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Appeal of the Composite Rating and Component Ratings for Asset Quality, Management, Sensitivity to Market Risk, and Information Technology (Fourth Quarter 2008)


A bank appealed to the Ombudsman the "3" composite rating as well as the "3" rating assigned for the areas of asset quality, management, sensitivity to market risk, and information technology. It its appeal, bank management stated that after reviewing the Uniform Financial Institutions Ratings System (UFIRS) criteria, a "2" rating was more appropriate. In the appeal, bank management also disagreed with the "troubled condition" designation. However, because the bank was under a formal enforcement action, the "troubled condition" designation was not an appealable issue.



In its appeal, bank management stated that while they understand the examination conclusions, they do not feel that they rise to the level of a formal enforcement action. Bank management states that it has a long-documented history of implementing examination recommendations as well as self-identification of issues and corrective action. Additionally, since the last exam, the bank has added significant banking experience to its leadership base through the addition of a new director and a chief financial officer. These additions have strengthened their core knowledge and improved their risk processes.

In regard to asset quality and the allowance for loan and lease losses (ALLL), bank management acknowledges some deterioration in the loan portfolio. However, the problem assets have an adequate reserve. The independent loan review covered 48.4 percent of total loans and recommended only one credit for downgrade—from pass to substandard.

With regard to market sensitivity, the bank's appeal states that the examination indicated only that the level of risk was higher than recommended, not that management lacked an understanding of the risks.

The bank's appeal further states that it immediately responded to deficiencies noted regarding information technology. Although the prior exam indicated that the bank's information technology program was consistent with a bank of its size and complexity, bank management has every intention of complying with the recommendations made by the examiners.

Supervisory Office

The supervisory office's response to the bank's appeal states that the "3" rating for asset quality is appropriate because of material loan growth, high concentrations in commercial real estate, and significant market deterioration. Additionally, management of credit risks was not consistent with the level of loan portfolio growth and did not fully recognize the level of deterioration.

The supervisory office concluded that the level of interest-rate risk was high and interest-rate management was weak. The bank's strategy of funding rapid loan growth with non-core funding sources presented high risk to short-term earnings.

With regard to information technology, board oversight was considered weak because there were repeat deficiencies noted in the security program, the business continuity plan, and audit.

The supervisory office stated that the "3" management rating was appropriate because of weak risk management in credit, funds management, and information technology. The quality of systems and the lack of discipline in applying policies and procedures were insufficient for the growth and increasing complexity of bank operations.


Banks operating under a formal enforcement action may appeal their assigned composite and component ratings. However, in such cases, the Ombudsman's review is restricted to the factual record, based on the conditions of the bank at the time of the examination. The facts, as detailed in the report of examination (ROE), are evaluated against the standards outlined in UFIRS and other regulatory policies to determine whether the supervisory office was correct and consistent in its application.

The bank's appeal did not dispute the facts of record as detailed in the ROE, but disagreed with the supervisory office regarding the severity of their impact. The composite rating and management component rating are typically reflective of the overall condition of the bank. The facts contained in the ROE reflect an increasing risk profile in overall operations, most notably in credit and market sensitivity. Additionally, the ROE contained a significant volume of "matters requiring attention" and several violations of law.

A "2" rating in any component is generally defined by UFIRS as an area with satisfactory risk management practices. Minor weaknesses may exist, but are not material to the safety and soundness of the institution and are being addressed.

A "3" rating in any component indicates management and board performance that needs improvement or risk management practices that are less than satisfactory.

Therefore, based on the weaknesses identified in asset quality, management, and sensitivity to market risk, the Ombudsman concluded that the "3" rating assigned by the supervisory office was appropriate.

The UFIRS defines a bank with a "2" composite rating as being fundamentally sound. No component rating should be more severe than "3". Only moderate weaknesses are present and are well within the board of directors' and management's capabilities and willingness to correct.

A composite "3" rating indicates some degree of supervisory concern in one or more component areas. Weaknesses range from moderate to severe and management may lack the ability or willingness to address the concerns within appropriate time frames. Additionally, risk management practices may be less than satisfactory.

Based on the above criteria, the Ombudsman concluded that a composite rating of "3" was appropriate for information technology and the overall condition of the bank.