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A community bank supervised by the Office of the Comptroller of the Currency (OCC) appealed to the OCC’s Ombudsman the supervisory office’s determinations in the most recent report of examination (ROE). Specifically, the bank appealed the following:
With respect to the first of the MRAs, the appeal argued that the “repeat” designation for the business and capital plan MRA was inaccurate. The appeal stated that management had addressed one of the corrective actions to evaluate the bank’s infrastructure, staffing, and internal controls needed to effectively accomplish strategic goals. The appeal also argued that the second corrective action to establish higher internal capital ratio triggers above the individual minimum capital ratio (IMCR) was new and due to a single event resulting from a unique confluence of events. The appeal stated that the third corrective action requiring stress testing of the bank’s mortgage banking activity was new.
The appeal argued that the “repeat” designation for the profit plan MRA was inaccurate because the bank had already implemented the profit plan to improve earnings to a satisfactory and sustainable level. In addition, the appeal argued that remaining corrective actions were new, including (1) a narrative of assumptions and plans to achieve and maintain targeted goals, (2) an update to the plan to reflect actual financial results, (3) stress testing of mortgage banking activities to ensure satisfactory and sustained profitability under varying interest rate scenarios, and (4) a formal budget process.
The appeal argued that the “repeat” designation for the mortgage banking risk assessment MRA was inaccurate because the corrective actions were new. The corrective actions were to consider risk exposures resulting from new activities to assess adequacy of policies, procedures, and controls, and present and document board review and approval of analysis supporting increased risk limits.
The appeal argued that the “repeat” designation for the ALLL methodology was inaccurate because the bank complied by receiving an independent review and validation of the ALLL methodology before issuance of the letter from the target examination. In addition, the appeal stated a new corrective action was added requiring compliance of the ALLL methodology with generally accepted accounting principles and OCC guidance.
The appeal argued that the “repeat” designation for the interest rate risk management MRA was unfair. The appeal stated that the bank had substantially complied by implementing a model validation policy and engaging an independent vendor to perform the model validation and the change in the model required further actions from third parties that were out of the bank’s control.
The appeal argued that the “repeat” designation for the employment contracts MRA was unfair because bank counsel submitted a letter disagreeing with the respective violation, which was the basis for the MRA, and the OCC did not provide due consideration to bank counsel’s letter.
The appeal argued that the new MRA for the board to ensure competent management was unfair because the examiners’ basis for this MRA were alleged “repeat” and new deficiencies, cited as MRAs, and alleged or minor violations.
The appeal argued that the new MRA for corporate governance practices was unfair because the board and management demonstrated continued responsiveness to regulatory concerns.
Three violations appeared in the ROE. With respect to the violation of 12 CFR 152.11(a), the appeal argued that the bank did not violate this regulation because examiners misinterpreted the regulation to mean that the bank’s minutes must be “correct and complete.” The appeal asserts that the books and records of account must be correct and complete, but the regulation requires only that the board of directors will keep minutes and that there is no qualifier requiring any particular quality or quantity of minutes.
With respect to the violation of 12 CFR 163.201(c), the appeal argued that the bank did not violate this regulation because the regulation concerns only the procedural requirements for considering a corporate opportunity, which were met by the board holding a discussion of the opportunity at a meeting. The appeal argued that the examiners’ finding that the minutes failed to indicate that the board properly considered the corporate opportunity is not a requirement of the regulation. The appeal also asserted that the bank resolved the alleged violation during an August 2013 board meeting but the letter from a prior target examination noted that management only “reportedly” resolved the violation.
With respect to the violation of 12 CFR 163.39, the appeal argued that citing a violation of regulation is inappropriate when there was a real question as to the applicability of a regulation. The appeal asserted that, during the examination, bank counsel provided a letter detailing the inapplicability of the regulation to the bank’s loan officer commission schedules. The appeal also asserted that the OCC did not respond to bank counsel to provide justification of the legal conclusion regarding the applicability of the regulation to the bank’s circumstances.
The Ombudsman reviewed the information submitted by the bank and the supervisory office. The “Bank Supervision Process” booklet of the Comptroller’s Handbook was used as the primary standard for determining the appropriate decisions. The Ombudsman also relied on 12 CFR 152.11(a), 12 CFR 163.201(c), 12 CFR 163.39, “Section 310” of the Office of Thrift Supervision Examination Handbook, and the “Duties and Responsibilities of Directors” and “Insider Activities” booklets of the Comptroller’s Handbook.
With respect to the “repeat” designation for the business and capital plan MRA, the Ombudsman determined that the supervisory office supported citing a “repeat” MRA as well as requiring two of the three corrective actions. The Ombudsman determined that the corrective action to establish higher internal capital ratio triggers than the IMCR should be removed because an enforcement action already required minimum capital ratios. Instead, the Ombudsman determined that the ROE should include a statement that it is the board and management’s responsibility to comply with enforcement actions and noncompliance may lead to additional enforcement actions. The Ombudsman directed the supervisory office to correct the supervisory record.
With respect to the “repeat” designation for the profit plan MRA, the Ombudsman determined there was proper support for the “repeat” MRA. The bank had not yet achieved satisfactory and sustained core earnings, net of mortgage banking, due to significant loan losses requiring high provision expenses and volatile earnings that were highly reliant on noninterest income from mortgage banking. An updated profit plan also was appropriate to reflect current operations, and a formal budget process was necessary to ensure the bank performs in line with projections and adjusts its operations accordingly to meet projections.
With respect to the “repeat” designation for the mortgage banking risk assessment MRA, the Ombudsman determined that there was proper support for the “repeat” MRA because the original MRA required a comprehensive risk assessment, including the outstanding corrective actions. The Ombudsman also determined that the most recent ROE should reflect this MRA as a first-time repeat, not second-time repeat. The bank received an extension on its commitment date for the MRA during the prior target examination so that prior instance should not count as a repeat. The Ombudsman directed the supervisory office to correct the supervisory record.
With respect to the “repeat” designation for the ALLL methodology MRA, the Ombudsman determined that the supervisory office supported the “repeat” designations because the original MRA required the bank to conform to the “Interagency Policy Statement on the Allowance for Loan and Lease Losses.” The Ombudsman also determined that the bank did not correct the MRA before receipt of the letter from the target examination because, during the target examination, the bank requested and received an extension on the commitment date to correct the MRA.
With respect to the “repeat” designation for the interest rate risk management MRA, the Ombudsman determined that the supervisory office supported the “repeat” designations because the bank had not yet completed the internal audit of the model’s effectiveness. The board’s decision to outsource the model to another vendor in July 2013 led to delays in implementing effective and complete corrective actions to close this MRA.
With respect to the “repeat” designation for the employment contract MRA, the Ombudsman determined that the supervisory office supported the “repeat” designation because the bank did not correct the respective violation that is the basis for this MRA. Refer to the violations section for additional details.
With respect to the new board to ensure competent management MRA, the Ombudsman determined that proper support exists for this MRA. The MRA aims to correct less than satisfactory risk management practices and quality management as demonstrated by continued loan losses and credit administration weaknesses, volatile earnings and less than satisfactory core earnings, repeat and new MRAs, and the number and type of violations of laws and regulations.
With respect to the new corporate governance practices MRA, the Ombudsman determined that the supervisory office supported citing this MRA. The supervisory office identified that the board has not held management accountable for improving asset quality and credit administration weaknesses, timely and sufficiently correcting MRAs, many of which are repeat, and ensuring compliance with laws, regulations, and bylaws.
With respect to violation of 12 CFR 152.11(a), the Ombudsman determined that the bank did not keep correct and complete minutes of director and committees of director meetings as required by this regulation and as supported by 12 CFR 163.170(c), “Establishment and maintenance of records.” In addition, the intent of 12 CFR 152.11(a) is to maintain accurate and complete minutes; otherwise, the exercise of keeping minutes is futile.
With respect to violation of 12 CFR 163.201(c), the Ombudsman determined that the supervisory office supported citing this violation. The burden is on the board to demonstrate compliance with this regulation and, specifically, that a disinterested and independent majority of the board, after a full and fair presentation of a matter, rejected the corporate opportunity as a matter of sound business judgment. The bank did not produce evidence that a disinterested and independent majority of the board reviewed and acted on the decision, and the board did not demonstrate that it received and considered a full and fair presentation of the corporate opportunity. In addition, the Ombudsman determined that the board minutes subsequently addressing the language in the regulation does not correct the violation, as the board has not yet met the intent of the regulation. The board must receive and review a full and fair presentation of the corporate opportunity as a matter of sound business judgment and record in writing the discussion and decision with the necessary precautions required by this regulation. Finally, the Ombudsman determined that the supervisory office must expand the violation write-up in the 2013 ROE and supervisory records to state the reasons why the bank violated the regulation and why the violation remains uncorrected.
With respect to the violation of 12 CFR 163.39, the Ombudsman determined that the supervisory office appropriately cited this violation because the loan officer offer and commission schedules constitute employment agreements under this regulation and these documents did not contain the specific provision required for all employment agreements. The Ombudsman also determined that the supervisory office did not provide sufficient support in the ROE for the violation and directed an expansion of the violation write-up in the 2013 ROE and its supervisory records to discuss the receipt and assessment of the bank counsel’s letter disagreeing with the violation as well as legal analysis supporting citing the violation.
