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Appeal of Component Ratings (Second Quarter 2013)


A community bank supervised by the Office of the Comptroller of the Currency (OCC) appealed to the Southern District Deputy Comptroller the supervisory office’s findings in a recent limited-scope examination (interim review). Specifically, the bank appealed its asset quality rating of 4, earnings rating of 3, and capital rating of 3.


Asset Quality: While the bank agreed that its asset quality was deficient in the past, the appeal contended that the supervisory office failed to note improving trends in key credit metrics that should have resulted in an upgrade in the bank’s asset quality component rating. The bank provided information that demonstrated a reduction of internally identified classified assets, past due loans over 30 days, and past due loans over 30 days excluding nonaccrual loans. The bank asserted that present levels in these reported ratios reflected well-controlled credit risk. The bank presented additional information comparing its nonperforming asset levels with other banks’ averages for the state and the region of the state where the bank is headquartered.  

Earnings: The bank’s appeal focused on return on average assets (ROAA) and net interest margin reported at year-end 2012 and for the first quarter of 2013. The reported reduction of internally identified classified assets was noted as support for an upgrade of the earnings component. The bank also provided information on ROAA performance for banks across the state and in this bank’s region of the state.  

Capital: The bank’s appeal concentrated on its improving trends in tier 1 capital and total risk-based capital ratios over the last three quarters. The bank asserted that the holding company’s preferred stock related to the Troubled Asset Relief Program was sold via U.S. Treasury auction to institutional investors. This sale allowed for full recovery of the original investment plus dividends and interest. The tier 1 leverage ratio for other banks in the state compared with this bank’s ratio was also presented.


The Deputy Comptroller reviewed the information submitted by the bank and the examination communication to the bank. The Uniform Financial Institutions Rating System (UFIRS), as defined in the “Bank Supervision Process” booklet of the OCC’s Comptroller’s Handbook, was used as the standard for determining the appropriate component ratings for asset quality, earnings, and capital.

The Deputy Comptroller noted that the interim review used financial information as of September 30, 2012, as the basis for the ratings and conclusions. The conclusions also noted that the scope of the examination reflected limited testing and that the interim review was conducted over a two-week period. The bank’s appeal focused on information that became available after the conclusions were formulated for the bank. While the bank’s appeal appears to reflect that progress has continued since the interim review took place, examiners did not have access to this information at the time of the interim review and did not have the opportunity to review, analyze, and confirm the information’s accuracy. The Deputy Comptroller concluded that the component ratings for asset quality, earnings, and capital reflected in the supervisory letter are consistent with the information available at the time of the interim review and conform to the UFIRS standards.