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A bank supervised by the Office of the Comptroller of the Currency (OCC) appealed to the Ombudsman the supervisory office’s (SO) conclusions in the most recent report of examination (ROE). Specifically, the bank appealed the following:
The appeal disagrees with the reclassification of certain deposits as brokered deposits, and the resulting violation of 12 USC 161(a). The bank asserts that the deposits should be reported as listed deposits, not as brokered deposits.
The appeal disagrees with the repeat status of the succession planning MRA concern. The appeal asserts the SO recently closed the succession plan concern of this MRA after deeming the plan satisfactory. The appeal states that the issues identified during the examination regarding the implementation of the succession plan are new concerns, not repeat.
The appeal disagrees with the downgrade in the component rating for liquidity to 5. The appeal contends that the bank’s liquidity levels, reliance on wholesale deposits, or funds management practices did not worsen or appreciably change since the previous examination. The appeal states that the SO applied a new standard for liquidity that is significantly harsher.
The appeal disagrees with the downgrade in the component rating for management to 5. The appeal states that the bank’s former chief financial officer (CFO), not its current CFO, was responsible for the bank’s liquidity levels and funds management practices. The appeal also contends that capital remained strong, and the board and management were seeking to mitigate net interest margin compression and replace municipal deposits with money market certificates of deposit.
The appeal disagrees with the composite rating downgrade to 5. The appeal disagrees that the volume and severity of problems were beyond management’s ability or willingness to control or correct. The appeal contends that no immediate outside financial or other assistance was needed for the bank to be viable, the bank does not pose a significant risk to the deposit insurance fund, and failure was highly improbable. The appeal states the bank was well-capitalized.
The Ombudsman conducted a comprehensive review of the appeal using the following supervisory standards in effect at the time of the examination:
The Ombudsman concurred with the SO for all issues appealed.
The Ombudsman concurred with the reclassification of the deposits and the call report violation. The subject deposits are brokered deposits, as defined in the call report instructions and 12 CFR 337.6(a). Brokered deposits are deposits that are obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker. The broker for the subject deposits is a deposit broker within the meaning of 12 CFR 337.6(a) because it is engaged in the business of facilitating the placement of deposits of third parties by engaging in matchmaking activities. As such, the bank must report these deposits as brokered deposits on Schedule RC-E of the call report.
The Ombudsman concurred with the repeat status of the succession planning MRA concern. The SO deemed the prior succession planning MRA closed upon receipt of a succession plan. However, the board and management had not yet implemented the plan, which is the focus of the concern cited as repeat in the ROE. Given the closure of the prior MRA, the deficiencies identified with the implementation of the succession plan during the examination support the designation of a repeat status.
The Ombudsman concurred with the rating of 5 for liquidity. Liquidity levels and funds management practices are so critically deficient that the bank’s continued viability is threatened. The bank’s reliance on wholesale and other rate- and credit-sensitive funds is at an unsafe and unsound level. These funds pose a substantial level of rollover risk because of the bank’s condition and inability to accept, renew, or roll over brokered deposits without a waiver from the Federal Deposit Insurance Corporation.
In addition, the material amounts of rate- and credit-sensitive funds are priced at high interest rates and have rapidly dissipated earnings. Management failed to produce accurate reports to reliably anticipate liquidity needs and identify available sources. The board-approved thresholds for liquidity risk limits are high and ineffective in controlling liquidity risk and responding in a timely manner to negative movements in the economy or the bank’s condition. This is particularly the case given the bank’s reliance on credit- and rate-sensitive funding.
These deficiencies align with the rating of 5 in the BSP Handbook, which states, “A rating of 5 indicates liquidity levels or funds management practices so critically deficient that the continued viability of the institution is threatened. Institutions rated 5 require immediate external financial assistance to meet maturing obligations or other liquidity needs.”
The Ombudsman concurred with the rating of 5 for management. The board and management’s strategy to grow longer-term assets with shorter-term rate- and credit-sensitive liabilities resulted in excessive exposure to loan and funding concentrations without commensurate risk management or controls. When market rates increased rapidly, the board and management failed to respond to alleviate the effects of liquidity and interest rate risks posed by the funding strategy. The SO communicated capital planning, interest rate model risk management, strategic and succession planning, and liquidity risk management concerns in previous reports of examinations. The concerns remained largely unaddressed as of the most recent examination. The bank’s audit functions failed to identify deficient internal controls within the asset liability management areas and financial statements.
These failures in the aggregate led to inaccurate reporting, failure to accurately measure, monitor, and control interest rate and liquidity risks, dissipation of earnings, and a decline in capital. The board and management’s failure to act timely and prudently led to the SO issuing several directives to preserve the bank’s liquidity and solvency. These deficiencies align with the rating of 5 in the BSP Handbook, which states, “A rating of 5 indicates critically deficient management and board performance or risk management practices. Management and the board have not demonstrated the ability to correct problems and implement appropriate risk management practices. Problems and significant risks are inadequately identified, measured, monitored, or controlled and now threaten the continued viability of the institution. Replacing or strengthening management or the board is necessary.”
The Ombudsman concurred with the composite rating of 5. The rapid and significant increase in interest rates exposed the bank’s unsafe and unsound funding strategy and weak balance sheet along with critically deficient risk management practices to measure, monitor, and control resulting risks. The significance of the concerns in liquidity and management drives the composite rating. Capital adequacy remains threatened by the unsafe or unsound practices that have led to the deteriorating financial condition, high funding and loan concentrations, imminent threat to liquidity, lack of comprehensive strategic and capital planning, and excessive interest rate risk exposure that will continue to erode retained earnings due to significant repricing mismatches. These deficiencies align with the composite rating of 5 in the BSP Handbook, which states, “[f]inancial institutions in this group exhibit extremely unsafe and unsound practices or conditions; exhibit a critically deficient performance; often demonstrate inadequate risk management practices relative to the institution’s size, complexity, and risk profile; and are of the greatest supervisory concern. The volume and severity of problems are beyond management’s ability or willingness to control or correct. Immediate outside financial or other assistance is needed for the financial institution to be viable. Ongoing supervisory attention is necessary. Institutions in this group pose a significant risk to the deposit insurance fund and failure is highly probable.”
The composite rating generally bears a close relationship to the component ratings assigned, but the composite rating is not derived by computing an arithmetic average of the component ratings. When examiners assign a composite rating, some components may be given more weight than others depending on the situation at the institution. In general, assignment of a composite rating may incorporate any factor that bears significantly on the overall condition and soundness of the financial institution. Management’s ability to respond to changing circumstances and address the risks that may arise from changing business conditions, or the initiation of new activities or products, is an important factor in evaluating a financial institution’s overall risk profile and the level of supervisory attention warranted. For this reason, examiners give the management component special consideration when assigning the bank’s composite rating.
