Brian J. Mischel

The Federal Deposit Insurance Corporation (FDIC) has adopted a final rule requiring insured depository institutions to prepay their estimated risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.  The prepaid assessment for these periods will be collected on December 30, 2009, along with the regular third-quarter 2009 risk-based assessment. 

Calculation

An institution’s prepaid assessment rate for the fourth quarter of 2009 and all of 2010 will be the total base assessment rate in effect on September 30, 2009.  The 2011 and 2012 rate will be the institution’s third-quarter 2009 total base assessment plus three basis points.  For purposes of calculating the prepaid amount, the third-quarter 2009 assessment base will be increased each quarter by an estimated 5% annual growth rate through the end of 2012.  For the FDIC’s online assessment rate calculator, including a prepayment tab helping institutions estimate their payment, click here.

Accounting

The entire prepaid assessment will be recorded as a prepaid expense (asset) as of December 30, 2009.  Starting with the expensing of the fourth-quarter assessment at December 31, 2009, and each subsequent quarter, each institution will record an expense for its regular quarterly assessment until there is no remaining asset.  At that time, the institution will record an accrued expense payable for the quarterly assessment payment.  This amount will be paid in arrears to the FDIC at the end of the following quarter.  Examples of situations leading to an early depletion of the prepaid assessment are:

• Deposit base growth exceeding the estimated annual 5% growth assumed in the calculation
• An increase in the institution’s assessment rate because of a decline in CAMELS (capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk) ratings
• An increase in the assessment rate by the FDIC     

The income tax consequences of the prepaid assessment depend on whether the “contract” period exceeds 12 months.  In reviewing the ruling and analyzing the statements made by the FDIC in the ruling regarding the tax treatment of the assessment, it appears the contract period is for the entire assessment period.  As long as the contract is for the entire assessment period, the prepayment will not qualify for any accelerated deductibility.  Thus, the amount that should be deducted for income tax purposes will be the same amount that will be amortized for U.S. generally accepted accounting principles (GAAP).

Therefore, the only amount deductible in 2009 will be the amount of the prepaid assessment applicable to the fourth quarter of 2009.  The 2010 income tax deduction will be the amount that will be amortized on the GAAP statements based on the portion of the prepayment applicable to each quarter in 2010.  This same concept will apply to 2011 and 2012.

Tax discussion in the ruling says that banks will be able to deduct quarterly assessments at least as quickly as they have in the past.  It also says that banks will not have any worse tax treatment than they would have had without the prepayment.  The ruling was silent regarding the fact that the amounts are now being paid, but the deduction is only allowed when the payment normally would have been made. 

The American Bankers Association continues to pursue a more favorable tax treatment for the prepayment.  If these efforts prove to be successful, some of the prepayment could be deducted earlier for income tax purposes.

Risk Weighting

Because the federal banking agencies’ risk-based capital rules allow an institution to apply a 0% risk weight to claims on U.S. government agencies, the FDIC believes the prepaid assessment will qualify for a 0% risk weight for purposes of calculating the institution’s risk-weighted assets.

Restrictions on Use & Implementation

Prepaid assessments will only be used to offset regular quarterly risk-based deposit insurance assessments.  For example, prepaid assessments may not be used to offset any future special assessments.  The FDIC will begin to offset prepaid assessments on March 30, 2010, representing payment for the regular fourth-quarter 2009 risk-based assessment.  Any amount of prepaid asset remaining on June 30, 2013, will be returned to the institution.  

Exemption

The FDIC will exercise its discretion as supervisor and insurer to exempt an institution if it is determined the prepayment will adversely affect the institution’s safety and soundness.  The FDIC will notify exempt institutions no later than November 23, 2009.  In addition, an institution may apply to the FDIC for a full or partial exemption of the prepayment requirement.  Written applications should be submitted to the Director of the Division of Supervision and Consumer Protection on or before December 1, 2009, by email or fax.  To be considered by the FDIC, an application must contain a full explanation of the need for the exemption with supporting documentation, including current financial statements and cash flow projections.  Exemption requests will be considered on a case-by-case basis and the FDIC expects only a few will be needed.  The FDIC will make this decision in consultation with the institution’s primary federal regulator.  Any application is considered denied unless the FDIC informs the applying institution by December 15, 2009, that either the institution is exempt from the prepaid assessment or the FDIC has deferred determination of the application for exemption until no later than January 14, 2010.  In the event of a deferral, the institution will not have to pay its prepaid assessment on December 30, 2009.

Transfer

The unused portion of a prepaid assessment may be transferred into a surviving or resulting insured institution in the event of a merger or consolidation.  An institution will need to notify the FDIC’s Division of Finance and submit a written agreement signed by legal representatives of both institutions.

Disposition in Certain Events

In the event an insured depository institution’s insured status terminates, any amount of its prepaid assessment remaining after satisfying assessment obligations not yet offset against the prepaid amount will be refunded to the institution.  In the event an insured depository institution fails, any amount of its prepaid assessment remaining after satisfying assessment obligations not yet offset against the prepaid amount will be refunded to the institution’s receiver.

Changes from Proposal

The final rule closely resembles the proposed rule, with some modifications to the implementation and exemption process that are intended to benefit institutions.  Any amount of remaining asset is to be returned to the institution on June 30, 2013, rather than December 30, 2014, as originally proposed.  Modifications to the exemption process include:

• More stringent deadlines imposed on the FDIC in order to provide institutions with earlier notice and greater opportunity to plan
• Allowing the FDIC to defer determination of exemption applications, if necessary (prepaid assessment due date would be postponed)
• Giving exempt institutions an opportunity to request that the FDIC withdraw an exemption

For the complete final rule published in the Federal Register, click here.

Contact your BKD advisor if you have additional questions.