AAC-2002-03 (November 25, 2002)
Decision
By letter dated February 19, 2002, Mr. ***, President and Chief Executive Officer of [Bank] (the 鈥淏ank鈥), requested a change to the Bank鈥檚 assessment risk classification for the January 1, 2002, semiannual assessment period. That request was denied by the Federal Deposit Insurance Corporation鈥檚 (鈥湺啾τ蜗废略剽) Division of Insurance and Research on May 8, 2002, and you appealed that determination to the 多宝游戏下载鈥檚 Assessment Appeals Committee (鈥淐ommittee鈥) by letter dated June 7, 2002.
At its meeting held on October 30, 2002, the Committee allowed the Bank, pursuant to Committee rules, to appear and make an oral presentation of its case for an assessment risk classification change. The Committee found that the presentation was highly professional and extremely helpful in resolving this matter, which involves application of the supervisory subgroup (鈥淪S鈥) cut-off dates set out in Financial Institution Letter (鈥淔IL鈥) 30-2000 (May 25, 2000).
The Bank is challenging its assignment by the 多宝游戏下载 to supervisory subgroup 1B. That assignment was based, in part, on an October 20, 2000 examination conducted by the Bank鈥檚 primary federal regulator (the Office of Thrift Supervision (鈥淥TS鈥)), the last examination transmitted to the Bank before the September 30, 2001 SS cut-off date.
Supervisory subgroup assignments are made in accordance with the 多宝游戏下载鈥檚 regulations, specifically, 12 C.F.R. 搂 327.4(a)(2). That section requires the 多宝游戏下载 to consider supervisory evaluations provided by an institution鈥檚 primary federal regulator and other relevant information in making these assignments.
Under guidelines set forth in FIL 30-2000, the 多宝游戏下载 assigns a supervisory subgroup to each institution for each semiannual assessment period based on a variety of factors, including 多宝游戏下载 review of the last examination finalized and transmitted to the institution by the primary regulator on or before the cut-off date. The 多宝游戏下载鈥檚 review may also include: Other written findings that result in a composite rating change by the primary regulator; 多宝游戏下载 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 鈥渁s of鈥 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 多宝游戏下载 Board of Directors (鈥淏oard鈥) addressed the need for cut-off dates in a 1993 rulemaking in which it called 鈥渟trict application鈥 of the cut-off date 鈥渢he fairest approach.鈥 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. And 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 allowed for exceptions only in 鈥渦nusual circumstances.鈥
To ensure greater fairness in the application of cut-off dates, and to allow consideration of unusual circumstances, the 多宝游戏下载 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 exam information may reflect, during the reconcilement period. Based upon certain factors, institutions may be flagged for review in the reconcilement period, although flagging is not a prerequisite for changing an institution鈥檚 rating during that period.
Thus, under the guidelines set out in the FIL, the 多宝游戏下载 looks to see whether exam 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 exam during that period.
The Bank contends that as of and before the September 30, 2001 cut-off date, facts and circumstances showed that it should have been assigned to SS 1A. The Bank maintains that improvement was evident during the reconcilement period and was confirmed in its next examination, begun by OTS on October 9, 2001. The results of that examination, communicated to the Bank by OTS on December 20, 2001, did in fact show improvement in the Bank鈥檚 CAMELS rating. In hindsight, therefore, the Bank鈥檚 overall condition as of the September 30, 2001, cut-off date appears to have merited a supervisory subgroup classification of 1A. This fact is at the core of the Bank鈥檚 argument. The real question, however, is not whether the Bank was ultimately found to merit an upgrade, but rather by what date did that information become available.
In the Committee鈥檚 view, the dispositive fact here is that the upgrade to the Bank鈥檚 ratings became apparent only as of December 20, 2001, the date OTS communicated its tentative exam results to the Bank. On November 16, 2001, the end of the reconcilement period, insufficient information was available to merit a change in the Bank鈥檚 rating. By that date, the OTS exam begun October 9, 2001, was not complete and no tentative ratings had been assigned or even discussed. No issues involving the Bank鈥檚 SS rating were raised by OTS at a meeting with the 多宝游戏下载 held November 27, 2001, to review actions taken during the reconcilement process. Indeed, at a December 11, 2001, meeting between Bank management, the OTS, and the 多宝游戏下载, OTS advised the Bank that its ratings would be disclosed at the next planned meeting. In short, there was no change to the bank鈥檚 rating confirmed in an ongoing examination by its primary federal regulator during the reconcilement period.
The Committee concludes that there was insufficient evidence for the 多宝游戏下载 to determine that an upgrade in the Bank鈥檚 condition was likely any time prior to communication by OTS of the Bank鈥檚 tentative exam rating. By that date, the September 30 cut-off and the reconcilement period had both passed. To grant the Bank the relief it requests would require in effect an extension of the cut-off date and reconcilement period to December 20, 2001. If the Committee did so, it would depart from years of established and consistent 多宝游戏下载 practice and would so attenuate the cut-off date as to render it barely discernible and largely ineffective. While the 多宝游戏下载 would like to reach out as far as possible to adjust supervisory subgroup classifications, the Bank would have the 多宝游戏下载 reach too far. As a final note, the cut-off date provides certainty for the industry as well as the 多宝游戏下载. It also sometimes results in a benefit for institutions that are downgraded after the cut-off date, as happened to the Bank in the first semiannual period of 2001.
The Committee has carefully considered the oral presentation as well as all of the written submissions made in this matter. Accordingly, while the Committee sympathizes with the Bank鈥檚 position and is mindful that had the results of the OTS exam been apparent sooner the result here might be different, for the reasons set forth above the Bank鈥檚 appeal is denied.
By direction of the Assessment Appeals Committee.