FR Y-8 Report. Bank Holding Company Report of Insured Depository Institutions Section 23.A Transactions with Affiliates

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1 FR Y-8 Report Bank Holding Company Report of Insured Depository Institutions Section 23.A Transactions with Affiliates

2 Overview Background of FR Y-8 4 steps to determine reporting requirements Affiliate Covered Transaction Exempt vs. Non-Exempt Section 23.A Completing the forms Reporting deadlines 2

3 Background When did it all begin? 1975 Bank Holding Company Intercompany Transactions and Balances Intent o Identify loans/exposures and asset transfers that potentially affect the bank s liquidity or soundness Regulation W 3

4 Regulation W Formally implements sections 23.A and 23.B of the Federal Reserve Act, including amendments under the 1999 Gramm-Leach- Bliley Act (GLBA) and numerous Board of Directors (Board) interpretations 23.A Relations with Affiliates (definitions, limitations, collateral) 23.B Restrictions on Transactions with Affiliates (market terms) 4

5 5 Who Files the FR Y-8?

6 The FR Y-8 Comprises a Cover page, a Declaration Page, and a Report Form Page 6

7 7 These are the report form pages (also referred to as the financial pages)

8 Part A and B Attestation page The DI has no transactions with affiliates pursuant to Reg. W The DI does not control any financial subsidiaries The DI does not have any derivative transactions outstanding with affiliates 8

9 DECLARATION The insured depository institution (IDI) does not have to complete Page 3 or Page 4 of this report if the insured depository institution meets all of the criteria in Part A or Part B of the Declaration page. 9

10 FR Y-8 Form Instructions: _i.pdf Comprehensive Review of Regulation W: Common Intercompany Transactions: eserveact2012.htm 10

11 Step 1: The first step is determining your affiliates. 11

12 What is an Affiliate? An Affiliate is Company Partnership LLC Business Trust or similar entity An Affiliate is NOT A natural person Sole Proprietorship unless in some manner the transaction benefits an affiliate Attribution Rule 12

13 Affiliate An Affiliate of an insured depository institution (DI) includes: A company that controls the insured DI Owns or controls 25 percent or more of the equity capital or power to vote 25 percent or more of any class of the voting securities Ownership or control of 15 percent or more of the equity capital of a portfolio company, per the GLBA A company under common control with the DI A company that is sponsored and advised by the DI 13

14 Affiliate An insured subsidiary depository institution (sub of bank) for Reg. W purposes, this type of affiliate would be atypical as it creates a quasi-hc entity. A financial subsidiary does not include insurance/securities type of operating subsidiaries. An operating subsidiary is different than the definition of financial subsidiary for Reg. W purposes, which is any subsidiary that engages in activities that are not permissible for national or state banks to conduct directly. Certain ESOP and joint venture subsidiaries * For more examples and clarification refer to the glossary in the FR Y-8 instructions, page GL-1. 14

15 Peterson s Arcade and Games; Husband Jim, owns 100% Cindy s Jewelry, owns 100% Bill s Auto Mall, LLC owns 100% Spotless Car Wash, Co. Bill owns 20% Bill Lindquist (owns 25% of BHC) John s Orchard owns 100% John Johnson (owns 10% of BHC) Johnson Hardware owned 100% by Adam (50%) and John (50%) Adam Johnson (owns 20% of BHC) Beowulf Bar and Grill Adam owns 50% Anderson Travel Sandy owns 100% Sandy Anderson (owns 5% of BHC) Cindy Peterson (owns 40% of BHC) Mayberry Holding Company (BHC) Affiliate Data Inc, Cindy is a 10% Shareholder 100% Mayberry Community Bank 100% Mayberry Insurance Co. Affiliate 15

16 Affiliate Review the following relationships: Parent Parent subsidiaries Other companies directly or indirectly controlled by the bank s shareholders (i.e. shared Board members) Companies sponsored and advised on a contractual basis by the bank or any subsidiary or affiliate of the bank Any company so designated by the Board 16

17 Affiliate Defining Control Directly or indirectly acting through one or more other persons, owns, controls, or has power to vote 25 percent of the other company (i.e. shared Board of Directors) Company or shareholder controls the election of a majority of the directors, trustees, or general partners Determined by a Federal Reserve Bank and/or Board of Governors 17

18 Affiliate Would not include the following... A company engaged solely in holding the premises of the insured depository institution A company engaged solely in conducting a safe deposit business Any company engaged solely in holding obligations of the U.S. Government or its agencies Any company where control results from the exercise of rights arising from a debt previously contracted (DPC) * For more examples and clarification refer to the glossary in the FR Y-8 instructions, page GL-1. 18

19 Peterson s Arcade and Games; Husband Jim, owns 100% Affiliate Cindy s Jewelry, owns 100% Affiliate Bill s Auto Mall, LLC owns 100% Affiliate Spotless Car Wash, Co. Bill owns 20% Bill Lindquist (owns 25% of BHC) John s Orchard owns 100% John Johnson (owns 10% of BHC) Johnson Hardware owned 100% by Adam (50%) and John (50%) Affiliate Adam Johnson (owns 20% of BHC) Beowulf Bar and Grill Adam owns 50% Anderson Travel Sandy owns 100% Sandy Anderson (owns 5% of BHC) Cindy Peterson (owns 40% of BHC) Mayberry Bank Holding Company (BHC) Affiliate Data Inc, Cindy is a 10% Shareholder (Affiliate?) 100% Mayberry Community Bank 100% Mayberry Insurance Co. Affiliate 19

20 Step 1 Affiliate or Non-Affiliate? Decide if transactions involving the reporting depository institution are with: Non-Affiliates Affiliates If all transactions are with non-affiliates and there is no Financial Subsidiary, sign the declaration page and submit the report Continue to Step 2 20

21 Step 2: Does the Affiliate have any Covered Transactions? 21

22 Step 2 Covered Transaction? Identify whether a transaction with affiliate is a Covered Transaction : 1. Loans or extensions of credit to an affiliate; 2. Purchase of or investment in securities issued by an affiliate or by financial subsidiary of insured DI by one of insured DI s affiliates; 3. Purchase of assets from an affiliate (purchasing a building from the HC exempt???); 22

23 Step 2 Covered Transaction? 4. Acceptance of securities issued by an affiliate for loan collateral to any person or company; 5. Issuance of guarantee, acceptance, or letter of credit on behalf of an affiliate; and 6. Engagement in any of the above with a third party (individual or legal entity) where proceeds were transferred or used for the benefit of an affiliate. (Attribution Rule) 23

24 What qualifies as a Loan or Extension of Credit? Mayberry Community Bank Loans or Extension of Credit to Affiliates 24

25 Extensions of Credit examples An advance to an affiliate overdraft Selling federal funds to an affiliate A lease that is the functional equivalent of a loan Purchasing a note or other security obligation Commercial Paper Debt Securities Material change in note structure Loan amount Maturity Any transaction where an affiliate becomes obligated to pay money to the member bank 25

26 Overdrafts for Affiliates FYI To avoid problems with overdrafts... Have written agreement in place; Have designated collateral pledged; Have an overdraft fee charged (if other customers of the bank are charged in similar circumstances); and Track overdrafts at a central location to ensure compliance with the 10 percent/20 percent limitation. 26

27 Step 2 Covered Transaction? Attribution Rule A transaction by a member bank with any person shall be deemed a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, that affiliate. 12 USC 371.c(A)(2) USC United States Code 27

28 Step 2 Covered Transaction? Types of transactions which could be Covered Transactions: Loans/Deposits Payables/Receivables Management/Service Fees Asset Purchases/Sales/Transfers Loan Participations Dividend in Kind 28

29 Examples... Loans/Deposits Bank-to-bank transactions are not covered transactions under the regulation (sister bank transactions are exempt), but are subject to the prohibition of low-quality assets Loan (and deposit) rates should be at market and interest paid promptly as due 29

30 Examples... Payables/Receivables Payables and receivables are created when one entity provides a service or makes payment on behalf of other affiliates These types of transactions must be settled in a reasonable time frame in order to comply with Section 23.B 30

31 Examples... Management/Service Fees Parent/Affiliate must actually be providing a service Market value of similar services is the preferred basis of fee assessment 23.B Direct allocation where possible Supported by written agreements Billed and paid as service is received Forbidden to pay management fees if institution would become undercapitalized 31

32 Examples... Asset Purchases/Sales/Transfers Sale of Asset Bank to Parent or Nonbank The transaction must be arm s length to satisfy 23.B requirements Assets should be transferred at fair market value with appropriate write-offs taken before transfer The HC s funding of the purchase should be considered don t want to see bank funding the HC s purchase of bank assets The parent company may need approval or file a notice pursuant to Regulation Y if loans are purchased 32

33 Examples... Asset Purchases/Sales/Transfers HC wants to sell the building to the bank Does the bank use substantially all of the space? Need an appraisal to determine value Parent needs to write down the property to market value Sale is made at the lower of carrying or market value Could be exempt? 33

34 Examples... Asset Purchases/Sales/Transfers Transferring Assets Nonbank subsidiary Moves bad assets off the bank s books Puts earning assets and capital into the bank Trigger a reportable Y-8 transaction? 34

35 Examples... Asset Purchases/Sales/Transfers Loan Participations General prohibition on the transfer of low-quality assets Must be at market rates and at arm s length Effect of transaction on financial condition of the bank Bank cannot purchase more than 50 percent of assets generated by an affiliate 35

36 Examples... Asset Purchases/Sales/Transfers Loan Participations May not be a covered transaction if: The bank makes an independent credit evaluation on each loan prior to the affiliate making the loan The bank agrees to purchase the loan prior to the affiliate making the loan The bank s purchase of the loan is not the primary source of funding for the affiliate, and Without recourse 36

37 No Covered Transactions If transactions with affiliates do not fall into one of the transaction categories previously listed and the depository institution does not have financial subsidiaries, then they do not have covered transactions Sign declaration page and submit report If declaration page is signed, the financial page should be left blank. 37

38 Declaration Page in Reporting Central 38

39 Regulation W If a covered transaction is made with an affiliate, it must comply with the following requirements under Regulation W, sections 23.A and 23.B: Safety and Soundness Requirement no exemption allowed; all transactions must be on terms and conditions consistent with safe and sound banking practices (section 23.A) Market Terms Requirement (section 23.B) Valuation and Timing Rules determines the amount of covered transaction subject to collateralization and quantitative limits (section 23.A) 39

40 Market Terms Requirement Section 23.B Requires that certain transactions, including all covered transactions be on market terms and conditions, as follows: On terms and under circumstances, including credit standards, that are substantially the same as those prevailing for comparable transactions. In the absence of comparable transactions, the bank must use terms, including credit standards, that in good faith would be offered to nonaffiliated companies. 40

41 Market Terms Requirement Section 23.B Market Terms Requirement applies to all of the following: All covered transactions; Sales of assets by the bank to affiliates; Payment of money or furnishing of services by the bank to an affiliate; Transactions where affiliate serves as agent or broker for the bank or any other person if the bank is a participant in the transaction; and Transactions by the bank with a third party if affiliate has a financial interest with third party or affiliate is a participant in the transaction. 41

42 Step 3 Exempt or Non-Exempt? Is the covered transaction exempt from quantitative limits or collateralization requirements? 42

43 Exempt Covered Transactions Purchases of marketable securities from a securities affiliate are exempt if: Securities affiliate is a SEC-registered broker-dealer; Security has a ready market, and price is quoted routinely on an unaffiliated electronic, real-time service; Security is eligible for a state member bank to purchase directly and the bank records the transaction as a purchase of a security for Call Report purposes; Bank does not purchase the security within 30 days of an underwriting (see regulation for exceptions); and Additional minor stipulations contained in regulation; 43

44 Exempt Covered Transactions Sister bank transactions (80 percent or more owned); Credit on uncollected items in the normal course of business; Correspondent banking deposits; Secured or guaranteed by obligations of the U.S. or its agencies; Secured with cash by a segregated, earmarked deposit account with the insured depository institution for the sole purpose of securing covered transactions (generally a time deposit); 44

45 Exempt Covered Transactions Purchasing securities of a servicing affiliate (as described in Section 4(c)(1) of the BHC Act of 1956); Municipal securities purchased from a securities affiliate (see regulation for requirements); Asset purchases by a newly formed bank (as approved by the appropriate federal banking agency); 45

46 Exempt Covered Transactions Agency transactions affiliate only acts as an agent in an asset sale to a third party; Riskless principal affiliate only acts as an agent and no affiliate of the bank is involved in the issuance or underwriting of a security; Fees Normal in the course of business; Non-Recourse Loan Purchases from an affiliated insured depository institution; 46

47 Exempt Covered Transactions Intraday credit to affiliates; Credit cards no more than 25 percent of total charges on the card are associated with affiliates; Certain internal corporate reorganizations; Merger or Purchase and Assumption activities; and Any transaction the Board of Governors has declared exempt. 47

48 Exempt Covered Transactions Exemptions to the Attribution Rule: Affiliates acting as agents/brokers as long as the affiliate does not retain any portion of the loan proceeds as a fee or commission (outside of a market-rate brokerage or agency fee); If the security purchased was issued by another affiliate, then exemption would not apply Loan proceeds from the bank are used to purchase securities issued by a third party through a broker-dealer affiliate of the bank that acts as riskless principal; and Pre-existing (not preapproved) line of credit to a customer who uses it to purchase securities from a registered broker-dealer affiliate. 48

49 Step 3 Exempt or Non-Exempt? Determine whether covered transactions with affiliates are: Exempt or Non-exempt If all transactions with affiliates are exempt and there are no Financial Subsidiaries, sign the declaration page See page GL-3 and 4 for exempt info. Continue to Step 4 49

50 Exercise 1 Mayberry Bank Holding Company (BHC) obtained a $3.25 million loan from its 100 percent owned subsidiary bank, Mayberry Community Bank, during the second quarter. The loan was made on June 30 and is fully secured by U.S. Treasury notes. Is Mayberry Holding Company an affiliate? Is this a covered transaction? Is this transaction exempt or nonexempt? 50

51 Exercise 1 Answer Is Mayberry Holding Company an affiliate? Yes Is this a covered transaction? Yes Is this transaction exempt or nonexempt? Exempt, guaranteed by U.S. Treasury securities 51

52 Step 4 - Section 23.A - Non-Exempt Limits aggregate amount of covered transactions between insured depository institution and any single affiliate <= 10 percent of DI s capital stock and surplus Limits aggregate amount of covered transactions with all affiliates <= 20 percent of DI s capital stock and surplus Requires certain covered transactions between insured DI and its affiliate(s) to meet collateral requirements defined by statute 52

53 Step 4 - Section 23.A - Non-Exempt Capital Stock and Surplus defined as: Tier 1 + Tier 2 + ALLL not included in Tier 2 as of the most recent Call Report Adjusted for financial subsidiary (can add back capital stock and surplus of the sub that counts as a covered transaction and is required to be deducted from the bank s capital for regulatory capital purposes) 53

54 Section 23.A Collateral Requirements Types of Collateral 100 percent obligations of the U.S. or its agencies 110 percent obligations of state and political subdivisions 120 percent debt instruments (loans and other receivables) 130 percent stock, leases, other real or personal property, or bank owned life insurance (BOLI) Ineligible collateral 54

55 Collateral Perfection and Priority Must be a first priority security interest or have enough value in a subordinated position Retired or amortized collateral must be replaced with eligible collateral Review the note s collateral on at least an annual basis 55

56 Bank Owned Life Insurance as Collateral Example BHC Borrowing from Subsidiary Split Dollar Life Insurance Endorsement plan Quantitative limits Collateral requirements if the bank is paying all or substantially all of the premiums, an unsecured extension of credit to the parent generally results 23.B market terms Collateral assignment plan Quantitative limits Cash surrender value must be 130 percent of the loan or would need additional collateral 23.B market terms on loan to parent 56

57 Bank Owned Life Insurance as Collateral Example Split Dollar Life Insurance Endorsement plans Bank owns the policy and pays all (or most) of the premiums; is reimbursed for premium payments at some time in the future Collateral assignment plans Parent owns the policy and pays the premium; uses the policy as collateral for loans from its subsidiary bank 57

58 Ineligible Collateral Low-quality assets Securities issued by any affiliate Equity securities issued by the member bank; and debt securities issued by the member bank that represent regulatory capital of the member bank Intangible assets (including servicing rights) Guarantees, Letters of Credit, and other similar instruments 58

59 Low Quality Asset (Section 223.3) 1) An asset (including a security) classified as Substandard, Doubtful, or Loss, or treated as Special Mention or Other Transfer Risk Problems, either in the most recent Report of Examination or inspection of an affiliate prepared by either a Federal or State supervisory agency or in any internal classification system used by the member bank or the affiliate (including an asset that receives a rating that is substantially equivalent to classified or special mention in the internal system of the member bank or affiliate) 2) An asset in a nonaccrual status 59

60 Low Quality Asset (Section 223.3) 3) An asset on which principal or interest payments are more than 30 days past due 4) An asset whose terms have been renegotiated or compromised due to the deteriorating financial condition of the obligor 5) An asset acquired through foreclosure, repossession, or otherwise in satisfaction of a debt previously contracted, if the asset has not yet been reviewed in an examination or inspection 60

61 Low Quality Asset (Section 223.3) Examples Loans: criticized, classified, nonaccrual, 30 days or more past due, renegotiated, or otherwise deemed so by examiner or the institution s internal rating system Securities: depreciated or sub-investment grade Other: include other real estate owned (OREO) until examined 61

62 Step 4 Subject to Section 23.A? Are non-exempt covered transactions with affiliates (other than financial subsidiaries) or transactions with financial subsidiaries subject to Section 23.A collateral requirements? Subject to (reported on line 1): Loan to or extension of credit to an affiliate Issuance of guarantee, acceptance, or LOC on behalf of an affiliate LOC that has been advanced upon must be secured (100 percent, 110 percent, 120 percent, or 130 percent) Not subject to (reported on line 2): Purchase of or investment in securities issued by an affiliate Purchase of assets from an affiliate Acceptance of securities issued by an affiliate for loan collateral to any person or company Unused portion of line of credit to affiliate(s) 62

63 Loan Example With All 4 Steps A car dealer owns 25 percent of BHC stock and 100 percent of a car dealership. A loan to his car dealership and any of the car dealership s customers would be treated as a covered transaction and be subject to the collateral requirements and capital limits. The car dealer is an affiliate The covered transaction is the loan to the customer (see Attribution Rule) Subject to 23.A Non-exempt (must meet collateral requirements) The loan is Non-exempt (must meet 10% capital limitations for aggregate amount) 63

64 Financial Subsidiaries A subsidiary of the bank that engages in activities that national banks are not allowed to engage in directly Section 5136A of the Revised Statutes of the United States Does not include a subsidiary engaged solely in the sale of 3 rd party insurance/securities as an agent or broker Lines 3 through 7 are to be filled out by all HC s with insured depository institutions that control a financial subsidiary (i.e. you must be a Financial Holding Company (FHC) to qualify) 64

65 Step 4 Subject to Section 23.A for Financial Subsidiaries of FHC? Line 3 Covered Transactions subject to section 23.A collateral requirements between the IDI and financial subsidiaries Line 4 Covered Transactions not subject to section 23.A collateral requirements between the IDI and financial subsidiaries Line 5 Purchase of, or investment in, securities issued by financial subsidiaries of IDIs by the IDI Equity securities (Exclude retained earnings) Debt securities 65

66 Step 4 Subject to Section 23.A for Financial Subsidiaries of FHC? Line 6 Purchase of, or investment in, securities issued by financial subsidiaries of IDIs by affiliates of the IDI Equity securities (Exclude retained earnings) Debt securities Line 7 Loans or other extensions of credit by affiliates of the IDI to the financial subsidiaries of the IDI (not subject to section 23.A) 66

67 Valuation of Transactions Loans maximum amount of indebtedness that could occur is broken out in line 1 (draw down amount) and line 2 (unused LOC) Asset purchases total amount of consideration provided (Carrying versus market value) Investment in affiliate securities greater of total consideration provided and carrying value of the securities on bank s books Loans secured by affiliate securities lesser of the amount of the loan or fair market value of the securities 67

68 Timing of Transactions Covered transactions must be reported as long as the purchased asset or funded loan remains on the reporting DI s books Exceptions involving acquisitions or mergers which result in an entity becoming an affiliate may occur 68

69 Recap Decision Tree Step 1 Affiliate or Non-Affiliate? Affiliate continue Non-Affiliate sign declaration page Step 2 Is it a Covered Transaction? If yes, then continue If not, sign declaration page Step 3 Exempt or Non-Exempt? If Non-exempt, then continue If Exempt, then sign declaration page Step 4 Subject to Section 23.A? Subject to (line 1) Not subject to (line 2) Lines

70 Completing the Financial Page Do not complete any part of this page if the declaration page was signed Part I Checkbox 2 A 1 indicates that the depository institution has covered transactions with financial subsidiaries only and lines 1 and 2 should be left blank Lines 3-7 for transactions with financial subsidiaries should be completed (FHC only), even if it is only zeros for all the line items Column A is the quarter-end aggregate amount and Column B is the maximum aggregate amount during the quarter 70

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73 Financial Page (cont d) Part I Checkbox 3 A 1 indicates that depository institution does not own financial subsidiaries and lines 1 and 2 should be completed If checkbox contains a 1, lines 3-7 containing information about depository institution transactions with financial subsidiaries should be left blank Memorandum 1 Respondents should determine an end of day aggregate total for all covered transactions for each day of the quarter (lines 1-6) and report the largest single end of day total for the quarter 73

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75 75 One Last Thing

76 Financial Page, Part II HCs only complete this page if the HC has an insured depository institution (IDI) that engages in derivative transaction w/an affiliate (Exclude credit derivatives that are included in Part I.) 76

77 Financial Page (cont d) Part II Line 1 Positive fair value of derivative transactions between DI and affiliate Report when an affiliate is the counterparty Can be netted under FIN 39 Line 2 Amount of collateral pledged to the DI to secure derivative contracts between the DI and the affiliate Report the market value of collateral Typically cash or Treasuries Line 3 Notional amount of derivative contracts between the DI and the affiliate Report the notional value of contracts with positive and negative fair values 77

78 Financial Page Part II in Reporting Central 78

79 FR Y-8 Report Deadlines Completed FR Y-8 reports are due to the Federal Reserve within 30 calendar days following quarter end by 5pm Reserve Bank time on: April 30 July 30 October 30 January 30 For the most part, this deadline follows the Call Report. The date will roll to the next business day if the deadline date is a weekend/holiday. 79

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81 Exercise 2 Cindy Peterson owns 40 percent of the voting shares of Mayberry BHC, which owns 100 percent of Mayberry Community Bank. Cindy Peterson also owns 10% of a newly formed company, Data, Inc. Mayberry Community Bank purchased 10,000 shares of Data, Inc. common stock, at a par value of $5/share on June 29. Note: Data, Inc. shares the same Board of Directors as the BHC. Is Data, Inc., an affiliate? Is this a covered transaction? Is it subject to Section 23.A collateral requirements? Where would it be reported on the FR Y-8 report? 81

82 Exercise 2 Answers Is Data, Inc. an affiliate? Yes, because Data, Inc. shares a Board of Directors with the BHC Is this a covered transaction? Yes Is it subject to Section 23.A collateral requirements? No, because it is not a loan. Where would it be reported on the FR Y-8 report? It would be reported on the financial page, line item 2 (Columns A and B), covered transactions NOT subject to Section 23A collateral requirements and Memorandum line 1. Note this is reported as $50 (in thousands). 82

83 83 Exercise 2 in Reporting Central

84 Exercise 3 Mayberry Community Bank makes a $1,000,000 loan to Mayberry Insurance Co., to build a new building and purchase equipment. The affiliate posts as collateral for the loan the following: $500,000 in U.S. Treasury securities $480,000 in corporate debt securities $130,000 in real estate Does the collateral satisfy Section 23.A requirements for a transaction with an affiliate? 84

85 Exercise 3 Answers YES! $500,000 of the loan is 100% secured by obligations of the U.S. $500,000/$500,000=1.0*100=100% $400,000 of the loan is 120% secured by debt instruments $480,000/$400,000=1.2*100=120% $100,000 of the loan is 130% secured by real estate $130,000/$100,000=1.3*100=130% 85

86 Exercise 4 Mayberry Bank lends Johnson Hardware, (100 percent owned by BHC shareholders Adam and John Johnson) $2.0M to fund an expansion project. Is Johnson Hardware an affiliate? Is this a covered transaction? Is it subject to Section 23.A collateral requirements? Where would it be reported on the FR Y-8 report? 86

87 Exercise 4 Answers Is Johnson Hardware an affiliate? Yes Is this a covered transaction? Yes Is it subject to Section 23.A collateral requirements? Yes Where would it be reported on the FR Y-8 report? It would be reported on the financial page, line item 1 (Columns A and B), covered transactions subject to Section 23A collateral requirements and Memorandum line 1. 87

88 88 Exercise 4 in Reporting Central

89 Exercise 5 Mayberry Bank lends Anderson Travel, (100 percent owned by BHC shareholder Sandy Anderson) $50K to fund the development and marketing of her travel Internet site and catalogs for mailings. Is Anderson Travel an affiliate? Is this a covered transaction? Is it subject to Section 23.A collateral requirements? Where would it be reported on the FR Y-8 report? 89

90 Exercise 5 Answers Is Anderson Travel an affiliate? No Is this a covered transaction? No Is it subject to Section 23.A collateral requirements? No Where would it be reported on the FR Y-8 report? This is not a reportable transaction 90

91 Exercise 6 Last One!! Jane Doe owns BHC stock and secures a $150K loan from the bank with said stock (loan is not for the stock that would be unacceptable). Is this a covered transaction? Is it subject to Section 23.A collateral requirements? Where would it be reported on the FR Y-8 report? 91

92 Exercise 6 Answers Is this a covered transaction? Yes Is it subject to Section 23.A collateral requirements? No Where would it be reported on the FR Y-8 report? Part I Lines 2a and 2b and Memorandum Line 1 92

93 93 Example 6 in Reporting Central

94 Real World Examples A nonprofit organization is headed by a HC director and the nonprofit shares a Board of Directors with the HC. The entity is considered an affiliate and any extension of credit to the organization (including transactions listed previously) would be considered a covered transaction. 94

95 Real World Examples A primary shareholder (owns >25 percent of the HC) and has an LLC that owns several airplanes, which has a line of credit with the bank to purchase aviation fuel: Covered transaction subject to section 23.A Must meet collateral requirements 100 percent obligations of the U.S. or its agencies 110 percent obligations of state and political subdivisions 120 percent debt instruments (loans and other receivables) 130 percent stock, leases, other real or personal property, or BOLI 95

96 Real World Examples The bank sells nonperforming loans to a nonbank subsidiary after writing them down to the newly appraised fair market value. The loans are modified with new rate/terms, etc. Over time the nonbank sells the loans back to the bank when they become current. This is a covered transaction because the terms of the note(s) were modified and they would be subject to Regulation W limitations as a percentage of capital (10 percent) for a single affiliate. 96

97 Real World Examples The holding company sells a parcel of land/insurance subsidiary, etc. to the bank. Covered transaction not subject to section 23A collateral requirements Any time the bank is purchasing an asset from an affiliate, it could be a reportable event Exemption: bank purchasing assets having a readily identifiable and publicly available market quotation and purchased at the market quotation (17 exemptions listed in the glossary) Affiliate overdrawn at bank subsidiary. Covered transaction subject to section 23A collateral requirements and must have collateral in place 97

98 Online Resources Comprehensive Review of Regulation W: Federal Reserve Board Rules and Regulations: FR Y-8 Form Instructions: 98

99 FR Y-8 Protocol Extended Analysis ZFRSSE??? Random Passwords s oh my You can send us data but not vice versa Best Practice How about we just call 99

100 Cherie Gordon - Cherie.M.Gordon@kc.frb.org Phone Barry Magnuson - Barry.Magnuson@kc.frb.org Phone

101 Peterson s Arcade and Games; Husband Jim, owns 100% Affiliate Cindy s Jewelry, owns 100% Affiliate Bill s Auto Mall, LLC owns 100% Affiliate Spotless Car Wash, Co. Bill owns 20% Bill Lindquist (owns 25% of BHC) John s Orchard owns 100% John Johnson (owns 10% of BHC) Johnson Hardware owned 100% by Adam (50%) and John (50%) Affiliate Adam Johnson (owns 20% of BHC) Beowulf Bar and Grill Adam owns 50% Anderson Travel Sandy owns 100% Sandy Anderson (owns 5% of BHC) Cindy Peterson (owns 40% of BHC) Mayberry Bank Holding Company (BHC) Affiliate Data Inc, Cindy is a 10% Shareholder 100% Mayberry Community Bank 100% Mayberry Insurance Co. Affiliate 101