By letter dated January 15, 2004, ***, Executive Vice
President, General Counsel, and Secretary of [Bank] (“the Bank”) submitted
an appeal to the FDIC’s Assessment Appeals Committee (“Committee”),
requesting a review of a December 19, 2003, determination by the FDIC’s
Director of the Division of Supervision and Consumer Protection, Michael J.
Zamorski. The December 19, 2003, determination denied a request for a change
to *** supervisory subgroup (“SS”) assignment from “C” to “B” for the July
1, 2003, semiannual assessment period.
“The Bank” contends that its SS assignment for the July 1,
2003, semiannual assessment period should have been “B” on the grounds that
its condition was not sufficiently severe as to justify the “4” composite
rating that was assigned by the Federal Reserve Bank of Atlanta (“FRB”) and
the Alabama State Banking Department (“State”). *** also indicates that
improvements in “the Bank’s” condition effected after the end of the SS
reconcilement period were not factored into the FDIC’s assessment decision.
After due consideration of the facts and issues at
question in this case, the Committee has determined that it cannot find in
“the Bank’s” favor. Before deciding “the Bank’s” appeal, the Committee
considered your request to provide an oral presentation if it would be at
all helpful in the decision-making process. The Committee concluded that the
record relating to “the Bank’s” appeal was sufficient and that an oral
presentation would not be helpful.
“The Bank’s” SS assignment was based on a February 10,
2003, examination conducted by “the Bank’s” primary federal regulator, the
FRB, and the State. Examination findings were finalized prior to the end of
the SS reconcilement period (May 16, 2003).
By way of background, SS assignments are made in
accordance with the FDIC’s regulations, specifically, 12 C.F.R. §
327.4(a)(2), which requires that the FDIC consider supervisory evaluations
provided by an institution’s primary federal regulator and other relevant
information in making these assignments.
Under guidelines set forth in
Institution Letter (“FIL”) 30-2000 (May 25, 2000), the FDIC assigns a SS
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.1 Under the FIL, the cut-off date for the July 1 assessment
period is the preceding March 31. 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’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.
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. The test for application of the SS cut-off date is 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.
At the February 10, 2003, examination, FRB and State
examiners determined that “the Bank” had deteriorated to an unsatisfactory
condition, warranting a CAMELS rating of 4-4-4-4-4-3/4. Examination findings were communicated to
“the Bank’s” board of directors at the conclusion of the examination of May
8, 2003, prior to the end of the SS reconcilement period (May 16, 2003).
Information available at the time of the reconcilement period supports the
SS rating of “C” ultimately assigned, which is consistent with the “4”
composite rating assigned by the FRB and State.
Key areas of concern identified during the examination
included deficient board and operating management supervision,
unsatisfactory actions to address an outstanding Board Resolution,
inadequate risk management procedures, a weak internal control environment,
an unsatisfactory volume of adversely classified assets, a $43 million
deficiency in the allowance for loan and lease losses, and a significant
decline in “the Bank’s” capital ratios. “The Bank” did not dispute the
severity of the problems identified during the examination. Indeed, “the
Bank” did not appeal to the FRB or the State to change the material
supervisory determinations related to the examination. Nonetheless, “the
Bank” maintains that improvement in *** financial condition was evident
after the examination, largely due to a capital injection, the sale of
branches, and recognition of losses.
The Committee commends the improvement in “the Bank’s”
financial condition since the SS assignment cut-off date. The Committee also
recognizes that these improvements were confirmed in an October 20, 2003,
examination by the FRB and State, and that “the Bank’s” composite rating was
raised to “3.” However, the question central to the Committee’s decision on
this matter is not whether “the Bank” was ultimately found to merit an
upgrade, but rather by what date that information became available. In the
Committee’s view, the dispositive fact is that key events relating to “the
Bank’s” improved composite rating, and potential changes in its SS
assignment, occurred subsequent to the reconcilement period. To grant “the
Bank” the relief requested would require in effect an extension of the
cut-off date and reconcilement period. If the Committee did so, it would
depart from years of established, consistent FDIC practice and would so
attenuate the cut-off date as to render it barely discernible and largely
The Committee carefully considered all of the written
submissions made in this matter, and accordingly, for the reasons set forth
above, “the Bank’s” appeal is denied.
By direction of the Assessment Appeals Committee.
1 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 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 allows for exceptions only in “unusual circumstances.”