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AAC- 2004-04 (September 7, 2004)

[Bank] (“the Bank”), submitted an appeal to the �౦��Ϸ����’s Assessment Appeals Committee (“Committee”) by letter dated April 29, 2004. The Bank is appealing the April 2, 2004 determination by the �౦��Ϸ����’s Division of Insurance and Research (“DIR”) denying the Bank’s request for review of its supervisory subgroup (“SS”) assignment for the January 1, 2004 semiannual assessment period.

At its meeting held on July 19, 2004, the Committee allowed the Bank, pursuant to Committee rules, to appear and make an oral presentation in support of its case for an assessment risk classification change. The presentation was highly professional and helpful in resolving this matter, which involves application of the SS cut-off dates set out in Financial Institution Letter (“FIL”) 90-2003 (November 28, 2003). After carefully considering all of the written and oral submissions and facts of this case, the Committee has determined that the Bank’s appeal must be denied.1

Background

The Bank was assigned an SS rating of “1C” for the January 1, 2004, semiannual assessment period. That assignment was based, in part, on a February 10, 2003 joint examination conducted by the Federal Reserve Bank of Atlanta (“FRB”) and Alabama State Banking Department (“State”). This was the last examination transmitted to the Bank prior to September 30, 2003, the SS cut-off date for the January 1, 2004 semiannual assessment period.

By letter dated March 9, 2004, addressed to DIR, the Bank requested review of its risk classification, seeking an upgrade to a “1B.” In support of its position, the Bank cited a joint FRB/State examination begun on October 20, 2003, that ultimately upgraded the Bank’s CAMELS composite rating from “4” to “3.” DIR denied the Bank’s request for review of the risk classification by letter dated April 2, 2004. In its decision DIR, among other things, outlined the guidelines set forth in FIL 90-2003 governing the determination of assessment risk classifications, discussed what is known as the “reconcilement period,” and concluded that insufficient evidence was available during the October 15 to November 19, 2003 reconcilement period to determine whether an upgrade would be appropriate.

In its appeal letter to this Committee, the Bank argues that the SS rating assigned to it as of the September 30, 2003 cut-off date was not reflective of all information available to the �౦��Ϸ���� as of the cut-off date and subsequent reconcilement period, and that the rating is therefore incorrect. The Bank also suggests that, based upon conversations with Division of Supervision and Consumer Protection (“DSC”) staff in the �౦��Ϸ����’s Atlanta Regional Office, the Bank understood that a request for review would be granted if the Bank’s CAMELS composite rating was upgraded to a “3,” provided the �౦��Ϸ���� concurred with the upgrade. Finally, the Bank suggests that the �౦��Ϸ���� accepted “other pertinent information” for purposes of a downgrade in 2003 but is rejecting “other pertinent information” for purposes of an upgrade in this case. The Bank believes that the �౦��Ϸ���� had, on or before the end of the reconcilement period, an extensive amount of other pertinent information upon which it could have, and should have, concluded that the Bank’s condition had improved sufficiently to justify an upgrade to an SS classification of “B” based on factors used to assign risk classifications outlined in the �౦��Ϸ����’s FIL 90-2003.

Analysis

SS assignments are made in accordance with the �౦��Ϸ����’s regulations, specifically, 12 C.F.R. § 327.4(a)(2), which requires that the �౦��Ϸ���� 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 90-2003, the �౦��Ϸ���� assigns a SS to each institution for each semiannual assessment period based on a variety of factors, including �౦��Ϸ���� 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.2 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 �౦��Ϸ����’s determination of an institution’s risk profile as of that date. The �౦��Ϸ����’s 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 �౦��Ϸ���� examinations; 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 �౦��Ϸ���� 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 by the FIL: “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.” For those institutions that are reviewed during the reconcilement period, recent information, including information obtained from examinations in process, generally will be considered. Typically, consideration may be given to examinations that are near completion. Examinations starting after the cut-off date, however, may not yet provide conclusive information to determine any preliminary ratings.

In applying the guidelines in the FIL, the �౦��Ϸ���� 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. The information available to the �౦��Ϸ���� during the reconcilement period and regarding the Bank, supported the SS of “C” as of the cut-off date; confirmation of its upgrade was not apparent until after the reconcilement period ended.

The Bank contends that its condition as of the September 30, 2003, SS cutoff date should have been reflective of a composite “3” rating based on the Bank’s improved condition as shown in the joint FRB/State examination begun on October 20, 2003. Specifically, the Bank asserted its “understanding” that the State and the FRB advised the �౦��Ϸ���� prior to the end of the reconcilement period that, although the rating had not been finalized, it appeared the Bank’s composite rating would be upgraded to a “3.” The Bank contends that a rating need not be finalized in order for the �౦��Ϸ���� to change an SS classification, citing FIL 90-2003 (“other pertinent information” may also be considered when assigning the SS classification). Other pertinent information, the Bank asserts, was available to the �౦��Ϸ���� through the �౦��Ϸ����’s on-site examination participant and justified an upgrade to “B” prior to the end of the reconcilement period.

In fact, the Bank was flagged for review during the reconcilement period (October 15 – November 19, 2003) and �౦��Ϸ���� staff conducted a review of the Bank for Risk Related Premium purposes. Nonetheless, conversations between FRB and �౦��Ϸ���� representatives at the end of the reconcilement period indicated that the joint FRB/State examination begun on October 20, 2003 (with �౦��Ϸ���� participation) was still in process and that no preliminary findings or conclusions were available at that time and would not be available for an additional three to four weeks. As a result, the �౦��Ϸ���� indicated to the Bank’s regulatory counsel that the �౦��Ϸ���� needed more definitive findings before any changes to the SS classification could be made based on the October 20, 2003 examination. The Bank acknowledges that it was told by �౦��Ϸ���� staff on November 19, 2003 that the Bank would receive an SS of “C” for the January 1, 2004 semiannual assessment period. FRB representatives indicate that it was not until January 9, 2004 that the FRB and State advised the Bank by telephone that the composite rating would officially be upgraded to a “3.” On January 15, 2004, examiners met with the Bank’s senior management at an exit meeting and management was indeed informed that the new CAMELS rating would be 343433/3. The Bank did not receive the finalized examination report until March 9, 2004, at a Board of Directors meeting with FRB/State representatives. In short, insufficient information was available prior to the end of the reconcilement period to determine that the Bank’s condition would be upgraded.

The Bank also states that, based upon conversations with DSC staff in the �౦��Ϸ����’s Atlanta Regional Office, it understood that if the October 20, 2003, examination ultimately resulted in a “3” composite rating, the Bank could appeal its SS “C” classification, provide evidence of the upgrade, and, if the �౦��Ϸ���� did not disagree with the upgrade, win the appeal and obtain a refund. There appears to have been a misunderstanding: �౦��Ϸ���� staff members in the Atlanta Regional Office indicate that they discussed with the Bank its obligation to pay the deposit insurance assessment by the due date and the various courses of action the Bank could take regarding a review of its SS classification but suggest that they did not advise the Bank that its appeal would be automatically granted: In any event, the statements alleged, even if made, are incorrect and do not bind this Committee.

The Bank further maintains that the �౦��Ϸ���� accepted “other pertinent information” in denying the Bank’s prior request and related AAC appeal for review of its risk classification for the July 1, 2003 semiannual assessment period (In the Matter of the Bank, AAC No: 2004-01 (March 22, 2004)). In that earlier case, the “other pertinent information” that was accepted by the �౦��Ϸ���� consisted of examination findings. The FRB, as the primary federal regulator, provided an assigned composite rating of “3” to the Bank based on a joint FRB/State in-process examination that had begun on February 10, 2003, prior to the March 31, 2003 cut-off date, and the Bank’s assigned risk classification was “2B.” After the cut-off date -- but before the end of the reconcilement period -- the FRB examination uncovered further financial deterioration. This ultimately resulted in a CAMELS rating of 444443/4 and a final risk classification for the July 1, 2003 semiannual assessment period of “2C.” The FRB revealed the CAMELS rating to the Bank’s senior management in a Board meeting held on May 8, 2003; the reconcilement period did not end until May 16, 2003. For these reasons, the Bank’s request for review and appeal in that earlier case were properly denied. In both the earlier and the present case, the same test has been applied.

In the present case, the Bank’s improvement to a “1B” did not become certain until after the reconcilement period ended. The Bank argues that, in hindsight, its overall condition as of the September 30, 2003 cut-off date merited a supervisory subgroup classification of “1B.” 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 the information became available. Here, that information was not available until January 9, 2004, well after the reconcilement period had ended.

The timing issues raised by the Bank in this appeal have been previously considered and consistently decided by the Committee in other appeals. See e.g., AAC No. 2002-03 (Nov. 25, 2002); AAC No. 2003-04 (Dec. 16, 2003). To grant the Bank the relief requested would require, in effect, an extension of the cut-off date and reconcilement period. Such action would depart from years of established, consistent �౦��Ϸ���� practice. It would so attenuate the cut-off date as to render it barely discernible and largely ineffective.

Conclusion

While the Committee sympathizes with the Bank’s position and is mindful that had the results of the FRB/State examination been apparent sooner the results here might be different, the Bank’s appeal is denied for the reasons set forth above.

By direction of the Assessment Appeals Committee, dated September 7, 2004.

• 1

  At the oral presentation, counsel for (the “Bank”) requested that the Committee refer this matter to the �౦��Ϸ���� Board of Directors for consideration.  The Committee determined that referral of the matter to the Board was not warranted.

• 2

  The �౦��Ϸ���� 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.”