Federal Deposit
Insurance Corporation

E-Mail: Comments@FDIC.gov Classification of Commercial Credit Exposure

The current classification system focuses primarily on borrower weaknesses and the possibility of loss without specifying how factors that mitigate loss, such as collateral and guarantees should be considered in the ratings assignment.

Response: While to some extent, the above statement may be true in some institutions, there are many institutions that do factor in collateral, guarantees, cash flow, liquid assets, and other variables into the loss allocation on classified credits. The use of a specific reserve worksheet to account for the above factors is a satisfactory way to assign a specific reserve against substandard and doubtful credits. If a specific reserve is warranted, it is assigned to a credit and included in the institution’s overall ALL calculation. A specific reserve does not necessarily mean that there is going to be a loss or that nonaccrual status should be applied, but if a default occurs, the severity of the loss has already been identified and provided for in the ALL. When the credit is judged to be in default (the borrower can no longer meet agreed to payments of principal or interest) then the credit can be placed on nonaccrual and/or may be subject to a partial charge-off to reflect the realizable value of the debt. The institution may adjust the risk rating and restructure the borrowers debt to correspond to its ability to repay or liquidate the collateral. In either case, the above system works well within the current framework and accomplishes the stated goal of rating the borrower’s financial capacity and any estimated loss severity. For community banks, we do not see where the new dual rating system adds anything to the existing process.

The proposed framework aligns the determination of a facilities accrual status, partial charge-off and ALL treatment with the ratings assignment process. The current framework does not provide a link between these important determinations and a facilities assignment to a supervisory category.

Response: As discussed above, if each substandard and doubtful borrower is subjected to a thorough specific reserve analysis, the current framework does link the above factors into the ALL process. The current framework has been in place for sometime (with minor changes) and is generally understood by all financial institutions, and (by our experience) evenly applied by the regulators. We believe this new process only adds complexity and confusion at a time when many community banks are already struggling to cope with BSA, Sarbanes-Oxley and a myriad of other regulations.

Thanks for the opportunity to respond to the proposal.

Robert Wayne Sewell
Senior Vice President
Credit Administration
Security Bank Corporation
Macon, Georgia