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Each depositor insured to at least $250,000 per insured bank

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4000 - Advisory Opinions


Application of Section 8(q) of the FDI Act to Two Consecutive Mergers Involving Two Separately Insured Depository Institutions and a De Novo Institution

FDIC-91-89 December 18, 1991 Mark A. Mellon, Attorney

This is in response to your letter of December 13, 1991. Based on your letter and telephone conversations with you and the General Counsel of ***, Mr. ***, it is my understanding that you wish to ascertain how Section 8(q) of the Federal Deposit Insurance Act (the "FDIA") would apply to two consecutive mergers of depository institutions which will occur in the near future.

You state in your letter that your institution ([Bank A]) will shortly merge a subsidiary institution ([Bank B]) into itself. Soon after this merger, [Bank A] will itself be merged into another insured depository institution (the "Bank"). You want to know how the deposits of these institutions will be insured under the FDIA and our insurance regulations subsequent to these transactions. You list several hypothetical situations in your letter which illustrate your interpretation of the FDIC's insurance regulations on this issue and ask me to state whether or not I agree with that interpretation.

Section 8(q) of the FDIA (12 U.S.C. § 1818(q)) provides that whenever the liabilities of an insured depository institution for deposits have been assumed by another insured depository institution, the insured status of the institution whose deposits are assumed shall terminate on the date that the FDIC receives satisfactory evidence of that assumption. The section further provides that the deposits which have been assumed as a result of this transaction shall be separately insured from the deposits of the assuming institution for: a) six months from the date of assumption for all demand deposits or b) the earliest maturity date after the six-month period in the case of time deposits (a provision in the FDIC insurance regulations, 12 C.F.R. § 330.3(g), follows the language of section 8(q)). Depositors who may have deposits with different insured depository institutions are thus provided with an opportunity to rearrange their deposits and retain full insurance coverage if those institutions should merge.

Pursuant to section 8(q), it is plain that the deposits of [Bank B] and [Bank A] will be separately insured from one another for six months (or the first maturity date for time deposits) after the merger of those two depository institutions. It is my opinion that separate insurance coverage will continue for these two groups of accounts even after [Bank A] is itself subsequently merged into the Bank, if the second merger occurs before the end of the six-month period beginning from the date of the first merger or prior to the first maturity date of any time deposits of [Bank B] or [Bank A]. This will provide any depositors who might have funds deposited with [Bank A], [Bank B] and the Bank with an opportunity to rearrange accounts.

To illustrate how this separate insurance coverage would work, let us suppose that the merger of [Bank A] and [Bank B] occurs on January 1, 1992. The assumed deposits of [Bank B] should then be separately insured from the deposits of [Bank A] until July 1, 1992. The second merger then occurs on February 1, 1992. The deposits of the Bank will then be separately insured from the deposits which the Bank has assumed until August 1, 1992. The separate deposit insurance, however, provided to the [Bank A] and [Bank B] deposits as a result of the first merger will continue after the second merger but only for six months from the date of that first merger. Subsequent to July 1, the deposits of [Bank A] and [Bank B] would be aggregated and separately insured from the deposits of the Bank for another month.

Similar coverage will be provided to the time deposits of [Bank B], [Bank A] and the Bank. This coverage will extend, however, until the first maturity date of those deposits. For example, suppose that a depositor individually owns certificates of deposit ("CDs") with [Bank B], [Bank A] and the Bank. Subsequent to the second merger, each of those certificates will be separately insured to $100,000 (if no other funds were on deposit with these institutions) until the maturity dates of those CDs.

If the maturity date of either the [Bank B] or the [Bank A] CD should occur before the end of the six-month period beginning from the date of the first merger and the depositor decides to renew the CDs at the same terms and rates, either CD will continue to be separately insured until the new maturity date. If the [merged institutions] CD's maturity dates occur subsequent to the first six-month period but before the end of the six-month period running from the date of the second merger and the depositor decides to renew the CDs at the same terms and rates, those funds will be aggregated and insured to $100,000 in the event of an insurance determination. This insurance will be separate, however, from that provided to any time deposits which the depositor might have with the Bank. This separate coverage will be in effect until the new maturity dates of these CDs.

If the depositor fails to renew the CD or renews it with different terms and rates, separate insurance will only be provided to the end of the six-month period which applies. CDs of [Bank A] and [Bank B] belonging to the same depositor which fall into this category and mature before the expiration of the six-month period running from the date of the first merger shall continue to be separately insured from each other and from any Bank deposits which the depositor might hold until the end of that period. Subsequent to that date, the [merged institutions] CDs will be aggregated and separately insured from any deposits which the depositor might hold with the Bank until the end of the six-month period running from the date of the second merger. CDs of [Bank B] and [Bank A] which mature after the end of the first six-month period and before the end of the second six-month period would be treated differently. If CDs of this type are not renewed or are renewed on different terms and rates, they will be aggregated and separately insured from any deposits of the Bank but only until the end of the second six-month period.

I have reviewed the five hypothetical deposit insurance situations which you have enclosed with your letter. I am in agreement with the outcome that you have reached for the first four hypotheticals which pertain to accounts of [Bank B] and [Bank A] subsequent to the first merger but prior to the second one with the Bank. I think your interpretation of the insurance regulations is in error, however, in your fifth hypothetical which deals with accounts of [Bank B], [Bank A] and the Bank after the second merger.

Your fifth hypothetical posits three accounts, one for each depository institution, with the following balances:

[Bank B]: $50,000 savings deposit

[Bank A]: $75,000 savings deposit

Bank: $25,000 savings deposit

The merger of [Bank B] into [Bank A] occurs on January 1, 1992 in your hypothetical. The subsequent merger of [Bank A] into the Bank occurs on April 1, 1992.

Under the FDIC insurance regulations, the deposits of [Bank B] and [Bank A] would be separately insured to $100,000 (assuming the depositor has no other deposits with these institutions) until July 1, 1992. This is true even after the merger with the Bank. Contrary to your hypothetical, the [Bank B] deposit would not become a general deposit of the Bank on July 1, 1992. Instead, on that date the deposits of [Bank B] and [Bank A] would be aggregated and separately insured from the deposits of the Bank until October 1, 1992, the end of the second six-month period. This means that the depositor has $25,000 of potential uninsured funds during this period. Subsequent to that date, all three deposits would be aggregated and insured to $100,000 in the event of an insurance determination. The depositor would then have $50,000 of potential uninsured funds.

I hope that this letter is responsive to your query. Please do not hesitate to contact me if you have any questions about this or any other matter. I am available to review any other hypothetical examples of deposit insurance coverage which you might wish to forward to me.


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