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Deposit Insurance Assessment Appeals: Guidelines & Decisions  

AAC-2002-03 (November 25,  2002)

Decision
By letter dated February 19, 2002, Mr. ***, President and Chief Executive Officer of [Bank] (the “Bank”), requested a change to the Bank’s assessment risk classification for the January 1, 2002, semiannual assessment period. That request was denied by the Federal Deposit Insurance Corporation’s (“FDIC”) Division of Insurance and Research on May 8, 2002, and you appealed that determination to the FDIC’s Assessment Appeals Committee (“Committee”) by letter dated June 7, 2002.

At its meeting held on October 30, 2002, the Committee allowed the Bank, pursuant to Committee rules, to appear and make an oral presentation of its case for an assessment risk classification change. The Committee found that the presentation was highly professional and extremely helpful in resolving this matter, which involves application of the supervisory subgroup (“SS”) cut-off dates set out in Financial Institution Letter (“FIL”) 30-2000 (May 25, 2000).

The Bank is challenging its assignment by the FDIC to supervisory subgroup 1B. That assignment was based, in part, on an October 20, 2000 examination conducted by the Bank’s primary federal regulator (the Office of Thrift Supervision (“OTS”)), the last examination transmitted to the Bank before the September 30, 2001 SS cut-off date.

Supervisory subgroup assignments are made in accordance with the FDIC’s regulations, specifically, 12 C.F.R. § 327.4(a)(2). That section requires the FDIC to consider supervisory evaluations provided by an institution’s primary federal regulator and other relevant information in making these assignments.

Under guidelines set forth in FIL 30-2000, the FDIC assigns a supervisory subgroup to each institution for each semiannual assessment period based on a variety of factors, including FDIC review of the last examination finalized and transmitted to the institution by the primary regulator on or before the cut-off date. The FDIC’s review may also include: Other written findings that result in a composite rating change by the primary regulator; FDIC examinations finalized on or before the cut-off date; results of offsite statistical analysis of reported financial statements; or other pertinent information. Under the FIL, the cut-off date for the January 1 assessment period is the preceding September 30. The FIL expressly states that the cut-off date refers to the date the written composite rating is transmitted to the institution and not to the examination “as of” date, the date of financial statements used in the examination, the starting or closing date of the examination, or the date of exit meetings.

The FDIC Board of Directors (“Board”) addressed the need for cut-off dates in a 1993 rulemaking in which it called “strict application” of the cut-off date “the fairest approach.” 58 Fed. Reg. 34357, 34359 (June 25, 1993). The Board articulated three bases for this view. First, the approach is fair to all institutions and to the deposit insurance funds. Whether upgraded or downgraded after the cut-off date, no insured institution will see the effect of that change until the next semiannual period. And cut-off dates protect the deposit insurance funds, since it is likely that only upgraded institutions would ever seek reclassification of their SS assignment. Second, if changes finalized after the cut-off date were considered, assessment notices would in effect become preliminary notices, subject to later revision for, potentially, hundreds of institutions. Finally, the cut-off date preserves needed predictability for the risk-based assessment system. In endorsing strict application of cut-off dates, the Board allowed for exceptions only in “unusual circumstances.”

To ensure greater fairness in the application of cut-off dates, and to allow consideration of unusual circumstances, the FDIC continues to look at the information referred to in FIL-30-2000 for a period of approximately six weeks after the cut-off date, in what is known as the reconcilement period. Institutions whose risk profile might have changed since their last examination can be subject to upgrades or downgrades, as more recent exam information may reflect, during the reconcilement period. Based upon certain factors, institutions may be flagged for review in the reconcilement period, although flagging is not a prerequisite for changing an institution’s rating during that period.

Thus, under the guidelines set out in the FIL, the FDIC looks to see whether exam results were transmitted in writing to the institution prior to the cut-off date, unless an institution is reviewed during the reconcilement period or there is evidence of a change that is confirmed by an ongoing exam during that period.

The Bank contends that as of and before the September 30, 2001 cut-off date, facts and circumstances showed that it should have been assigned to SS 1A. The Bank maintains that improvement was evident during the reconcilement period and was confirmed in its next examination, begun by OTS on October 9, 2001. The results of that examination, communicated to the Bank by OTS on December 20, 2001, did in fact show improvement in the Bank’s CAMELS rating. In hindsight, therefore, the Bank’s overall condition as of the September 30, 2001, cut-off date appears to have merited a supervisory subgroup classification of 1A. This fact is at the core of the Bank’s argument. The real question, however, is not whether the Bank was ultimately found to merit an upgrade, but rather by what date did that information become available.

In the Committee’s view, the dispositive fact here is that the upgrade to the Bank’s ratings became apparent only as of December 20, 2001, the date OTS communicated its tentative exam results to the Bank. On November 16, 2001, the end of the reconcilement period, insufficient information was available to merit a change in the Bank’s rating. By that date, the OTS exam begun October 9, 2001, was not complete and no tentative ratings had been assigned or even discussed. No issues involving the Bank’s SS rating were raised by OTS at a meeting with the FDIC held November 27, 2001, to review actions taken during the reconcilement process. Indeed, at a December 11, 2001, meeting between Bank management, the OTS, and the FDIC, OTS advised the Bank that its ratings would be disclosed at the next planned meeting. In short, there was no change to the bank’s rating confirmed in an ongoing examination by its primary federal regulator during the reconcilement period.

The Committee concludes that there was insufficient evidence for the FDIC to determine that an upgrade in the Bank’s condition was likely any time prior to communication by OTS of the Bank’s tentative exam rating. By that date, the September 30 cut-off and the reconcilement period had both passed. To grant the Bank the relief it requests would require in effect an extension of the cut-off date and reconcilement period to December 20, 2001. If the Committee did so, it would depart from years of established and consistent FDIC practice and would so attenuate the cut-off date as to render it barely discernible and largely ineffective. While the FDIC would like to reach out as far as possible to adjust supervisory subgroup classifications, the Bank would have the FDIC reach too far. As a final note, the cut-off date provides certainty for the industry as well as the FDIC. It also sometimes results in a benefit for institutions that are downgraded after the cut-off date, as happened to the Bank in the first semiannual period of 2001.

The Committee has carefully considered the oral presentation as well as all of the written submissions made in this matter. Accordingly, while the Committee sympathizes with the Bank’s position and is mindful that had the results of the OTS exam been apparent sooner the result here might be different, for the reasons set forth above the Bank’s appeal is denied.

By direction of the Assessment Appeals Committee.



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