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.

Accounting for the Prepaid Assessments

The FDIC has indicated that each institution would record the entire amount of its prepaid assessment as a prepaid expense, an asset on its balance sheet, as of December 30, 2009. As of December 31, 2009, and each quarter thereafter, each institution would record an expense, or a charge to earnings, for its quarterly assessment invoiced on its quarterly statement and an offsetting credit to the prepaid assessment until the asset is exhausted. The federal banking agencies’ risk-based capital rules permit an institution to apply a zero percent risk weight to all claims on U.S. Government agencies, and the FDIC has indicated that the prepayment will qualify for such treatment.

Exemptions to Institutions that would Face Financial Hardship

The proposed rule allows an exemption for institutions where prepayment would adversely affect the safety and soundness of such institutions. Upon consultation with the institution’s primary federal regulator, the FDIC would have the ultimate authority to authorize exemption. Institutions, however, may apply to the FDIC for exemption if such prepayment would significantly impair its liquidity or would otherwise create significant hardship. The FDIC will review such applications on a case-by-case basis. The FDIC has indicated that they will keep exemption status confidential. At this time, however, there has been no guidance regarding SEC disclosure obligations for reporting institutions.

Other Details for Proposed Prepaid Assessments

The prepaid assessments, as proposed, will only be used to offset regular quarterly risk-based deposit insurance assessments. Under the proposed rule, prepaid assessments could not be used to offset other payments to the FDIC, such as FICO assessments or TLGP assessments.

An institution would be permitted to transfer any portion of its prepaid assessment to another insured depository institution, provided it complied with certain notification requirements. As a result, in the event an institution merged with, or consolidated into, another institution, the surviving institution would be entitled to use any unused portion of the disappearing institution’s prepaid assessment not otherwise transferred.

No Additional Special Assessments

The final rule adopted on May 22, 2009 imposed a special assessment on each institution’s assets minus Tier 1 capital to be collected on September 30, 2009. (see http://www.bankbryancave.com/fdic-adopts-a-final-rule-regarding-special-assessments/). That final rule also allowed the FDIC to make additional special assessments of up to 5 basis points of an institution’s assets minus Tier 1 capital. The FDIC has indicated that the prepayment option proposed is an alternative to making further special assessments under the May 22 final rule. Consequently, the FDIC has confirmed that there is no need for further accruals for special assessments after payment of the special assessment due September 30, 2009. (See http://www.fdic.gov/news/board/Sept29no3.pdf).

The proposed rule is currently open for comment until October 28, 2009. For more information please see http://www.fdic.gov/regulations/laws/federal/propose.html.