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Deposit Insurance Assessment Appeals: Guidelines & Decisions  

AAC- 2007-01 (May 8, 2007)

***, ****, ** (the “Bank”), filed an appeal with the Assessment Appeals Committee (“Committee”) of the Federal Deposit Insurance Corporation (“FDIC”) by letter dated February 23, 2007.  The Bank is appealing a decision issued by the FDIC’s Division of Finance (“DOF”) on January 26, 2007.  In that decision, DOF denied the Bank’s request to be deemed the successor to the one-time assessment credit of X (“Bank X”).  The Bank claims entitlement to the Bank X assessment credit under the provisions of the de facto rule in the FDIC’s assessment regulations.  That rule requires a “successor” institution to have assumed “substantially all of the deposit liabilities” and acquired “substantially all of the assets” of another institution. 12 C.F.R. § 327.31(c), (g).  The Bank contends that a purchase and assumption transaction with Bank X satisfies these regulatory requirements.  This appeal concerns application of the de facto rule to the Bank’s transaction.

The Committee met on April 10, 2007.  After carefully considering all of the written submissions and facts of this case, the Committee has determined to grant the Bank’s appeal and award it the one-time assessment credit of Bank X.

On November 22, 2002, the Bank consummated a purchase and assumption transaction with Bank X.  In the transaction, the Bank assumed all of the deposit liabilities (the deposits assumed totaled $161,993,429.20) and the majority ($160,353,385.90) of Bank X’s total assets ($197,539,556.64).  The assets retained by Bank X totaled $37,186,170.74, broken down into four categories:  Cash and Due From and Fed Funds ($27,036,069); commercial real estate loans ($3,852,872); Federal Home Loan Bank (“FHLB”) stock and cash ($1,249,815); and other assets, consisting of taxes receivable for net operating losses ($5,049,130).  Bank X voluntarily terminated its insurance and liquidated its operations on December 30, 2002.

On February 8, 2006, the Federal Deposit Insurance Reform Act of 2005 (“the Reform Act”) became law.  The Reform Act mandated a one-time assessment credit of approximately $4.7 billion to be allocated to each “eligible insured depository institution” or its “successor.”  12 U.S.C. § 1817(e)(3)(A).  To be eligible for the one-time assessment credit under the statute, an institution must have been in existence on December 31, 1996, and have paid a deposit insurance premium prior to that date, or must be a successor to such an institution.  Section 1817(e)(3)(C).

The regulation implementing the one-time credit was approved by the FDIC Board of Directors on October 6, 2006, becoming effective on November 17, 2006.  12 C.F.R. § 327.30-.36.  The relevant portion of the rule defines “successor” institution as the “resulting institution” (i.e., the “acquiring, assuming, or resulting institution in a merger”) or “an insured depository institution that acquired part of another insured depository institution’s 1996 assessment base ratio under paragraph 327.33(c) … under the de facto rule.”  Section 327.31(f), (g). 

Under the rules, therefore, two avenues exist for becoming the successor institution to an institution that was eligible for the one-time assessment credit:  via an actual merger or under the de facto rule.  This appeal concerns the latter.

Under the de facto rule, an institution may become a successor to an institution that was eligible for the one-time assessment credit through “any transaction in which an insured depository institution assumes substantially all of the deposit liabilities and acquires substantially all of the assets of any other insured depository institution at the time of the transaction.”  Section 327.31(c).  A successor institution under the de facto rule takes its proportionate share of the eligible institution’s 1996 assessment base ratio based on the deposit liabilities it assumed in the transaction.  Section 327.33(c).  In short, for purposes of entitlement to the one-time assessment credit, an institution acquiring under the de facto rule will be treated the same as the acquiring institution in a merger, except that, if less than 100 percent of deposit liabilities are acquired by purchase and assumption, then a portion of the credit and 1996 assessment base ratio will stay behind with the selling institution.

The preamble to the rulemaking included guidance regarding application of the de facto rule: “the FDIC considers an assumption and acquisition of at least 90 percent of the transferring institution’s deposit liabilities and assets at the time of transfer as substantially all of that institution’s assets and deposit liabilities. Any successor institution qualifying under that threshold would be entitled to a pro rata share, based on the deposit liabilities assumed, of the transferring institution’s remaining 1996 assessment base ratio at  the time of transfer.”  71 Fed. Reg. 61374, 61378-79 (Oct. 18, 2006).  The FDIC acknowledged that inclusion of the de facto rule into the regulation departed from the “clear, bright line that a strictly applied merger definition would provide” but viewed it as “fairer” than a strict merger approach.  71 Fed. Reg. at 61379.

The FDIC’s rules also provided insured institutions with the opportunity to request review if they disagreed with the FDIC’s determination of eligibility (or ineligibility) to the assessment credit, with the FDIC’s calculation of the credit amount, or if they believed that the Statement of One-Time Assessment Credit did not fully or accurately reflect their own 1996 assessment base ratios or appropriate adjustments for successors.  Section 327.36(a)(1).  Institutions were given 30 days from the effective date of the rule (that is, until December 18, 2006) to submit a request for review of the one-time assessment credit.  Section 327.36(a)(1).  Failure to file a timely request for review of the one-time assessment credit bars institutions from subsequently requesting review.  Section 327.36(b)(2).

On October 18, 2006, the FDIC issued Financial Institution Letter (“FIL”) 93-2006.  The FIL transmitted the one-time assessment credit rule and notified the industry that the FDIC would be providing a preliminary Statement of One-Time Assessment Credit to all eligible institutions.  According to the FIL, “A successor institution is defined as the acquiring, assuming, or resulting institution in a merger or consolidation or the acquiring institution under a de facto rule.  The de facto rule recognizes a transfer of at least 90 percent of an institution's assets and deposit liabilities as a substantial transfer of the transferring institution's business.”  The FIL further noted that “[b]ecause the amounts shown in the Statements [of One-Time Assessment Credit] will not reflect credits as a result of transfers under the de facto rule, an institution claiming credits under this rule must file a request for review.” 

Preliminary Statements of One-Time Assessment Credit were made available to all open and active insured depository institutions on October 18, 2006, via FDICconnect, the FDIC’s e-business website.  The Bank’s preliminary statement listed credits resulting from its 2000 acquisition of another institution, but no credits were shown as a result of the Bank X acquisition in 2002.

On October 26, 2006, DOF received the Bank’s timely request for review, signed by its Executive Vice-President and Chief Financial Officer “A.”  In this request, Mr. A asserted that the Bank should receive the one-time assessment credit for the acquisition of  Bank X because it had “acquired substantially all (97 percent of the loans) the banking assets and all the deposit liabilities” of Bank X.  The Bank’s 2002 annual report accompanied the request and Mr. A asked to be contacted should DOF require more information.

By letter dated November 22, 2006, DOF responded to Mr. A, requesting additional documentation to support the Bank’s claim so that the FDIC could verify the amounts provided.  On November 29, 2006, DOF received from the Bank documentation sufficient to confirm the purchase and assumption transaction, to determine the total assets and total deposit liabilities of Bank X at the time of the transaction, and to determine the total deposit liabilities assumed and total assets acquired by the Bank.  This documentation included, among other things, a one-time credit analysis that contained details of the assets purchased and the liabilities assumed; the Bank X closing ledger; the Bank’s 8-K/A filed with the Securities and Exchange Commission; and the purchase and assumption agreement.  In addition, the Bank indicated that no other insured institutions claimed Bank X’s one-time assessment credit.

DOF denied the Bank’s request for review by letter dated January 26, 2007.  Citing the regulatory preamble language, DOF determined that the Bank had acquired 100 percent of the deposit liabilities of Bank X, but only about 81 percent of Bank X’s assets.  This calculation was based on the Bank’s acquisition of approximately $160 million out of Bank X’s assets of approximately $197 million.  For this reason, DOF determined that the Bank had not met one of the FDIC’s two de facto rule criteria – it had not acquired at least 90 percent of Bank X’s assets - and thus it was not a successor to Bank X’s one-time assessment credit.

In its February 23, 2007 appeal to this Committee, the Bank argues that it should be deemed Bank X’s successor under the de facto rule because it assumed all of Bank X’s deposit liabilities and substantially all of its “banking assets” rather than “total assets” as determined by DOF.  According to the Bank, Bank X’s balance sheet contained more than $27 million in “undeployed cash” that was used to satisfy the obligations of creditors, with the remainder distributed to shareholders.  The Bank contends that “it did not make sense” for it to purchase cash.  According to the Bank, “[a]ny sale of such cash would have been on a dollar-for-dollar basis and, as such, would have accomplished nothing.”  In the Bank’s view, “purchasing undeployed cash would have been pointless (and … atypical in circumstances of this nature).”

Because it is undisputed that the Bank acquired all of the deposit liabilities from Bank X in the November 22, 2002 transaction, resolving this appeal requires the Committee to determine whether the Bank also acquired “substantially all” of Bank X’s assets.  12 C.F.R. § 327.31(c). 

We turn first to the Bank’s 2002 purchase and assumption transaction with Bank X and the assets it acquired.

The materials submitted by the Bank show that Bank X retained approximately $37 million (approximately 19 percent) of its assets following the purchase and assumption transaction and that these assets were disposed of prior to its December 30, 2002 voluntary termination of deposit insurance and liquidation of its operations. 

Dividing this amount into four categories of retained assets, the Bank focuses on the largest amount – approximately $27 million in cash that it refers to in its appeal as “undeployed cash” (in supporting documentation, the Bank also labels these funds “Cash and Due From & Fed Funds”).  A portion of this amount went to satisfy Bank X’s creditors; the remainder was distributed to the stockholders prior to Bank X’s voluntary insurance termination and liquidation.  Arguing that the regulations do not require the FDIC to consider “total” assets, the Bank requests that the $27 million be deducted from Bank X’s assets to create an asset subcategory it styles “banking assets.”

The Bank argues that it acquired more than 90 percent of Bank X’s “banking assets,” and therefore the requirements of the de facto rule are met.  This argument, however, overlooks seminal facts:  the funds retained by Bank X were part of its assets, were reflected as such on its ledger, and were not purchased by the Bank.  Omitting these funds from the larger category of Bank X assets would create a “less than all” category of  assets to which the “substantially all” standard would apply.  The regulation, however, creates no subdivisions of bank assets.  Consequently, the Committee does not adopt this approach.

The Bank, however, makes the implicit point that a cash-for-cash sale of a type the Bank describes would have satisfied the de facto rule as articulated in the rulemaking preamble and, consequently, would have entitled the Bank to Bank X’s one-time assessment credit.  The Bank structured the 2002 transaction in a manner that did not include a cash-for-cash purchase - when it appears no other obstacle to a cash-for-cash purchase existed.  That the Bank should be barred from obtaining Bank X’s one-time assessment credit simply because it did not pay cash-for-cash appears disproportionate. 

The Bank purchased 100 percent of Bank X’s deposit liabilities and approximately 81 percent of its assets, when the “undeployed cash” is treated as an asset that did not transfer.  That cash - approximately $27 million - remained with Bank X and was used to satisfy Bank X’s creditors and stockholders prior to its voluntary insurance termination and liquidation, which occurred just 38 days later.  But for the choice to avoid a cash-for-cash purchase of these funds, the percentage of Bank X’s total assets purchased would have exceeded 90 percent.  On these facts, the Committee finds that the Bank in substance has satisfied the requirements of the de facto rule for purposes of determining its entitlement to Bank X’s one-time assessment credit.  This result is consistent with Committee precedent in which an institution “in substance” met regulatory assessment requirements where the form of a merger transaction technically prevented that result.  AAC No. 2001-03 (Nov. 26, 2001) (surviving established bank was “in substance” a de novo bank because of improvements resulting from a merger).

For the reasons and on the facts set out in this decision, the Committee finds that the Bank in substance satisfied the requirements of the FDIC’s de facto rule and is therefore entitled to the one-time assessment credit of Bank X.  


By direction of the Assessment Appeals Committee, dated May 8, 2007.


Valerie J. Best
Assistant Executive Secretary


Last Updated 08/15/2007

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