A
bank formally appealed the examination conclusions regarding the
condition of the bank.
Specifically, bank management believed the report of
examination:
- Overstated
the adverse condition of the bank's commercial loan portfolio;
- Unduly
criticized the bank's strategic planning process;
- Assigned a
troubled condition designation to the bank without any reference to
any standard; or benchmark against which the bank was judged; and,
- Incorrectly
assessed the bank's risk profile and capital rating.
Discussion
The bank acknowledged
deterioration in its commercial loan portfolio, but stated that
the (OCC) Canary benchmarks
reflecting the operation of its credit function were inherently
conservative.
The loan
portfolio has remained well balanced between retail, real estate,
commercial, and construction.
In 1999 asset quality was rated 2; since then, asset quality
has improved and capital has grown. Risk from unsecured credit
has been steadily declining since 1996. The commercial loan
portfolio consists of loans to locally owned and operated
businesses. The level
of non-accrual loans, past-due loans, and charge-offs has improved;
and the allowance for loan and lease losses (ALLL) has been
adequate.
The
appeal further states that the objective measures reflected an asset
quality rating of 2 while subjective and harsh comments were made in
the report of examination (ROE) that resulted in an assigned rating
of 3.
The
OCC believed that the bank's overall condition remained
unsatisfactory and that the level of risk remained moderate and
increasing. Subprime credit represented 150 percent of Tier
1 capital. Capital
was insufficient in relation to the overall risk profile of the
bank, and earnings continued to suffer because of high overhead
and losses from loans and other assets. Asset quality and credit
administration practices were less than satisfactory. Classified loans increased
from 15 percent to 37 percent, the loan review function and account
officers failed to accurately identify problem loans and the level
of retail credit accounts with low credit scores was high. Also, while some progress
had been made towards complying with the formal agreement, most
articles were in noncompliance.
Conclusion
The
ombudsman concluded that, while the tone of the report was unduly
harsh, the overall assessment and ratings assigned in the
report on examination (ROE) complied with agency policy and are
reasonably reflective of the bank's condition at that time. There was evidence of
increased credit risk and the level of noncompliance with the formal
agreement appropriately impacted the ratings, risk profile, and
overall condition of the bank.
Subsequent
Event
Subsequent
to the appeal, the supervisory office completed a review of the
first quarter 2003 financial and asset quality information submitted
by the bank. The review
was initiated to assess management and the board's progress in
improving the bank's earnings performance and lowering its risk
profile. As a result,
capital, asset quality, and liquidity ratings were upgraded. Additionally, the
credit risk profile was reflected as moderate with a stable
direction. A complete
assessment of the composite and other component ratings was not
performed. The
ombudsman concurred with these changes.
