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4000 - Advisory Opinions


Availability of Oakar Provision for BIF-Member Recipient of Deposits Acquired From BIF-Member Oakar Bank

FDIC--95--27

May 23, 1995

Valerie J. Best, Counsel

You asked us to confirm your understanding that the proposed transaction described below would not be a "conversion transaction" as that term is defined in 12 U.S.C. § 1815(d)(2)(B) and therefore would not trigger the imposition of exit/entrance fees payable to the Savings Association Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF") pursuant to 12 U.S.C. § 1815(d)(2)(E).

Background

A conversion transaction is defined, in relevant part, to mean

(1)  the merger or consolidation of a BIF member with a SAIF member;

(2)  the assumption of any liability by any BIF member to pay any deposits of a SAIF member (or vice versa); or

(3)  the transfer of assets of any BIF member to any SAIF member in consideration of the assumption of liabilities for any portion of the deposits of such BIF member (or vice versa).1

Notwithstanding the moratorium on conversion transactions and subject to certain requirements, any insured depository institution may participate in any one of the above-described transactions pursuant to 12 U.S.C. § 1815(d)(3), the so-called "Oakar'' provision, with the approval of the agency responsible for approving the acquiring, assuming or resulting institution's merger application under 12 U.S.C. § 1828(c).2

Proposed Transaction

An unidentified institution, designated herein as the "Buyer," is a member of the BIF. Another unidentified institution, designated as the "Seller," is likewise a BIF-member. The Seller, however, previously assumed deposits from a SAIF-member pursuant to 12 U.S.C. § 1815(d)(3). Pursuant to 12 U.S.C. § 1815 and the FDIC's implementing regulations (12 C.F.R. § 327.31--33.), that portion of the Seller's assessment base which is equal to the Seller's adjusted attributable deposit amount ("AADA") is subject to assessment at the rate applicable to SAIF members and is not taken into account in computing the amount of any assessment to be allocated to BIF. The rate applicable to BIF members is applied to the Seller's assessment base less that portion of the assessment base which is equal to the Seller's AADA.

You write that the Seller's total deposit base can be assumed to be $10 billion, and its AADA can be assumed to be $9.6 billion. The Buyer has never participated in an Oakar transaction or otherwise assumed another institution's liability to the SAIF. The Buyer proposes to assume $800 million of deposits associated with approximately 60 branches of the Seller and to acquire the branches themselves, together with certain related assets.

You suggest that for purposes of 12 U.S.C. § 1815, the Buyer's assumption of Seller's deposits could essentially be viewed in two parts. In the first part, the Buyer would acquire that amount of Seller's deposits equal to the excess of its total deposit base over its AADA. That is, the Seller would transfer to Buyer substantially all of its BIF-insured deposits ($400 million). In the second part of the transaction, you suggest that the Seller would be treated as transferring SAIF deposits to the Buyer.

Treatment of Deposits Transferred by an Oakar Bank

It continues to be the view of Legal Division staff that if the aggregate of all deposits transferred to BIF-member banks by a BIF-member Oakar bank will not reduce the Oakar bank's total deposit base below the amount of its AADA, the transfer of deposits would be a transfer of BIF-insured deposits and, therefore, would not be regarded as a "conversion transaction" as that term is defined in 12 U.S.C. § 1815(d)(2)(B).3 As a consequence, the "insubstantial portion" test would not apply, conversion fees would not be required, and the transfer would not result in any reduction or adjustment of the AADA. If, however, any deposit transfer by a BIF-member Oakar bank to another BIF-member reduces the Oakar bank's total deposit base below the amount of is AADA, such a transfer may be regarded as a conversion transaction and, as such, subject to FDIC approval, the "insubstantial portion" test set forth at 12 U.S.C. § 1815(d)(2)(D), and entrance and exit fees.

Applying the foregoing to the Proposed Transaction, the transfer of the first $400 million in deposits from the Seller to the Buyer would be treated as a transfer of BIF-insured deposits and, therefore, would not be regarded as a conversion transaction and would not be subject to exit or entrance conversion fees. The transfer of the remaining $400 million in deposits from the Seller to the Buyer would be regarded as a conversion transaction and, as such, subject to FDIC approval, the insubstantial portion test, and entrance and exit fees.

Availability of Oakar Provision for BIF-Member Recipient of Deposits Acquired From BIF-Member Oakar Bank

As indicated above, the term "conversion transaction" is defined by reference to "BIF members" and "SAIF members." A BIF member acquiring deposits from a SAIF member pursuant to 12 U.S.C. § 1815(d)(3) retains its status as a BIF member and is not a SAIF member.4 Given that both the Seller and the Buyer are BIF members, you ask whether, after the aggregate of all deposits transferred to the Buyer (or any other BIF-member banks) by the Seller reduces the Seller's total deposit base below the amount of its AADA, the Buyer may acquire the deposits that are treated as SAIF-insured deposits from the Seller pursuant to the Oakar provision, 12 U.S.C. § 1815(d)(3). It is my view that the Buyer may apply to acquire such deposits pursuant to the Oakar provision.5

The statute provides that, in the case of any acquiring, assuming, or resulting depository institution which is a BIF member, that portion of the deposits of such member for any semiannual period which is equal to the AADA "shall be treated as deposits which are insured by the [SAIF]" for purposes of calculating the assessment to be paid to SAIF and for purposes of allocating costs in the event of default.6 Even though the Seller and the Buyer are both BIF members, the Seller--having reduced its assessment base to an amount which is equal to its AADA--would then be transferring that portion of its assessment base which is subject to assessment at SAIF rates.7 In order to give effect to the statutory framework established by Congress, it is my view that any deposit transfer by an Oakar bank that impacts the bank's AADA should be treated as a conversion transaction and, as such, may be consummated pursuant to the Oakar provision.

If the Buyer's Oakar application is approved by the appropriate Federal banking agency, the Buyer could acquire the additional deposits pursuant to 12 U.S.C. § 1815(d)(3) with the result that the exit and entrance fees would not apply and the insubstantial limitations would not apply. The Buyer would, however, be required to pay assessments to SAIF at SAIF assessment rates on that portion of its deposits that are attributable to the AADA of the selling Oakar bank under the AADA formula prescribed at 12 U.S.C. § 1815(d)(3)(C). Such payments could be discontinued after the moratorium expires if the institution obtains the approval of the FDIC to treat the transaction as a conversion and the institution pays any exit and entrance fees prescribed by the FDIC. 12 U.S.C. § 1815(d)(3)(i). No current provision of Federal law would compel an institution that assumed deposit liabilities pursuant to 12 U.S.C. § 1815(d)(3) to treat the acquisition as a conversion transaction after the moratorium expires.

Please call us if you require additional assistance.

1 12 U.S.C. § 1815(d)(3)(A)(i); 12 U.S.C. §§ (d)(2)(B)(ii), (iii), and (iv). Go back to Text

2 12 U.S.C. § 1815(d)(3)(A)(i). Go back to Text

3 FDIC Advisory Opinions 92-80 (Nov. 16, 1992) and 90-22 (June 15, 1990). Go back to Text

4 FDIC General Counsel Opinion No. 7, 60 Fed. Reg. 7055 (Feb. 6, 1995). Go back to Text

5 In this instance, a single depository institution is acquiring the subject deposits from the Buyer. Consequently, this letter does not address the treatment to be accorded deposits simultaneously transferred from an Oakar bank to multiple depository institutions wherein the aggregate amount transferred impacts the Oakar bank's AADA. Likewise, this letter does not discuss the treatment of an Oakar bank's AADA in the event the Oakar bank merges or consolidates with another depository institution. Go back to Text

6 12 U.S.C. §§ 1815(d)(3)(B)(i) and (H). Go back to Text

7 This issue would have arisen even if the FDIC Legal Division staff had adopted an alternative position as to the treatment to be accorded deposits transferred by Oakar banks. Go back to Text


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