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FDIC Finalizes Prepaid Assessments Rule

On November 12, 2009, the FDIC adopted its final rule regarding prepaid assessments.  The final rule is largely unchanged from the FDIC’s initial proposal; the most significant change is that the FDIC will now refund any unused assessments after collection of the amount due on June 30, 2013, as opposed to December 30, 2014.

Effect

As noted by the FDIC, the prepayment of FDIC assessments primarily impacts liquidity – both of the FDIC Deposit Insurance Fund and the banks.  As the prepaid assessments merely represent the prepayment of future expense, they do not affect a Bank’s capital (the prepaid asset will have a risk-weighting of 0%) or tax obligations.

Given the higher FDIC assessments generally, and the elevated assessment rates for troubled banks, the prepayment of FDIC assessments could represent a significant cash outlay.  The FDIC’s online assessment rate calculator includes a prepayment tab to help banks estimate their payments

Exemptions

The final rule provides that the FDIC, after consultation with the institution’s primary federal regulator, may exempt any institution from the prepayment requirement if it determines, in its sole discretion, that the prepayment “would adversely affect the safety and soundness of the institution.”  The FDIC is required to provide notice to such institutions by Monday, November 23, 2009 if it has exempted the institution.  We are aware that the FDIC started mailing exemption letters on November 12th.

The FDIC has not indicated the standards it will apply for exemptions.  Based on the exemptions we’ve seen so far, it appears that all institutions subject to a formal enforcement action may be exempted.

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FDIC Pre-payment Assessment Update

On September 29, 2009, the FDIC announced a proposed rule that would require institutions to prepay on December 30, 2009, an estimated quarterly risk-based assessments for the 4th quarter of 2009 and for all 2010, 2011, and 2012.   For a synopsis, see our prior summary of the proposed rule. Comments to the proposed rule are due by October 28, 2009.

Tax Treatment of Prepayments

The general rule is that prepayments that benefit more than one taxable period cannot be deducted in full, but must be deducted over the periods for which the benefits are obtained.  Thus, a payment of 3 years worth of insurance premiums cannot be deducted in a single tax year regardless of whether the institution is an S corporation or a C corporation.  The rule also is the same for cash method taxpayers, with one limited exception.  A cash method taxpayer can prepay up to 12 months of expenses and claim a deduction when paid.  For example, an institution could prepay its 2010 insurance premiums in December of 2009 and claim the deduction in 2009.  However, if the institution prepaid 3 years worth of insurance premiums in 2009, it could not deduct the entire amount paid.

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FDIC Board Votes to Mandate Prepaid Assessments and Immediately Adopts 3 Basis Point Increase Effective January 2011

The proposed rule adopted at the FDIC Board Meeting on September 29, 2009 amended the final rule adopted in May 2009 to restore losses to the Deposit Insurance Fund (DIF).

Assessments for 4th Quarter 2009 and all of 2010-2012 Due December 30, 2009

The proposed rule would require insured institutions to prepay on December 30, 2009, an estimated quarterly risk-based assessments for the 4th quarter of 2009 and for all 2010, 2011, and 2012. If the proposed rule is adopted, an institution’s assessment will be calculated by taking the institution’s actual September 30, 2009 assessment and adjusting it quarterly by an estimated 5 percent annual growth rate through the end of 2012. Further, the FDIC will incorporate the uniform 3 basis point increase effective January 1, 2011.

The FDIC will continue to provide quarterly statements showing the actual amount of assessment owed and reflecting a reduction of the amount of prepayment “credit” applied to the amount due. If the FDIC has underestimated the amount of the prepaid assessment when compared to the actual assessment due, or factors change that would increase the assessment during the period in which the prepayment is applied, the institution will be required to pay quarterly assessments as usual once the prepaid assessment is exhausted. If, however, the FDIC has overestimated the amount of assessment due, or factors change that would decrease the assessment due during the period in which the prepayment is applied, the institution will be entitled to a refund of any overpayment not exhausted by December 30, 2014.

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FDIC Adopts a Final Rule Regarding Special Assessments

On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment and authorizing the FDIC to impose additional special assessments of 5 basis points, if necessary.  The initial special assessment and any additional special assessment will be based on an institution’s assets minus Tier 1 capital as of June 30, 2009.  This final rule differs significantly from the interim rule that FDIC issued on March 2, 2009.

The interim rule contemplated a 20 basis point special assessment, based on an institution’s deposits, which is the assessment base used for the regular quarterly risk-based assessments.  The interim rule also contemplated imposing additional special assessments of up to 10 basis points at the end of each remaining calendar quarter of 2009.

The final rule lowered the initial special assessment from 20 to 5 basis points, and any additional special assessment from 10 to 5 basis points, but changed the assessment base from deposits to assets minus Tier 1 capital.  The memorandum from the FDIC’s director of the insurance and research division indicates that the “departure from the regular risk-based assessment base is appropriate in the current circumstances because it better balances the burden of the special assessment.”

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