Each depositor insured to at least $250,000 per insured bank

Appendix A to Subpart A

Method to Derive Pricing Multipliers and Uniform Amount

I. Introduction

The uniform amount and pricing multipliers are derived from:

•  A model (the Statistical Model) that estimates the probability that a Risk Category I institution will be downgraded to a composite CAMELS rating of 3 or worse within one year;

•  Minimum and maximum downgrade probability cutoff values, based on data from June 30, 2008, that will determine which small institutions will be charged the minimum and maximum initial base assessment rates applicable to Risk Category I;

•  The minimum initial base assessment rate for Risk Category I, equal to 12 basis points, and

• The maximum initial base assessment rate for Risk Category I, which is four basis points higher than the minimum rate.

II. The Statistical Model

The component rating for sensitivity to market risk (the "S" rating) is not available for years prior to 1997. As a result, and as described in Table A.1, the Statistical Model is estimated using a weighted average of five component ratings excluding the "S" component. Delinquency and non-accrual data on government guaranteed loans are not available before 1993 for the Call Report filers and before the third quarter of 2005 for TFR filers. As a result, and as also described in Table A.1, the Statistical Model is estimated without deducting delinquent or past-due government guaranteed loans from either the loans past due 30--89 days to gross assets ratio or the nonperforming assets to gross assets ratio. Reciprocal deposits are not presently reported in the Call Report or TFR. As a result, and as also described in Table A.1, the Statistical Model is estimated without deducting reciprocal deposits from brokered deposits in determining the adjusted brokered deposit ratio.

The financial variable regressors used to estimate the downgrade probabilities are obtained from quarterly reports of condition (Reports of Condition and Income and Thrift Financial Reports). The weighted average of the "C," "A," "M," "E" and "L" component ratings regressor is based on component ratings obtained from the most recent bank examination conducted with 24 months before the date of the report of condition.

The Statistical Model uses ordinary least squares (OLS) regression to estimate downgrade probabilities. The model is estimated with data from a multi-year period (as explained below) for all institutions in Risk Category I, except for institutions established within five years before the date of the report of condition.

The OLS regression estimate coefficients, β_j for a given regressor j and a constant amount, β₀, as specified in equation 1. As shown in equation 3 below, these coefficients are multiplied by values of risk measures at time T, which is the date of the report of condition corresponding to the end of the quarter for which the assessment rate is computed. The sum of the products is then added to the constant amount to produce an estimated probability, d_iT, that an institution will be downgraded to 3 or worse within 3 to 12 months from time T.

The risk measures are financial ratios as defined in Table A.1, except that: (1) The loans past due 30 to 89 days ratio and the nonperforming asset ratio are adjusted to exclude the maximum amount recoverable from the U.S. Government, its agencies or government-sponsored agencies, under guarantee or insurance provisions; (2) the weighted sum of six CAMELS component ratings is used, with weights of 25 percent each for the "C" and "M" components, 20 percent for the "A" component, and 10 percent each for the "E," "L," and "S" components; and (3) reciprocal deposits are deducted from brokered deposits in determining the adjusted brokered deposit ratio.

Equation 3d_iT = β₀ + β₁ (Tier 1 Leverage Ratio_iT) + β₂ (Loans past due 30 to 89 days ratio_iT) + β₃ (Nonperforming asset ratio_iT) + β₄ (Net loan charge-off ratio_iT) + β₅ (Net income before taxes ratio_iT) + β₆ (Adjusted brokered deposit ratio_iT) + β₇ (Weighted average CAMELS component rating_iT)

III. Minimum and Maximum Downgrade Probability Cutoff Values

The pricing multipliers are also determined by minimum and maximum downgrade probability cutoff values, which will be computed as follows:

The uniform amount and pricing multipliers used to compute the annual base assessment rate in basis points, P_iT, for any such institution i at a given time T will be determined from the Statistical Model, the minimum and maximum downgrade probability cutoff values, and minimum and maximum initial base assessment rates in Risk Category I as follows:

Equation 4

P_iT = α₀ + α₁ *d_iT subject to Min ≤ P_iT ≤ Min + 4

where α₀ and α₁ are a constant term and a scale factor used to convert d_iT (the estimated downgrade probability for institution i at a given time T from the Statistical Model) to an assessment rate, respectively, and Min is the minimum initial base assessment rate expressed in basis points. (P_iT is expressed as an annual rate, but the actual rate applied in any quarter will be P_iT/4.) The maximum initial base assessment rate is 4 basis points above the minimum (Min + 4)

Solving equation 4 for minimum and maximum initial base assessment rates simultaneously,

Min = α₀ + α₁ *0.0182 and Min + 4 = α₀ + α₁ *0.1506

where 0.0182 is the minimum downgrade probability cutoff value and 0.1506 is the maximum downgrade probability cutoff value, results in values for the constant amount, α₀ and the scale factor, a₁:

Equation 5

α₀ = Min --     4*0.0182     = Min -- 0.550(0.1506 -- 0.0182

and Equation 6

α₁ =          4         = 30.211(0.1506 -- 0.0182)

Substituting equations 3, 5 and 6 into equation 4 produces an annual initial base assessment rate for institution i at time T, P_iT, in terms of the uniform amount, the pricing multipliers and the ratios and weighted average CAMELS component rating referred to in 12 CFR 327.9(d)(2)(i):

Equation 7P_iT = [(Min -- 0.550) + 30.211* β₀] + 30.211 * [β₁ (Tier 1 Leverage Ratio_T)] + 30.211 * [β₂ (Loans past due 30 to 89 days ratio_T)] + 30.211 * [β₃ (Nonperforming asset ratio_T)] + 30.211 * [β₄ (Net loan charge-off ratio_T)] + 30.211 * [β₅ (Net income before taxes ratio_T)] + 30.211 * [β₆ (Adjusted brokered deposit ratio_T)] + 30.211 * [β₇ (Weighted average CAMELS component rating_T)]

again subject to Min ≤ P_iT ≤ Min + 4 where (Min -- 0.550) + 30.211 * β₀ equals the uniform amount, 30.211 * β_j is a pricing multiplier for the associated risk measure j, and T is the date of the report of condition corresponding to the end of the quarter for which the assessment rate is computed.

V. Updating the Statistical Model, Uniform Amount, and Pricing Multipliers

The initial Statistical Model is estimated using year-end financial ratios and the weighted average of the "C," "A," "M," "E" and "L" component ratings over the 1988 to 2006 period and downgrade data from the 1989 to 2007 period. The FDIC may, from time to time, but no more frequently than annually, re-estimate the Statistical Model with updated data and publish a new formula for determining initial base assessment rates--equation 7--based on updated uniform amounts and pricing multipliers. However, the minimum and maximum downgrade probability cutoff values will not change without additional notice-and-comment rulemaking. The period covered by the analysis will be lengthened by one year each year; however, from time to time, the FDIC may drop some earlier years from its analysis.

[Codified to 12 C.F.R. Part 327, Appendix A]

[Appendix A added at 71 Fed. Reg. 69313, November 30, 2006, effective January 1, 2007; amended at 74 Fed. Reg. 9557, March 4, 2009, effective April 1, 2009]