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Appeal of CAMELS Composite Rating and Component Ratings for Asset Quality, Management, Liquidity and Consumer Compliance (Fourth Quarter 2010)


A community bank appealed the downgrade in composite rating and component ratings for asset quality, management, liquidity, and consumer compliance assigned at the most recent examination. The bank also appealed conclusions regarding the bank's level of compliance with the formal enforcement action.


The decision to appeal was based on an examination that had several inconsistencies as well as calculation errors. The appeal stated that positive statements within the report of examination (ROE) contradicted criticisms of management practices regarding the investment portfolio. Additionally, the bank disagreed with several loan classifications, which would significantly lower total criticized assets. The board believed liquidity continued to be strong. The appeal also asserted compliance management was downgraded solely because of the lack of independence between the internal auditor and BSA officer although the same personnel had performed this function for the past 20 years and had always been complimented on her work. Lastly, the appeal reiterated management's belief that the bank's overall condition more accurately reflected a 2 rating.


The ombudsman reviewed the information submitted by the bank and the supervisory office. The Uniform Financial Institutions Rating Systems (UFIRS) as defined in the Comptroller's Bank Supervision Process Handbook was used as the standard for determining the appropriate composite rating and component ratings for asset quality, management, and liquidity. The OCC's Overview Handbook for Consumer Compliance provided guidance for determining the appropriate consumer compliance rating.

With respect to the downgrade in asset quality from 2 to 3, the ombudsman found the bank's asset quality exhibited characteristics of a 3 rating. The ROE identified a significant increase in classified assets and credit risk management processes in need of improvement. Based on the level of risk exposure, an elevated level of supervisory attention was warranted and the need to improve rating was appropriate.

With respect to the downgrade in liquidity from 1 to 2, the ombudsman found the bank's liquidity position was consistent with a satisfactory rating. The bank had adequate sources of liquidity; however, increasing credit risks and the lack of a contingency funding plan negatively impact the bank's overall liquidity position. The downgrade more accurately reflected the bank's current liquidity position including modest weaknesses in funds management processes.

With respect to the downgrade in consumer compliance from 1 to 2, the ombudsman found the bank's compliance program exhibits characteristics of a generally strong program. The ROE stated the bank's compliance risk was elevated by the lack of independence in Bank Secrecy Act (BSA) testing. Although management took steps during the examination to address this deficiency, the risks remain until the corrective action is proven effective. Therefore, the bank exhibited a generally strong consumer compliance management program with capable oversight by management; however, weaknesses did exist.

With respect to the downgrade in management from 2 to 3, the ombudsman found that management exhibited the characteristics of a 3 rating. Every aspect of the bank is a reflection of management and board supervision. Increasing risk exposure, ineffective credit risk management processes, and numerous violations of law are indicative of management and board supervision that are in need of improvement. These weaknesses elevate supervisory office concerns and meet the criteria for a 3 management rating.

Based on the above conclusions, the ombudsman found the composite rating downgrade from 2 to 3 was appropriate. The less than satisfactory rating for asset quality coupled with a less than satisfactory rating for management was sufficient to support a less than satisfactory rating for the overall condition of the bank. The board of directors and management were encouraged to work with their supervisory office to address the concerns raised during the examination so the bank may return to a healthy position.