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The ombudsman received a formal appeal of examination conclusions involving the sensitivity to market risk, earnings, and management component ratings. The bank's appeal stated that in the Report of Examination the OCC assigned the bank a 3 rating for sensitivity to market risk, a 5 rating for earnings, and a 5 for management. Bank management and the board of directors' contention was that these CAMELS component ratings did not accurately reflect the bank's condition at the time of the examination.
Management and the bank's board believed that:
"Neither the condition of the bank's sensitivity to market risk as of the examination date, as compared to the last examination, nor the quality of the bank's Asset/Liability Management Policy warranted the OCC downgrading the bank's Sensitivity to Market Risk rating from a ''2'' to a ''3.''
Furthermore, by commissioning reports with outside consulting firms, which also reflects the positive state of the bank's interest rate risk management, the bank has illustrated sound risk management policies and procedures.
The supervisory office concluded in the ROE that the bank's interest rate risk was slightly elevated because of an imbalance resulting from assets repricing faster than liabilities. The ROE also commented that the board and management's planning and risk management processes were deficient. Additionally, the supervisory office believed the Asset/Liability Management Committee had not taken an active role in managing the balance sheet or interest rate risk.
In accordance with OCC Bulletin 97-1 (''Uniform Financial Institutions Rating System'') the sensitivity to market risk rating is intended to reflect the degree to which changes in interest rates can adversely affect the earnings and capital of a financial institution. Considerations in determining the sensitivity rating are management's ability to identify, measure, monitor, and control market risk, and the adequacy of the capital and earnings in relation to the bank's level of interest rate risk exposure. The ombudsman's review did not find adequate support that the board and management were actively managing the bank's interest rate risk (IRR) position.
Review of the information provided to the ombudsman's office revealed:
Based on the risk management weaknesses described above, the ombudsman concluded that the 3 rating assigned during the examination was appropriate.
The bank's submission commented that:
Although at the time of the last ROE, the bank was experiencing losses, it was taking steps to increase earnings. During the past year, the bank commenced its SBA and Credit Card program, both of which introduced a significant revenue stream to the bank. The bank's earnings trend is not negative and does not represent a distinct threat to the bank's capital. During this time the bank also raised additional capital to compensate for funding the increased provision for loan losses. The increase in revenue from the last examination and the nature of the bank's expenses in no way can justify the downgrading of the bank's earnings rating. The OCC's assignment was wholly improper.
Comments in the ROE concluded that earnings remain poor and were eroding the bank's capital. The supervisory office also stated that management and the board needed to take immediate and ongoing action to alleviate large continuing losses and address the other weaknesses. Examiners' primary concern was that continuing losses of the magnitude experienced in the last years would threaten the bank's viability.
Pursuant to OCC Bulletin 97-1 (''Uniform Financial Institutions Rating System'') earnings are intended to reflect not only the quality and trend, but also factors that may affect the sustainability or quality of earnings. Considerations in determining the earnings rating are the following:
The ombudsman's review revealed that over the last two years, the bank had no traditional core earnings. The bank experienced net-operating losses in the last two years of approximately $600,000 and $900,000, respectively. These losses included provisions to the allowance for loan and lease losses of $600,000 and $700,000, respectively.
Furthermore, the net interest margin declined from 4.60 percent to 3.80 percent in the same time period due to increasing funding costs and declining loan yields. Net losses had eroded capital, necessitating an injection of capital. Additionally, the earnings posture of the bank could be further affected by the bank's risk profile and risk management practices. These include:
Therefore, the ombudsman concluded that the 5 rating assigned during the examination was appropriate.
The bank's appeal letter stated management and the board have made a concerted and significant effort to improve the depth and stability of bank management by making position-specific improvements. They believed that through the creation of new officer positions and the hiring of new officers, the bank management team was significantly stronger at the time of this examination than at the time of the last examination. For these reasons, bank management believed a downgrade in the bank's management rating was inconsistent with the actual condition of the bank.
The ROE stated management and the board's supervision was ineffective. The ROE comments also asserted management actions were not substantive nor were they taken in a timely manner to strengthen the bank's loans and risk management systems. The bank continued to experience turnover in management and the board. Additional examination findings revealed the bank did not have a legal number of directors, the president/chief-lending officer was terminated, and the chief financial officer resigned.
Pursuant to OCC Bulletin 97-1 (''Uniform Financial Institutions Rating System'') the management rating is intended to reflect the capability and performance of the board and management. Some considerations in determining the management rating are:
The ombudsman's review revealed that the position specific appointments did not improve the depth, stability, and expertise needed in the board and management. This finding was based on the following:
Strong leadership is essential in a financially troubled institution. The board's effort to provide leadership had not been effective. Therefore, the ombudsman concluded the 5 rating assigned during the examination was appropriate.