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Appeal of CAMEL Rating (Third Quarter 1995)


A bank formally appealed its composite CAMELS rating of "3." Bank management argued that the bank did not meet the definition of a 3-rated institution. Management stated that the bank did not "exhibit a combination of financial, operational or compliance weaknesses ranging from moderately severe to unsatisfactory. "Management stated that the bank was not in significant noncompliance with laws and regulations. Management's appeal letter cited the following justifications for an upgrade to a "2" rating:

  • The bank has been profitable for five of the last six years, including a return to profitability in 1994 from a small loss in 1993. The net interest margin was a healthy 6.2 percent, compared to a peer group average of 3.99 percent.
  • The bank undertook a successful public stock offering and raised $110,000 in capital. This raised the bank's Tier 1 leverage capital ratio to 10.2 percent and the risk-based capital ratio to more than 14 percent.
  • The level of classified assets was a modest 12 percent of Tier 1 capital plus the ALLL in 1994, although the amount of commercial loans doubled. Loan charge-offs decreased by 64 percent and recoveries increased by 87 percent in 1994. Loan policies and procedures were revised and improved over the past year; the directors are now involved in approving loans over $50,000.
  • The board of directors has focused on improving the quality, commitment, and training of bank management and employees over the past year. The board and management have substantially complied with all of the articles of two formal agreements.


This small ($20 million) bank was founded in 1922 and had seen virtually no growth until 1994. The bank entered into a formal agreement in 1992 to restrict transactions between the bank and affiliated companies of its one-bank holding company. The ownership of the bank has been transferred from the holding company, and the formal agreement is being removed. A second formal agreement was entered into in 1993 because of lack of management oversight and lack of direction. The bank had had three chief executive officers in the previous year. Six of the articles of the formal agreement have been complied with, and the bank was in partial compliance with the remaining five articles. Of particular concern was the article dealing with credit administration issues.

The report of examination (ROE) cites the following as major supervisory concerns: an inexperienced president, lack of management depth, lack of capacity to manage anticipated growth in commercial lending activities, and uncertain ability to return profitability to a satisfactory level. The ROE goes on to state that management supervision has improved but is still considered less than satisfactory in view of the above concerns. Earnings performance was rated as less than satisfactory due to recurring overhead expenses and the costs of the recent stock offering.

The bank was designated as "well capitalized" with Tier 1 leverage capital of more than 10 percent. Classified assets were minimal at less than 12 percent, and the return on assets was positive although far below peer group averages. The anticipated problems in the loan portfolio have never materialized in spite of the loan administration issues.

The affiliation and ownership with the bank holding company has been dissolved and management and supervision of the bank has been stabilized. The board of directors has extended the employment contract of the president. The president is now ably assisted by an experienced chairman of the board in making commercial credit decisions.

Financial information received after the ROE reflected rapid asset growth and a corresponding decrease in the capital ratios. However, the capital ratios remain in excess of regulatory requirements. Also, about 50 percent of the growth was vested in highly liquid marketable securities or federal funds sold. Positive net earning trends continued. At the request of the ombudsman, the chairman of the board submitted a preliminary capital plan. The plan called for the sale of additional common stock from an offering circular that has been previously approved by the OCC.


The ombudsman agrees that there is reason for some concern about the rapid growth of the bank and that credit administration practices need to improve. With the aid and guidance of the OCC, these issues can be addressed in the normal course of business.

The composite CAMELS rating of "3" was upgraded to a "2". The lack of management stability and experience has been addressed and credit administration issues can be resolved in the normal course of operations. The financial condition of the bank is satisfactory, with classified assets at a stable low level, and earnings trends are favorable. Capital ratios remain above regulatory requirements; OCC district personnel will work with the board on the capital plan that has been submitted.