Federal Deposit
Insurance Corporation

August 16, 2006

VIA EMAIL

Mr. Robert E. Feldman, Executive Secretary
Attention: Comments,
Federal Deposit Insurance Corporation
550 17th Northwest
Washington, DC 20429

Re: RIN 3064-AD08

Dear Mr. Feldman:

On behalf of Arrow Financial Corporation, Glens Falls, New York (Arrow), I would like to make the following few comments on the FDIC’s proposed rule under the Federal Deposit Insurance Reform Act of 2005 (Act), implementing the Act’s provision authorizing a one-time $4.7 billion credit on deposit insurance assessments. The proposed rule, like the Act, states that only those insured depository institutions that were in existence on December 31, 1996 and had previously paid deposit insurance premiums, or their successors, are eligible for a share of the credit. The proposed rule, like the Act, basically ties the amount of the credit allocable to an eligible institution to its assessment base (insured deposit total) compared to the aggregate assessment base on such date.

However, the Act expressly authorizes the FDIC’s Board of Directors, in promulgating regulations, to take into account any other factors not reflected in the statute that the board believes are “appropriate” in implementing the purposes of the Act, and in the proposed rule it has done so. The principal subject to which the board has turned its interpretive attention is the issue of succession, that is, in which cases will all or a portion of the credit allocable to an eligible institution that was in existence on December 31, 1996, be allocated to another institution, either because the former institution no longer exists or because all or a significant portion of the deposits underlying its credit have been sold to another institution. In its proposed rule, the board has adopted a “follow the charter” approach to this question but in the accompanying release also considers, and specifically invites comment on, a more complex “follow the deposits” concept, which has generated much comment and controversy.

We urge the board, acting under the statutory mandate to take into account such other factors as it deems appropriate, to modify the proposed rule to reflect another inequity contained therein that is clearly at variance with the underlying purpose of the Act. This inequity is that, under the current proposal, there may be little if any correlation between the dollar amount that an eligible institution receives as its share of the one-time $4.7 billion assessment credit and the dollar amount of high-rate premium payments that the institution actually paid into the insurance funds in the period preceding the December 31, 1996 measurement date.

Payment of high-rate premiums prior to the measurement date are obviously important under the Act; any institution that never paid premiums before that date is not eligible to share in the credit unless it is a successor to an eligible institution. Yet, there is clearly some contemporary element to the payment of such prior premiums. Only institutions still in existence on the measurement date are eligible to receive a portion of the credit; long-disappeared banks and thrifts are not. Moreover, all of the discussion and literature surrounding passage of the Act, as well as the prevailing insurance premium rates themselves, make it abundantly evident that the perceived period of “overpayment” by insured institutions, the penalty that the Act’s one-time credit was intended to correct, was a relatively finite period, extending at earliest from enactment of FIRREA in 1989 until at latest the measurement date itself.

The inequity is this: under the proposal, any institution that paid high rate premiums for its insured deposits during a majority of this finite period, perhaps right up until the measurement date, but then transferred a significant portion of such deposits to another institution in a purchase and assumption transaction that was completed immediately before the measurement date, receives no portion of the credit allocable to such deposits, whereas the acquiror or its successor, having paid few if any of high-rate premiums on these deposits, receives all of the credit.

This happened to us. In 1996, we sold a substantial quantity of deposits held by one of our subsidiary banks, in two purchase and assumption transactions subject to regulatory approval, after paying high-rate premiums on such deposits for the preceding decade, and the acquiror, who paid virtually no high-rate premiums on such deposits, will under the current proposal receive the full amount of the credit allocable thereto. This seems inequitable.

There is a relatively simple fix, which we believe does no damage to and is not prohibited by the language of the Act. We would suggest that the proposal be changed to weight the dollar amount of any eligible institution’s portion of the one-time assessment credit to reflect the premium rates actually paid by it with respect to its deposits over the five year period preceding the measurement date. Although precise measurement of the relative premium rates paid by eligible institutions over the period poses some technical challenges, we believe that general approximations and corresponding adjustments will not prove undoable.

As a separate but related matter, we also suggest that the rule can be adjusted in cases like ours to “follow the deposits backward.” As amended, the rule would allocate that portion of any eligible institution’s share of the one-time credit, determined on the basis of its deposits as of December 31, 1996, that is attributable to deposits acquired by it during the preceding five-year period from another eligible institution in a transaction subject to federal bank regulatory approval, to the seller institution, adjusted to reflect that portion of the five-year period in which the seller as opposed to the buyer held the deposits. Although this change may not perfectly align the loss suffered by eligible institutions with their portion of the credit, it will go far to remedy the gross imbalance that exists for some institutions such as Arrow under the present proposal.

As a final note, we observe that the FDIC’s release accompanying the initial proposal seeks comment on the appropriate allocation of any portion of the one-time credit that cannot be allocated to any eligible institution or any successor of an eligible institution, due to the fact that eligible institutions that held a portion of the aggregate assessment base on December 31, 1996 no longer exist, either directly or in the form of a successor by merger. If the FDIC’s Board of Directors determines to adopt a “follow the deposits” approach for post-December 31, 1996 transactions, this concern should largely fade away. If it does not, we would suggest that, as an alternative, the final rule be amended to give the FDIC the discretion to allocate any such unallocated portion of the one-time credit among those eligible institutions that are able to make a compelling case to the agency that they paid substantial “high-rate” premiums into the insurance funds in the years immediately preceding the measurement date and, under the rule as adopted, have not been compensated out of the one-time credit in amounts that are commensurate with their loss, compared to other insured institutions.

Thank you for the opportunity to comment.

Sincerely,

Thomas L. Hoy
Chairman, President and CEO
Arrow Financial Corporation