Supervisory Memorandum 1004

							                          Texas Department of Banking
                           Dedicated to Excellence in Texas Banking 


                                               SUPERVISORY MEMORANDUM - 1004
January 4, 2010

TO:                All State-Chartered Trust Companies
                   All Bank and Trust Examining Personnel

FROM:              Charles G. Cooper, Banking Commissioner

SUBJECT:           Examination Frequency for Trust Companies


Background and Purpose
Initially issued in July 1996, this Policy Memorandum revised and superseded Numbered Memorandum 90-02 to more
specifically outline the Department’s examination priorities for trust companies. A subsequent revision in October 1997
provided that, at the discretion of the Commissioner, a review of the annual financial statement of an exempt trust
company may be substituted for an on-site examination. This revision modifies the examination frequency for new trust
companies requiring a full scope examination within twelve months of opening and clarifies the various types of
examination scopes utilized by the Department.

Section 181.104 of the Texas Finance Code requires that the banking commissioner examine each state trust company
annually, with the allowance to defer an examination for not more than six months if such a deferment is necessary for
the efficient enforcement of the statute. Section 182.013 of the Texas Finance Code allows the banking commissioner to
examine or investigate an exempt state trust company periodically, as necessary, to verify the annual certification
required to be filed by an exempt state trust company.

Examination Frequency Policy
It is the policy of the Department of Banking to have an on-site presence by examiners at every non-exempt trust
company at least annually. More frequent examinations are performed on the higher risk institutions, as outlined in the
table below. Risk, and thus examination frequency, is generally determined by the supervisory ratings assigned to the
company (see Supervisory Memorandum – 1002 in our Law and Guidance Manual for the ratings definitions).
Examinations performed by the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve Bank (FRB) are
considered acceptable for meeting these priorities when a company is an affiliate of a bank, under a bank holding
company, or subject to FDIC review under statute.

Examination Scope
The scope of each examination is based upon circumstances of the individual trust company. The Department utilizes
three types of examination scopes for trust companies: Full Scope, Target, and Visitation. Only the Full Scope
Examination meets the Department’s examination priorities.

         A regular, Full Scope Examination is the most comprehensive with the Department’s examiners completing
          risk-focused procedures that are designed to assess the safety and soundness of the trust companies’ operations
          and activities, resulting in an appropriate UITRS or CAMELS (Capital, Asset Quality, Management, Earnings,
          Liquidity, and Sensitivity to Market Risk) rating. A formal Report of Examination is produced for the trust
          company to review.
         A Target Examination Program allows examiners to focus on the highest risk areas of the trust company, while
          excluding certain operational assignments determined to be of lower risk due to the nature of the trust
          company’s activities. Examiners will continue to review all critical aspects of the trust company’s operations to
          the extent needed to assign CAMEL and MOECA (Corporate and Fiduciary) ratings. A targeted scope
                       Supervisory Memorandum -1004 Examination Frequency for Trust Companies.

         examination may be documented in a “Letter of Findings” to the trust company. Corporate and Fiduciary
         ratings may be issued.
        A Visitation Examination Program is a narrow examination which may focus on one or more Corporate or
         Fiduciary components or on a specific risk area. A CAMEL or MOECA component rating or the overall
         CAMEL or MOECA rating may be changed at a visitation. A visitation conducted for a newly chartered trust
         company will include a compliance review with the original Order Granting Charter, a review of policies, and
         interviews with management. A visitation may be documented with either a “Letter of Findings” to the trust
         company or an internal memorandum, depending upon the findings and if Corporate or Fiduciary ratings have
         been revised.

An Information Technology (IT) review should be performed to coincide with the full scope examination as outlined in
Supervisory Memorandum 1020.

If at any time it becomes apparent that the planned scope of supervisory activity should be expanded, the Department will
not hesitate to do so. It is the policy of the Department to document each on-site presence by a Report of Examination, a
Letter of Finding, or an internal memorandum containing pages as appropriate to present and support the results of the
review.

Examination Scope and Frequency Schedule
The following chart details the general criteria for determining examination frequency of state-chartered trust companies
for Safety and Soundness examinations. The frequency and scope outlined in the table meet the examination priorities of
the Department. Examinations started in the month that they are due meet the Department’s examination performance
measures.


        COMPOSITE RATING                                       SCOPE AND FREQUENCY

             4 or 5 CAMEL                Regular full scope examination annually plus a targeted scope
                    or                   examination during interim (i.e., at approximately 6 months).
              4 or 5 UITRS

                3 CAMEL                  Same as for 4 and 5-rated companies. An interim targeted scope
                    or                   examination may be omitted at the discretion of the Trust Coordinator.
                 3 UITRS

             1 or 2 CAMEL                Regular full scope examination annually; however, a targeted scope
                    or                   examination may be substituted on an alternate year basis upon final
              1 or 2 UITRS               approval of the Director of Bank & Trust Supervision. Regular full
                                         scope examinations must be conducted at least every 2 years.


             New Company -               Visitation within 6 months after opening followed by a regular full
              Not Yet Rated              scope examination not sooner than 6 months after opening, but not
                                         later than 12 months after opening.

         Exempt under Statute -          Examination annually. A review of the annual financial statement
          Texas Finance Code             required under §181.107 of the Texas Trust Company Act may be
               §182.011                  substituted for an on-site examination at the discretion of the Deputy
                                         Commissioner or Commissioner.




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