National Bank Appeals Process:
Appeal of Examination Conclusions for Asset Quality, Capital Adequacy, Corporate Governance, Recommended Reserve Allocation, and Designation as "Troubled Condition" - (Third Quarter 2004)

A bank formally appealed the examination conclusions for asset quality, the recommended re­serve allocation, capital adequacy, and corporate governance.  In addition, the bank appealed its designation as "troubled condition."  The bank asked the ombudsman to conduct an independent review of the examination findings.

The basis of the appeal is the most recent safety and soundness examination in which the bank's composite rating was downgraded from 2 to 3; the component ratings for capital, asset qual­ity, and earnings were downgraded from 2 to 3; management was downgraded from 2 to 5; and liquidity remained unchanged at 2.  The appeal also states that the examiners recommended an immediate provision to the allowance for loan and lease losses (ALLL) that was excessive when compared to industry norms and the bank's loss history.  According to the appeal, the downgrades are based on aberrations caused by a one-time event (i.e., the acquisition of a federal savings bank) rather than well-established patterns of mismanagement.

The appeal states that based on its historical composite and component ratings, the bank has always been a well-run institution.  Therefore it seems improbable that the condition of the bank had fallen so far and so fast in one year, particularly since the board and management had not changed.  According to the appeal, two things had changed:  (1) was the acquisition of a troubled federal savings bank (which was approved by the OCC), and (2) the regulatory environment had tightened regarding corporate governance and internal audit.

The supervisory office response stated that the condition of the bank had vastly deteriorated.  A series of events and activities negatively impacted the overall condition of the bank.  The acquisi­tion of the federal savings bank was inaccurately and untimely accounted for and internal audits were inadequate.  Credit risks increased substantially due to improper monitoring and control.  This resulted in the need for a substantial provision to the ALLL.  Additionally, an international transaction, though resolved without incident, exposed the bank to undue financial risks and raised significant concerns about management and board oversight.  The culmination of these deficiencies threatened the viability of the institution and replacing or strengthening management and the board was deemed critical to its survival.

Conclusion

The ombudsman conducted a comprehensive review of the information submitted by the bank and documentation from the supervisory office.  The review included meetings with members of the bank's board of directors, senior management team, and legal counsel.  The ombudsman also met with members of the supervisory office.  The ombudsman's review focused on whether there was sufficient support for the assigned ratings and whether the ratings reflected the condition of the bank at the time of the examination.

The ombudsman opined that the conclusions reached by the supervisory office were well support­ed by the facts at the time of the examination.  The designation of the bank as troubled condition was consistent with agency policies and standards.