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A problem federal savings association (bank) supervised by the Office of the Comptroller of the Currency (OCC) appealed to the Ombudsman the supervisory office’s (SO) determination in the most recent report of examination (ROE). Specifically, the bank appealed the following:
The appeal disagreed with the SO’s assessment of noncompliance with the Board to Ensure Competent Management and Board Oversight article. The appeal disagreed that the board and management failed to ensure the safe and sound operation of the bank by failing to implement and adhere to a viable and consistent strategic plan. The appeal advised that a niche consumer loan product (niche product) was a cornerstone of the bank’s Strategic Plan that had received a prior written determination of no supervisory office objection (NSO) from the SO, and that the bank’s failure to achieve profitability was a direct result of the SO’s direction to cease offering the niche product. The appeal argued that the SO’s conclusion that the board and management focused on the sale of the bank and made decisions that exacerbated existing problems was unfounded. The appeal rejected the SO’s conclusion that senior management authorized expenses to benefit a non-bank entity.
The appeal asserted that the bank was in compliance with the Strategic Plan article because it was operating under a plan that had received the SO’s NSO. The appeal disagreed with the SO’s conclusion that the board and management did not share details with the SO regarding the formation of the non-bank entity and that the information was not included in the Strategic Plan or board minutes. The appeal contended that the board and management disclosed to the SO two key initiatives regarding the sale of the bank as well as the sale or transfer of the bank’s niche product, and management continued to document progress on those initiatives thereafter.
The appeal argued that the bank did not disregard the Implementation of New Products and Services article’s requirements by introducing a new product without first submitting a written analysis of the product to the SO for review and prior written determination of NSO. The appeal contended that management did not recall, and had no record of, the SO notifying the bank that a prior determination of NSO was required for the new consumer loan product (new product).
The appeal argued that the new MRA for Liquidity Risk Management Practices was not warranted as the bank appropriately managed the bank’s liquidity, including stress testing for extreme liquidity events such as the risk of account runoff and inability to renew brokered deposits. The appeal asserted that management informed the SO that the bank procured a significant amount of two-year certificates of deposit after the onsite examination, which increased the bank’s on-balance-sheet liquidity ratio.
The appeal argued that the new Conflict of Interest MRA was not warranted as the board and management complied with regulations related to potential conflicts of interest regarding the formation of a non-bank entity. The appeal asserted that the bank’s senior management disclosed the conflict in accordance with 12 CFR 163.200 and the bank’s Corporate Governance Policy. The appeal also contended that the board had established structures and protocols to address potential conflict of interest related to the senior manager’s involvement with the non-bank entity.
The Ombudsman conducted a comprehensive review of the information submitted by the bank and primarily considered the supervisory standards below in determining the appropriate decisions.
The Ombudsman concurred with the SO that the bank was not in compliance with the Board to Ensure Competent Management and Board Oversight article of the EA but also revised the ROE to add or correct certain statements. The Ombudsman agreed with the SO that the board and management did not ensure a safe and sound operation of the bank because they failed to achieve and sustain profitability. The Ombudsman found that the niche product’s growth was below projections and its offering did not help the bank achieve profitability, even prior to the required cessation of the offering of the product. The board and management were not operating under the strategic plan that had received the SO’s NSO due to the board and management’s implementation of several key strategic decisions that were not specified in that plan. In addition, the board did not submit a revised strategic plan to the SO for a prior written determination of NSO to reflect actions they had intended to take. The Ombudsman concurred with the SO that the board and management made decisions that exacerbated existing problems. Significant expenses incurred on the niche product and the new product exacerbated existing earnings weaknesses with no noted benefit evidenced as of the examination. In addition, the sale and replacement of higher yielding consumer loans with lower yielding commercial real estate (CRE) loans negatively affected the bank’s net interest margin. The Ombudsman determined that while certain expenses attributed to the bank were related to the sale of the niche product and occurred under the leadership of the senior manager with a conflict, there was insufficient evidence to indicate that expenses were incurred to benefit solely the non-bank entity, which was partially owned by the bank’s senior manager and formed to potentially purchase the bank’s niche product.
The Ombudsman concurred with the SO that board and management were in noncompliance with the Strategic Plan article of the EA for several reasons. The Ombudsman also revised the ROE to add or correct certain statements. The Ombudsman determined that the board and management submitted a strategic plan that did not reflect strategic initiatives or implementation of initiatives that were in process, i.e., sale of the bank and the niche product as well as implementing a new product. The board and management repeatedly executed strategic decisions prior to submitting accurate strategic plans reflecting those decisions and requesting a prior written determination of NSO from the SO. The board and management were not transparent in their decision-making and strategic pursuit of the sale of the bank and the niche product as well as the senior manager’s ownership interest in a non-bank entity formed to potentially purchase the bank’s niche product. The Ombudsman determined that the expenses the bank incurred to sell the niche product could potentially benefit the non-bank entity. As such, the senior manager’s involvement with these expenses was a conflict of interest that the board and management did not appropriately manage. In addition, the board and management did not adhere to the previously approved strategic plans to achieve the primary short-term goal of profitability. Management missed earning targets and profitability target dates continued to extend.
The Ombudsman concurred with the SO that the board and management are not in compliance with the Implementation of New Products and Services article of the EA, as management established a new product prior to seeking NSO, as required by the article. The Ombudsman found that management executed an agreement with a third party to initiate the new product before submitting a written analysis of the product to the SO for review and before receiving the SO’s prior written determination of NSO. The SO had informed the board and management in writing that NSO for the new product was required. During the examination, the SO also found that management had executed some transactions related to this product.
The Ombudsman concurred with the issuance of the Liquidity Risk Management Practices MRA. The bank’s quantity of liquidity risk was high due to its high reliance on credit and rate sensitive funds, low asset liquidity, and weak financial condition. The Ombudsman concurred with the SO’s conclusion that the bank’s stress test scenarios were not sufficiently severe given the bank’s risk profile. For example, the board and management did not sufficiently plan for the elevated liquidity risk that could result from a reclassification of the bank’s capital category to “adequately capitalized” for Prompt Corrective Action purposes. Such a designation would restrict rates paid for deposits, require approval from the Federal Deposit Insurance Corporation to accept deposits, and prevent the acceptance of any brokered deposits. The Ombudsman concluded that the improvement in the bank’s liquidity ratio was positive based on deposits procured; however, the improvements do not fully address the concerns outlined in the MRA and were in response to the examination findings.
The Ombudsman concurred with the SO’s conclusion that a Conflict of Interest MRA was warranted but also determined that the MRA needed to be revised. Board and management did not establish appropriate controls, including corporate governance processes, to effectively manage conflicts of interest created by the board’s non-objection to management establishing a non-bank entity to potentially purchase the bank’s niche product. The formation of the non-bank entity created a conflict for the bank’s senior manager and four bank employees and called into question the employees’ ability to act impartially on behalf of the bank for operational and decisional activities related to the niche product. In particular, the conflict called into question the senior manager’s ability to act impartially when engaging in strategic planning and making decisions that impacted the allocation of resources between the niche product and the remainder of the bank.
