Appeal of CAMEL Rating (Fourth Quarter 1996)
A formal appeal was received from a bank that disagreed with the composite CAMEL rating of "3" assigned during their most recent safety and soundness examination. The bank's chairman provided a summary of the bank's view of the more significant misstatements and omissions of fact included in the Report of Examination (ROE):
In the appeal letter the chairman also stated that while the bank does not agree with the conclusions drawn by the OCC or the degree of severity afforded many of their concerns, the board and management have already taken the following action to resolve the major concerns as follows:
The chairman also noted that at the time of appeal the bank's Tier 1 leverage ratio was already approximately 7 percent.
During the third quarter of 1995, the bank acquired a portfolio of loans made to foreign corporations and individuals secured by third party certificates of deposit (offshore shell corporations). On September 30, 1995, the bank reported a Tier 1 leverage ratio of 4.05 percent due to the funding of the $40MM in deposit-backed international loans during the third quarter. A month later the bank requested authority to operate with less than the minimum Tier I leverage ratio required under 12 CFR 3.6. The bank's request for an exemption was not granted. As of December 31, 1995, the bank's Tier 1 leverage ratio was 4.24 percent.
The bank's ROE describes the Office of the Comptroller of the Currency's (OCC's) primary concern as the drop in the bank's Tier 1 capital as a percent of adjusted total assets (leverage ratio) to an unacceptable level. The drop in the leverage ratio was a result of the bank significantly increasing their holdings of loans to foreign corporations and individuals secured by third party certificates of deposit. Because of the drop in capital ratios, the banks supervisory office also became very concerned about the levels of interest rate risk, the banks earnings, and the supervision by management and the board of directors.
Subsequent to the examination the board of directors passed the following resolution:
BE IT RESOLVED, that steps will be taken to reduce the number and amount of international loans so that a capital-to-assets ratio of no less than 6 percent is attained within ninety days and, that future international business would not cause the bank to fall below 6 percent.
BE IT RESOLVED, that the banks mutual fund holdings will be disposed of within the next 30 days.
BE IT RESOLVED, that at this time, mutual funds will not be considered an appropriate investment for the bank.
Through runoff of a portion of the banks deposit backed loans, the banks Tier 1 capital ratio was approximately 7 percent at the time of the appeal and the bank had disposed of all of its mutual fund investments.
The significant growth in the deposit backed loans during 1995 materially changed the banks risk profile. The ombudsman concluded that at the time of the examination the "3" rating assigned in the bank's most recent ROE was appropriate. However, the subsequent actions taken by the board to resolve the OCC's major concerns changed the risk profile of the bank to the point of justifying a new examination: The ombudsman requested the supervisory office to schedule an examination to reassess the bank's current condition.
Material Subsequent Event: The bank was recently re-examined by the supervisory office and the bank's composite CAMEL rating was upgraded to a composite CAMEL "2."