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Deposit Insurance Assessment Appeals: Guidelines & Decisions  

AAC- 2004-05 (December 21, 2004)

Decision
(“The Bank”), submitted an appeal to the FDIC’s Assessment Appeals Committee (“Committee”) by letter dated September 17, 2004. The Bank is appealing the August 24, 2004 determination by the FDIC’s Division of Insurance and Research (“DIR”) denying the Bank’s request for review of its supervisory subgroup (“SS”) assignment for the July 1, 2004 semiannual assessment period. After carefully considering all of the written submissions and facts of this case, the Committee has determined that the Bank’s appeal must be denied.

Background
The Bank was assigned an SS rating of “1B” for the July 1, 2004, semiannual assessment period. That assignment was based, in part, on a January 5, 2004 joint examination conducted by the FDIC and the Illinois Office of Banks and Real Estate (“State”). This was the last examination transmitted to the Bank prior to March 31, 2004, the SS cut-off date for the July 1, 2004 semiannual assessment period.

By letter dated July 19, 2004, addressed to DIR, the Bank requested review of its risk classification, seeking an upgrade to “1A.” In support of its position, the Bank cited its perceived strengths in several areas of financial performance and low risk to the Bank Insurance Fund. 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 noted that the Bank’s SS assignment of “B” was reviewed and verified by the FDIC’s Chicago Regional Office during the April 14-May 21, 2004 reconcilement period. As a result, the January 5, 2004 joint examination was found to be descriptive of the Bank’s risk profile as of the March 31, 2004 cut-off date. DIR denied the Bank’s request for review by letter dated August 24, 2004.

In its appeal letter to this Committee, the Bank argues that the SS rating assigned to it as of the March 31, 2004 cut-off date was not reflective of the Bank’s solid performance in a number of areas. Additionally, the Bank asserts that it represents “the lowest level of risk to the Bank Insurance Fund” and that its downgrade resulted when FDIC regional examiners forecasted potential risk as described in FIL-7-2000. FIL-7-2000 provides that institutions in the best-rated premium category with atypically high risk profiles “will be given an opportunity to address the cited deficiencies with risk-management practices before higher premiums are assessed.” That opportunity, the Bank contends, was not provided.

The Bank’s request for an oral presentation of its case to the Committee was denied under the standards set forth in the Guidelines for Appeals of Deposit Insurance Assessment Determinations (FDIC Financial Institution Letter 113-2004 (October 13, 2004)) and the Bank has been so notified.

Analysis
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 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.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 relates to the FDIC’s determination of an institution’s risk profile as of that date. The FDIC’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 FDIC examinations; results of offsite statistical analysis of reported financial statements; or analysis of 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-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 FDIC 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 Bank contends that it received a rating downgrade at the conclusion of the January 5, 2004 examination in spite of the Bank’s strong performance in several key financial areas. According to the Bank, FDIC regional representatives were concerned about characteristics exhibited by the Bank that were similar in nature to other institutions that later fell into a troubled condition. In this way, the Bank claims that FDIC representatives were forecasting potential risk as described in FIL-7-2000; and, therefore, the procedures outlined in FIL 7-2000, including an opportunity to address the deficiencies before higher premiums are assessed, must apply.

FIL-7-2000 addresses enhancements to the Risk-Related Premium System though the introduction of refinements intended to identify institutions with atypically high-risk profiles among those in the best-rated premium category (in this case “1” and “2” rated institutions), and to determine whether there are unresolved supervisory concerns regarding the risk-management practices of those institutions. Under the FIL, the FDIC employs a two-step process for identifying those “high-risk” institutions. Step 1 provides a supplementary screening process for institutions in the best-rated supervisory category to identify outliers (extreme values) in terms of combinations of rapid growth, concentrations, high yields on loan portfolio, and rapid changes in business mix. Under Step 2, if risk-management concerns are identified, institutions are notified that unless the concerns are adequately addressed before the next semiannual period, higher assessment premiums may be charged. Invoking Step 2, the Bank contends that it was not given an opportunity to address those concerns prior to an increase in FDIC premiums.

FIL-7-2000, however, does not apply in the Bank’s case. While the Bank was flagged for review during the reconcilement period (April 14-May 21, 2004), it was not flagged based on the supplementary screens provided for in FIL-7-2000. Rather, the Bank was flagged because its Statistical CAMELS Offsite Rating (SCOR)2 was more favorable than its examination rating. We note that the Bank had been flagged by the FIL 7-2000 supplementary screens in each of the five semiannual periods prior to July 2004, when it was rated “1A,” and may have had discussions each time with the Regional Office. However, the Bank’s “1B” rating for the July 2004 semiannual period was based on the January 5, 2004 examination, not on the supplementary screen procedures described in FIL-7-2000.

The Bank’s appeal is essentially a challenge to its condition as determined by the January 5, 2004 examination.3 The Bank contends that it is in a much stronger financial position than the FDIC perceives. Comments from the January 5, 2004 examination, however, indicate that the Bank was experiencing aggressive growth in the commercial real estate area and was vulnerable to a downturn in the commercial real estate markets. The growth caused further concern because of the informality exhibited in the Bank’s loan administration and underwriting areas. The Bank was cited for a number of FDIC regulation violations and a Board Resolution was adopted.

The Bank’s SS assignment of “B” was reviewed by the FDIC’s Chicago Regional Office during the April 14-May 21, 2004 reconcilement period. The January 5, 2004 joint examination was found to be descriptive of the Bank’s “1B” risk profile as of the March 31, 2004 cut-off date, and that rating was verified. In short, the information available to the FDIC during the reconcilement period supported the Bank’s assigned SS of “B” as of the cut-off date.

Conclusion
The Bank’s risk classification for the July 2004 semiannual period was based in part on the January 5, 2004 exam, completed on February 6, 2004, which was the last exam completed prior to the March 31, 2004 cutoff date. The Bank’s SS assignment was reviewed during the reconcilement period, at which time the “B” rating was verified, and no other examination was in-process prior to or after the cut-off date or during the reconcilement period to support an upgrade to the Bank’s SS classification. The supplementary screen procedures set out in FIL 7-2000 were not the basis for the Bank’s downgraded risk classification. Accordingly, for the reasons set forth in this decision the Bank’s appeal is denied.

By direction of the Assessment Appeals Committee, dated December 21, 2004.


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.”

2 The SCOR model – the primary factor used to flag institutions for review during the reconcilement period – uses statistical techniques to estimate the relationship between quarterly financial data and examination results. Institutions are flagged for review if the SS assignment differs materially from the composite SCOR.

3  To the extent the Bank sought to challenge the findings of the January 5, 2004 examination, an appeal to the Supervision Appeals Review Committee would have been the appropriate avenue (see Guidelines for Appeals of Material Supervisory Determinations (FDIC Financial Institution Letter 113-2004 (Oct. 13, 2004)).

 

 


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