FDIC Federal Register Citations
Simmons First National Bank
To: Federal Deposit Insurance Corporation
Robert E. Feldman, Executive Secretary
From: John Dews, Chairman and CEO
Re: Interagency Proposal Classification of Commercial Credit Exposures
Date: June 29, 2005
This letter is provided in response to the Interagency Proposal on the
Classification of Commercial Credit Exposures. From all indications, the
proposal will create significant burden and complexities for all banks,
regardless of asset quality. Therefore, we are opposed to the current
recommendation. Our opinion is based on the following:
The proposal seeks to do away with the current system of special
mention, substandard, and doubtful designations, and replace with a
more cumbersome and complex system. This proposal will be particularly
burdensome for smaller institutions, i.e., less than $250 million, due to
their characteristic portfolio mix of smaller commercial-type loans. In
addition, these institutions do not normally have the staffing depth to
facilitate the expanded loan reviews and increased analyses this system
At a time when bank net loan losses are at historic lows, this
proposal is not justified. Are the regulators finding enough disparities
in their determinations of risk rating assignments versus internal
monitoring systems to require a completely new rating structure? Results
of our recent regulatory examinations have certainly not supported that
The new system would be more difficult for regulators, lenders, and
internal auditors to manage/ monitor. Specifically, the two-tiered rating
proposal for substandard and doubtful loans is not possible on many
computer mainframes, including the one utilized by Simmons First National
Corporation. Our current mainframe allows for one credit rating per
Customer Identification File, and this change would require significant
programming and maintenance costs to the company.
Although not specifically defined in the proposal, this action by the
regulators has the appearance of yet another attack on the concept of
unallocated reserves. Stratifying the substandard and doubtful ratings
further would justify opinions to reconcile every dollar in the Allowance
for Loan Loss reserves to a specific loan, with no cushion for unexpected
occurrences. Unallocated reserves are vital to safeguard the company
against the inherent imprecision of determining risk ratings and related
To reiterate, we do not believe this is a viable proposal at this time.
If certain financial institutions exhibit loan loss rates or unidentified
exposures which necessitate closer monitoring, those issues should be
addressed on a case by case basis, without penalty to the institutions that
are assessing risk accurately.
One of the advisory bulletins received recently (advocating the proposal)
said it best: The current classification system dates back to 1938 with
only minor revisions made over the last seven decades. Our point exactly.
If it has survived seventy years, through cycles of economic depression,
interest rate volatility, and even international threat, why change it now?
Your consideration in this matter is appreciated.