• FDIC Adopts Final Rule Requiring Institutions to Prepay More than Three Years of Assessments
  • November 25, 2009 | Authors: Michael D. Morehead; Timothy M. Sullivan
  • Law Firms: Hinshaw & Culbertson LLP - Chicago Office; Hinshaw & Culbertson LLP - Springfield Office; Hinshaw & Culbertson LLP - Chicago Office
  • On November 12, 2009, the Federal Deposit Insurance Corporation (FDIC) amended its regulations to require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010-2012 (the prepayment period). This prepaid assessment will be collected on December 30, 2009, along with each institution’s regular quarterly risk-based deposit insurance assessment for the third quarter of 2009.

    The prepaid assessments will be applied against future quarterly assessments (as they may be so revised) until the prepaid assessment is exhausted or the balance of the prepayment is returned, whichever occurs first.

    The FDIC is exempting institutions from the prepayment requirement if it believes that the prepayment will affect the safety and soundness of the institution. An insured depository institution may apply to the FDIC for an exemption if the prepayment would significantly impair the institution’s liquidity or otherwise create extraordinary hardship.

    The FDIC is not precluded from changing assessment rates or from further revising the risk-based assessment system during the prepayment period.

    Earlier this year, the FDIC adopted a regulation which imposed a special assessment on June 30, 2009, of five basis points of an institution’s total assets minus its Tier 1 capital as of that date, not to exceed 10 basis points of the institution’s risk-based assessment base as of that date. This rulemaking also authorized the FDIC to impose up to two additional special assessments, each at up to the same rate, at the end of the third and fourth quarters of 2009.

    The FDIC has indicated that it will not be imposing any additional special assessments for the third and fourth quarters of 2009.

    Calculation of Estimated Prepaid Assessment Amount
    For purposes of estimating an institution’s assessments for the prepayment period and calculating the amount that an institution will prepay on December 30, 2009 (the prepaid amount), the institution’s assessment rate will be its total base assessment rate in effect on September 30, 2009. When making this calculation, the FDIC will also assume that an institution’s third quarter 2009 assessment base will increase quarterly at a 5 percent annual growth rate through the end of 2012.

    On September 29, 2009, the FDIC increased annual assessment rates by 3 basis points beginning in 2011. Therefore, the FDIC will increase an institution’s total base assessment rate for purposes of estimating its assessments for 2011 and 2012 by an annualized 3 basis points beginning in 2011.

    Changes to data underlying an institution’s September 30, 2009, assessment rate or assessment base received by the FDIC after December 24, 2009, will not affect an institution’s prepaid amount.

    An institution’s failure to file its third quarter of 2009 report of condition will not exempt it from this prepayment requirement.

    Mergers. For purposes of calculating the prepaid assessment, the FDIC will consider mergers and consolidations that are recorded in the FDIC’s computer systems as of December 24, 2009. If a merger is recorded by this date, the assessment for the acquired institution will be paid by the acquirer at its rate.

    Prepaid Assessment Invoice. The amount of each insured depository institution’s prepaid assessment will be included on its quarterly certified statement invoice for the third quarter of 2009. This invoice will be available on FDICconnect no later than December 16, 2009.

    Changes in Assessments After Prepayment. During the prepayment period, due to such things as slower deposit growth or changes in CAMELS ratings, an institution’s actual assessments may differ from the prepaid amount. The FDIC will consider events that occur during the prepayment period when it issues quarterly invoices. As a consequence, an institution may have to make additional assessment payments before the prepayment period has concluded. 

    Quarterly Invoice. An institution’s quarterly certified statement invoice will include:

    • the regular quarterly risk-based assessment due for the corresponding quarter based on the assessment base and assessment rate applicable to that quarter;
    • the amount of the prepayment that will be applied toward the risk-based assessment for that quarter; and
    • the amount (if any) of any remaining prepaid amount.

    An insured depository institution may continue to request review or revision (as appropriate) of its regular risk-based assessment each quarter under Sections 327.4(c) and 327.3(f) of the FDIC regulations.

    Implementing Prepaid Assessments. The FDIC will begin to offset prepaid assessments on March 30, 2010, by paying the regular quarterly risk-based deposit insurance assessment for the fourth quarter of 2009.

    Refunds. Any prepaid assessment left over after the June 30, 2013, payment will be returned to the institution. If the FDIC determines that its liquidity needs allow, it may return any remaining prepaid assessment to the institution sooner.

    Accounting and Risk-Weight for Prepaid Assessments
    Accounting for Prepaid Assessments. An institution should record the prepaid assessment as a prepaid expense (asset) as of December 30, 2009. The institution’s estimated expense for its regular risk-based assessment should be recorded each calendar quarter. However, the offsetting entry to the expense for a particular quarter will depend on the method of payment for that quarter’s expense.

    As of September 30, 2009, each institution should have accrued an expense (a charge to earnings) for its estimated regular quarterly risk-based assessment for the third quarter of 2009, which is a quarter for which assessments would not have been prepaid, and a corresponding accrued expense payable (a liability).

    On December 30, 2009, each institution will pay both its assessment for the third quarter of 2009 (thereby eliminating the related accrued expense payable), and its prepaid amount.  It will record the entire amount of its prepaid assessments as a prepaid expense (asset).

    As of December 31, 2009, each institution should record: (1) an expense (a charge to earnings) for its estimated regular quarterly risk-based assessment for the fourth quarter of 2009; and (2) an offsetting credit to the prepaid assessment asset because the fourth quarter assessment of 2009 will have been prepaid.

    Risk Weighting of Prepaid Assessments. The FDIC has indicated that the prepaid assessment qualifies for a zero percent risk weight.

    TLGP Nondeposit Debt. The FDIC also believes that Temporary Liquidity Guarantee Program (TLGP) non-deposit debt obligations should receive a zero percent risk weight consistent with the risk weight proposed for prepaid assessments.

    Because insured deposits are fully backed by the full faith and credit of the United States government and no insured depositor has ever or will ever take a loss, the FDIC will review reducing the risk weight on insured deposits to zero percent consistent with the treatment of other government-backed obligations.

    Restrictions on Use of Prepaid Assessments
    Prepaid assessments may only be used to offset regular quarterly risk-based deposit insurance assessments and may not be used, for example, for any of the following:

    • To offset FICO assessments;
    • To offset any future special assessments under Federal Deposit Insurance Act (FDI Act) Section 7(b)(5);
    • To offset any future systemic risk assessments under FDI Act Section 13(c)(4)(G)(ii);
    • To offset TLGP assessments under 12 C.F.R. 370;
    • To pay assessments for quarters prior to the fourth quarter of 2009;
    • To pay civil money penalties; or
    • To offset interest owed to the FDIC for underpayment of assessments for assessment periods prior to the fourth quarter of 2009.

    The FDIC will apply an institution’s remaining one-time assessment credits under Part 327 subpart B before applying its prepaid assessment to its regular quarterly risk based deposit insurance assessments. One-time assessment credits may not be used to reduce an institution’s prepaid assessment.

    Exemptions for Certain Insured Depository Institutions
    FDIC Determination. The FDIC is exempting from the prepayment requirement an institution for which the FDIC determines that the prepayment would adversely affect the safety and soundness of the institution. The FDIC will consult with the institution’s primary federal regulator in making this determination. It will also notify any exempted institution of its determination to exempt the institution as soon as possible, but in no event later than November 23, 2009.

    The FDIC has begun notifying institutions that they will be exempt.

    Application for Exemptions. An insured depository institution may apply to the FDIC for an exemption if the prepayment would significantly impair the institution’s liquidity or otherwise create extraordinary hardship. The term “extraordinary hardship” reflects the FDIC’s view that few exemptions will be granted other than for those institutions exempted by the FDIC pursuant to its own initiative.

    Written applications for exemption from the prepayment obligation should be submitted to the Director of the Division of Supervision and Consumer Protection on or before December 1, 2009, by electronic mail or fax - ([email protected]) or fax (202-898-6676). The application must contain a full explanation of the need for the exemption with supporting documentation, including current financial statements, cash flow projections, and any other relevant information that the FDIC deems appropriate.

    Any application for exemption will be deemed denied unless the FDIC notifies the applying institution by December 15, 2009, that: (1) the institution is exempt from the prepaid assessment; or (2) the FDIC has postponed determination of the application for exemption until no later than January 14, 2010.

    In the event that the FDIC postpones such determinations, the institution will not have to pay its prepaid assessment on December 30, 2009. If the FDIC ultimately denies the institution’s request for exemption, it will notify the institution of the denial and of the date by which the institution must pay the prepaid assessment. That date will be no less than 15 days after the date of the notice of denial.

    The final rule eliminated the option of a partial prepayment exemption since the FDIC determined that it would be infeasible to determine partial payments.

    Request for Withdrawal of Exemption. An institution that the FDIC has exempted may request that the FDIC allow it to pay the prepaid amount. The FDIC, after consulting with the institution’s primary federal regulator, may determine that the exemption is not necessary. If it does, it will notify the institution that the exemption has been withdrawn.

    Written applications requesting that the FDIC withdraw an exemption should be submitted to the Director of the Division of Supervision and Consumer Protection on or before December 1, 2009, by electronic mail or fax -- ([email protected]) or fax (202-898-6676). An application requesting that the FDIC withdraw an exemption must contain a full explanation of the reasons the exemption is not needed with supporting documentation, including current financial statements, cash flow projections, and other relevant information that the FDIC deems appropriate. Any application requesting that the FDIC withdraw an exemption will be deemed denied unless the FDIC notifies the applying institution by December 15, 2009 that the exemption has been withdrawn.

    Any exempted institution and any institution for which the FDIC has postponed determination of its request for exemption must still pay its third quarter 2009 risk-based assessment on December 30, 2009.

    Transfer of Prepaid Assessments
    An insured depository institution will be permitted to transfer any portion of its prepaid assessment to another insured depository institution. The institutions must submit a written agreement signed by their legal representatives to the FDIC’s Division of Finance and documentation evidencing that each representative has the legal authority to bind the institution. Adjustments to the institutions’ prepaid assessments will be made by the FDIC on the next assessment invoice that will be available via FDICconnect at least 10 days after the FDIC receives the written agreement. This is similar to the procedural requirements associated with the transfer of the one-time assessment credit provided by the Federal Deposit Insurance Reform Act of 2005.

    Prepaid assessments cannot be transferred to any entity that is not an insured depository institution. Nor can they be pledged to any entity.

    Mergers. In the event that an insured depository institution merges with, or is consolidated into, another insured depository institution, the surviving or resulting institution will be entitled to use any unused portion of the disappearing institution’s prepaid assessment not otherwise transferred.

    Disposition in the Event of Failure or Termination of Insured Status
    In the event that an insured depository institution’s insured status terminates, any amount of its prepaid assessment remaining (other than any amounts needed to satisfy its assessment obligations not yet offset against the prepaid amount) will be refunded to the institution. In the event of an insured depository institution’s failure, any amount of its prepaid assessment remaining (other than any amounts needed to satisfy its assessment obligations not yet offset against the prepaid amount) will be refunded to the institution’s receiver.