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Appeal of Shared National Credit (SNC) – (Third Quarter 2010)
A community bank appealed the downgrade in the management rating assigned at the most recent examination.
The appeal asserted that the bank's composite rating and management rating were rated 2 at the most recent examination. A new president was installed prior to the end of the examination and the Report of Examination (ROE) included favorable comments about the new management team. The ROE recognized that the new management team was "...inexperienced in the lending area but they were willing and able to learn and be successful". Similar comments were made during the next visit.
The appeal states that "without even conducting an exam" the supervisory office downgraded management to a 3 because of two call report errors. The errors were unintentional and reflected a need for training of the employee responsible for preparing the call reports. The appeal further states that upon learning of the errors the bank took immediate corrective action and engaged a different accounting firm to assist in the preparation and review going forward.
The supervisory office response states that the downgrade in the management rating was based on recurring call report errors and inexperienced management. Call report errors were noted during a quarterly review that impacted certain schedules but not the income statement or balance sheet. These errors did impact six prior call reports but did not materially impact call report accuracy, therefore, no violation was cited.
During a subsequent quarterly review, additional call report errors were noted that impacted the prior two call reports. These errors caused non-performing credits and other real estate owned (OREO) to be misstated. These errors were not detected by management or their external accounting firm. Because of the repetitiveness of the Call Report inaccuracies and the impact to public financial reports, the Supervisory Office cited a violation of 12 USC 161 Reports to the Comptroller of the Currency. Management's unfamiliarity with Call Report preparation and an ineffective review process were cited as the cause of the violation.
The Ombudsman reviewed the information submitted by the bank and by the supervisory office. The Uniform Financial Institutions Rating System (UFIRS) was used as the standard for determining the appropriate management rating.
A rating of 2 indicates satisfactory management and board performance and risk management practices relative to the institution's size, complexity, and risk profile. Minor weaknesses may exist, but are not material to the safety and soundness of the institution and are being addressed. In general, significant risks and problems are effectively identified, measured, monitored, and controlled.
A rating of 3 indicates management and board performance that need improvement or risk management practices that are less than satisfactory given the nature of the institution's activities. The capabilities of management or the board of directors may be insufficient for the type, size, or condition of the institution. Problems and significant risks may be inadequately identified, measured, monitored, or controlled.
Based on the ombudsman's review of the facts at the time of the ratings downgrade, the Supervisory Office appropriately applied the ratings guidance in assigning the 3 rating. The recurring call report deficiencies noted by the supervisory office were indicative of a management team that was inexperienced and risk management systems that need improvement. These characteristics are consistent with the definition of a 3 rated management team.