November 13, 1979
UNIFORM FINANCIAL
INSTITUTIONS RATING SYSTEM*

Introduction
 
The rating system provides a general framework for evaluating
and assimilating all significant financial, operational, and
compliance factors in order to assign a summary or composite
supervisory rating to each Federally regulated commercial bank,
savings and loan association, mutual savings bank and credit
union. The purpose of the rating system is to reflect in a
comprehensive and uniform fashion an institution's financial
condition, compliance with laws and regulations and overall
operating soundness. In addition to serving as a useful tool for
summarizing the condition of individual institutions, the rating
framework will also assist the public and Congress in assessing
the aggregate strength and soundness of the financial industry.

Although it is acknowledged that to some degree each type of
financial institution poses its own set of supervisory issues
and concerns, the uniform rating system is predicated upon
certain features and functions, including qualitative and
quantitative factors, common to all categories of institutions.
In general, financial institutions provide a wide range of
essential credit, depository and related financial services to
individuals, private commercial enterprises and governments. In
so doing, financial institutions play an important and integral
role in the stability and growth of economic activity at the
local, regional, national or international level. Institutions
are best able to carry out these essential functions and
accommodate the demand for financial services when they are
operated in a sound and prudent manner in full compliance with
relevant laws and regulations.

Overview

Each financial institution is assigned a uniform composite
rating that is predicated upon an evaluation of pertinent
financial and operational standards, criteria and principles.
The rating is based upon a scale of one through five in
ascending order of supervisory concern. Thus, "1" represents the
highest rating and, consequently, the lowest level of
supervisory concern; while "5" represents the lowest, most
critically deficient level of performance and, therefore, the
highest degree of supervisory concern. Each of the five
composite ratings is described in greater detail below.

In assigning a composite rating, all relevant factors must be
weighed and evaluated.  In general, these factors include: the
adequacy of the capital base, net worth and reserves for
supporting present operations and future growth plans; the
quality of loans, investments and other assets; the ability to
generate earnings to maintain public confidence, cover losses
and provide adequate security and return to depositors; the
ability to manage liquidity and funding; the ability to meet the
community's or membership's legitimate needs for financial
services and cover all maturing deposit obligations; and the
ability of management to properly administer all aspects of the
financial business and plan for future needs and changing
circumstances.  The assessment of management and administration
includes the quality of internal controls, operating procedures
and all lending, investment and operating policies; compliance
with relevant laws and regulations; and the involvement of the
directors, shareholders and officials. In general, assignment of
a composite rating may incorporate any other factors that bear
significantly on the overall condition and soundness of the
financial institution.

Notwithstanding the use of common summary ratings, specific
performance benchmarks, standards and principles will continue
to recognize existing structural, operational and regulatory
distinctions among different types of financial institutions.
Thus, while each financial institution will be evaluated upon
criteria relating to its particular industry, the assignment of
a uniform composite rating will help to direct uniform and
consistent supervisory attention in such a way that does not
depend solely upon the nature of an institution's charter or
business, or the identity of its primary Federal regulator.
While distinctions among credit unions, savings and loan
associations, commercial banks and mutual savings banks are
recognized, overall uniformity and consistency of supervision
will be strengthened by the existence of common supervisory
ratings.

The primary purpose of the uniform rating system is to help
identify those institutions whose financial, operating or
compliance weaknesses require special supervisory attention
and/or warrant a higher than normal degree of supervisory
concern. In an effort to accomplish this objective, the rating
system identifies certain institutions whose financial,
operational or managerial weaknesses are so severe as to pose a
serious threat to continued financial viability. These
institutions are, depending upon degree of risk and supervisory
concern, rated Composite "4" or "5". Such institutions are
generally characterized by unsafe, unsound or other seriously
unsatisfactory conditions and carry a relatively high
possibility of failure or insolvency. The uniform identification
of such institutions will help to ensure:

1)	That the degree of supervisory attention and the type of
supervisory response are based upon the severity and nature of
an institution's problems;

2)	That supervisory attention and action are, to the extent
possible, administered uniformly and consistently, regardless of
the type of institution or the identity of the regulatory
agency; and

3)	That appropriate supervisory action is taken to address
those institutions whose financial problems entail the greatest
potential for hardship or inconvenience to depositors, borrowers
or the public; or those institutions whose potential weaknesses
would most seriously disrupt the proper and efficient
functioning of the financial system.

The rating system also identifies a category of institutions
that have some combination of financial or compliance
deficiencies that, while posing little or no threat to financial
viability under present circumstances, do warrant more than
normal supervisory concern. These institutions are not deemed to
present a significant risk of failure, or of loss or hardship to
depositors, borrowers, or the public, but do require a higher
than normal level of supervision. The delineation of this
category will assist supervisory authorities in separating the
most serious and critical problem institutions whose viability
may be in question from those institutions whose financial or
compliance deficiencies may require a specific supervisory
response but do not constitute a significant risk of failure,
insolvency or bankruptcy. Institutions that warrant some
supervisory concern but do not entail a relatively high
possibility of failure or insolvency are generally rated
Composite "3".

Composite Ratings

Composite ratings are defined and distinguished as follows:

Composite 1

Institutions in this group are basically sound in every respect;
any critical findings or comments are of a minor nature and can
be handled in a routine manner. Such institutions are resistant
to external economic and financial disturbances and more capable
of withstanding the vagaries of business conditions than
institutions with lower ratings. As a result, such institutions
give no cause for supervisory concern.  

Composite 2 

Institutions in this group are also fundamentally sound, but may
reflect modest weaknesses correctable in the normal course of
business.  The nature and severity of deficiencies, however, are
not considered material and, therefore, such institutions are
stable and also able to withstand business fluctuations quite
well.  While areas of weakness could develop into conditions of
greater concern, the supervisory response is limited to the
extent that minor adjustments are resolved in the normal course
and operations continue satisfactory.  

Composite 3 

Institutions in this category exhibit a combination of
financial, operational or compliance weaknesses ranging from
moderately severe to unsatisfactory. When weaknesses relate to
financial condition, such institutions may be vulnerable to the
onset of adverse business conditions and could easily
deteriorate if concerted action is not effective in correcting
the areas of weakness.  Institutions which are in significant
non-compliance with laws and regulations may also be accorded
this rating. Generally, these institutions give cause for
supervisory concern and require more than normal supervision to
address deficiencies.  Overall strength and financial capacity,
however, are still such as to make failure only a remote
possibility.

Composite 4

Institutions in this group have an immoderate volume of serious
financial weaknesses or a combination of other conditions that
are unsatisfactory. Major and serious problems or unsafe and
unsound conditions may exist which are not being satisfactorily
addressed or resolved. Unless effective action is taken to
correct these conditions, they could reasonably develop into a
situation that could impair future viability, constitute a
threat to the interests of depositors and/or pose a potential
for disbursement of funds by the insuring agency. A higher
potential for failure is present but is not yet imminent or
pronounced. Institutions in this category require close
supervisory attention and financial surveillance and a
definitive plan for corrective action.

Composite 5 

This category is reserved for institutions with an extremely
high immediate or near term probability of failure. The volume
and severity of weaknesses or unsafe and unsound conditions are
so critical as to require urgent aid from stockholders or other
public or private sources of financial assistance. In the
absence of urgent and decisive corrective measures, these
situations will likely require liquidation and the payoff of
depositors, disbursement of insurance funds to insured
depositors, or some form of emergency assistance, merger or
acquisition.