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A problem federal savings bank (bank) supervised by the Office of the Comptroller of the Currency (OCC) appealed to the Ombudsman the supervisory office’s (SO) determinations in the most recent report of examination (ROE). Specifically, the bank appealed the
The appeal disagreed with the continued capital rating of 3. The appeal contended that the SO misapplied the capital planning guidance, resulting in an incorrect determination that the bank lacked adequate contingencies to support its risk profile. The appeal asserted that the ROE inaccurately stated that the bank cannot raise additional capital due to the holding company’s obligation to repay the Troubled Asset Relief Program (TARP). The appeal asserted that the proposed sale of a bank asset would increase capital.
The appeal argued that the bank’s asset quality should be rated a 2. The appeal asserted that the SO downgraded the asset quality component rating to a 3 based on the bank’s manual reconciliation processes, the ALLL methodology and balance, and the bank’s CRE concentration but did not consider the bank’s improved asset quality metrics. The appeal argued that the bank’s ALLL methodology complied with OCC guidance and generally accepted accounting principles (GAAP) and the dollar volume of non-owner occupied (NOO) CRE had decreased.
The bank disagreed with the aggregate credit risk assessment of high, stating that the assessment was based on the bank’s CRE concentration levels, which increased due to a decline in the bank’s capital rather than an increase in the dollar volume of CRE loans.
The appeal contended that the SO should delay the downgrade in the earnings rating to a 4 until the SO has an opportunity to evaluate the bank’s implementation of its strategic plan. The appeal contended that on a pro-forma basis, excluding non-core expenses and charge-offs, the bank would have been profitable as of the examination date.
The appeal contended that the SO incorrectly evaluated the liquidity risk resulting from the bank’s level of brokered deposits when downgrading the liquidity rating to a 3. The appeal asserted that the bank did not significantly rely on brokered deposits and was not precluded from obtaining brokered deposits because the bank could apply for a brokered deposit waiver from the Federal Deposit Insurance Corporation (FDIC). Further, the appeal asserted that the bank had no record of liquidity risk management weaknesses.
The appeal disagreed with the assessment of noncompliance for seven articles of the EA. The bank asserted the following:
The appeal disagreed with the SO’s conclusion that the violation of 12 CFR 21.21(d)(1) remained uncorrected. The appeal also disagreed with the SO’s conclusion that the bank had not made acceptable, substantial progress in correcting this violation.
The appeal disagreed with the SO’s conclusion that the violation of 12 CFR 21.21(d)(3) remained uncorrected. The appeal asserted that the board always ensured that the bank met its legal obligation by designating a qualified BSA Officer responsible for coordinating and monitoring compliance with the bank’s BSA Program.
The appeal disagreed with the SO’s citation of a violation of 12 USC 1818(s). The appeal asserted the bank had undertaken significant efforts to remediate the bank’s BSA Program and disagreed with the SO’s conclusion that the bank had not made acceptable, substantial progress to comply with the BSA Program article and correct the violation of 12 CFR 21.21(d)(1).
The appeal argued that the management rating of 4 was not supported as the board and management had taken significant steps to comply with the EA and ensure the bank’s safe and sound operation. The appeal asserted that the bank hired experienced management, made significant improvements in its audit function and BSA Program, and strengthened legacy internal control weaknesses.
The appeal contended that the SO did not support the downgrade in the composite rating to a 4. The appeal contested the capital, asset quality, management, earnings, and liquidity component ratings supporting the composite rating downgrade.
The appeal asserted that the ROE inaccurately listed commitment dates for corrective actions relative to certain EA articles.
The Ombudsman conducted a comprehensive review using the supervisory standards in effect at the time of the examination including:
The Ombudsman concurred with the SO regarding a 3 rating for capital. The Ombudsman agreed with the appeal assertion that the bank’s holding company is under no obligation to repay the TARP since the U.S. Department of Treasury’s (Treasury) ownership of the holding company was previously converted to common stock and, therefore, did not directly impede the bank’s ability to raise additional capital. The Ombudsman determined that the capital rating was supported by other significant risks to capital. Capital ratios were above the regulatory minimum levels, but did not provide adequate support for the bank’s high-risk profile, considering operational and accounting concerns, high CRE concentrations, credit risk management concerns, and significant compliance and reputation risks arising from the bank’s BSA compliance program deficiencies. In addition, the SO identified liquidity risk management concerns given the bank’s reliance on brokered deposits for funding. These layered risks, coupled with deficient earnings, warranted higher capital levels or a reduction in the quantity of risk. The bank’s strategy to increase capital was dependent on the sale of an asset, but the Ombudsman determined that the bank’s risk profile continued to be high even with the pro-forma capital increase from the asset sale.
The Ombudsman concurred with the SO’s rating of 3 for asset quality. According to the Uniform Financial Institutions Rating System, a rating of 3 is assigned when asset quality or credit administration practices are less than satisfactory. The Ombudsman determined that the bank’s asset quality trends, ratios, and metrics appeared to reflect a moderate level of risk; however, significant credit risk management weaknesses and the continued high CRE concentration supported the asset quality rating of 3 and insufficient credit risk management assessment. Material credit risk management weaknesses identified at the examination resulted in three new credit-related MRAs and noncompliance with the EA. Concentration risk management was weak given management’s inaccurate portfolio and individual loan stress testing, and failure to reduce NOO CRE exposure in accordance with the EA.
The Ombudsman acknowledged the decline in the dollar amount of outstanding NOO CRE loan volume but determined that the CRE concentration exposure is most appropriately measured as a percentage of capital to identify risk to capital. The bank’s CRE loan exposure as a percentage of capital had increased and remained well above the EA requirements. The Ombudsman concurred with the SO that the bank’s ALLL methodology was not consistent with accounting and regulatory guidance and identified additional deficiencies that the bank needed to correct.
The Ombudsman concurred with the SO’s rating of 4 for earnings. Earnings were deficient due to operational losses, lack of internal controls, and ineffective financial reporting processes. The bank was unprofitable and earnings were insufficient to support operations, augment capital, and fund the ALLL. The Ombudsman determined that even after excluding non-recurring items, the bank reported a net loss as of the examination date in the ROE. Management’s financial reporting process was unreliable given the need to amend multiple years of call reports. The bank also had to revise the budget as well as the strategic and capital plans because they were based on inaccurate information.
The Ombudsman concurred with the SO’s rating of 3 for liquidity due to the bank’s high reliance on brokered deposits, lack of contingent sources of liquidity, and insufficient liquidity risk management practices. The Ombudsman concurred with the SO’s assessment of insufficient for liquidity risk management. Given the bank’s significant reliance on brokered deposits, the board and management did not sufficiently plan for the elevated liquidity risk that could result from a reclassification of the bank’s capital category to “adequately capitalized” for Prompt Corrective Action purposes. Such a designation would restrict rates paid for deposits, require approval from the FDIC to accept deposits, and prevent the acceptance of any brokered deposits. Management lacked a diversified funding strategy to offset the potential loss in liquidity from brokered deposits and had a weak contingency funding plan and insufficient management information systems to monitor the brokered deposit concentration and rollover.
The Ombudsman concurred with the SO that the bank remained in noncompliance with the CRE article but reached some different conclusions regarding the reasons for noncompliance. The lack of CRE loan sales coupled with continued CRE originations and operating losses led to the increase in CRE loans as a percentage of total capital and delayed the bank’s efforts to reduce the NOO CRE concentration. The Ombudsman agreed with the bank that the ROE did not acknowledge the bank’s submission of the written policies and procedures; however, the ROE did appropriately communicate that the SO had not provided NSO because management needed to revise and resubmit the policies and procedures. The Ombudsman concurred with the SO that the policies and procedures did not address all EA article requirements, including development of CRE concentration limits and a strategy to reduce any non-conforming concentrations consistent with such limits. The Ombudsman also identified deficiencies with the bank’s portfolio-wide global stress test that were not in the ROE.
With respect to the capital article, the Ombudsman rendered a split decision. The Ombudsman agreed with the SO that the bank was in noncompliance with this article as the bank must revise the capital plan to update the financial information given the financial reporting errors. The Ombudsman agreed with the bank that the holding company was under no obligation to repay the TARP given the Treasury’s common stock ownership.
The Ombudsman agreed with the SO that the bank remained in noncompliance with the BSA Program article because management had not yet effectively implemented all changes and the bank’s BSA Program needed to be expanded. The Ombudsman disagreed with the SO that the board and management had not made acceptable, substantial progress regarding this article. The Ombudsman determined that the SO’s transactional testing evidenced instances of noncompliance with the bank’s revised policy and procedures, but the overall level of exceptions was substantively lower than the results documented in the ROE. The Ombudsman determined that the bank did not comply with the BSA Officer requirements of the article, as the bank experienced significant turnover in the BSA Officer position and failed to demonstrate the ability to retain a permanent, qualified full-time BSA Officer. The Ombudsman determined that the bank remained in noncompliance with the BSA Action Plan article, as the bank must demonstrate effective implementation and adherence to the BSA Action Plan. The Ombudsman directed the SO to revise the ROE to reflect the timing of the SO’s NSO of the bank’s BSA Action Plan.
The Ombudsman concurred with the SO’s assessment that the violation of 12 CFR 21.21 (d)(1) was uncorrected but disagreed that the board and management had not made acceptable, substantial progress in addressing this violation. The Ombudsman determined that the bank had not yet effectively implemented all changes required by the BSA Program article of the EA, which supported the SO’s assessment that the violation remained uncorrected. The SO did not give sufficient weight, however, to the bank’s corrective action relative to one of the two underlying MRAs that resulted from the violation and the bank’s actions to address a related suspicious activity article when determining acceptable, substantial progress.
The Ombudsman concurred with the SO’s assessment that the violation of 12 CFR 21.21(d)(3) was uncorrected. The Ombudsman determined that the appointment of a BSA Officer was not sufficient to meet the regulatory requirement, if that person does not have the expertise, authority, or time to complete the job satisfactorily. The bank experienced significant turnover in the BSA Officer position and had not demonstrated the ability to retain a qualified, experienced, and full-time BSA Officer to effectively coordinate and monitor day-to-day compliance with the bank’s BSA Program.
The Ombudsman disagreed with the SO’s conclusion that the bank had failed to make acceptable, substantial progress to address the corrective actions for the BSA Program article and the violation of 12 CFR 21.21(d)(1) to support citing a violation of 12 USC 1818(s). The Ombudsman directed the SO to remove this violation and all references to it from the ROE and the supervisory record.
The Ombudsman determined that the bank remained in noncompliance with the Strategic Plan article. The Ombudsman agreed with the SO’s decision to not provide NSO to the most recently revised strategic plan due to references to new products and the lack of clarity on whether the board planned to simply research or actually implement the new products.
The Ombudsman determined that the bank remained in noncompliance with the Board and Management Supervision article because the board’s actions to address this article were insufficient to comply with the requirements. The Ombudsman also concurred with the SO regarding documentation in board minutes noting that a significant charge-off warranted a formal discussion with the board and documentation in board minutes because it was material to the bank’s financial condition. In addition, given the materiality, it warranted proactive and timely notification to the SO, particularly since the bank was operating under increased supervisory scrutiny given the issuance of the EA.
The Ombudsman concurred with the SO’s assessment of a 4 rating for management. The bank’s financial condition had deteriorated with deficient earnings posing significant risk to capital. Moreover, the bank’s high CRE concentration, liquidity funding strategy, operational issues, and ongoing BSA concerns also posed heightened risk to capital. Internal controls and risk management practices were weak across multiple areas of the bank. The Ombudsman agreed with the SO that the board and management failed to promptly and successfully address existing problems, including the EA and existing MRAs. The Ombudsman concurred with the SO that the overall audit function was weak due, in part, to weak audit committee oversight.
The Ombudsman determined that the 4 composite rating was supported given deficient board and management oversight. Serious financial and managerial deficiencies had resulted in unsatisfactory performance and an excessive level of supervisory deficiencies. Earnings were deficient and capital levels did not fully support the bank’s high and increasing risk profile. Management failed to reduce the bank’s excessive concentration of NOO CRE loans, as required by the EA. Two BSA-related violations and many of the EA articles remained uncorrected.
The Ombudsman determined that the SO did not accurately communicate the commitment dates for two of the EA articles and directed the SO to revise the ROE accordingly. The Ombudsman directed the SO and bank management to work together to develop appropriate commitments for actions and time frames to comply with the EA.
