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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551 

DIVISION OF SUPERVISION AND REGULATION

SR 14-4 

April 18, 2014 

Revised December 6, 2021 

On December 6, 2021 this letter was revised to modify its applicability. This letter applies to the 

supervision of state member bank and credit extending nonbank subsidiaries of bank holding 

companies with greater than or equal to $10 billion and less than $100 billion in total 

consolidated assets. The letter previously applied to state member bank and credit extending 

nonbank subsidiaries of bank holding companies with $10 to $50 billion in total consolidated 

assets. In addition, references to the allowance for credit losses (ACL) were added to the letter, 

as was a reference to SR 20-8, “Joint Statement on Adjustment to the Calculation for Credit 

Concentration Ratios Used in the Supervisory Approach.” The officer approving the issuance of 

this letter was also revised to reflect the current Division Director.

TO THE OFFICER IN CHARGE OF SUPERVISION

AT EACH FEDERAL RESERVE BANK 

SUBJECT: Examiner Loan Sampling Requirements for State Member Bank and Credit 

Extending Nonbank Subsidiaries of Bank Holding Companies in the Regional Banking 

Organization Supervisory Portfolio 

Applicability: This letter applies to institutions supervised by the Federal Reserve with greater 

than or equal to $10 billion and less than $100 billion in total consolidated assets. 

Introduction 

This guidance sets forth loan sampling expectations for the Federal Reserve’s 

examination of state member bank (SMB) and credit extending nonbank subsidiaries of bank 

holding companies with greater than or equal to $10 billion and less than $100 billion in total 

consolidated assets. Examiners will have the flexibility, depending upon the structure and size of 

subsidiary SMBs, to utilize the guidance applicable to smaller SMBs when the SMB subsidiary’s 

total assets are below $10 billion. This guidance supersedes the examiner loan sampling 

expectations described in SR letter 94-13, “Loan Review Requirements for On-site 
 

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Examinations,” and clarifies expectations for the assessment of material1 retail credit portfolios

for these institutions. This guidance should be implemented upon issuance for SMBs and credit 

extending nonbank subsidiaries of bank holding companies with greater than or equal to $10 

billion and less than $100 billion in total consolidated assets. 

A thorough review of a bank’s loan and lease portfolio remains a fundamental element of 

the Federal Reserve’s examination program for SMBs. Such credit reviews are a primary means 

for examiners to: (1) evaluate the effectiveness of a bank’s internal loan review program and 

internal grading systems for determining the reliability of internal reporting of classified and 

Special Mention credits, (2) assess compliance with applicable regulations, and (3) determine the 

efficacy of credit risk management and credit administration processes. Further, examiners use 

the findings from their credit review to identify the overall thematic credit-risk management 

issues; to assess asset quality; to assist in the assessment of the adequacy of the allowance for 

loan and lease losses (ALLL) or allowance for credit losses (ACL), as appropriate; and to inform 

their analysis of capital adequacy.

Loan Sampling Methodology 

Reserve Banks will establish the annual loan sampling objective during the supervisory 

planning process. The annual sampling objective should provide coverage of material exposures, 

including those in the retail segments.

2

 Reserve Banks should plan on conducting at least two

loan quality reviews during the annual supervisory cycle of SMBs with greater than or equal to 

$10 billion and less than $100 billion in total consolidated assets. 

Each review should focus on one or more material commercial loan segment exposures 

by Call Report loan type and, in total over the annual cycle, should cover the four highest 

concentrations for commercial credits in terms of total risk-based capital for any Call Report loan 

type from Schedule RC-C. Loan segments that generate substantial revenues are generally likely 

to entail higher risk. To the extent that examiners can determine that a loan category contributes 

25 percent or more to annual revenues,

3 examiners should sample these segments. Examiners 

should also sample other loan segments that they or the bank’s internal loan review have 

identified as exhibiting high risk characteristics. Such risk characteristics include: liberal 

underwriting, high levels of policy exceptions, high delinquency trends, rapid growth, new 

lending products, concentrations and concentrations to industry, significant levels of classified 

credits, or significant levels of Special Mention credits. In addition to these risk-focused 

1

 A loan portfolio or portfolio segment is considered material when the portfolio or segment exceeds 25 percent of 

total risk-based capital or contributes 25 percent or more to annual revenues. Total risk-based capital refers to tier 1 

capital plus the allowance for loan and lease losses. See SR letter 20-8, “Joint Statement on Adjustment to the 

Calculation for Credit Concentration Ratios Used in the Supervisory Approach,” for additional information.

2 Commercial loan segments include commercial and industrial (C&I) loans, 1-4 family construction, other 

construction loans, multifamily loans, farm loans, non-farm non-residential owner occupied, and non-farm nonresidential other loans. Retail loan segments include first lien mortgages, closed-end junior liens, home equity lines 

of credit (HELOCs), credit cards, automobile loans, and other consumer loans.

3 The 25 percent threshold should be based on internal MIS and may not be applicable or available in all instances. 

For the purposes of this guidance, annual revenue equals net interest income plus non-interest income. 
 

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samples, a sample of loans to insiders must be reviewed.4 Annual loan sampling coverage by 

examiners should take into consideration the severity of the asset quality component rating, the 

effectiveness of the internal loan review program, the results of internal loan portfolio stress 

testing, and current asset quality financial trends. 

During the examination scoping phase, Reserve Bank staff should analyze the results of 

recent loan review reports or audits prepared for an institution’s internal use and the Reserve 

Bank’s most current assessment of credit risk management to help establish the size and 

composition of loans to be selected for review. An institution’s internal loan review program 

should achieve substantial coverage beyond the examiners’ annual judgmental sample of 

material loan portfolios. Examiners should review the findings and recommendations of the 

institution’s internal loan review program to help identify areas of risk. In selecting loans from 

each segment of the loan portfolio to review, examiners should include a selection of the largest 

loans, problem loans (past due 90 days or more, nonaccrual, restructured, Special Mention, 

watch list, or internally classified loans), and newly originated loans. Examiners should ensure 

the sample selection includes robust coverage of classified, Special Mention, and watch credits. 

At a minimum, loans selected for review from commercial loan segments should represent 

10 percent of the committed dollar amount of credit exposure within the loan segment. 

Sample sizes should be increased beyond the 10 percent minimum, based on examiner 

judgment, for segments when the examination scoping process or the internal loan review 

program has identified: 

1) deficiencies with credit risk management and administration practices, 

2) loan growth has been unusually high, 

3) credit quality or collateral values have been adversely affected since the prior 

review by volatile local or national economic conditions, or 

4) unreliable internal credit risk grading. 

Conversely, sample sizes should be based on the 10 percent minimum if: 

1) previous examinations concluded that internal loan review and credit risk 

identification is effective, 

2) internal loan review has reviewed a loan segment within the last 12 months and 

noted no material weaknesses, and 

3) the examination scoping process reveals no significant credit risk management 

issues. 

In general, the lower range of 10 percent sampling of each segment or the entire commercial 

portfolio would be acceptable when all aspects of credit risk, as discussed in this letter, indicate 

low and stable risk.

4 Federal Reserve examiners must test and evaluate Regulation O compliance annually.
 

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Examiners should determine classification amounts for retail credits using the Uniform 

Retail Classification Guidance (SR letter 00-8, “Revised Uniform Retail Credit Classification 

and Account Management Policy”). Annually, examiners should focus on one or more material 

retail loan segment exposures by Call Report loan type. Examiners should determine the 

appropriate sample of retail loans from material segments based on risk to be tested for 

compliance with internal credit administration policies and underwriting standards. While there 

is no minimum coverage expectation for retail portfolios or segments, the goal of sampling is to 

assist examiners in making an informed assessment of all aspects of retail credit risk 

management. If applicable, examiners should evaluate and test secondary market origination and 

servicing practices and quality assurance programs. Examiners should also sample other retail 

loan segments, as needed, from segments the examiners or internal loan review identify as 

exhibiting high risk characteristics such as liberal underwriting, high delinquency trends, rapid 

growth, new lending products, or significant levels of classified credits.

Documentation of Loan Sampling Analysis and Methodology 

Examiners should discuss their analysis and objectives for achieving loan sampling 

coverage with Board staff during the annual supervisory planning process. Upon reaching a 

consensus with Board staff, the analysis and methodology should be retained in workpapers and 

documented in the supervisory plan. Further, examiners should document their loan sample 

selection methods in scoping memoranda and in the confidential section of the report of 

examination. The required workpaper documentation of the commercial loan coverage 

calculation should be based on total loan commitments and should generally exclude loans 

reviewed outside of the Reserve Bank’s supervisory plan when a detailed analysis of the loans by 

an examiner and an assessment of credit risk management were not performed. Review of 

syndicated loans and participations, such as those from the Shared National Credits (SNCs) 

annual review, should only be included in the coverage ratio if Reserve Bank staff reviewed the 

credit-risk management aspects of the credit (for example, adherence to underwriting policies) 

and these findings are included in the examiner’s assessment of overall credit-risk management 

practices. Examiners should continue to follow the SNC grading guidance.5

Follow-Up Expectations for Examinations with Adverse Findings

Examiners should generally consider a bank’s internal risk rating system to be less 

reliable when examiner downgrades6

 or internal loan review downgrades equal 10 percent of the 

total number of loans reviewed, or 5 percent of the total dollar amount of loans and commitments 

reviewed. When a bank’s risk rating system is determined to be unreliable, examiners may need 

to expand sampling to better evaluate the effect of rating differences on the bank’s ALLL/ACL

and capital. In such situations, examiners should direct the bank to take corrective action to 

validate its internal ratings and to evaluate whether the ALLL/ACL or capital should be 

5 Refer to SR letter 77-377, “Shared National Credit Program.” 

6 A credit risk grading difference is considered a downgrade when: a) a risk rating is changed by the examiner from 

an internal Pass rating to Special Mention or classified category, b) a risk rating is changed by the examiner from 

Special Mention to a classified category, or c) a risk rating is changed by the examiner within the classified 

categories.
 

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increased. The Reserve Bank will follow-up with the bank to assess progress on corrective 

action and verify satisfactory completion. The timeframe for follow-up should correspond with 

the timeframe during which actions are to be completed.7

 All follow-up actions on adverse 

findings should be discussed with Board staff. 

Reserve Banks are asked to distribute this letter to state member bank and credit 

extending nonbank subsidiaries of regional banking organizations, appropriate safety-andsoundness examiners, and other supervisory staff. Questions regarding this letter may be sent via 

the Board’s public website.8

Michael S. Gibson

Director

Division of Supervision and Regulation

Cross references:

• SR letter 20-8, “Joint Statement on Adjustment to the Calculation for Credit 

Concentration Ratios Used in the Supervisory Approach” 

• SR letter 13-13/CA letter 13-10, “Supervisory Considerations for the Communications of 

Supervisory Findings”

• SR letter 00-8, “Revised Uniform Retail Credit Classification and Account Management 

Policy” 

• SR letter 77-377, “Shared National Credit Program”

7 Refer to SR letter 13-13/CA letter 13-10, “Supervisory Considerations for the Communications of Supervisory 

Findings.”

8 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.