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FDIC Federal Register Citations

Simmons First Bank of  Northwest Arkansas

To: Federal Deposit Insurance Corporation
Robert E. Feldman, Executive Secretary

From: Dennis H. Ferguson, Executive Vice President
Simmons First Bank of Northwest Arkansas

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 would mandate.

• 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 assumption.

• 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 loss potential.

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.

Dennis H. Ferguson
Executive Vice President
Simmons First Bank of Northwest Arkansas

Last Updated 06/30/2005

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