Deposit Insurance Assessment Appeals: Guidelines & Decisions

AAC-2001-02 (August 23, 2001) 

Decision

This appeal involves a request for a change in the capital group (“CG”) assignment of [Bank] (the “Bank”) from a “2” to a “1” for the semiannual assessment period beginning January 1, 2001.

Background

CG assignments are made in accordance with section 327.4(a)(1) of the Federal Deposit Insurance Corporation’s (“FDIC”) Rules and Regulations, using the method agreed upon by the Federal Financial Institutions Examination Council’s Surveillance Task Force for calculating capital ratios. The method utilizes data reported in an institution’s Report of Condition and Income (“Call Report”) or Thrift Financial Report as of the applicable cut-off date. In this case, the September 30, 2000, Call Report was used to determine the Bank’s CG assignment for the assessment period beginning January 1, 2001.

The three capital groups are described as follows.

Group 1 – Well Capitalized:

Total Risk-Based Capital Ratio equal to or greater than 10 percent, Tier 1 Risk-Based Capital Ratio equal to or greater than 6 percent, and Tier 1 Leverage Capital Ratio equal to or greater than 5 percent.

Group 2 – Adequately Capitalized:

Not “Well Capitalized” and Total Risk-Base Capital Ratio equal to or greater than 8 percent, Tier 1 Risk-Based Capital Ratio equal to or greater than 4 percent, and Tier 1 Leverage Capital Ratio equal to our greater than 4 percent.

Group 3 – Undercapitalized:

Neither “Well Capitalized” nor Adequately Capitalized.”

Generally, changes to CG assignments can only be made by amending the applicable Call Report.

The Bank’s CG assignment for the second semiannual period of 2000 was a “2”, “Adequately Capitalized,” based on the Bank’s March 31, 2000, Call Report. The Bank’s composite CAMELS rating was downgraded from a “2” to a”4” at its May 2000, examination conducted by the Federal Reserve Bank of Kansas City (“FRB”) and the Colorado Banking Department (“State”). Following the examination, the Bank submitted a Capital Plan that included a reallocation of assets from the Bank’s holding company to the Bank, but the  accounting procedures necessary for the reallocation were not completed until the end of October 2000. Thus, the Bank remained “Adequately Capitalized” as of the September 30, 2000, CG cutoff date for the first assessment period of 2001 and was assigned and assessment risk classification of “2C”.

By letter dated April 10, 2001, the Bank requested a review of its CG assignment for the semiannual assessment period beginning January 1, 2001. In its letter, the Bank acknowledged that it was “Adequately Capitalized” as of September 30, 2000, but asserted that it had always been “Well Capitalized,” except for a brief period of time reported in the September 30, 2000, Call Report. The Bank also indicated that it had returned to a “Well Capitalized” position by December 31, 2000.

By letter dated June 6, 2001, the FDIC denied the Bank’s request through its Division of Insurance (“DOI”). The denial letter advised the Bank that Financial Institutions Letter (“FIL”) 30-00, furnished to all FDIC insured institutions on May 25, 2000, states that CG assignments are calculated from data provided by the institution in its Call Report as of CG cut-off date. The cut-off date is set in accordance with section 327.4(a)(1) which states that capital groups will be based on data reported “…as of September 30 for the assessment period beginning the following January 1.” Therefore, because data reported on the Bank’s September 30, 2000, Call Report indicated that it was “Adequately Capitalized,” the “2” CG assignment was correct. Finally, the Bank was advised that it could appeal DOI’s decision to the Assessment Appeals Committee (“Committee”) within 30 days from the date of the denial.

Table 1 shows recent and projected assessments for the Bank. The table indicates that for the second semiannual assessment period of 2001, the Bank’s risk classification improved to “1C” and the assessment rate dropped to 17 basis points. This reflects an improved capital position based on March 31, 2001, Call Report data, when the Bank again met the regulatory requirement for being “Well Capitalized.” The total payment for the second semiannual assessment period of 2001 is projected to be approximately $27,533, and the total payment for the year will be approximately $63, 270.

Table 1
 

*Estimated payment due September 30, 2001.

The Bank's Appeal

The Bank filed a written appeal of denial on June 22, 2001. In its appeal letter, the Bank recognized the need for the FDIC to set and adhere to regulations and procedures, but it asserts that “mitigating circumstances must be properly and fully reviewed and examined if in fact appeal is a realistic and legitimate consideration.” According to the Bank, it was deeply embroiled in an internal investigation of one of its officers and was unaware of the change to the CG cutoff dates. Additionally, the Bank maintains that the representatives of the various regulatory agencies did not inform the Bank of the importance of its capital status as of the September 30, 2000, Call report date, nor was it informed of the financial impact of not being (“Well Capitalized”) as of that date. Finally, the Bank asserts that it could have completed its approved regulatory transactions prior to the September 30, 2000, capital cutoff deadline if it had known the financial effect of those transactions on the Bank’s profitability.

Analysis

The focus of this appeal is the CG cutoff date contained in section 327.4(a)(1). Section 327.4 addresses the method by which the FDIC determines assessment risk classifications under the risk-based assessment system. An institution’s assessment risk classification determines the multiplier that the FDIC applies to the institution’s assessment base to calculate an institution’s deposit insurance assessment for both quarters of a given semiannual assessment period. The assessment risk classification is comprised of two components, a CG assignment and a supervisory subgroup (“SS”) assignment. Section 327.4(a)(1) specifically requires that an institution’s CG classification be determined for the upcoming semiannual assessment period based upon data filed in the institution’s Call Report as of either March 31 or September 30, as appropriate. The CG component of the regulation has been essentially the same since the inception of the risk-based premium system, but the CG cutoff date was changed in a notice-and-comment rulemaking proceeding in 1999. In that rulemaking proceeding, the CG cutoff was moved from six months to three months prior to the beginning of the assessment period.

The capital cutoff requirement contained in section 327.4(a)(1) is clear and the FDIC provided ample notice of the regulation and its impact on insured depository institutions’ risk based assessments. However, the Bank is essentially urging that strict compliance with the regulation’s requirements is inequitable and burdensome. The Bank contends, therefore, that it should not be required comply with the CG cutoff and raises various equitable issues.

The Bank first asserts that it has always been a “Well Capitalized” institution, except for a brief time when it filed its September 30, 2000, Call Report. This assertion is incorrect. The Bank was “Adequately Capitalized” on two previous occasions and had a CG assignment of “2.” This occurred for the semiannual assessment periods beginning July 1, 1999, and July 1, 2000, based on Call Report dates of December 31, 1998 and March 31, 2000, respectively. Thus, the Bank paid higher premiums in the past based on a CG assignment of “2” and it should have been aware of the financial implications of not being “Well Capitalized’ for assessment purposes before its September 30, 2000, Call Report was filed.

The Bank also maintains that it was unaware of what it characterized as the “arbitrary change” to the CG cutoff date, as reflected in the FIL referenced in DOI’s letter to the Bank. The regulatory changes to the CG cutoff dates, however, were not announced for the first time in that FIL as the Bank implies. The FDIC advised all insured depository institutions of proposed revisions to Part 327 addressing the change to the CG cutoff dates and requested comments in FIL-86-99, dated September 15, 1999. Again, in FIL-112-99, dated December 20, 1999, the FDIC advised all insured depository institutions that the regulation governing deposit insurance assessments had changed and the new CG cutoff dates would be moved to three months prior to the beginning of the assessment period and that the final rule would take effect on April 1, 2000.

Therefore, the Bank had the benefit of the same notice all other insured depository institutions were provided regarding the change to the CG cutoff dates on two occasions prior to the issuance of the May 25, 2000, FIL that the Bank has attempted to place at issue in this appeal. In addition, the Committee notes that the semiannual assessment period in dispute, which began January 1, 2001, was the second semiannual assessment period for which the new CG cutoff dates were in effect. Therefore, the Bank already had been classified as “Adequately Capitalized” under the new CG cutoff dates for the preceding semiannual period but did not request a CG reclassification for that semiannual period based upon the assertion the Bank is presenting in this appeal.

Additionally, the Bank asserts that it was not informed by representatives of the FDIC, either in meetings or during examinations, as to the importance of the Bank’s capital status before the bank filed its September 30, 2000, Call Report. Although this assertion appears to be correct, the Bank appears to be attempting to shift its responsibility for compliance with written regulatory requirements to the agency administering the regulations. This argument seems to suggest that FDIC representatives should be required to continuously restate regulatory requirements and analyze the implications of decisions reached by bank managers for possible adverse impacts on their institutions in light of existing regulations. The Committee does not believe such a standard is appropriate. Additionally, as stated earlier, the new CG cutoff requirements had already been applied to the Bank for the semiannual assessment period that preceded the one involved in this appeal. Although the Bank may have been distracted by issues raised by its regulations in mid-2000, the Bank should have been aware of the financial impact of the new CG cutoff date requirements when it received its third quarter deposit insurance assessment invoice in July 2000. Further, the Bank could have sought advice from its own legal or accounting staff, or other resources, such as the Assessment Hotline that the FDIC makes available in the Washington office to answer assessment-related questions, if this had been a concern for the bank prior to the September 30 cutoff date.1

Considering all of the foregoing information, the Committee is not convinced that the Bank’s request for a change in its assessment risk classification should be granted and, for the reasons stated in this Decision, the Assessment Appeals Committee DENIES the Bank’s request.

• 1

  The FDIC’s toll free Assessment Hotline (1-800-759-6596) has been referred to in several FILs the FDIC has sent insured depository institutions since the risk based assessment system was implemented. See eg., FIL-27-94, April 26, 1994; FIL-99-96, December 6, 1996; and FIL-30-2000, May 25, 2000.