X (the Bank), by letter dated February 24, 2005, filed an
appeal with the Assessment Appeals Committee (Committee) of the Federal
Deposit Insurance Corporation (FDIC). The Bank is appealing a decision
issued by the FDICs Division of Insurance and Research (DIR) on January
26, 2005, denying the Banks Request for Review of its supervisory subgroup
(SS) rating for the January 1, 2005 semiannual period. The Bank seeks
reclassification of its SS assignment from 1C to 1B for that period.
At its meeting held on April 28, 2005, the Committee allowed the Bank,
pursuant to the Guidelines for Appeals of Deposit Insurance Assessment
Determinations,1 to appear
and make an oral presentation in support of its
case for a change in SS rating. The oral presentation was particularly
helpful to the Committee in illuminating the issues presented in this
appeal. After carefully considering all of the written and oral submissions
and the facts of this case, however, the Committee has determined that the
Banks appeal must be denied.
The Bank was assigned an SS of C for the January 1, 2005 assessment
period. That assignment was based upon its CAMELS composite rating of 4,
resulting from a Federal Reserve Bank of Minneapolis (FRB) examination, in
which the FDIC participated, that began on February 2, 2004 and ended on May
12, 2004. September 30, 2004 was the effective date for assigning SS
classifications for the first semiannual period of 2005 pursuant to FDIC
regulations and procedures. The February 2, 2004 exam was the last exam
finalized and transmitted to the Bank by the FRB, its primary federal
regulator, on or before the September 30, 2004 cut-off date.
The FDIC participated in an FRB targeted review of the Bank that began on
September 7, 2004 and was completed on September 23, 2004. The targeted
review did not include assignment of a CAMELS rating.
The reconcilement period for the January 1, 2005 semiannual assessment
period began on October 12, 2004 and ended on November 19, 2004. The Bank
was flagged for review and its SS rating of C was confirmed. The
information reviewed included the February 2, 2004 examination; offsite
financial information, including the Banks June 30, 2005 Call Report; the
September 7, 2004 targeted review findings; and correspondence from the Bank
and FRB, including the Banks efforts to comply with a Written Agreement
entered into with the FRB on September 23, 2003.2The Banks December 15,
2004 assessment invoice contained a risk classification of 1C for the
January 2005 semiannual period.
No examination was in-process as of the cut-off date or during the
reconcilement period. An FRB examination of the Bank was begun on November
29, 2004, ten days after the reconcilement period ended. Preliminary CAMELS
ratings from that exam were not determined until December 16, 2004.
On January 19, 2005, the FRB transmitted the final results of the
November 29, 2004 examination to the Bank. The Banks CAMELS ratings were
243322, with a composite rating of 3 assigned.
By letter dated December 21, 2004, the Bank requested review of the risk
classification assigned to it for the January 2005 period, seeking an
upgrade from 1C to 1B. According to the Bank, its capital ratios
significantly exceeded the requirements of the Written Agreement and had
improved each quarter; earnings remained strong; Marketable Assets
exceeded Bank insured deposits; loan loss reserves were fully funded; the
FRB exam of November 29, 2004 had upgraded the Banks CAMELS rating to a
composite 3; and the Bank had complied with the Written Agreement as
evidenced by a letter from the FRB dated October 14, 2004. For those
reasons, the Bank asserted that the risk it posed to the FDIC insurance fund
was extremely remote.
DIR denied the Banks Request for Review by letter dated January 26,
2005. Outlining the process for determining risk classifications for insured
institutions, DIR explained that the Banks January 2005 risk classification
was based primarily on the composite rating assigned at the February 2004
examination, the last finalized composite rating before the September 30,
2004 cut-off date. DIR noted that the FDIC considers other pertinent
information during the reconcilement period, and that institutions whose
risk profile might have changed since the last exam can be subject to SS
upgrades or downgrades, as more recent examination information may reflect.
According to DIR, the FDIC lacked, and therefore could not consider, the
results of any exam more recent than February 2, 2004, either at the cut-off
date or during the reconcilement period, when the SS was determined.
On February 24, 2005, the Bank appealed DIRs denial to this Committee.
Acknowledging that the last finalized, transmitted report of examination
prior to the cut-off date assigned it a CAMELS 4 rating, the Bank asserts
that available supervisory information warranted an SS upgrade to B. The
Bank points out that FRB and FDIC personnel, in the nine month period
following the February 2004 exam, had analyzed whether the Bank was in
compliance with its Written Agreement and later performed the November 29,
2004 exam. A significant amount of substantive, favorable supervisory
information was generated during this period, the Bank asserts, which should
have been considered by the FDIC in determining the Banks January 2005 SS
rating. Such information, in the Banks view, goes beyond its CAMELS rating
and falls within the variety of factors set forth in
FIL-90-2003 (Nov. 28,
2003) for assigning SS ratings.
The Bank also contends it was told by FRB and FDIC representatives that
the November 29, 2004 examination results, if available by December 31,
2004, would be considered in determining the Banks SS for the January 2005
semiannual period. Based on these statements, the Bank asserts that it
reasonably believed that the reconcilement period ended on December 31,
2004. According to the Bank, previous Committee decisions are not yet
public and therefore it could not verify the accuracy of the statements
made. Claiming the benefit of the doubt, the Bank urges the Committee to
extend the Banks reconcilement period until the end of 2004.
SS assignments are made in accordance with the FDICs regulations,
specifically, 12 C.F.R. §
327.4(a)(2), which 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-90-2003, the FDIC assigns an SS to each
institution for each semiannual assessment period based on a variety of
factors, including FDIC review of the results of the last examination
finalized and transmitted to the institution by the primary regulator on or
before the cut-off date.3
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 relates to the FDICs determination of an
institutions risk profile as of that date. The FDICs review may also
include a review of other written findings that result in a composite rating
change by the primary regulator; a review of the finalized results of
independent, joint or concurrent FDIC examinations; results of offsite
statistical analysis of reported financial statements; or analysis of other
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-90-2003 for a period of approximately six
weeks after the cut-off date, in what is known as the reconcilement
period. As provided in the FIL: The FDIC continues to consider other
pertinent information during a reconcilement period following the cut-off
date. Institutions whose risk profile might have changed since their last
examination can be subject to supervisory subgroup upgrades or downgrades,
as more recent examination information may reflect, during the reconcilement
period. As indicated in the FIL, and in the decisions of this Committee
(see, e.g., AAC No. 2004-04, at 4 (Sept. 7, 2004); AAC
No. 2003-02 (Aug. 1,
2003)), other pertinent information will usually consist of more recent
examination information. Examinations in process may generate such
information. Examinations starting after the cut-off date, however, may not
yet provide conclusive information to change an institutions SS ratings.
The FDIC, in applying the guidelines in the FIL, looks to whether
examination results were transmitted in writing to the institution on or
before 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.
According to the Bank, before and during the reconcilement period the
FDIC possessed sufficient supervisory information to have concluded that the
Banks condition warranted an SS upgrade to B for the January 2005
semiannual period. However, rather than looking to the factors set out in
FIL-90-2003, which would bring the favorable information to light, the Bank
asserts that the FDIC considered only the prior CAMELS rating that resulted
from the February 2004 examination. In short, the Bank argues that the FDIC
reconcilement review of the Banks SS was improper. With that in mind, the
Committee must focus on the reconcilement review that was performed.
The Bank was flagged because its Statistical CAMELS Offsite Rating
reflected improvements to its condition, and consequently its SCOR disagreed
with its 1C SS assignment. At the time the Bank was reviewed, the Case
Manager had available the FRBs February 2, 2004 Examination Report, the
FRBs September 7, 2004 targeted review, Call Report information as of June
30, 2004, and various correspondence between the Bank and the FRB. The Case
Manager noted improvements, including increasing capital ratios, lower
charge-off ratios, and improved liquidity indices, credit risk management,
and account management guidance practices. Further, the Bank appeared to
have substantially complied with the Written Agreement requirements.
The Case Manager, however, also noted that significant risk continued to
emanate from the Banks subprime credit card program and insufficient
information was available as to the adequacy of allowances for loan and
lease losses and the potential impact of a large tax-related year-end
dividend. The Bank had high (16.5%) delinquency rates, and management
continued to focus on the total managed portfolio with limited oversight of
the Bank-owned portion of the portfolio. Although the Bank had adopted
certain policies and plans, its degree of compliance could not be determined
at the time of reconcilement. In addition, the Case Manager had no follow-up
information regarding certain items of concern detailed in the February 2,
2004 Examination Report, including significant weaknesses in the adequacy of
accounting, audit, and internal control systems, as well as the Banks
management of operational, legal and reputational risks. Moreover, the
findings of the September 7, 2004 targeted review (which assigned no CAMELS
rating) indicated the need for more diligent analysis, monitoring and
reporting of credit card performance and risk attributes on a legal entity
On November 24, 2004, the FDIC notified the FRB of the results of the
reconcilement process for all flagged banks and requested that the FRB
contact the FDIC if any case warranted further review. The FRB did not
respond as to the Banks SS assignment.
The Committee, having examined the reconcilement process applied to the
Bank, finds that confirmation of the supervisory subgroup of C in the
reconcilement review conducted on October 25, 2004 reflected appropriate
consideration of the variety of factors set out in FIL-90-2003 in light of
the information available at the time.5
Information that supported a ratings upgrade for the Bank did not become
available until the on-site November 29, 2004 examination was conducted. The
Bank, however, points out that the November 29, 2004 exam used information
as of the September 30, 2004 cut-off date, and that the exam ultimately
resulted in a composite 3 rating for the Bank. The Bank argues that
because the November 29, 2004 exam ultimately determined that an upgrade was
merited, its appeal should be granted.
As the Committee has noted in prior cases, the real question presented is
not whether an upgrade is ultimately found to be merited, but rather by what
date that information became available. See AAC No.
2002-03, at 3 (November
25, 2002). That is the essence of the timing problem the Bank faces. Not
until December 16, 2004 was a preliminary composite rating of 3
communicated to the Bank by the FRB. Final examination results were not
transmitted to the Bank until the FRBs January 19, 2005 letter, which
upgraded the Banks CAMELS ratings from 344333/4 to 243322/3. Both events
occurred well after the reconcilement period ended. In short, the November
29, 2004 examination results were obtained too late to affect the Banks SS
rating for the January 2005 semiannual period.
The timing issue raised by the Bank in this appeal has been considered
and consistently decided by this Committee. See AAC No. 2002-03 (Nov. 25,
2002), AAC No. 2003-01 (June 18, 2003), AAC No. 2003-02 (August 1, 2003),
AAC No. 2003-03 (September 29, 2003), AAC No.
2003-04 (December 16, 2003), AAC No.
2004-01 (March 22, 2004), AAC No.
2004-03 (July 23, 2004), AAC No.
2004-04 (September 7, 2004), and AAC No. 2004-05 (December 21, 2004). For
example, in AAC No. 2002-03, the bank asked the AAC to consider improvements
that did not become evident until after the reconcilement period. There, an
examination begun shortly after the cut-off date resulted in an improved
composite rating, but the results were not available until after the
reconcilement period ended. The AAC rejected the banks argument because
there was no change in rating confirmed in an ongoing examination by its
primary federal regulator during the reconcilement period. Here, the Banks
examination did not begin until after the reconcilement period had ended.
The Bank next asserts that it was informed by regulators that the
November 2004 examination would be considered in determining its January
2005 risk assessment if the results were available by December 31, 2004. The
Bank interpreted this to mean that the reconcilement period would run
through December 31. Without publicly available Committee decisions, the
Bank complains that it lacked any basis to correct such misstatements. At
the oral presentation, the Bank added that had it known of the November 19,
2004 reconcilement period end date, it would have urged the FRB to conduct
an earlier examination.
The Bank did not raise this issue with DIR in its Request for Review.
Under the Guidelines for Appeals of Deposit Insurance Assessment
Determinations, [o]nly matters previously reviewed at the division level,
resulting in either a written determination or a direct referral to the AAC,
may be appealed to the AAC. (Guidelines,
The Guidelines were provided
to all insured institutions in FIL-113-2004, dated October 13, 2004.
Consequently, this issue is not properly before the Committee and cannot
provide the Committee with grounds to sustain the Banks appeal. See AAC No.
99-01, at 3 n.9 (May 14, 1999) (matter not raised below is not ripe for
Committee consideration on appeal).
In any event, the Committee notes that FDIC field and regional staff
recalled no such statements as alleged by the Bank. Moreover, even if the
statements alleged were made, they are incorrect and would not bind the
Committee. See AAC Case No. 2004-04, at 4 (Sept. 7, 2004).
Finally, it is evident that the Bank was confused as to the length of the
reconcilement period. Certainly, FIL-90-2003 does not specify dates
governing reconcilement periods - flexibility in the timing of the period
would be eliminated if it did. Reconcilement periods currently last
approximately six weeks after the cut-off date, although the period can
vary. Approximate reconcilement period length is discussed in some AAC
decisions, all of which will soon be posted (redacted in conformance with
on the FDICs Internet website. Review of these decisions
would likely have dispelled the Banks confusion. Prior to Internet
availability, however, the FDIC has at all times relevant to the Banks
Request for Review made all Committee decisions publicly available by
providing paper copies upon request. Indeed, paper copies were provided in
response to a request by the Bank prior to the submission of its appeal.
Lack of Internet availability to Committee decisions provides no basis for
the relief sought.
The Committee has carefully considered all of the oral and written
submissions made in this matter. The reconcilement review accorded the Bank
was consistent with the FDICs process as set out by regulation and in
FIL-90-2003. The timing issues raised by the Bank have been previously
considered and rejected by the Committee. As in those cases, the requested
relief would require, in effect, an extension of the cut-off date and
reconcilement period to the point that there would be no effectively
applicable time limit. Further, the cut-off date provides certainty for the
industry, as well as the FDIC, and it sometimes results in a benefit for
institutions that are downgraded after the cut-off date, as it did for this
Bank in 2002. Finally, the Banks misunderstanding of the reconcilement
period end date provides no basis for granting the relief it seeks.
Accordingly, for the reasons set forth in this decision, the Banks
appeal is denied.
By direction of the Assessment Appeals Committee, dated July 1, 2005.
The Guidelines are set out at 69
41479, 41486 (July 9, 2004), and in FDIC Financial Institution Letter (FIL)
113-2004 (Oct. 13, 2004).
2 The Bank and the FRB entered into the Written Agreement
to address a number of issues related, in part, to the credit card
operations of the Bank and a non-bank subsidiary of the Banks holding
company. The Written Agreement covered, among other things, new accounts and
portfolio growth, capital and strategic plans, allowances for loan and lease
losses, recordation of revenue and income, affiliate transactions and
servicing, regulatory communications and cooperation, dividends and
interest, compensation, liquidity, accounting and regulatory reporting
3 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.
4 The SCOR system is a model that statistically tests the
correlation of financial data to examination ratings. It is one of several
criteria that may result in an institution being flagged for reconcilement
review. During the October 12 to November 19, 2004 reconcilement period more
than 550 institutions were flagged.
5 Reconcilement reviews for all flagged institutions,
including the Bank, were completed during the first five weeks of the
reconcilement period. During this five-week period, Case Managers reviewed
information and submitted written analyses for each flagged institution;
each analysis was then reviewed by FDIC Regional Office management. To allow
sufficient time for staff analysis and management review of the institutions
involved, the process was staggered within the reconcilement period. All
flagged institutions cannot be reviewed on the same day, nor can they all be
reviewed on the last day of a reconcilement period. The reconcilement review
of the Bank was conducted on October 25, 2004. In light of assertions made
at the oral presentation, the Committee notes that even considering
information available as of the last day of the Reconcilement Period - which
would include the Banks September 30, 2004 Call Report an upgrade to the
Banks SS would not have been warranted.