4000 - Advisory Opinions
Whether Certain Deposits Institution Sold After Acquiring Branches As Part of a Merger Transaction Must Be Included When Calculating Adjusted Attributable Deposit Amount
June 15, 1995
Valerie J. Best, Counsel
I am writing in response to your letters concerning the appropriate treatment of certain branch deposits which your institution sold after acquiring the branches as part of a merger with another insured depository institution. For purposes of calculating your institution's "adjusted attributable deposit amount" you must include the branch deposits. Please consider the following.
A. The Transactions.
At the close of business on January 13, 1995, ABC Savings Bank ("ABC") merged with XYZ Savings Bank ("XYZ"). ABC was a member of the Bank Insurance Fund ("BIF"). XYZ was a member of the Savings Association Insurance Fund ("SAIF"). Prior to its merger with ABC, XYZ had assumed deposits from a BIF-member pursuant to 12 U.S.C. § 1815(d)(3), the so-called "Oakar'' provision. Since ABC was a BIF member and XYZ was a SAIF member (even though XYZ had previously acquired deposits from a BIF member pursuant to Oakar), the merger of ABC with XYZ was consummated pursuant to 12 U.S.C. § 1815(d)(3).
B. Moratorium on Conversion Transactions.
Notwithstanding the moratorium on conversion transactions1 and subject to certain requirements, any insured depository institution may participate in a conversion transaction pursuant to the Oakar provision with the approval of the agency responsible for approving the acquiring, assuming or resulting institution's merger application. A transaction consummated pursuant to the Oakar provision is not subject to exit/entrance fees and is not subject to the "insubstantial" limitation otherwise imposed by statute on such transactions.2 However, a BIF-member acquiring deposits from a SAIF-member pursuant to the Oakar provision is required to pay assessments to SAIF, at SAIF-assessment rates, on that portion of its deposits which is equal to the "adjusted attributable deposit amount" ("AADA"). The amount of the AADA is determined pursuant to a statutory formula prescribed at 12 U.S.C. § 1815(d)(3)(C).
II. ABC's Position.
You write that, under two Purchase and Assumption Agreements dated October 18, 1994, XYZ had agreed to sell two of its "State" branches to AAA Bank ("AAA") and two other "State" branches to BBB Bank ("BBB") (referred to collectively as the CCC Banks). You state that, despite the date of the contracts to sell and the desire by all parties to complete the transactions by December 31, 1994, this was not possible because of the need to obtain regulatory approval and comply with subsequent customer notification requirements. You advise that the Office of the Comptroller of the Currency approved AAA's branch purchases on January 17, 1995. The branch purchases by BBB were approved by the Federal Reserve Bank on January 11, 1995 and by the State Banking Department on January 23, 1995. You indicate that, because of the need to provide customers with at least a 30-day notice of the pending sales as required by the bank regulators (as well as the need to make systems, operational, and other arrangements) the branch sales were re-scheduled to occur on March 10, 1995.
You contend that XYZ had firm agreements to sell the branches prior to year-end 1994 but, because of the regulatory approval and notification process, the transactions could not be finalized before December 31, 1994 or before the merger of ABC and XYZ was consummated. You write:
Therefore, ABC proposed that, since these balances [for the Branch Sales] would not be part of it's reportable deposits in the March 31, 1995 Thrift Financial Report [but for the delay], the amount of the deposits from these four branches (approximately $260 million) should not be reported as acquired SAIF deposits on ABC's Oakar] Worksheet and any future reports.
You believe that this approach reflects the intent of the Oakar provision, equitably reflects future deposit assessments, and avoids what you describe as the "double counting" that you suggest would occur with three financial institutions being assessed for SAIF deposits in the future when only two "State" commercial banks would have these deposits as contemplated."
III. Discussion--Treatment of Deposits Acquired from XYZ
A. Treatment of XYZ's AADA.
Although you did not specifically raise the issue in your letter, it is worth noting that a portion of the deposits ABC acquired from XYZ) would have already been treated as BIF deposits as follows. Pursuant to 12 U.S.C. § 1815 and the FDIC's implementing regulations (12 C.F.R. §§ 327.31-33.) and prior to the merger of ABC and XYZ, that portion of XYZ's assessment base which was equal to XYZ's AADA was subject to assessment at the rate applicable to BIF members and was not taken into account in computing the amount of any assessment to be allocated to SAIF.
The dollar amount equal to XYZ's AADA (as determined by reference to the most recent certified statement filed by XYZ prior to the merger of ABC and XYZ) would be added to that portion of ABC's deposits that are treated as deposits which are insured by the BIF (and would not be added to ABC's AADA).
B. Branch Deposits Acquired by ABC from XYZ Must Be Included When Calculating ABC's AADA.
The statute provides that, in the case of any acquiring, assuming, or resulting depository institution which is a BIF member, that portion of its deposits "for any semiannual period which is equal to the [AADA] shall be treated as deposits which are insured by the [SAIF]."3 The statute further requires that that portion of any assessment assessed under 12 U.S.C. § 1817 which is determined in accordance with this requirement shall be deposited in the SAIF.4
The statute provides that the AADA shall be calculated as follows:
(C) Determination of Adjusted Attributable Deposit Amount. The [AADA] which shall be taken into account for purposes of determining the amount of the assessment under subparagraph (B) for any semiannual period by any acquiring, assuming, or resulting depository institution in connection with a transaction under subparagraph (A) is the amount which is equal to the sum of--
(i) the amount of any deposits acquired by the institution in connection with the transaction (as determined at the time of such transaction);
(ii) the total of the amounts determined under clause (iii) for semiannual periods preceding the semiannual period for which the determination is being made under this subparagraph; and
(iii) the amount by which the sum of the amounts described in
clauses (i) and (ii) would have increased during the preceding
semiannual period (other than any semiannual period beginning before
the date of such transaction) if such increase occurred at a rate equal
to the annual rate of growth of deposits of the acquiring, assuming, or
resulting depository institution minus the amount of any deposits
acquired through the acquisition, in whole or in part, of another
insured depository institution.5
As indicated above, ABC's AADA must be calculated by reference to the amount of any deposits acquired by ABC in connection with ABC's merger with XYZ, as determined at the time of such merger. FDIC regulations define the phrase "deposits acquired by the institution" to mean: "[A]ll deposits that are held in the institution acquired by such institution on the date of such transaction. . . ."7 The branch deposits at issue were held in XYZ on the date of the merger and, consequently, must be included in ABC's AADA.
You may be interested to know that, where the Federal banking regulators and the Antitrust Division of the Department of Justice required certain deposits to be divested as a condition to the approval of a proposed merger, we opined that it could reasonably be said that the bank in that case was acting as a conduit for the SAIF-member deposits; under the specific circumstances presented, the deposits were not "acquired" by the bank.8 The facts presented in your case do not warrant similar treatment, however.
Among other things, the bank regulators and/or the Department of Justice did not require ABC to commit to divest the branches as a condition of approving the acquisition of XYZ nor does there appear to have been any other similar regulatory order or condition in place. The treatment you suggest would impact the CCC Banks yet you did not indicate that the CCC Banks concur with your request. The date on which the merger was to occur was chosen by ABC and XYZ; arguably ABC and XYZ could have written their agreement so as to delay the date of merger until the branches were sold. As noted in your letter, some of the delay was due to the need to make systems, operational, and other arrangements. While I am sympathetic to your concerns regarding the apparent delay in obtaining approvals, the fact that the CCC Banks were unable to obtain more timely approvals under the Bank Merger Act does not diminish your institution's responsibility to comply with the requirements of the Oakar provision.
C. Impact on ABC's Total Deposit Base--ABC's March 31, 1994 Thrift Financial Report.
As I understand your letter, you believe that a dollar amount equal to the deposits sold must be included in the total deposit base reported in your institution's March 31, 1994 Thrift Financial Report even though the deposits were sold prior to the March 31st reporting date. This is incorrect. The following example may help to illustrate the treatment to be accorded your institution's deposits.
Assume that XYZ had a total deposit base of 5.5 billion. Of that amount, 2 billion was allocated to XYZ's AADA and was treated as BIF-insured deposits. The remaining 3.5 billion was treated as SAIF-insured. The branches to be sold to AAA Bank and BBB Bank had total deposits of $250 million. Prior to the acquisition, ABC had a total deposit base of 6 billion, all BIF-insured.
ABC acquired XYZ on January 13th. After consummation on January 13th, ABC had a total deposit base of 11.5 billion. Of that amount, 3.5 billion was allocated to ABC's AADA (SAIF-insured). The remaining amount of 8 billion (6+2=8) was treated as BIF-insured.
On March 10th assume ABC sold the branches to AAA Bank and BBB Bank ( i.e., $250 million). As of March 31st, ABC would report a total deposit base of 11.25 billion in its Thrift Financial Report; its total deposit base would not be inflated by the branches it sold prior to the March 31st report date. The deposits acquired by AAA Bank and BBB Bank would be characterized as BIF-deposits. There would be no "double counting" for SAIF. Please call me at (202) 898-3812 if you have any questions or if you would like to further discuss this issue. If members of your staff require assistance in completing the assessment forms or Oakar worksheet, please call Connie Brindle at (703) 516-5553 or Dennis Probst at (703) 516-5549.
1 12 U.S.C. § 1815(d)(2)(A)(i). Go back to Text
2 12 U.S.C. §§ 1815(d)(2)(C), (D) and (E). Go back to Text
3 12 U.S.C. § 1815(d)(3)(B)(i). Go back to Text
4 12 U.S.C. § 1815(d)(3)(D)(i). Go back to Text
5 12 U.S.C. § 1815(d)(3)(C) (emphasis added). Go back to Text
6 12 C.F.R. § 327.32(a)(3). Go back to Text
7 12 C.F.R. § 327.32(a)(4). If, however, the FDIC or Resolution Trust Corporation ("RTC'') has been appointed conservator or receiver for the acquired institution, the term does not include certain volatile deposits. 12 C.F.R. § 327.32(a)(4); 54 Fed. Reg. 51372 (Dec. 15, 1989). Go back to Text
8 FDIC Advisory Opinion 94-50 (Oct. 12, 1994). Go back to Text