4000 - Advisory Opinions
Conversion Transactions: FDIC Prior Approval Unnecessary Where Converting Institution Remains Well-Capitalized and Primary Regulators Approve Transaction
June 14, 1993
Jeffrey M. Kopchik, Counsel
This is in response to your May 21, 1993 letter to Alan J. Kaplan, Assistant General Counsel. It is my understanding from your letter that [A], a registered bank holding company, has entered into agreements to acquire [B], a savings and loan holding company. Subsequent to the proposed acquisition, [C], a federal savings association which is a wholly-owned subsidiary of [B], proposes to convert to a state-chartered nonmember insured bank that will continue to be a member of the Savings Association Insurance Fund ("SAIF") pursuant to section 5(d)(2)(G) of the Federal Deposit Insurance Act ("FDI Act"). Immediately prior to consummation of the proposed acquisition and the shareholder's meeting approving the conversion, [B] may declare and pay a special dividend. Because the special dividend is expected to be paid from funds provided by [C], [C]'s capital will be reduced. However, [C] is currently considered to be "well-capitalized" pursuant to the Office of Thrift Supervision's ("OTS") recently promulgated regulations relating to prompt corrective action and will remain well-capitalized even after the payment of the special dividend. Applications to approve the special dividend, acquisition and conversion have been filed or will be filed in the near future with the *** Banking Commission, the Board of Governors of the Federal Reserve System ("Federal Reserve") and the OTS.
Section 18(i)(2) of the FDI Act, 12 U.S.C. 1828(i), provides that:
"No insured Federal depository institution shall convert
into a State depository institution if its capital stock or its surplus
will be less than the capital stock or surplus, respectively, of the
converting bank at the time of the shareholder's meeting approving such
conversion, without the prior written consent of . . . the [FDIC]
if the resulting bank is to be a State nonmember insured
bank. . . ."
What is now section 18(i)(2) of the FDI Act was originally part of section 18(c) of the Federal Deposit Insurance Act of 1950. (Pub. L. No. 797). It was transferred to section 18(i) of the FDI Act in 1966 as part of the Bank Merger Act Amendments. (Pub. L. No. 89--356). The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 revised the section to incorporate the terms "insured Federal depository institution" and "insured State depository institution" instead of "insured bank" and "insured State bank", respectively. A review of the section's legislative history shows that Congress intended section 18(i) to "provide a more equitable two way conversion street' for National and State banks." H.R. Rep. No. 1083, 81st Cong., 1st Sess. 1 (1949). However, the section was also intended to give the FDIC "the necessary control to prevent capital and surplus diminution in such transactions. . . ." Id. at 3. [Emphasis added].
In the instant case, you have represented that [C]'s capital and surplus after the consummation of the conversion transaction will not be less than its capital and surplus at the time of the shareholder's meeting approving the conversion. However, [C]'s capital will be reduced immediately prior to the consummation of the proposed merger as a result of the payment of a special dividend. The shareholder's meeting approving the conversion will be held subsequent to the merger. While section 18(i)(2) refers to a decrease in capital or surplus subsequent to the shareholder's meeting approving the conversion, the legislative history of the section suggests that Congress intended the Corporation to prevent transactions which result in a diminution in capital. The special dividend appears to be an integral part of the entire transaction described in your letter, the Agreement and Plan of Reorganization and the Agreement and Plan of Merger. While the instant case does not appear to fall within the literal language of section 18(i)(2), the section's legislative history leads to the conclusion that its purpose is to prevent the diminution of an institution's capital resulting from a conversion from a federal to a state charter. The instant facts illustrate quite clearly that despite the fact that [C]'s capital will be reduced via the special dividend prior to the shareholder's meeting approving the conversion, payment of the special dividend is part and parcel of the entire transaction. As such, the purpose of the statute would not be served if the FDIC were to ignore the totality of a transaction simply because the diminution in capital immediately precedes the shareholder's meeting approving the conversion. Thus, in my opinion, the FDIC could review a transaction and require prior written approval to prevent an unwarranted diminution of capital where the distribution is immediately prior to the shareholder's meeting.
You note in your letter, however, that payment of the special dividend is subject to prior notice to and approval by the OTS. Moreover, the merger is subject to approval by the Federal Reserve and OTS. Finally, the conversion must be approved by the South Dakota Banking Commission, the Federal Reserve and OTS. Your letter also represents that [C] will remain well-capitalized (pursuant to the OTS prompt corrective action regulation) even after payment of the special dividend. In view of the fact that (1) every facet of the proposed transaction will be reviewed very carefully by regulatory authorities and (2) [C] will remain well-capitalized despite the special dividend, the FDIC Legal Division and Division of Supervision staff are of the opinion that, in the instant case, FDIC review of the proposed conversion transaction would serve no purpose pursuant to FDI Act § 18(i)(2). Thus, I confirm your firm's opinion that, in the instant case, FDIC prior approval of the conversion transaction as described in your letter is not necessary.
If you have any questions, please do not hesitate to contact me.