Risky Business: Weighing in on Schedule RC-R Part II

Call Report preparers for banks that cannot opt for the Community Bank Leverage Ratio (“CBLR”) option get to experience the joys of Schedule RC-R Part II. I think it is the schedule we all love to hate more than any other. After slogging our way through schedules RI through RC-O at the end we are rewarded with the most tedious and arcane part of the Call Report.

3PR Inc. is often engaged to review banks’ call reports, including the infamous Schedule RC-R. Here are some of the more common issues we have seen:

Misstating the risk of due from depository institution balances. Balances due from depository institutions are generally weighted at 20%, but the first $250,000 in deposits at each institution are FDIC insured and may be weighted at 0%. But, if the bank’s outstanding cash items in process are included in the general ledger balance for a correspondent bank, that amount should be considered separately and weighted at 20%. Deposits at Federal Reserve banks carry a 0% risk weight, but deposits at Federal Home Loan Banks are all weighted at 20% since they are not FDIC insured.

Confusing FRB EBA overnight funds sold with fed funds sold. Banks sometimes misclassify Federal Reserve Bank Excess Balance Accounts as fed funds. Even though they are the functional equivalent of overnight fed funds and are managed through a commercial correspondent, they are actually obligations of the Federal Reserve Bank. They should be reported as deposits due from depository institutions and risk weighted at 0%.

Properly sorting out risk weights for Residential Mortgage Exposures. The reporting of “Residential Mortgage Exposures” can get a bit tricky. Well underwritten 1-4 family first lien mortgages originated by the bank typically carry a 50% risk weight, but mortgages with a high LTV are weighted at 100% and mortgages with a U.S. government agency guarantee are 20% just to name two exceptions. Preparers need to refer to the instructions.

Multifamily mortgages with original amounts of $1 million or less should be included in residential exposures. Well underwritten small multifamily mortgages may be risk weighted at 50% if the following criteria are met:

• The loan is prudently underwritten including the loan amount as a percentage of the appraised value of the real estate collateral.
• The loan is not 90 days or more past due or on nonaccrual;
• The loan is not restructured or modified

There is also such a thing as Statutory Multifamily Loans that can qualify as residential exposures. Preparers should read the Call Report Instructions (at least until their eyes glaze over) on this topic to see if it might apply to their situation.

Some banks have so few multifamily loans (and so much equity capital) that they don’t feel that it is worth jumping through the extra hoops to report a lower risk weight for multifamily loans. This may be true especially if it is hard to document the necessary conditions. If in doubt, it is probably best to keep the risk weight at 100%.

Not lowering the risk weight for guaranteed or cash secured loans. The majority of loans in most banks’ portfolios will be risk weighted at 100% risk. However, loans secured by deposits in the bank may be weighted at 0%, but only to the extent that they are deposit secured. Preparers should document the balance of the deposit account collateral with their workpapers.

The guaranteed portion of SBA loans can be risk weighted at 20% but purchased SBA Guaranteed Interest Certificates are 0% risk weight. So are SBA PPP loans. This is true for PPP loans even if they are not forgiven.

Mistakes in reporting and risk weighting BOLI. Bank Owned Life Insurance (“BOLI”) can have different risk weights depending upon the type. The insurance or agency providing the policies should document the value and the type of insurance held each quarter.

Reporting unused commitments incorrectly. Unused commitments are risk weighted according to their original maturities, one year or less or greater than one year. Preparers occasionally make the mistake of reporting them by remaining maturity instead.

Then there are the Unconditionally Cancelable Commitments. These are the available amounts of lines of credit that can be rescinded by the bank at will. Examples of these include overdraft lines and credit card lines. Home equity lines are also considered Unconditionally Cancelable if the bank at its sole discretion may, “prohibit additional extensions of credit, reduce the credit line, and terminate the commitment to the full extent permitted by relevant federal law.”

Our best advice for success with Schedule RC-R Part II is to not do it. If your bank qualifies for the CBLR reporting option, we recommend that you take it and avoid this risky business altogether. From the point of view of actually managing the bank, there are probably better ways to measure and analyze risks.