Appeals of Material Supervisory Determinations: Guidelines
(May 2, 2002)
At its meeting held on April 22, 2002, the Supervision
Appeals Review Committee (“Committee”) of the Federal Deposit Insurance
Corporation (“FDIC”) considered the appeal filed by [Bank] (“Bank”). In its
appeal, the Bank contested certain material supervisory determinations
contained in the safety and soundness examination, dated August 6, 2001
(“Report”), prepared jointly by the FDIC and the Alabama State Banking
Department. In accordance with the Guidelines for Appeals of Material
Supervisory Determinations, the scope of the Committee’s review was limited
to the facts and circumstances as they existed at the time of the
examination. Facts or circumstances that occurred after the examination, and
any subsequent corrective actions the Bank may have taken, will be reviewed
during future on-site supervisory activities.
The Committee found that the ratings assigned at this
examination were not inappropriately influenced by outside factors such as
pending lawsuits or communication with regulators. The Committee found that
the conclusions in the Report were supported by facts presented within the
Upon careful consideration of the issues raised in the
appeal, the Committee determined that the component and composite Uniform
Financial Institution Ratings assigned at the examination were appropriate.
Also, Superintendent of Banks Maria B. Campbell of the Alabama State Banking
Department, who was provided with a copy of the Bank’s appeal, has advised
the FDIC that she considers the ratings assigned at the examination
The Committee’s rationale for the decisions rendered in
the Bank’s appeal is presented below.
Capital Component Rating
The Report documented that capital levels at the time of the examination
were insufficient to fully support the Bank’s risk profile. The
insufficiency of capital appeared more pronounced when consideration is
given to the Bank’s weak earnings performance and the volume and trend of
problem assets. The need for improvement in the Bank’s capital posture was
evident. The Committee concurred with the “3” rating assigned to the Capital
Asset Quality Component Rating
The level of risk and problem assets found at this examination and
documented in the Report was significant. The ratio of adversely classified
assets to capital and reserves was higher at this examination than at the
prior examination and the severity of adverse classifications increased,
despite the Bank’s taking a high volume of loan losses between examinations.
The Report listed a significant number of examples of deficient credit
administration practices, some of which were cited as remaining uncorrected
from the prior examination. In contrast to what was stated in the appeal,
the Report documented non-compliance with several asset quality-related
provisions of the Memorandum. The Committee concurred with the “4” rating
assigned to the Asset Quality component.
Management Component Rating
The Bank’s financial condition and performance as documented in the Report
reflect unfavorable trends and an unsatisfactory risk profile. Deficient
management and board performance are documented in the Report. The Report
provides evidence that management has inadequately identified, measured,
monitored, and controlled risk. Risk management practices were found
unacceptable relative to the Bank’s size, complexity, and risk profile. The
Report also notes that concerns cited at previous examinations remained
uncorrected at this examination. Based on the foregoing, the Committee
concurred with the “4” rating assigned to the Management component.
Earnings Component Rating
The Report appropriately identified deficient Bank earnings performance.
Earnings were not sufficient to support the Bank’s operations while
maintaining adequate capital and Allowance for Loan and Lease Losses (“ALLL”)
levels. Capital contributions from the parent company were needed to augment
capital. At the time of the examination, earnings had trended downward since
1996. Although outside the purview of this appeal, in hindsight, the Bank
did show a small profit for 2001; however, much of this profit can be
attributed to realized securities gains. According to the December 31, 2001
Uniform Bank Performance Report (“UBPR”), even with the benefit of
securities gains, the Bank’s Return on Average Assets (“ROA”) of 0.40
percent was significantly below its peer group average of 1.20 percent. The
Bank’s ROA fell in the 5th percentile of the peer group. The Bank’s
performance was similarly poor at the time of the Report. The June 30, 2001
UBPR shows that the Bank’s ROA fell in the 7th percentile of the peer group.
The Report also found that the ALLL was severely underfunded. The Report
provided evidence of nominal earnings, the development of significant
negative trends, and a substantive drop in earnings from previous years. The
Committee concurred with the “4” rating assigned to the Earnings component.
Liquidity Component Rating
Considering the factors detailed in the Report, in conjunction with the
overall condition of the Bank, the liquidity posture was found less than
satisfactory. The relaxation of policy constraints in this area,
uncertainties concerning the continued availability of borrowing sources,
and the current financial posture of the Bank point toward the need for
continued close monitoring and management of the Bank’s liquidity position.
Based on the foregoing, the Committee concurred with the “3” rating assigned
to the Liquidity component.
Sensitivity to Market Risk Component Rating
The Report identified inadequate supervision of this area by senior
management and the board of directors. Risk management practices were
deficient for the size, sophistication, and level of market risk accepted by
the Bank. Primary areas of concern included the Bank’s liability sensitive
position; the lack of board oversight; the lack of conformity with policy
guidelines; the loss of key financial management personnel; and the lack of
independent review of the interest rate risk management program. The level
of earnings and capital provide inadequate support for the degree of market
risk taken by the Bank. Lack of reliable data to support the Bank’s interest
rate risk profile was also a concern. Based on the foregoing, the Committee
concurred with the “4” rating assigned to the Sensitivity to Market Risk
The Report cited numerous examples of serious financial or managerial
deficiencies that contributed to the Bank’s unsatisfactory performance. Many
of the weaknesses were also detailed in the violation of Part 364, Appendix
A – Standards for Safety and Soundness, of the FDIC Rules and Regulations,
cited in the Report. It is evident that, at the time of the examination,
management and the board of directors were not satisfactorily addressing the
weaknesses and problems of the Bank. Significant apparent violations of
federal and state law were cited. As identified and documented in the
Report, risk management practices are generally unacceptable relative to the
institution’s size, complexity, and risk profile. The findings of the Report
reflect that the Bank poses a risk to the deposit insurance fund. The Report
also supports the stance that if the problems facing the Bank are not
promptly addressed, viability could be threatened.
As the Committee upheld the Report’s rating of all
components, the Bank’s overall condition was deemed to warrant a “4”
composite rating. This conclusion was not reached upon a calculation of a
numerical average but was a result of the consideration of the key Report
findings relating to each of the components.
Request to Appear
Before deciding your appeal, the Committee considered your request to appear
in person before the Committee. Based upon a review of your comprehensive
appeal letter, dated February 21, 2002, the Committee concluded that the
information relating to the appeal was complete. Accordingly, the Committee
determined that no oral presentations, either by the bank or by the Division
of Supervision, were necessary. Please be assured that the Bank’s appeal and
all of the facts and circumstances related to it received careful
This decision is considered a final supervisory decision of the FDIC.
By direction of the Supervision Appeals Review Committee
of the FDIC.