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AAC-2004-01 (March 22, 2004) 

By letter dated January 15, 2004, ***, Executive Vice President, General Counsel, and Secretary of [Bank] (“the Bank”) submitted an appeal to the �౦��Ϸ����’s Assessment Appeals Committee (“Committee”), requesting a review of a December 19, 2003, determination by the �౦��Ϸ����’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 �౦��Ϸ����’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 �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 Financial Institution Letter (“FIL”) 30-2000 (May 25, 2000), 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 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 �౦��Ϸ����’s review may also include other written findings that result in a composite rating change by the primary regulator, �౦��Ϸ���� 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 �౦��Ϸ���� 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 �౦��Ϸ���� practice and would so attenuate the cut-off date as to render it barely discernible and largely ineffective.

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.

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  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.”