Background
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.