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Appeal of Composite and Component Ratings and Troubled Condition Designation (Third Quarter 2017)


A bank supervised by the Office of the Comptroller of the Currency (OCC) appealed to the District Deputy Comptroller conclusions from its most recent report of examination (ROE) issued by the supervisory office (SO). Specifically, the bank appealed

  • the composite rating of “3;”
  • the “troubled condition” designation for purposes of Section 914 of the Financial Institutions Reform, Recovery, and Enforcement Act, 12 USC 1831i, and as defined in the OCC’s implementing regulation, 12 CFR 5.51; and
  • the component ratings of “3” for asset quality and management.


The appeal asserted that the composite rating and “troubled condition” designation were unsupported because the SO rated a majority of the component ratings as “2,” deemed most areas of the risk management system as satisfactory, and noted many positive attributes regarding the bank’s condition and risk management system in the ROE.

With respect to the asset quality rating, the appeal contended that asset quality and credit administration practices are satisfactory. The appeal stated that the levels of past due and nonaccrual loans, other real estate owned, classified assets, and concentrations of credit are satisfactory. The appeal also disagreed with the criticisms regarding the bank’s commercial real estate (CRE) portfolio, stating that bank management met with the SO prior to the examination to discuss its strategy of growing the portfolio and afforded the SO an opportunity to discuss any concerns with the bank’s strategic plan. The appeal acknowledged that the bank’s credit administration practices could be improved, but should be deemed satisfactory.

Regarding the management rating, the appeal asserted that the board and management are willing and capable of addressing the SO’s concerns. The appeal also stated that risk management practices are satisfactory in a majority of the areas and the financial condition of the bank is also satisfactory.

Supervisory Standards

The Deputy Comptroller thoroughly reviewed the appeal using the following supervisory standards:

  • The “Bank Supervision Process” booklet of the Comptroller’s Handbook, September 2007, updated May 2013
  • 12 CFR 5.51(c)(7), “Definition of Troubled Condition”
  • OCC bulletin 2006-46, “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices,” December 2006


The Deputy Comptroller concurred with the SO’s assessment of “3” for the composite rating. The Uniform Financial Institutions Rating System (UFIRS) states that a bank’s composite rating bears a close relationship to the component ratings assigned but is not derived by computing an average of the component ratings. When assigning a composite rating, some components may be weighted more heavily than others. The Deputy Comptroller concluded that the weaknesses identified in credit, liquidity, and strategic risk management processes, combined with an increasing risk profile, resulted in heightened supervisory concern. Additionally, concentrations of credit in construction and development (C&D) loans, coupled with insufficient concentration risk management, could impact the financial condition of the bank if economic fluctuations occur.

The Deputy Comptroller agreed with the bank that the bank should not be designated as being in “troubled condition” because it does not meet the definition outlined in 12 CFR 5.51(c)(7). According to the regulation, a “troubled condition” designation can be applied in three ways: (1) the bank has a composite rating of 4 or 5 under UFIRS; (2) the bank is subject to a formal enforcement action; or (3) the bank is notified in writing by the SO. In this case, the SO had notified the bank in writing of its “troubled condition” designation, however, the Deputy Comptroller disagreed with the assessment. The SO revised the ROE to remove reference to the “troubled condition” designation.

The Deputy Comptroller agreed with the SO’s assessment of “3” for the component rating for management. The SO identified weak or insufficient risk management for credit, liquidity, and strategic risks. The board and management significantly grew the bank’s loan portfolio and assumed concentrations of credit without establishing sufficient risk management systems. The SO also noted instances of noncompliance with internal policies and procedures related to lending and liquidity. Additionally, the bank’s strategic plan was not adequate. The strategic plan did not discuss loan growth with sufficient granularity, outline the current and projected concentration levels, and include a capital analysis to support such concentrations.

The Deputy Comptroller concurred with the SO’s assessment of “3” for the component rating for asset quality. Management implemented a loan growth strategy, beginning in 2015, that exceeded peer averages and fueled concentrations of credit in non-owner-occupied CRE and C&D loans. The bank’s quality of underwriting was moderate to liberal, and management did not improve the concentration risk management practices to monitor and control the growing concentrations. Refer to OCC bulletin 2006-46, “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices.”