AAC-2000-03 (December 12, 2000)
Decision
This administrative appeal was filed by [Bank] (X or the “Bank”), requesting a change in its supervisory subgroup (“SS”) assignment for the semiannual assessment period beginning July 1, 2000. The Bank was assigned an SS assignment of “1B” and requests a change to “1A.” The SS assignment was based on a composite rating of “3” assigned to the Bank as the result of a September 20, 1999, examination conducted jointly by the FDIC and the State of New Mexico. Subsequent to the examination, on February 18, 2000, the Bank entered into a Memorandum of Understanding (“MOU”) with the FDIC to address asset quality deficiencies due to high levels of classified assets and inadequate loan review procedures as well as management control issues relating to board composition and independence. X is well-capitalized and argues that the payment of insurance premiums by an institution with such a strong capital position is unfair.
Background
Supervisory subgroup assignments are made in accordance with section 327.4(a)(2) of the FDIC’s Rules and Regulations, which provides as follows:
“…each institution will be assigned to one of three subgroups based on Corporation’s consideration of supervisory evaluations provided by the institution’s primary federal regulator. “The supervisory evaluations include the results of examination findings by the primary federal regulator, as well as other information the primary federal regulator determines to be relevant. In addition, the Corporation will take into consideration such other information (such as state examination findings, if appropriate) as it determines to be relevant to the institution’s financial condition and the risk posed to the BIF or SAIF.”
The three supervisory subgroups, as set forth in the current and previous Financial Institution Letters addressing the Risk-Related Premium System, are as follows:
Subgroup A
Consists of financially sound institutions with only a few minor weaknesses and generally corresponds to the primary federal regulator’s composite rating of “1” or “2.”
Subgroup B
Consists of institutions that demonstrate weaknesses that, if not corrected, could result in significant deterioration of the institution and increased risk of loss to insurance funds, and generally corresponds to the primary federal regulator’s composite rating of “3.”
Subgroup C
Consists of institutions that pose a substantial probability of loss to the insurance funds unless effective corrective action is taken, and generally corresponds to the primary federal regulator’s composite rating of “4” or “5.”
The supervisory cut-off date for determining SS assignments is September 30 for assessment periods beginning January 1, and March 31 for assessment periods beginning July 1. Thus for the July 1, 2000, assessment period the supervisory cut-off date was March 31, 2000. For the July 1, 2000, assessment period the supervisory cut-off date was March 31, 2000. For the July 1, 2000, semiannual assessment period, the Bank’s supervisory subgroup assignment of “B” was based on a composite rating of “3” as of the March 31, 2000, cut-off date. This composite rating resulted from a September 20, 1999, examination conducted jointly by the FDIC and the State of New Mexico. The examination was completed on October 21, 1999.
The Bank requested a review of the SS assignment by letter dated June 30, 2000. The Bank argued that an institution with a Total Risk-Based Capital to Risk-Weighted Assets ration of 26.40 percent should not be paying FDIC insurance premiums. By letter dated July 21, 2000, Division of Insurance notified the Bank that their request was denied. This decision was based on the fact that the most recent Report of Examination indicated that the Bank’s condition warranted an SS assignment of “B.”
Analysis and Conclusion
X’s main argument is that the capital position of the Bank is very strong and mitigates the risk posed to the deposit insurance fund. However, after reviewing the Bank’s condition and the reasons for assigning a composite “3” rating to the Bank at the September 20, 1999, examination, the Committee agrees with the examination findings. Capital ratios alone may not adequately reflect the risk posed by the Bank. Factors such as asset quality, loan underwriting standards and other operating systems are best evaluated as part of the ongoing supervisory process. Regardless, the FDIC’s existing risk-based premium system, in place since 1993, uses both capital ratios and supervisory ratings – not capital ratios alone – to determine premiums. The most recent examination rating as of the March 31, 2000, cut-off date established for the second semiannual assessment period of 2000 was a composite “3” rating, which corresponds to a supervisory subgroup assignment of “B.”
For the reasons discussed herein, under authority delegated by the Board of Directors of the Federal Deposit Insurance Corporation, the Committee denies the Bank’s appeal. This recommendation is fully consistent with well-established FDIC policy and practices regarding applicability of the SS cut-off dates, and while exceptions to the rules may, under compelling circumstances, be considered, such must be both rare and well supported if the system is to maintain credibility.