Risk Management Manual of Examination Policies - FDIC

LOANS Section 3.2
consistent with the FDIC's standards regarding the
identification and charge-off of such loans; and
• There are no material deviations from the FDIC's
standards.
Minor criticisms of the bank's loan review process as it
relates to loan charge-offs or immaterial individual
deviations from the FDIC's standards should not preclude
the issuance of an "express determination" letter.
An "express determination" letter should not be issued if:
• The bank's loan review process relating to charge-offs
is subject to significant criticism;
• Loan charge-offs reported in the Report of Condition
and Income (Call Reports) are consistently overstated
or understated; or
• There is a pattern of loan charge-offs not being
recognized in the appropriate year.
When the issuance of an "express determination" letter is
appropriate, it should be prepared on FDIC letterhead
using the following format. The letter should be signed
and dated by the examiner-in-charge and provided to the
bank for its files. The letter is not part of the Report of
Examination.
Express Determination Letter for IRS Regulation 1.166-
2(d)(3)
“In connection with the most recent examination of [Name
of Bank], by the Federal Deposit Insurance Corporation, as
of [examination date], we reviewed the institution’s loan
review process as it relates to loan charge-offs. Based on
our review, we concluded that the bank, as of that date,
maintained and applied loan loss classification standards
that were consistent with regulatory standards regarding
loan charge-offs.
This statement is made on the basis of a review that was
conducted in accordance with our normal examination
procedures and criteria. It does not in any way limit or
preclude any formal or informal supervisory action
(including enforcement actions) by this supervisory
authority relating to the institution’s loan review process or
the level at which it maintains its allowance for loan and
lease losses.
[signature]
Examiner-in-charge
[date signed]
When an "express determination" letter is issued to a bank,
a copy of the letter as well as documentation of the work
performed by examiners in their review of the bank's loan
loss classification standards should be maintained in the
workpapers. A copy of the letter should also be forwarded
to the Regional Office with the Report of Examination.
The issuance of an “express determination” letter should be
noted in the Report of Examination according to procedure
in the Report of Examination Instructions.
When an examiner-in-charge concludes that the conditions
for issuing a requested "express determination" letter have
not been met, the examiner-in-charge should discuss the
reasons for this conclusion with the Regional Office. The
examiner-in-charge should then advise bank management
that the letter cannot be issued and explain the basis for
this conclusion. A comment indicating that a requested
"express determination" letter could not be issued, together
with a brief statement of the reasons for not issuing the
letter are addressed in the Report of Examination
Instructions.
CONCENTRATIONS
Generally a concentration is a significantly large volume of
economically-related assets that an institution has advanced
or committed to one person, entity, or affiliated group.
These assets may in the aggregate present a substantial risk
to the safety and soundness of the institution. Adequate
diversification of risk allows the institution to avoid the
excessive risks imposed by credit concentrations. It should
also be recognized, however, that factors such as location
and economic environment of the area limit some
institutions' ability to diversify. Where reasonable
diversification realistically cannot be achieved, the
resultant concentration calls for capital levels higher than
the regulatory minimums.
Concentrations generally are not inherently bad, but do add
a dimension of risk which the management of the
institution should consider when formulating plans and
policies. In formulating these policies, management
should, at a minimum, address goals for portfolio mix and
limits within the loan and other asset categories. The
institution's business strategy, management expertise and
location should be considered when reviewing the policy.
Management should also consider the need to track and
monitor the economic and financial condition of specific
geographic locations, industries and groups of borrowers in
which the bank has invested heavily. All concentrations
should be monitored closely by management and receive a
more in-depth review than the diversified portions of the
institution's assets. Failure to monitor concentrations can
DSC Risk Management Manual of Examination Policies 3.2-51 Loans (12-04)
Federal Deposit Insurance Corporation