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Appeal of Report of Examination Conclusions - (Third Quarter 2003)


A bank formally appealed the examination conclusions regarding the condition of the bank. Spe­cifically, bank management believed the report of examination:

  • Overstated the adverse condition of the bank's commercial loan portfolio;
  • Unduly criticized the bank's strategic planning process;
  • Assigned a troubled condition designation to the bank without any reference to any standard; or benchmark against which the bank was judged; and,
  • Incorrectly assessed the bank's risk profile and capital rating.


The bank acknowledged deterioration in its commercial loan portfolio, but stated that the (OCC) Canary benchmarks reflecting the op­eration of its credit function were inherently conservative. The loan portfolio has remained well balanced between retail, real estate, commercial, and construction. In 1999 asset quality was rated 2; since then, asset quality has improved and capital has grown. Risk from unsecured credit has been steadily declining since 1996. The commercial loan portfolio consists of loans to locally owned and operated businesses. The level of non-accrual loans, past-due loans, and charge-offs has improved; and the allowance for loan and lease losses (ALLL) has been adequate.

The appeal further states that the objective measures reflected an asset quality rating of 2 while subjective and harsh comments were made in the report of examination (ROE) that resulted in an assigned rating of 3.

The OCC believed that the bank's overall condition remained unsatisfactory and that the level of risk remained moderate and increasing. Subprime credit represented 150 percent of Tier 1 capi­tal. Capital was insufficient in relation to the overall risk profile of the bank, and earnings con­tinued to suffer because of high overhead and losses from loans and other assets. Asset quality and credit administration practices were less than satisfactory. Classified loans increased from 15 percent to 37 percent, the loan review function and account officers failed to accurately identify problem loans and the level of retail credit accounts with low credit scores was high. Also, while some progress had been made towards complying with the formal agreement, most articles were in noncompliance.


The ombudsman concluded that, while the tone of the report was unduly harsh, the overall assess­ment and ratings assigned in the report on examination (ROE) complied with agency policy and are reasonably reflective of the bank's condition at that time. There was evidence of increased credit risk and the level of noncompliance with the formal agreement appropriately impacted the ratings, risk profile, and overall condition of the bank.

Subsequent Event

Subsequent to the appeal, the supervisory office completed a review of the first quarter 2003 financial and asset quality information submitted by the bank. The review was initiated to assess management and the board's progress in improving the bank's earnings performance and lower­ing its risk profile. As a result, capital, asset quality, and liquidity ratings were upgraded. Ad­ditionally, the credit risk profile was reflected as moderate with a stable direction. A complete assessment of the composite and other component ratings was not performed. The ombudsman concurred with these changes.