Appeals of Material Supervisory Determinations: Guidelines
(July 14, 1995)
Your appeal of material supervisory determinations has been decided. Rulings
not in your favor were made by the Supervision Appeals Review Committee
(“Committee”) of the Federal Deposit Insurance Corporation (“FDIC”) on July
12, 1995, and are conveyed in this letter. The other appeal issues and
comments on other matters related to the examination process were resolved
by Nicholas J. Ketcha Jr., Acting Director, Division of Supervision. Mr.
Ketcha’s findings are conveyed in a separate letter.
The Committee’s finding on each item decided against your bank is
presented below along with an explanation of the reason for the decision.
1. Violations of Law and Regulations
A. State Code Violation/Holding Chattel Property in Excess of One Year
Deputy Commissioner Charles Griffith of the Oklahoma State Banking Department
confirmed for the Committee that the apparent violation is properly cited.
The fact that the borrower (*****) continues to be the registered owner is
understood. However, the relevant determinations for purposes of
interpreting the Code are that the property is considered to be under the
bank’s control and that the bank has privileges normally associated with
ownership. In this case, the debt is in default and collateral is being
liquidated to pay on the loan balance. To determine that one could avoid the
State code by simply not registering (in instances where ownership is
recorded) property in the bank’s name would be contradictory to the Code’s
B. Violations of FDIC Rules and Regulations on Real Estate Appraisals
The Committee reviewed all six apparent real estate violations cited in the
examination report. Determinations against the bank are that X and Y can be
cited as apparent violations because the bank did not have the required real
estate evaluations as of the transaction date or the examiner’s asset review
2. Allowance for Loan Losses
Judgments about the adequacy of loan loss reserves are based on variables
that can sometimes support different conclusions. However, in your case, the
reserve inadequacy cannot reasonably be disputed since loans classified
Loss, and over which there is not stated disagreement, exceeded the
allowance for loan losses. The provision expense would have been large
($156,000) just to replenish the reserve to the pre-examination level. Even
then, the reserve balance would represent only 1.03 percent of loans, a
level which appears short of your stated practice maintaining reserves at
“well over 1 percent with an additional amount for classified loans.” The
examination report requested the reserve be restored to an amount higher
than the pre-examination level in order to provide adequate coverage for
high risk in the loan portfolio.
Higher reserve coverage is warranted due to the following factors. The
remaining adversely classified and special mention loans as of the
examination date would represent 4.7 times a reserve replenished to its
prior level and a sizable 45 percent of total capital and reserves as of the
examination after charge-offs. The examination report notes that the loan
loss reserve methodology the bank has been using does not follow your own
loan policy guidelines. The examination report also indicates that loan
administration is weak, as evidenced by a high volume of adversely
classified and special mention loans and other real estate, a large volume
of documentation exceptions, and an ineffective loan review system. Lastly,
pre-examination reserve coverage was low relative to peers as evidenced by
the loan loss reserve to total loan level being well below average (13th
percentile) while net charge-offs and noncurrent and high risk levels were
considerably above average (82nd, 70th, and 91st percentiles, respectively).
These determinations constitute the final decision of the Federal Deposit
By direction of the Supervision Appeals Review Committee of the Federal
Deposit Insurance Corporation.