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Deposit Insurance Assessment Appeals: Guidelines & Decisions  

AAC- 2003-01 (June 18, 2003)

By letter dated January 31, 2003, *** Vice President of [Thrift] (the Thrift), requested a change to the Thrifts assessment risk classification for the January 1, 2003, semiannual assessment period. The request was denied by the Federal Deposit Insurance Corporations (FDIC) Division of Insurance and Research on February 24, 2003. The Thrift appealed that determination to the FDICs Assessment Appeals Committee (Committee) by letter dated March 14, 2003.

At its meeting held May 14, 2003, the Committee reviewed the Thrifts appeal. After carefully considering the issues raised by the Thrift, the Committee concluded that the Thrifts appeal must be denied.

The Thrift is challenging its assignment by the FDIC to supervisory subgroup (SS) 1B. The assignment was based, in part, on an August 16, 2001, examination conducted by the Office of Thrift Supervision (OTS), the Thrifts primary federal regulator. This examination was the last examination transmitted to the Thrift before the September 30, 2002, SS cut-off date.

Supervisory subgroup assignments are made in accordance with the FDICs regulations, specifically, 12 C.F.R. 327.4(a)(2). That section requires the FDIC to consider supervisory evaluations provided by an institutions 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 federal regulator on or before the cut-off date. The FDICs 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. Cut-off dates also 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 examination information may reflect, during the reconcilement period. Based upon certain factors, institutions may be flagged for review during the reconcilement period, although flagging is not a prerequisite for changing an institutions rating during that period.

Thus, under the guidelines set out in the FIL, the FDIC looks to see whether examination 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 examination during that period.

The Thrift contends that as of and before the September 30, 2002, cut-off date, other pertinent information showed that it should have been assigned to SS 1A. In early 2000, the Thrift was required to submit a Compliance Plan (Plan), to correct interest rate risk concerns. The Plan was approved by OTS on October 6, 2000. According to the Thrift, the Plan objectives were achieved in the first quarter of 2001, but the Plan was not terminated by OTS until September 9, 2002. In the Thrifts view, had the Plan been terminated after the first quarter of 2001, it would in all likelihood have achieved a composite rating of 2 after the August 2001 examination, and would have been assigned to SS 1A as of the September 30, 2002, cut-off date. In short, the Thrift argues that delay in the termination of the Plan postponed regulatory recognition of its compliance for an unreasonable period of time.

The Thrifts contention that the August 2001 examination resulted in a composite rating of 3 solely because the Plan remained in effect is not correct. In fact, the Thrifts composite 3 rating was based primarily on its ratings for management and earnings. The Thrifts overall condition was not considered satisfactory and earnings deterioration was evident. Loan administration and underwriting deficiencies were also criticized, as they had been in the previous two examinations. Indeed, the August 2001 examination results contradict the Thrifts contention that its risk exposure was minimal or moderate since the first quarter of 2001.

In the Committees view, the controlling fact here is that the Thrifts improvement to 1A did not become apparent until January 24, 2003. The reconcilement period for the January 1, 2003, semiannual period began on October 11, 2002, and ended on November 15, 2002. Although OTS began an examination on November 4, 2002, insufficient information was available to merit a change in the Thrifts rating by the end of the reconcilement period on November 15, 2002. OTS did not consider the Thrift to be a composite 2 institution prior to the examination and did not determine that an upgrade to composite 2 was warranted until the examination was completed. In short, there was no change to the Thrifts 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 Thrifts condition was likely anytime prior to the September 30 cut-off date or the end of the reconcilement period. Indeed, the first formal regulatory action recognizing the Thrifts improved condition did not occur until January 24, 2003, when OTS completed its examination. By that date, the September 30 cut-off date and the reconcilement period had both passed. To grant the Thrift the relief it requests would require, in effect, an extension of the cut-off date and reconcilement period to January 24, 2003. 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 attempts to reach out as far as possible to adjust supervisory subgroup classifications, the Thrift would have the FDIC reach too far.

The Committee has carefully considered all of the submissions made in this matter. Accordingly, although the Committee is mindful that if the results of the OTS exam had been apparent sooner the result here might be different, for the reasons set forth above, the Thrifts appeal is denied

Pursuant to authority delegated by the FDIC Board of Directors to the Committee, this decision constitutes the FDICs final agency action on this matter.

By direction of the Assessment Appeals Committee.

 


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