgage company does not count
toward the bank's fulfillment of its obligations under CRA.
The demand for 1-4 family residential loans in the bank's delineated community is low due to the
demographics of the area. While
the bank has historically referred customers requesting 30-year loans to an
unaffiliated mortgage company, the bank recently relaxed its loan policy to
begin offering 30-year, fixed-rate mortgages (using FNMA guidelines) to be sold
into the secondary market. This is
a positive step; however, since the demand for these types of loans is low, the
bank was encouraged to identify other ways to assist the bank's community in
meeting its housing-related credit needs.
Conclusion
While the four reasons the bank felt the Needs to Improve
rating was assigned were being reviewed in detail, a comprehensive reassessment
of the bank's overall CRA performance was conducted. After
careful review, it was found that a Needs to Improve rating accurately reflects
the bank's performance during the period of evaluation covered in the bank's
PE. Although there was too much
emphasis placed on the bank's loan to deposit ratio in the PE, the overall
rating of Needs to Improve was accurate. The
rating is based primarily on the bank's performance associated with its limited
flexibility in lending decisions.
It is evident that management and the board of directors have
taken steps to enhance the performance since the examination. As
evidenced by the board of directors' approval of the changes in the loan
policy, management and the directors have recognized the bank's ability to be
more flexible in its lending standards without sacrificing quality.
Although it appears the bank's loan demand is relatively low and the level of market competition
has increased because of the movement of large institutions into the bank's
area, it is believed that through revising the bank's standards, offering new
products, aggressively educating the bank's delineated community, and marketing
these products effectively, the bank will find additional credit needs that can
be met.
The bank is uniquely postured to materially benefit from an elevated level of community
development activities. Focused
efforts in this area should result in improved CRA performance.
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