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Deposit Insurance Assessment Appeals: Guidelines & Decisions
AAC- 2007-02 (May 29, 2007)
Bank A, ***, *** (“A”), filed an appeal with the Assessment Appeals Committee (“AAC” or “Committee”) of the Federal Deposit Insurance Corporation (“FDIC”) by letter dated April 27, 2007. A is appealing a March 30, 2007, decision issued by the FDIC’s Division of Finance (“DOF”). In its decision, DOF denied A’s request that *** Bank B (“B”) be deemed the successor to the one-time assessment credits of six institutions. A is the successor in interest to B and is therefore entitled to any assessment credits to which B may be entitled. According to A, B - in a series of transactions that occurred in 2000 - assumed enough of the deposit liabilities and acquired enough of the assets of the six institutions to be entitled to those institutions’ assessment credits 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). This appeal concerns application of the de facto rule to the B transactions.
Committee invited A, pursuant to the
Guidelines for Appeals of Deposit
*** (“Holding Company”) was a bank holding company located in ***, ***. Holding Company directly or indirectly controlled and owned all of the stock of seventeen insured depository institutions in ***. Holding Company consolidated the charters of sixteen of these institutions under two entities – B, a banking institution, and a trust company (“Trust Company”). The consolidation was effected in a two-step process during August and October of 2000.
The relevant portion of the August step involved consolidating the banking operations of three institutions under the charter of an institution that became B. One of the three - *** Bank C (“C”) - was in existence as of December 31, 1996, and had paid deposit insurance assessments prior to that date. The trust operations and charters of the three institutions were ultimately consolidated as Trust Company.
The relevant portion of the October step involved consolidating the banking operations of five more insured depository institutions into B. The five - *** (“Bank D”), *** (“Bank E”), *** (“Bank F”), *** (“Bank G”), and *** (“Bank H”) - were in existence as of December 31, 1996, and had paid deposit insurance assessments prior to that date. As in the August transactions, the trust operations and charters of these five institutions were ultimately consolidated into Trust Company.
Trust Company voluntarily terminated its deposit insurance on March 8, 2001. On July 12, 2002, both B and Trust Company were acquired by A. It is the assessment credits of the six above-named institutions (“the six subsidiaries”) that A – as the successor to B - claims.
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). In short, two regulatory 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). Thus, 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. 61,374, 61,378-79 (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 61,379.
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. A’s preliminary statement listed no assessment credits attributable to the six subsidiaries.
On December 18, 2006, A filed its timely request for review, signed by its Vice President X. Included with the request were documents supporting A’s request, including the Trust Company articles of merger, Holding Company’s 10-K for the year 2000, and A’s preliminary estimated assessment credit statements from March 31, 2006, and October 16, 2006.
By letter dated February 9, 2007, DOF acknowledged receipt of A’s request for review and sought additional information that would support A’s claim. DOF suggested that A provide information as specified in FIL 93-2006: transfer/transaction agreements; closing statements or similar documents showing assets and deposit liabilities transferred by each institution; general ledgers showing total assets and total deposits as of the transaction date; and any other supporting documentation.
On February 28, 2007, DOF received from A an undated Bank Merger Act application describing the relevant transaction, briefing books for four of the institutions in question showing, among other things, a balance sheet for each; September 30, 2006 Call Report schedules showing balance sheets and deposit liabilities for the six subsidiaries at the relevant times; and the March 20, 2002 articles of merger for Holding Company and A.
DOF denied the Bank’s request for review by letter dated March 30, 2007. After reviewing the documentation provided by A, DOF indicated that the submissions did not demonstrate that B met both of the de facto criteria. Specifically, DOF noted it was “unable to calculate the percentage of assets acquired and deposits assumed on the dates of the transactions.”
In its April 27, 2007 appeal to this Committee, A reasserts its claim to the B assessment credits and attaches nine lettered exhibits. The exhibits include Call Reports from the relevant time period for the six subsidiaries as well as for B; the Bank Merger Act application for the consolidation; a purchase and assumption agreement relating to step one of the consolidation; an October 21, 2004 letter describing part of the transactions; spreadsheets and balance sheets for the six subsidiaries at the relevant time; Trust Company balance sheets for the relevant time; the order approving termination of Trust Company’s deposit insurance; and an affidavit from the vice president and general counsel of Holding Company at the relevant time. Some of this material was not previously submitted to DOF.
A acknowledges in its appeal that it “experienced difficulty in establishing with precision the transfer of assets and liabilities from the Holding Company subsidiaries to B as of the date of the transaction.” This is because, according to A: the transaction occurred seven years ago and many records may not exist; one bank’s accounting system was never converted to Holding Company’s system; the consolidation was of wholly-owned affiliated institutions, so the detail usually present for non-affiliated institution consolidations is lacking; and many relevant records were labeled for storage by Holding Company’s personnel no longer associated with A, making retrieval difficult.
A asserts that, based on the documentation submitted, the only supportable explanation of the consolidation is that B acquired more than 90 percent of the assets and more than 90 percent of the deposit liabilities of the six subsidiaries.
The Committee must examine the evidence presented by A to resolve the question of whether B assumed “substantially all” of the deposit liabilities and acquired “substantially all” of the assets of the six subsidiaries consolidated in 2000. 12 C.F.R. § 327.31(c). Under the FDIC’s regulations, an institution that files a request for review of the one-time assessment credit “shall provide documentation sufficient to support the change sought by the institution.” 12 C.F.R. § 327.36(c). In appeals to this Committee generally, the burden of proof as to all matters at issue rests with the institution. AAC Guidelines, Paragraph H.
We begin by noting A’s concern that establishing the precise transfer of assets and deposit liabilities in the B transaction has been difficult. A has gone to great effort to locate and submit evidence relevant to this case, some of it dating back seven years; the Committee has considered all of the evidence presented by A.
A first asserts that the Call Reports of the separately-chartered Holding Company’s subsidiary banks (Bank A Exhibit B) “demonstrate that the total assets and liabilities of the subsidiaries roughly approximated those of B” and “show that B ultimately came to acquire the assets and liabilities of the Holding Company subsidiaries.” Although the figures concern all but one of Holding Company’s seventeen subsidiaries, not simply the six relevant to this appeal, the Call Report documentation does offer some support for A’s assertion regarding both deposit liabilities and assets. The deposit liabilities appear to have slightly grown in the relevant time period, and the assets acquired by B during the relevant time period appear to have declined less than 10 percent. Although not dispositive, for purposes of the de facto rule requirements these figures provide some support for A’s contention that the total assets and liabilities of the subsidiaries “roughly approximated” those of B.
A also cites language in the Bank Merger Act applications (Bank A Exhibit C) showing that the Holding Company consolidation involved “affiliated entities” and that “the banking operations only” of the six subsidiaries were “merged and consolidated into the charter of B.” According to A, “banking operations” means all bank related assets and liabilities other than de minimis assets required for the trust company operations. The application language appears consistent with A’s contentions, as does language in the Purchase and Assumption Agreement (Bank A Exhibit D) that calls for the transfer of “all of the banking related assets” and assumption of “all of the banking related liabilities.” The term “banking related liabilities” likely includes all deposit liabilities (information obtained from the Call Reports also supports this conclusion). However, consideration of “banking related assets” (emphasis added) would invoke an asset subcategory which the Committee has recently declined to create in applying the de facto rule. See AAC No. 2007-01 (May 8, 2007) (de facto rule applies to all assets, not just “banking assets”).
A cites an October 21, 2004 letter regarding C to A (Bank A Exhibit E), which summarizes the effects of the transaction on C. According to A, C was affected identically to the other five subsidiaries. This letter demonstrates that the surviving trust company (*** Trust Company) held no banking related assets or liabilities when its amended articles of incorporation became effective in August of 2000. Consequently, all of this subsidiary’s deposit liabilities (and by extrapolation all of the other five subsidiaries’ deposit liabilities) likely were assumed by B. The same cannot be said - based on this letter - of the assets, however, because the de facto rule applies not just to banking related assets, but to all of an institution’s assets.
A’s Exhibits F and G contain the spreadsheets and balance sheets for the six subsidiaries for the month end preceding the consolidation and for the B “Banking Centers” for the months following the consolidation, as well as Trust Company’s balance sheets for three periods toward the end of 2000. The spreadsheets provide some evidence, albeit imprecise, that “the total assets and liabilities of B … approximate within a 10% variance the total assets and liabilities of the separately chartered Holding Company subsidiaries ….” In other words, this evidence (like Exhibit B) tends to support A’s contention that B acquired substantially all of the assets of the six subsidiaries.
A also offers the April 3, 2001, Order of Approval of Termination of Insurance (Bank A Exhibit H) verifying receipt by the FDIC of “satisfactory evidence” that B assumed the deposit liabilities of *** (“Bank I”), the predecessor of Trust Company. A acknowledges that this document “does not completely dispose of all proof issues under the de facto rule,” but contends that it resolves questions regarding assumption of substantially all deposit liabilities of the six subsidiaries. This Order underscores A’s contention that Trust Company no longer held any deposits following the consolidation, and therefore provides additional support for A’s contention that B assumed substantially all of the six subsidiaries’ deposit liabilities.
Finally, the affidavit of Y (Bank A Exhibit I) offers corroborative evidence that B assumed substantially all of the deposit liabilities and acquired substantially all of the assets of the six subsidiaries in these transactions. Mr. Y was Senior Vice President and Associate General Counsel of Holding Company from 1993 through 2002. It is his view that the “only assets or liabilities transferred to Trust Company from the Holding Company subsidiary banks … did not include any bank deposits” and “consisted of tangible and intangible personal property … the total value of which was less than 5% of the total assets of the subsidiary banks.”
Weighing all of the evidence presented, and mindful of the time that has
elapsed since the transactions occurred and the difficulties inherent in the
search for relevant evidence from multiple entities, the Committee finds
that A has met its evidentiary burden and satisfied the requirements of the
de facto rule for purposes of determining its entitlement to B’s
one-time assessment credits.
For the reasons and on the facts set out in this decision, the Committee finds that A has satisfied the requirements of the FDIC’s de facto rule and is therefore entitled to the one-time assessment credits of B, including the credits of the six institutions at issue here.
By direction of the Assessment Appeals Committee, dated May 29, 2007.
Valerie J. Best
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