Appeals of Material Supervisory Determinations: Guidelines
(September 27, 1996)
The Supervision Appeals Review Committee of the
Federal Deposit Insurance Corporation (FDIC), on September 27, 1996,
considered the appeal of [Bank] ("Bank") and concludes that the examiners
computation of the allowance for loan losses is appropriate.
Your observation that the Interagency Policy Statement on
the Allowance for Loan and Lease Losses provides for a charge-off horizon
of less than one year in certain circumstances is correct. However, the
policy statement clarifies that such shorter time period may be justified if
the loan pool is not subject to greater than normal credit risks. The
nature of the loans, including the volume of charge-offs and renewals,
indicate that the subject loan portfolio contains risks far greater than
normally associated with the typical loan portfolio of a bank insured by the
FDIC. Furthermore, the contention that a shorter time horizon is reasonable
because the finance company loans mature on average in 3.5 months is not
supported. In actuality, the volume of renewals and the Banks amortization
of the premium paid on purchased loans over a seven-year period to correlate
to the anticipated length of the borrowing relationship reflect a much
longer time period.
We disagree with the methodology for
loan and lease losses recommended by Accounting firm (X). X subtracts cash
payments made by borrowers from ending charge-offs in determining loss
experience. This result in an understatement of historic charge-offs and
causes the reserve estimate to reflect only a partial year of projected
Based on the aforementioned factors, the
standard one-year time horizon appears to be warranted and the methodology
for assessing the adequacy of the reserves for loan losses utilized by the
examiners at the December 31, 1995, examination is considered appropriate.
We regret that there may have been previous misunderstandings between the
FDIC and the Bank on the appropriate level for the loan loss reserve. While
it is expected that the appropriate reserve will be established promptly,
our Dallas Regional Office will work with your Bank on a plan to address any
capital implications of this action.
Pursuant to our guidelines, the scope of
our review was limited to the facts and circumstances that existed at the
time of the examination. This determination is considered a final
supervisory decision of the FDIC.
By direction of the Supervision Appeals
Review Committee of the FDIC.