4000 - Advisory Opinions
Application of "Insubstantial Portion" Exception to Conversion Transaction Moratorium Where Bank Merges with Trust Company Which Does Not Hold Deposits
October 29, 1991
Valerie J. Best, Counsel
I am writing in response to your inquiry concerning the application of the "insubstantial portion" exception authorized by 12 USC 1815(d)(2)(C)(i) to the proposed merger of * * * ("Trust Company") with * * * ("[Bank]"). Trust Company will be absorbed into [Bank], and [Bank] will continue operations. Trust Company is a member of the Bank Insurance Fund ("BIF"); [Bank] is a member of the Savings Association Insurance Fund ("SAIF"). Trust Company asserts that it does not currently hold, and has never held, deposits (whether or not insured.).1 Trust Company asserts that it is not authorized to accept deposits other than trust deposits. As to trust deposits, Trust Company asserts that any and all cash received from its customers is transferred upon receipt to accounts at other banks.
The proposed merger of Trust Company into [Bank] would be a conversion transaction. Based upon the facts presented to us by Trust Company, it is our opinion that the FDIC could, if it found that it was otherwise appropriate, approve the conversion transaction pursuant to the insubstantial portion exception contained in 12 USC 1815(d)(2)(C)(i).
The term "conversion transaction" is generally defined to include a change of status from a SAIF member to a BIF member, or vice versa; the merger or consolidation of a SAIF member with a BIF member; the assumption of deposit liabilities of a SAIF member by a BIF member, or vice versa; and the transfer of assets in consideration of such a deposit assumption. 12 USC 1815(d)(2)(B). The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") imposed a five-year moratorium on conversion transactions, with limited exceptions for (1) conversion transactions that affect an "insubstantial portion" of the total deposits of each participating institution, and (2) certain conversions involving institutions in default or in danger of default. The "insubstantial portion" exception reads as follows:
(C) Approval during moratorium
The Corporation [FDIC] may approve a conversion transaction at any time if--
(i) The conversion transaction affects an insubstantial portion, as determined by the Corporation, of the total deposits of each depository institution participating in the conversion transaction . . . .
12 USC 1815(d)(2)(C)(i).
The proposed merger of Trust Company (a BIF-member) into [Bank] (a SAIF-member) is deemed to be a "conversion transaction" pursuant to 12 USC 1815(d)(2)(B)(ii). As such, it is prohibited by 12 USC 1815(d)(2)(A) unless specifically excepted by law. As shown by the above-quoted statute, a conversion transaction may be approved by the FDIC pursuant to 12 USC 1815(d)(2)(C)(i), notwithstanding the moratorium, if it affects an insubstantial portion of each institution's "total deposits." The term "deposit" is defined to include, among other items, trust funds "received or held by such bank or savings association, whether held in the trust department or held or deposited in any other department of such bank or savings association." 12 USC 1813(l)(2). The term "trust funds" is, in turn, defined to mean "funds held by an insured depository institution in a fiduciary capacity and includes, without being limited to, funds held as trustee, executor, administrator, guardian, or agent." 12 USC 1813(p).
If Trust Company held funds in a fiduciary capacity, whether held in the trust department or held or deposited in any other department of such Trust Company, then it would be holding deposits. As noted above, however, Trust Company asserts that it does not hold trust deposits.
The issue, then, is whether the merger of an insured depository institution that is a member of BIF with an insured depository institution that is a member of SAIF, may be permitted by the FDIC pursuant to 12 USC 1815(d)(2)(C)(i) where the merging institution does not have any deposits. More specifically, is an "insubstantial portion" of the total deposits of each institution participating in a merger affected where the merging institution does not have any deposits.2
It is our view that, where the merging institution (that is, the passive unit that is to be absorbed) does not have, and has not had, any deposits, the merger may be approved by the FDIC pursuant to the "insubstantial portion" exception contained in 12 USC 1815(d)(2)(C)(i).
Such an interpretation is consistent with the purposes of the statute. If the merger of Trust Company into [Bank] were permitted, no deposits would leave the BIF and no deposits would enter the SAIF. The current BIF assessment base would not be eroded. SAIF would not be diluted.
1Trust Company did not report any total deposits in its Reports of Condition and Iincome (Call Reports) for the last several years. Go back to Text
2This transaction differs from a transaction wherein deposits are to be transferred to a de novo institution, and the two participating institutions belong to different insurance funds. We have opined that such a transaction is a conversion transaction and therefore prohibited by the moratorium. We have further opined that the insubstantial portion exception created by 12 USC 1815(d)(2)(C)(i) would not exempt such a transaction from the moratorium. Go back to Text