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FDIC Federal Register Citations From: Harley Charlson Sent: Tuesday, June 07, 2005 11:49 AM To: Comments Subject: FIL-22-05 on Proposed Classification of Commercial Credit Exposures This is to comment on FIL-22-05 on Proposed Classification of Commercial Credit Exposures. Comment will be provided on each proposed classification change. 1. "SPECIAL MENTION" PRESENTLY, AND PROPOSED CATEGORY IS "MARGINAL" The proposed "MARGINAL" category is acceptable. The expanded definition over the current special mention category is good. Currently, Union Bank & Trust formally utilizes an 8 loan grade system of excellent, good, satisfactory, acceptable, special mention, substandard, doubtful, and loss. Additionally, as a loan reviewer where at times there are borrowers that may have temporary shortfalls of either working capital, temporary losses, or slightly higher leverage, an informal category of acceptable-"minus" has been utilized. This is an in-between category for those borrowers who are monitored to either get better, possibly be moved, or are a candidate for a criticized or classified rating if not improved. Therefore, with the new proposed marginal rating, this looks to possibly be a wider rating range than the previous special mention classification, and may possibly obviate the use of the use of the "acceptable-minus" rating in our case. Historically, it has been my observation that very little use of the special mention category by bank examiners has been made in bank examinations, with rather the focus on classified assets (substandard and doubtful). Are the plans to change the focus going forward to have examiners rate some borrowers as marginal as well? The proposed marginal definition also states: "The rating should also be used for borrowers that have made significant progress in resolving their financial weaknesses, but still exhibit characteristics inconsistent with a "pass" rating." Does this mean either substandard or doubtful classified borrowers can be upgraded to "marginal" versus the previous expectation/standard of having to be able to upgrade substandard and doubtful only to pass categories? The previous "special mention" category reflected, "Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification." The new marginal classification should also include this statement so everyone is clear that the MARGINAL category is not a classified asset category. 2. "SUBSTANDARD" PRESENTLY AND PROPOSED NEW CATEGORY "WEAK" After all the years of utilizing both the substandard and doubtful categories for loan classification, it makes no sense to change the titles of these categories at this time and particularly with the proposed changes to WEAK and DEFAULT. The new proposed definition of WEAK classified credits has expanded language regarding stressed borrowers, but relative to the current "substandard" category it is missing one very important element. The current "substandard" definition includes a phrase "or by collateral pledged." The proposed WEAK category make no reference to collateral coverage at all!! 3. "DOUBTFUL" PRESENTLY AND PROPOSED NEW CATEGORY "DEFAULT" As reflected above, a change in name of the classification from DOUBTFUL to DEFAULT serves no meaningful purpose at this point. The proposed new definition provides some additional defining language which is likely good. However, the old definition also provided more of a transition definition from substandard to doubtful with its statement of, "An asset classified "doubtful" has all the weaknesses inherent in one classified substandard with the added characteristic ...." In the new definition, it indicates that DEFAULT borrowers may be upgraded if "... They have met their contractual debt service requirements for six consecutive months and their financial condition supports...they will recover their recorded book value(s) in full." This implies that they will be put back on accrual as well, which should likely be indicated as well. The new proposed facility ratings for DEFAULT rated credits make no sense at all as typically a presently rated DOUBTFUL borrower for most banks has a reserve of 50%. In some cases, partial charge offs relative to the potential collateral recovery value have already occurred! Therefore, the facility ratings under the 30% level for DEFAULT rate borrowers are not relevant. What would make more sense would be to institute facility ratings on SUBSTANDARD/WEAK borrowers that have a collateral or lack of guarantor recovery with a gap of 10 to 30% of not covering the borrower's loan balance. Therefore, facility ratings under 30% would relate to SUBSTANDARD/WEAK borrowers and facility ratings over 30% would relate to DOUBTFUL/DEFAULT borrowers. 4. "LOSS" PRESENTLY AND PROPOSED CONTINUED USE OF "LOSS" The present loss definition is sufficient and needs no change. 5. CONCLUSION The proposed classification expanded definitions have some merit on select classifications as reflected to enhance understanding of classification of borrowers. The proposed renaming of certain classifications is not appropriate, to include the proposed name changes of substandard to weak and doubtful to default. The proposed WEAK definition lacks any reference at all to collateral coverage. The facility rating proposed to rate the estimated loss on a facility is ill conceived as it relates only to the DOUBTFUL/WEAK classification, which historically has been reserved at 50%, and needs to be broadened to the SUBSTANDARD/WEAK category if put in place. Harley A. Charlson Union Bank & Trust Company Corporate Loan Review Officer 4243 Pioneer Woods Dr. Lincoln, NE 68501 |
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Last Updated 06/08/2005 | Regs@fdic.gov |
