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AAC-2003-02 (August 1, 2003)

By letter dated March 26, 2003, ***, Chairman and Chief Executive Officer of [Bank] (the “Bank”), requested a change to the Bank’s assessment risk classification for the January 1, 2003 semiannual assessment period. The request was denied by the Federal Deposit Insurance Corporation’s (“�౦��Ϸ����”) Division of Insurance and Research (“DIR”) on April 25, 2003. The Bank appealed the DIR’s determination to the �౦��Ϸ����’s Assessment Appeals Committee (“Committee”) by letter dated May 22, 2003.

At a meeting held July 21, 2003, the Committee reviewed the Bank’s appeal. After carefully considering the issues raised by the Bank, the Committee has concluded that the Bank’s appeal must be denied.

The Bank is challenging its assignment by the �౦��Ϸ���� to supervisory subgroup (“SS”) “1B.” The assignment was based, in part, on a May 28, 2002 examination conducted by the Office of Thrift Supervision (“OTS”), the Bank’s primary federal regulator, with �౦��Ϸ���� participation. This was the last examination transmitted to the Bank before the September 30, 2002 SS cut-off date.

Supervisory subgroup assignments are made in accordance with the �౦��Ϸ����’s regulations, specifically, 12 C.F.R. § 327.4(a)(2). That section requires the �౦��Ϸ���� to 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 30-2000, the �౦��Ϸ���� assigns a supervisory subgroup 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 federal regulator on or before the cut-off date. 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. 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 �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 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 �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. Based upon certain factors, institutions may be flagged for review during the reconcilement period, although flagging is not a prerequisite for changing an institution’s rating during that period.

Thus, under the guidelines set out in the FIL, the �౦��Ϸ���� 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 Bank contends that its assessment risk classification improved from “1B” to “1A” for the January 1, 2003 semiannual period. These improvements, according to the Bank, began prior to the September 30, 2002 cut-off date, and continued thereafter, with a “dramatic” decline in the level of classified assets occurring between September 30, 2002 and December 31, 2002. In the Bank’s view, this is not indicative of an institution that exhibits risk to the deposit insurance funds and therefore it should not have been assigned an SS classification of 1B. The Bank seeks an exception to the September 30, 2002 cut-off date so that subsequent alleged changes to the Bank’s condition can be given “due consideration” by the �౦��Ϸ����.

The Committee finds no basis on the merits of the Bank’s appeal for the relief it requests. The most recent examination was begun by OTS on May 28, 2002, completed on August 7, 2002, and transmitted to the Bank on August 27, 2002. The �౦��Ϸ���� participated in the examination and concurred with the “3” composite rating assigned by the OTS. No other examination was in process that would have led to a review or upgrade of the Bank’s SS classification prior to the September 30, 2002 cut-off date or during the October 11 – November 15, 2002 reconcilement period.

Moreover, the Committee cannot concur in the Bank’s contentions regarding its condition prior to and after the September 30 cut-off date. Problems appear to have existed from the cut-off date through the reconcilement period, and, indeed, the Bank’s net income was negative at the end of the first quarter of 2003.

To grant the Bank the relief it requests would conflict with the evidence of the Bank’s actual condition during the relevant period and would disregard consistent �౦��Ϸ���� policy and practice concerning application of the cut-off date.

Finally, the Committee notes that the Bank did not address the finding that its request for review was filed late. Although the procedural defect of late filing constitutes additional grounds for denial of the Bank’s appeal, the Committee has extended to the Bank full consideration of the merits of its arguments on appeal.

The Committee has carefully considered all of the submissions made in this matter. Accordingly, for all of the reasons set forth above, the Bank’s appeal is denied.

By direction of the Assessment Appeals Committee.