[Federal Register Volume 72, Number 67 (Monday, April 9, 2007)]
[Notices]
[Pages 17618-17625]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-6602]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[No. OTS-2007-0009]


Savings and Loan Holding Company Rating System

AGENCY: Office of Thrift Supervision, Treasury (OTS).

ACTION: Notice and request for comment.

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SUMMARY: Changes in the environment in which depository institutions 
and their holding companies operate have had a substantial impact on 
the way they are managed and necessitate changes in the way they are 
supervised. OTS supervises a diverse population of holding companies 
ranging from non-complex companies with limited activities to large, 
internationally active conglomerates that engage in a variety of 
activities. OTS has a well-established program for meeting its 
statutory responsibilities with respect to savings and loan holding 
companies (SLHCs or holding companies) and the thrift industry. Holding 
company supervision is an integral part of this oversight program, and 
OTS routinely takes steps to enhance its risk-focused supervision of 
holding companies.
    While OTS has emphasized risk management in its supervisory 
processes for SLHCs of all sizes and complexities, this emphasis is not 
readily apparent in the primary components of the current SLHC 
supervisory rating system, CORE (Capital, Organizational Structure, 
Relationship, and Earnings). Therefore, OTS is considering making 
changes to the component descriptions and rating scale used to evaluate 
the condition of SLHCs. All SLHCs are assigned a rating, although the 
degree of supervisory scrutiny varies based on a risk-focused 
evaluation of their size, complexity, business activities, and risk 
exposures. OTS is committed to maintaining a common CORE component 
framework and a rating system that is flexible and applies to all 
SLHCs. After reviewing public comments, OTS intends to make any 
necessary changes to the proposal and adopt a final SLHC rating system.

DATES: Comments must be received by June 8, 2007.

ADDRESSES: You may submit comments, identified by OTS-2007-0009, by any 
of the following methods:
     Federal eRulemaking Portal: Go to http://www.regulations.gov, select ``Office of Thrift Supervision'' from the 
agency drop-down menu, then click submit. Select Docket ID ``OTS-2007-
0009'' to submit or view public

[[Page 17619]]

comments and to view supporting and related materials for this notice 
of proposed rulemaking. The ``User Tips'' link at the top of the page 
provides information on using Regulations.gov, including instructions 
for submitting or viewing public comments, viewing other supporting and 
related materials, and viewing the docket after the close of the 
comment period.
     Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: OTS-2007-0009.
     Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: OTS-2007-0009.
    Instructions: All submissions received must include the agency name 
and docket number for this rulemaking. All comments received will be 
entered into the docket and posted on Regulations.gov without change, 
including any personal information provided. Comments, including 
attachments and other supporting materials received are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    Viewing Comments Electronically: Go to http://www.regulations.gov, 
select ``Office of Thrift Supervision'' from the agency drop-down menu, 
then click ``Submit.'' Select Docket ID ``OTS-2007-0009'' to view 
public comments for this notice of proposed rulemaking.
    Viewing Comments On-Site: You may inspect comments at the Public 
Reading Room, 1700 G Street, NW., by appointment. To make an 
appointment for access, call (202) 906-5922, send an e-mail to 
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202) 
906-6518. (Prior notice identifying the materials you will be 
requesting will assist us in serving you.) We schedule appointments on 
business days between 10 a.m. and 4 p.m. In most cases, appointments 
will be available the next business day following the date we receive a 
request.

FOR FURTHER INFORMATION CONTACT: Donna Deale, Director, Holding 
Companies and Affiliates, (202) 906-7488.

SUPPLEMENTARY INFORMATION: 
    The SLHC rating system is a management information and supervisory 
tool that systematically indicates the condition of SLHCs. It provides 
an evaluation of the SLHC's condition for use by the supervisory 
community and focuses supervisory responses and actions. The SLHC 
rating system also provides a measurement tool to discuss the 
enterprise's condition with SLHC management. The current SLHC rating 
system was implemented in 1988. The rating system currently includes 
the following components:

Capital

    The first component of a holding company examination is an 
evaluation of Capital. OTS does not apply a standardized capital 
requirement to SLHCs. Instead, OTS considers the overall risk profile 
of the consolidated entity on a case-by-case basis. This involves 
assessing analytical measures that include overall leverage, the level 
of short-term debt and liquidity, cash flow, reliance on thrift and 
other subsidiary earnings, interest coverage, quality of earnings, and 
level of consolidated tangible and equity capital. Individualized 
capital requirements can be used as a tool to achieve this goal when 
necessary.

Organizational Structure

    The Organizational Structure component requires examiners to 
identify the organizational structure and ownership and assess any 
changes. OTS also reviews the activities of the holding company and 
other affiliates to determine regulatory compliance and to assess the 
risks these activities may pose to the thrift.

Relationship

    In the Relationship component, examiners assess the interaction of 
the holding company's board of directors and executive management with 
the thrift. Examiners reach conclusions about:
     The materiality of the thrift to the holding company or 
its controlling shareholders;
     The degree of influence the holding company has over the 
thrift and how this influence affects the thrift's operations;
     Whether the board of directors provides adequate oversight 
for the holding company and its subsidiaries;
     How actively the holding company is involved in the 
management of the thrift;
     The degree of interdependence of the thrift and other 
entities within the holding company structure; and
     Whether the board has implemented effective policies and 
procedures to maintain separate corporate identities and avoid 
conflicts of interest.

Earnings

    In the Earnings component, examiners assess the holding company's 
operations and financial condition and their current and prospective 
effect on the subsidiary thrift. OTS pays close attention to the 
holding company's earnings trends and capacity as well as cash flow. It 
also evaluates the relative contributions and dividend payout ratios of 
significant subsidiaries and the overall financial performance of the 
holding company enterprise.
    You can find a thorough description along with examination 
procedures for each component in the OTS Holding Companies Handbook at 
http://www.ots.treas.gov.
    After evaluating these four components, OTS assigns a composite 
SLHC rating using the following definitions: \1\
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    \1\ Component ratings are assigned to all complex SLHCs and may 
be assigned, at the examiner's discretion, to noncomplex SLHCs. When 
assigned, the four components are rated on a scale of one to three 
in descending order of performance quality. The definitions 
currently in use are set forth in the OTS Holding Companies 
Handbook.
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    Above Average (A): Holding company enterprises in this group have a 
wealth of financial strength. The enterprise could be called upon to 
provide financial or managerial resources to the thrift if 
circumstances dictate. Above Average holding company enterprises may 
exhibit minor weaknesses, but they are deemed to be correctable in the 
normal course of business. For this rating, all component ratings will 
generally be rated 1 or 2.
    Satisfactory (S): Holding company enterprises in this group are 
those whose effect on the thrift is considered neutral. Overall, these 
holding companies exhibit financial conditions and operating 
performance that pose only a remote threat to the viability of the 
thrift. Satisfactory holding company enterprises generally do not 
possess the financial strength to be considered a substantial resource 
to the thrift. These companies may be reliant on the thrift for 
dividends or other sources of funds to service debt; however, their 
debt level and expected need for funds from the thrift are not 
considered overwhelming.
    For this rating, the components should generally be rated 2, but 
may include components rated 1 or 3.
    Unsatisfactory (U): This rating is reserved for holding company 
enterprises that impose a detrimental or burdensome effect on the 
thrift. Such companies exhibit high levels of various operating 
weaknesses that at best are considered less than satisfactory. There 
exists an inordinate reliance involving the thrift. Either the holding 
company is

[[Page 17620]]

inordinately reliant on the thrift for cash flow, or the thrift is 
inordinately reliant on the holding company for critical operating 
systems. Without immediate corrective action, the thrift's viability 
may be impaired. Enterprises deserving of this rating will 
predominantly have components that are rated 3, although even one 
component with a 3 rating may suffice to justify an overall U rating if 
the problems are severe enough. An Unsatisfactory rating is only given 
in the most severe circumstances. Such a rating would be comparable to 
a 4 or 5 composite thrift rating, and would carry the presumption that 
formal enforcement action is required, pursuant to RB 18-1b.
    Since the introduction of this rating system, banking organizations 
and SLHCs have become more complex. Several SLHCs have significant 
international operations and many engage in multiple types of financial 
activities. In addition, certain SLHCs that existed prior to the 
enactment of activities restrictions in the Gramm-Leach-Bliley Act 
engage in commercial, manufacturing, and other retail activities. As of 
December 2006, SLHCs had aggregate consolidated assets of $7.7 
trillion. Because of SLHCs' diversity and OTS's risk focused holding 
company examination approach, the agency's approach to holding company 
examinations and ratings must document our assessment of the risk 
profile of the holding company enterprise as well as management's 
ability to identify, measure, monitor, and control risks.

Changes to Examination Components

    This document proposes changes to two of the existing four 
examination components. OTS is proposing these changes to place greater 
emphasis on risk management. The number of components and OTS's risk 
focused examination approach would not change because of this proposal.
    Using a slightly revised approach within the CORE framework, OTS 
will review two components that focus on financial condition (Capital 
and Earnings) and two other components (Organizational Structure and 
Risk Management) that focus on the activities and operations conducted 
within the enterprise and the SLHC's risk management practices.
    With the exception of the ratings changes discussed later in this 
document, OTS is not proposing a change to its philosophy on evaluating 
the financial components (Capital and Earnings). OTS will continue to 
evaluate capital adequacy relative to a given enterprise's risk 
profile.
    Within the Organizational Structure component, examiners would 
assess inherent risk in the context of lines of business, operations, 
affiliate relationships, concentrations, and other exposures. The most 
significant types of risk are defined in the proposed rating 
description for the Organizational Structure component. Based on its 
experience regulating holding companies and on a review of similar 
guidance by other banking and supervisory agencies, OTS compiled a 
comprehensive list of risks that holding company enterprises face.
    OTS proposes changing the name of the ``R'' component from 
Relationship to Risk Management. Within the Risk Management component, 
examiners would evaluate corporate governance; board of directors and 
senior management oversight; policies, procedures, and limits; risk 
monitoring and management information systems; and internal controls. 
OTS recognizes that each SLHC must have the flexibility to tailor risk 
management programs to its size, complexity, and inherent risks. OTS 
also recognizes that its most complex holding companies are highly 
integrated and may manage risk on an enterprise-wide basis, both within 
and across business lines and legal entities.

Changes to Rating System

    OTS believes that it should refine the current holding company 
supervisory approach and ratings system. An effective rating system 
must include an accurate assessment of each enterprise's financial and 
managerial condition. The rating system must be flexible and apply to 
holding companies of all sizes and complexity. The current rating scale 
does not facilitate meaningful distinctions in the strengths and 
weaknesses of an enterprise. Therefore, OTS is proposing the use of a 
five-point numeric scale similar to the Uniform Financial Institution 
Ratings System (UFIRS) and the OTS CAMELS rating system. The five-point 
scale would be used for both composite and component ratings assigned 
to SLHCs. The use of a five-point scale will better reflect issues of 
supervisory concern and will provide more distinction in the 
supervisory assessment of condition. A five-point scale also correlates 
with and is more comparable to the thrift and bank holding company 
rating systems.
    OTS proposes to make one other change to the ratings definitions. 
Historically, OTS has based the rating of the holding company 
enterprise on its effect on its subsidiary thrift. OTS has encountered 
situations where it has supervisory concerns within the holding company 
enterprise, which did not have a direct impact on the thrift. OTS 
believes that using the effect on the thrift subsidiary as a SLHC 
rating criterion can lead to misinterpretation of the rating. It also 
may not be as accurate in portraying the condition of the SLHC 
enterprise as ratings criteria based on financial condition, 
operations, and risk profile.
    After thoroughly evaluating the language in the ratings 
definitions, OTS believes that language emphasizing the SLHC's effect 
on its thrift subsidiary limits the supervisory purpose of the rating. 
The SLHC's effect on its thrift subsidiary will continue to be an 
important consideration in the examination process, but the proposal 
does not include such language as rating criterion.
    The proposed changes will elevate the prominence of risk 
management; better align holding company examination components with 
OTS's supervisory process; and provide a more accurate assessment of 
the condition of SLHCs. OTS recognizes that it bases certain guidance 
and administrative processes on the current SLHC rating scale and 
definitions. OTS anticipates that a rating of ``4'' or ``5'' will 
equate to an ``unsatisfactory'' rating for assessment and enforcement 
purposes. OTS expects to conform existing guidance and regulations to 
incorporate any changes made to the SLHC rating system.

Proposed Text of the Savings and Loan Holding Company Rating System

Holding Company Rating System

    The holding company rating system is used to assess a holding 
company's Capital, Organizational Structure, Risk Management, and 
Earnings. Using this system, OTS comprehensively and uniformly 
evaluates all holding company enterprises, focusing supervisory 
attention on the holding company enterprises that are complex or 
exhibit financial and operational weaknesses or adverse trends. The 
rating system:
     Identifies problem or deteriorating holding company 
enterprises
     Categorizes holding company enterprises with deficiencies 
in particular areas
     Assesses the aggregate strength of the SLHC industry.
    Each holding company enterprise receives a composite rating based 
on the evaluation factors.
    Composite and component ratings are assigned based on a 1 to 5 
numeric scale. A ``1'' rating is the highest rating, indicating the 
strongest performance and practices and least degree of supervisory 
concern. A ``5'' rating is the

[[Page 17621]]

lowest rating, indicating the weakest performance and the highest 
degree of supervisory concern.
    Examiners will use the following descriptions to assign composite 
and component ratings to SLHCs.

Description of the Rating System Elements

Composite Rating
    The composite rating is the overall assessment of the holding 
company enterprise as reflected by its organizational structure, risk 
management, and consolidated financial strength. The composite rating 
encompasses both a forward-looking and current assessment of the 
consolidated enterprise, as well as an assessment of the relationship 
between the companies in the enterprise. The composite rating is not a 
simple numeric average of the CORE components; rather, the composite 
rating reflects OTS's judgment of the relative importance of each 
component to the operation of the holding company enterprise. Some 
components may receive more weight than others depending on the SLHC's 
activities and risk profile. Assignment of a composite rating may 
incorporate any factor that significantly affects the overall condition 
of the holding company enterprise, although generally the composite 
rating is closely related to the component ratings assigned.
    Composite 1. A holding company enterprise in this group is sound in 
almost every respect and generally has components rated 1 or 2. Any 
weaknesses are minor, and the board of directors and management can 
correct them in the normal course of business. The enterprise is able 
to withstand economic, financial, and risk exposure changes because of 
solid risk management practices and financial condition. Cash flow is 
abundant and adequately services debt and other obligations. This 
holding company enterprise exhibits strong performance and risk 
management practices relative to its size, complexity, and risk 
profile.
    Composite 2. A holding company enterprise in this group is 
fundamentally sound but may have modest weaknesses. The board of 
directors and management are capable and willing to correct any 
weaknesses. Generally, no component rating should be more severe than 3 
for this holding company enterprise. Risk management practices and 
financial condition create stability, and this holding company 
enterprise is capable of withstanding business fluctuations. Cash flow 
is adequate to service obligations. Overall, risk management practices 
are satisfactory relative to the enterprise's size, complexity, and 
risk profile.
    Composite 3. A holding company enterprise in this group raises some 
degree of supervisory concern in one or more of the component areas, 
with weaknesses that range from moderate to severe. The magnitude of 
the deficiencies is generally not severe enough to rate a component 
more severely than 4. Management may lack the ability or willingness to 
effectively address weaknesses within appropriate time frames. This 
holding company enterprise is less resistant to adverse business 
conditions. Risk management practices may be less than satisfactory 
relative to the enterprise's size, complexity, and risk profile. 
However, there is only a remote threat to the holding company 
enterprise's continued viability.
    Composite 4. A holding company enterprise in this group has serious 
financial or managerial deficiencies that result in unsatisfactory 
performance. The supervisory concerns, which management and the board 
are not satisfactorily addressing, range from severe to critically 
deficient. A holding company enterprise in this group is generally not 
capable of withstanding adverse business fluctuations. Risk management 
practices are generally unacceptable relative to the enterprise's size, 
complexity, and risk profile. The enterprise may place undue pressure 
on subsidiaries to meet its cash flow by upstreaming imprudent 
dividends or fees. Unless there is prompt action to correct these 
conditions, future viability could be impaired.
    Composite 5. The magnitude and character of the risk management or 
financial weaknesses of a holding company enterprise in this category 
could lead to insolvency without immediate aid from shareholders or 
supervisory action. The volume and severity of problems are beyond the 
board and management's ability or willingness to control or correct. 
Risk management practices are inadequate relative to the enterprise's 
size, complexity, and risk profile. The inability to prevent liquidity 
or capital depletion places the holding company enterprise's continued 
viability in serious doubt.
Capital Adequacy (C) Component Rating
    C reflects the adequacy of an enterprise's consolidated capital 
position, from a regulatory perspective and an economic capital 
perspective, as appropriate to the holding company enterprise. During 
OTS's review of capital adequacy, OTS will consider the risk inherent 
in an enterprise's activities and the ability of capital to absorb 
unanticipated losses, support business activities including the level 
and composition of the parent company and subsidiaries' debt, and 
support business plans and strategies.
    Capital Rating 1. A rating of 1 indicates that the consolidated 
holding company enterprise maintains an abundant amount of capital to 
support the volume and risk characteristics of its business lines and 
products; to provide a significant cushion to absorb unanticipated 
losses; and to fully support the level and composition of borrowing. In 
addition, the enterprise has abundant capital to support its business 
plans and strategies, it has the ability to enter capital markets to 
raise additional capital as necessary, and it has a strong capital 
allocation and planning process.
    Capital Rating 2. A rating of 2 indicates that the consolidated 
holding company enterprise maintains adequate capital to support the 
volume and risk characteristics of its business lines and products; to 
provide a sufficient cushion to absorb unanticipated losses; and to 
support the level and composition of borrowing. In addition, the 
enterprise has sufficient capital to support its business plans and 
strategies, it has the ability to enter capital markets to raise 
additional capital when necessary, and it has a satisfactory capital 
allocation and planning process.
    Capital Rating 3. A rating of 3 indicates that the consolidated 
holding company enterprise may not maintain sufficient capital to 
support the volume and risk characteristics of certain business lines 
and products; the unanticipated losses arising from the activities; or 
the level and composition of borrowing. In addition, the enterprise may 
not maintain a sufficient capital position to support its business 
plans and strategies, it may not have the ability to enter into capital 
markets to raise additional capital as necessary, or it may not have a 
sufficient capital allocation and planning process. The capital 
position of the consolidated holding company enterprise could quickly 
become inadequate if there is deterioration in operations.
    Capital Rating 4. A rating of 4 indicates that the capital level of 
the consolidated holding company enterprise is significantly below the 
amount needed to ensure support for the volume and risk characteristics 
of certain business lines and products; the unanticipated losses 
arising from activities; and the level and composition of borrowing. In 
addition, the weaknesses in the capital position

[[Page 17622]]

prevent the enterprise from supporting its business plans and 
strategies, it may not have the ability to enter into capital markets 
to raise additional capital as necessary, or it has a weak capital 
allocation or planning process.
    Capital Rating 5. A rating of 5 indicates that the level of capital 
of the consolidated holding company enterprise is critically deficient. 
Immediate assistance from shareholders or other external sources of 
financial support is required.
Organizational Structure (O) Component Rating
    The O component is an assessment of the operations and risks in the 
holding company enterprise. In the O component, OTS evaluates the 
organizational structure, considering the lines of business, affiliate 
relationships, concentrations, exposures, and the overall risk inherent 
in the structure.
    OTS's analysis under the O component considers existing as well as 
potential issues and risks. OTS pays particular attention to the 
following types of risk in assigning the O rating:

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              Type of risk                         Description
------------------------------------------------------------------------
Credit.................................  Credit risk arises from the
                                          potential that a borrower or
                                          counterparty will fail to
                                          perform on an obligation.
Market.................................  Market risk is the risk to a
                                          financial institution's
                                          condition resulting from
                                          adverse movements in market
                                          rates or prices, such as
                                          interest rates, foreign
                                          exchange rates, or equity
                                          prices.
Liquidity..............................  Liquidity risk is the potential
                                          that an institution will be
                                          unable to meet its obligations
                                          as they come due because of an
                                          inability to liquidate assets
                                          or obtain adequate funding
                                          (funding liquidity risk) or
                                          that it cannot easily unwind
                                          or offset specific exposures
                                          without significantly lowering
                                          market prices because of
                                          inadequate market depth or
                                          market disruptions (market
                                          liquidity risk).
Operational............................  Operational risk arises from
                                          the potential that inadequate
                                          information systems,
                                          operational problems, breaches
                                          in internal controls, fraud,
                                          or unforeseen catastrophes
                                          will result in unexpected
                                          losses. Transaction risk
                                          arises from problems with
                                          service or product delivery.
                                          This risk is a function of
                                          internal controls, information
                                          systems, employee integrity,
                                          and operating processes.
Legal/Compliance.......................  Legal risk arises from the
                                          potential that unenforceable
                                          contracts, lawsuits, or
                                          adverse judgments can disrupt
                                          or otherwise negatively affect
                                          the operations or condition of
                                          a banking organization.
                                          Compliance risk is the risk to
                                          earnings or capital arising
                                          from violations of, or
                                          nonconformance with, laws,
                                          rules, regulations, prescribed
                                          practices, or ethical
                                          standards.
Reputation.............................  Reputation risk is the
                                          potential that negative
                                          publicity regarding an
                                          institution's business
                                          practices, whether true or
                                          not, will cause a decline in
                                          the customer base, costly
                                          litigation, or revenue
                                          reductions.
Country/Sovereign......................  Country risk arises from the
                                          general level of political,
                                          financial, and economic
                                          uncertainty in a country,
                                          which impacts the value of the
                                          country's bonds and equities.
                                          Sovereign risk is the risk
                                          that a central bank will
                                          impose foreign exchange
                                          regulations that will reduce
                                          or negate the value of foreign
                                          exchange contracts. It also
                                          refers to the risk of
                                          government default on a loan
                                          made to a country or
                                          guaranteed by it.
Contagion/Systemic.....................  Contagion entails the risk that
                                          financial difficulties
                                          encountered by a business line
                                          or subsidiary of a holding
                                          company could have an adverse
                                          impact on the financial
                                          stability of the enterprise
                                          and possibly even on the
                                          markets in which the
                                          constituent parts operate.
                                          Systemic risk is defined by
                                          financial system instability,
                                          potentially catastrophic,
                                          caused or exacerbated by
                                          idiosyncratic events or
                                          conditions in financial
                                          intermediaries. Impacted areas
                                          include: market value of
                                          positions, liquidity, credit-
                                          worthiness of counterparties
                                          and obligors, default rates,
                                          liquidations, risk premia, and
                                          valuation uncertainty.
Concentration..........................  The exposure to losses due to a
                                          concentration (assets,
                                          liabilities, off-balance-
                                          sheet) at the subsidiary,
                                          business line, and/or
                                          enterprise level.
Intra-Group Transactions...............  Exposures to risk that result
                                          from transactions between
                                          affiliates.
Strategic and Execution................  Strategic and execution risk is
                                          the risk to earnings or
                                          capital arising from adverse
                                          business decisions or improper
                                          implementation of those
                                          decisions. This risk is a
                                          function of the compatibility
                                          of an organization's strategic
                                          goals, the business strategies
                                          developed to achieve those
                                          goals, the resources deployed
                                          against these goals, and the
                                          quality of implementation. The
                                          resources needed to carry out
                                          business strategies are both
                                          tangible and intangible. They
                                          include communication
                                          channels, operating systems,
                                          delivery networks, and
                                          managerial capacities and
                                          capabilities. Strategic risk
                                          focuses on more than an
                                          analysis of the written
                                          strategic plan. It focuses on
                                          how plans, systems, and
                                          implementation affect the
                                          enterprise's franchise value.
                                          It also incorporates how
                                          management analyzes external
                                          factors that impact the
                                          strategic direction of the
                                          company.
------------------------------------------------------------------------

[[Page 17623]]

 
                                Insurance
------------------------------------------------------------------------
Pricing and Underwriting Risk..........  The risk that pricing and
                                          underwriting practices are
                                          inadequate to provide for the
                                          risks assumed.
Reserving Risk.........................  The risk that actual losses or
                                          other contractual payments
                                          reflected in reported reserves
                                          or other liabilities will be
                                          greater than estimated.
------------------------------------------------------------------------

    Organizational Structure Rating 1. A rating of 1 indicates that the 
organizational structure, including the nature and level of risk 
associated with the affiliates' activities, pose minimal concern. 
Management controls and monitors intra-group exposures. Any concerns 
posed by strategic plans, the control environment, concentrations, 
legal or reputational issues, or other types of risk within the 
enterprise are minor, and management and the board can address them in 
the normal course of business.
    Organizational Structure Rating 2. A rating of 2 indicates that the 
organizational structure exhibits minor weaknesses, but the nature and 
level of risks associated with the holding company's activities are 
unlikely to be material concerns. Intra-group exposures, including 
servicing agreements, are generally acceptable, but isolated 
transactions or exposures may present limited cause for regulatory 
concern. Concerns posed by strategic plans, the control environment, 
concentrations, legal or reputational issues, or other types of risks 
within the enterprise are modest, and management and the board can 
address them in the normal course of business.
    Organizational Structure Rating 3. A rating of 3 indicates that 
there are organizational structure weaknesses that raise supervisory 
concern. The nature and level of risks associated with the holding 
company activities are moderately likely to cause concern. Intra-group 
exposures, including servicing agreements, have the potential to 
undermine the financial condition of other companies in the enterprise. 
Strategic growth plans, weaknesses in the control environment, 
concentrations, legal or reputational issues, or other types of risk 
within the enterprise are moderately likely to cause regulatory 
concern. The enterprise has one or more entities in the structure that 
could adversely affect the operation of other entities in the 
enterprise if management does not take corrective action.
    Organizational Structure Rating 4. A rating of 4 indicates that 
there are weaknesses in the organizational structure of the enterprise, 
and/or the nature and level of risks associated with the holding 
company's activities are, or have a considerable likelihood of 
becoming, a cause for concern. Intra-group exposures, including 
servicing agreements, may also have the immediate potential to 
undermine the operations of companies in the enterprise. Strategic 
growth plans, weaknesses in the control environment, concentrations, 
legal or reputational issues, or other types of risk within the 
enterprise may be of considerable cause for regulatory concern. The 
weaknesses identified could seriously affect the operation of one or 
more companies in the enterprise.
    Organizational Structure Rating 5. A rating of 5 indicates that 
there are substantial weaknesses in the organizational structure of the 
enterprise, and/or the nature and level of risks associated with the 
activities are, or pose a high likelihood of becoming, a significant 
concern. Strategic growth plans, a deficient control environment, 
concentrations, legal or reputational issues, or other types of risk 
within the enterprise may be of critical concern to one or more 
companies in the enterprise. The weaknesses identified seriously 
jeopardize the continued viability of one or more companies in the 
enterprise.
Risk Management (R) Component Rating
    R represents OTS's evaluation of the ability of the directors and 
senior management, as appropriate for their respective positions, to 
identify, measure, monitor, and control risk. The R rating underscores 
the importance of the control environment, taking into consideration 
the complexity of the enterprise and the risk inherent in its 
activities.
    The R rating includes an assessment of four areas: board and senior 
management oversight; policies, procedures, and limits; risk monitoring 
and management information systems; and internal controls. These areas 
are evaluated in the context of inherent risks as related to the size 
and complexity of the holding company's operations. They provide a 
consistent framework for evaluating risk management and the control 
environment. Moreover, a consistent review of these four areas provides 
a clear structure and basis for discussion of the R rating.

------------------------------------------------------------------------
   Risk management element                    Description
------------------------------------------------------------------------
Governance/Board and Senior    This area evaluates the adequacy and
 Management Oversight.          effectiveness of board and senior
                                management's understanding and
                                management of risk inherent in the
                                holding company enterprise's activities,
                                as well as the general capabilities of
                                management. It also considers
                                management's ability to identify,
                                understand, and control the risks within
                                the holding company enterprise, to hire
                                competent staff, and to respond to
                                changes in risk profile or changes in
                                the holding company's operating sectors.
Policies, Procedures, and      This area evaluates the adequacy of
 Limits.                        policies, procedures, and limits given
                                the risks inherent in the activities of
                                the consolidated enterprise and its
                                stated goals and objectives. OTS's
                                analysis considers the adequacy of the
                                enterprise's accounting and risk
                                disclosure policies and procedures.
Risk Monitoring and            This area assesses the adequacy of risk
 Management Information         measurement and monitoring, and the
 Systems.                       adequacy of the holding company's
                                management reports and information
                                systems. Include a review of the
                                assumptions, data, and procedures used
                                to measure risk and the consistency of
                                these tools with the level of complexity
                                of the enterprise's activities.
Internal Controls............  This area evaluates the adequacy of
                                internal controls and internal audit
                                procedures, including the accuracy of
                                financial reporting and disclosure and
                                the strength and influence of the
                                internal audit team. Include a review of
                                the independence of control areas from
                                management and the consistency of the
                                scope coverage of the internal audit
                                team with the complexity of the
                                enterprise.
------------------------------------------------------------------------


[[Page 17624]]

    Risk Management Rating 1. A rating of 1 indicates that management 
effectively identifies and controls all major enterprise risks. 
Management is fully prepared to address risks emanating from new 
products and changing market conditions. The board and management are 
forward-looking and active participants in managing risk. Management 
ensures that appropriate policies and limits exist and that the board 
understands, reviews, and approves them. Policies and limits are 
supported by risk monitoring procedures, reports, and management 
information systems that provide management and the board with the 
information and analysis necessary to make timely and appropriate 
decisions in response to changing conditions. Risk management practices 
and the enterprise's infrastructure are flexible and highly responsive 
to changing industry practices and current regulatory guidance. Staff 
has sufficient expertise and depth to manage the risks assumed. 
Internal controls and audit procedures are sufficiently comprehensive 
and appropriate to the size and activities of the holding company. 
There are few noted exceptions to the enterprise's established policies 
and procedures, and none is material. Management effectively and 
accurately monitors and manages the enterprise consistent with 
applicable laws, regulations, and guidance, and in accordance with 
internal policies and procedures. Risk management processes are fully 
effective in identifying, monitoring, and controlling risks.
    Risk Management Rating 2. A rating of 2 indicates that the 
enterprise's management of risk is largely effective, but exhibits some 
minor weaknesses. Management and the board demonstrate a responsiveness 
and ability to cope successfully with existing and foreseeable risks in 
the business plans. While the enterprise may have some minor risk 
management weaknesses, management and the board have recognized and are 
resolving these problems. Overall, board and senior management 
oversight, policies and limits, risk monitoring procedures, reports, 
and management information systems are satisfactory and effective. 
Risks are controlled and do not require additional supervisory 
attention. The holding company enterprise's risk management practices 
and infrastructure are satisfactory, and management makes appropriate 
adjustments in response to changing industry practices and current 
regulatory guidance. Staff expertise and depth are generally 
appropriate to manage the risks assumed. Internal controls may display 
modest weaknesses or deficiencies, but they are correctable in the 
normal course of business. The examiner may have recommendations for 
improvement, but the weaknesses noted should not have a significant 
effect on the condition of the enterprise.
    Risk Management Rating 3. A rating of 3 signifies that there are 
moderate deficiencies in risk management practices and, therefore, 
there is a cause for additional supervisory attention. One or more of 
the four elements of sound risk management is not acceptable, which 
precludes the enterprise from fully addressing one or more significant 
risks to its operations. Certain risk management practices need 
improvement to ensure that management and the board are able to 
identify, monitor, and control all significant risks. In addition, the 
risk management structure may need improvement in areas of significant 
business activity, or staff expertise may not be commensurate with the 
scope and complexity of business activities. Management's response to 
changing industry practices and regulatory guidance may not be 
sufficient. The internal control system may be lacking in some 
important aspects, leading to continued control exceptions or failure 
to adhere to written policies and procedures. The risk management 
weaknesses could have adverse effects if management does not take 
corrective action.
    Risk Management Rating 4. A rating of 4 represents deficient risk 
management practices that fail to identify, monitor, and control 
significant risk exposures in material respects. There is a general 
lack of adequate guidance and supervision by management and the board. 
One or more of the four elements of sound risk management is deficient 
and requires immediate and concerted corrective action by the board and 
management. The enterprise may have serious identified weaknesses that 
require substantial improvement in internal control, accounting 
procedures, or adherence to laws, regulations, and supervisory 
guidance. The risk management deficiencies warrant a high degree of 
supervisory attention because, unless properly addressed, they could 
seriously affect the condition of the holding company enterprise.
    Risk Management Rating 5. A rating of 5 indicates a critical 
absence of effective risk management practices in identifying, 
monitoring, or controlling significant risk exposures. One or more of 
the four elements of sound risk management is wholly deficient, and 
management and the board have not demonstrated the capability to 
address these deficiencies. Internal controls are critically weak and 
could seriously jeopardize the continued viability of the enterprise. 
If not already evident, there is an immediate concern about the 
reliability of accounting records and regulatory reports and the 
potential for losses if corrective measures are not taken immediately. 
Deficiencies in the enterprise's risk management procedures and 
internal controls require immediate and close supervisory attention.
Earnings (E) Component Rating
    E reflects the consolidated holding company enterprise's overall 
financial performance, including measures such as the quality of 
consolidated earnings, profitability, and liquidity. OTS's review of 
this area considers the level, trend, and sources of earnings on a 
consolidated level as well as for material legal entities or business 
lines. OTS also assesses the ability of earnings to augment capital and 
to provide ongoing support for an enterprise's activities.
    Within this component, OTS also considers the liquidity of the 
enterprise. This rating reflects the consolidated holding company 
enterprise's ability to attract and maintain the sources of funds 
necessary to achieve financial efficiency, support operations, and meet 
obligations. OTS evaluates the funding conditions for each of the 
material legal entities in the holding company structure to determine 
if any weaknesses exist that could affect the funding profile of the 
consolidated enterprise.
    Earnings Rating 1. A rating of 1 indicates that the consolidated 
holding company enterprise's overall financial performance is solid. 
The quantity and quality of earnings for material business lines and 
subsidiaries are sufficient to make full provision for the absorption 
of losses and/or accretion of capital in light of asset quality and 
business plan objectives. The enterprise has strong liquidity levels 
along with well-developed funds management practices. The parent 
company and subsidiaries have reliable and sufficient access to sources 
of funds on favorable terms to meet present and anticipated liquidity 
needs.
    Earnings Rating 2. A rating of 2 indicates that the consolidated 
holding company enterprise's financial performance is adequate. The 
quantity and quality of the earnings for major business lines and 
subsidiaries are

[[Page 17625]]

generally adequate to make provision for the absorption of losses and/
or accretion of capital in light of asset quality and business plan 
objectives. The enterprise maintains satisfactory liquidity levels and 
funds management practices. The parent company and subsidiaries have 
access to sufficient sources of funds on acceptable terms to meet 
present and anticipated liquidity needs. Modest weaknesses in funds 
management practices may be evident, but management and the board can 
correct those weaknesses in the normal course of business.
    Earnings Rating 3. A rating of 3 indicates that the consolidated 
holding company enterprise's financial performance exhibits modest 
weaknesses. Major business line and subsidiary earnings are not fully 
adequate to make provisions for the absorption of losses and the 
accretion of capital in relation to the business plan objectives. The 
financial performance of this enterprise may reflect static or 
inconsistent earnings trends, chronically insufficient earnings, or 
less than satisfactory asset quality. This enterprise's liquidity 
levels or funds management practices may need improvement. The 
enterprise may lack ready access to funds on reasonable terms or may 
evidence significant weaknesses in funds management practices at the 
parent company or subsidiary levels. However, these deficiencies are 
correctable in the normal course of business with sufficient board and 
management attention.
    Earnings Rating 4. A rating of 4 indicates that the consolidated 
holding company enterprise's financial performance is weak. Major 
business line or subsidiary earnings are insufficient to provide for 
losses and the necessary accretion of capital. The enterprise may 
exhibit erratic fluctuations in net income, poor earnings (and the 
likelihood of a further downward trend), intermittent losses, 
chronically depressed earnings, or a substantial drop from previous 
performance. The liquidity levels or funds management practices of this 
holding company enterprise may be deficient. The enterprise may not 
have or be able to obtain a sufficient volume of funds on reasonable 
terms to meet liquidity needs at the parent company or subsidiary 
levels.
    Earnings Rating 5. A rating of 5 indicates that the consolidated 
holding company enterprise has poor financial performance and one or 
more business lines or subsidiaries are experiencing losses. Such 
losses, if not reversed, represent a distinct threat to the 
enterprise's solvency through erosion of capital. In addition, the 
liquidity levels or funds management practices are critically deficient 
and may threaten continued viability. The enterprise requires immediate 
external financial assistance to meet maturing obligations or other 
liquidity needs.

    Dated: April 3, 2007.
By the Office of Thrift Supervision.
Scott M. Polakoff,
Deputy Director & Chief Operating Officer.
 [FR Doc. E7-6602 Filed 4-6-07; 8:45 am]
BILLING CODE 6720-01-P