This administrative appeal was filed by “Parent” (“Parent”) on behalf of two
of its bank subsidiaries, [Bank] (X) and [Thrift] (Y) (collectively, the “Z
Banks” or “Banks”), requesting a refund of assessments paid since 1995 on
what Parent alleges were incorrect adjusted attributable deposit amounts (“AADAs”)
computed under section 5(d)(3) of the Federal Deposit Insurance Act (the
Parent contends that the Federal Deposit Insurance
Corporation (“FDIC”) should have permitted the Banks to adjust their
respective AADAs at the end of year in which the Banks first acquired their
secondary fund deposits. Parent is appealing a decision by the FDIC’s
Division of Finance (“DOF”) denying Parent’s request to adjust the Banks’ AADAs.
Parent contends that the Banks have paid over $17 million in excess
assessments because of the incorrect calculation of their AADAs. At issue is
the period of time covered by the first annual growth adjustment to the
Banks’ AADAs and the application of the corresponding growth rate to the
Banks’ initial AADAs.
The FDIC is charged with assessing and collecting deposit insurance
premiums for the Bank Insurance Fund (“BIF”) and the Savings Association
Insurance Fund (“SAIF”). This process is fairly straightforward for insured
depository institutions that hold only deposits insured by one insurance
fund. The process becomes significantly more complicated, however, when the
institution is one of the more than 800 existing Oakar institutions, which
have deposits insured by both the BIF and the SAIF.
Under the Oakar Amendment2
a BIF-insured institution that acquires
deposits from a SAIF-insured institution is treated as a hybrid institution
required to pay deposit insurance assessments to both its primary and
secondary insurance funds. The “primary fund” is the deposit insurance fund
of which the institution is a member.3
The “secondary fund” is the insurance
fund that is not the member’s primary fund4
For example, a “BIF Oakar,” is a
member of the BIF but a portion of its assessment base is also allocated to
the SAIF. The portion so allocated is equal to the institution’s AADA, which
is computed and adjusted over time pursuant to the statutory formula
contained in the Oakar Amendment. The assessments on that portion are paid
into the SAIF; the assessments on the remainder of the assessment base are
paid into the BIF.5
Also, FDIC losses resulting from the failure of an Oakar
institution are shared, pro rata, by BIF and SAIF.6
The AADA is the means by
which an Oakar institution’s deposits are allocated for assessment and fund
When the Oakar Amendment was enacted in 19897
the FDIC developed a program
to administer its provisions and developed a procedure to calculate AADAs.
From the enactment of the Oakar Amendment in 1989 through the implementation
of the Quarterly growth computation in 1997,8
the FDIC calculated an Oakar
institution’s AADA growth adjustment on an annual basis.
The two Z bank subsidiaries, X and Y are BIF members. X acquired a SAIF-member
institution in the first half of 1993 and Y acquired a SAIF-member
institution in the first half of 1994. Thus, they are both Oakar (BIF-member)
banks. X (as of December 31, 1994) and Y (as of December 31, 1995) filed
their first Growth Worksheets for their respective AADAs.
10 In October 1997,
Parent for the first time requested that the FDIC correct those Worksheets
because the Banks had not made adjustments for the “first year.”
In a letter dated March 16, 1998, the Deputy Director of DOF denied
Parent’s request, explaining that X had properly filed its first Growth
Worksheet as of December 31, 1994, and Y had properly filed its first Growth
Worksheet as of December 31, 1995. Parent is appealing that decision to this
Committee,11 asserting that the
Parent Banks should have been permitted to
adjust their AADAs as of the end of the years in which they engaged in Oakar
A. Parent’s Arguments
Parent asserts that the FDIC incorrectly withheld Growth Worksheets from
the Z Banks at the end of the year in which their Oakar transactions took
place. Thus, the Z Banks were not able to use the AADAs with the negative
growth adjustments for determining the Z Banks’ assessments for succeeding
years. Parent argues that under the Oakar Amendment a bank must apply a
growth increment computed with respect to every semiannual period except for
the period beginning before the date of the Oakar transaction (i.e., except
for the period in which the transaction occurs).
X acquired a SAIF-member institution in February 1993. The semiannual
period beginning before the date of the acquisition was the period January
1, 1993 through June 30, 1993. Parent contends that, by the plain language
of the statute, the second semiannual period of 1993 is not excluded from
the growth calculation; thus, when X calculated its AADA for purposes of the
assessment due in January 1994, it should have been allowed to include a
growth amount with respect to the second semiannual period of 1993. Parent
makes a parallel argument for Y with respect to the secondary fund deposits
it acquired in February 1994.
Parent also contends that the FDIC treated the Z Banks differently from
similarly situated banks without justification. It cites an example where
banks that had engaged in Oakar transactions (during the first half of 1993
through 1996) were permitted to apply a growth adjustment to new AADAs as
well as to their pre-existing AADAs.
B. Analysis of Parent’s Arguments
1. Timing of the First AADA Adjustment Parent has acknowledged the correctness of the FDIC’s practice of
calculating an Oakar institution’s AADA growth adjustment on an annual basis
and does not challenge it here. The legal memorandum attached to its June 9,
1998, letter to the FDIC stated that “[t]he Growth Worksheets created by
FDIC staff and used each year were true to the statutory requirements for
the proper application of the growth rate to AADA before 1997.” Thus, Parent
is not objecting to the use of the annual growth calculation.
12 It is
contending, however, that each of the Z Banks should have been permitted to
determine one annual growth rate over two semiannual periods (including the
semiannual period in which the Oakar transaction occurred) and should have
been permitted to apply the resulting annual growth rate to the AADA of the
second semiannual period only.
As explained above, during the periods involved in this appeal, an
institution’s first AADA growth adjustment was based on the annual rate of
growth of deposits, measured from the beginning to the end of the first full
calendar year following the year in which the Oakar transaction occurred.
This practice was fully compliant with the statutory requirement excluding
the period of acquisition from the calculation of the first AADA growth
adjustment. Using X as an example, the FDIC’s interpretation measured X’s
annual rate of growth of deposits from December 31, 1993, to December 31,
1994, and applied its negative five percent adjustment to the December 31,
1994, AADA. In contrast, under Parent’s interpretation, X’s AADA would have
been adjusted one year earlier, based on deposit growth measured from
December 31, 1992 (a date prior to the February 22, 1993, Oakar transaction)
to December 31, 1993. The annual rate of deposit growth for that period was
negative 165 percent. Multiplying the initial AADA (determined at the time
of the transaction) by negative 165 percent would have entirely eliminated
X’s December 31, 1993, AADA.
Similarly, Parent, believes that Y’s December 31, 1994, AADA should have
been adjusted by the rate of change in its deposit base measured from
December 31, 1993 (before the Oakar transaction date of February 17, 1994)
to December 31, 1994. The annual rate of deposit growth for this period was
negative 104 percent. Again, multiplying the initial AADA by negative 104
percent would have entirely eliminated Y’s December 31, 1994, AADA.
Accordingly, under Parent’s theory, the Z Banks would both have ceased to be
Oakar institutions in December of the year in which they became Oakar
institutions; that is, they would have wiped out their assessment liability
to the SAIF.
The Committee believes this result would, first, be incompatible with the
basis structure and purpose of the Oakar Amendment. Second, it violates a
fundamental principle of the Oakar Amendment: To ensure that cross-fund
acquisitions do not result in the transfer, from one insurance fund to the
other, of responsibility for insuring acquired deposits (without payment of
the required entrance and exit fees). Third, application of the Parent
methodology, when coupled with negative growth, would yield unreasonable
Parent requests that the annual growth rate for X be measured from
December 31, 1992, to December 31, 1993. Such a measurement would include
the original Oakar transaction itself, which occurred on February 22, 1993.
Applying this growth rate percentage would be contrary to the statutory
mandate that excludes the application of any deposit growth occurring in the
period of acquisition.13
The AADA growth process established by Congress
refers to the semiannual cycle for computing assessments. The Oakar
Amendment excludes the impact of acquisitions from the growth computation in
two ways: (a) The statutory growth formula excludes deposits acquired
through a merger or acquisition when determining the annual deposit growth
rate to be used to adjust the AADA; and (b) the statutory language prohibits
the application of the deposit growth percentage to the AADA reported for
the period within which the transaction takes place.
From the beginning, however, the FDIC determined that an annual cycle to
compute AADAs was permissible under the statute and provided certain
important benefits over a rigid adherence to the semiannual framework.
FDIC ensured that the central features of the AADA computation – excluding
the increase due to the Oakar transaction itself and measuring growth on a
post-transaction basis – were retained. Parent’s approach, by contrast,
would insert the Oakar transaction into the heart of the growth computation.
Thus, to accept Parent’s request would violate the plain statutory language
that describes the growth computation.
Also, Congress intended that mergers and acquisitions not result in a
transfer of deposit insurance from one fund to the other without the payment
of entrance and exit fees.15
If Parent were to adjust its initial AADAs in the year in which the
transactions occurred, it would effectively violate one of the conditions of
the Oakar transaction approval. Section 5(d)(3)(E)(ii) of the FDI Act
that one of the conditions for approval of an Oakar transaction is that the
transaction not result in the transfer of any deposit insurance from one
insurance fund to the other insurance fund. Parent seeks to calculate and to
apply growth in the year in which the initial transactions occurred,
effectively transferring deposits from the SAIF to the BIF without payment
of the required entrance and exit fees. Indeed, under Parent’s
interpretation the Z Banks would have transferred all acquired deposits
without payment of entrance and exit fees and would have ceased to be Oakar
institutions in December of the years in which they became Oakar
Finally, Parent’s interpretation, when coupled with negative growth,
would yield anomalous results. Using X as an example, the proposed process
would result in an annual growth rate of negative 165 percent. By measuring
the annual growth rate in the year of acquisition, the calculation would be
comparing the total deposit run-off of the acquisition(s) to the total
deposit base of the buyer’s original or pre-merger institution (rather than
to the deposit base of the buyer after the merger has been consummated). The
result produces the anomaly of a negative growth rate that exceeds 100
percent, and the clearly non-existent concept of a “negative” AADA.
the rulemaking process in 1996, the FDIC Board has recognized “negative
growth” of an AADAs as a general proposition. As part of that rulemaking,
however, the Board also stated that the FDIC would not extend the negative
growth concept beyond reasonable limits.18
Parent request violates both the
express language and the fundamental intent of the statute and applies
negative AADA growth beyond reasonable limits.
For the foregoing reasons, the Committee has determined that the
treatment of the Z Banks, with regard to their first AADA growth
adjustments, was appropriate and in keeping with the Oakar Amendment.
2. Alleged Disparate Treatment The Committee also disagrees with Parent’s allegation of disparate
treatment. The FDIC has attempted to apply the AADA annual growth process in
a consistent manner to all similarly situated institutions. As explained
above, during the periods involved in this dispute (i.e., prior to 1997),
an Oakar institution that had acquired an AADA was first eligible to adjust the
new AADA at the end of the first full calendar year following the year of
acquisition. From January 1992 through December 1996, there were 1,010 Oakar
acquisitions -- 914 BIF-Oakar transactions and 96 SAIF-Oakar transactions.
These were transactions in which either an institution acquired an AADA for
the first time or an existing Oakar institution acquired additional AADA. In
787 (or 86 percent) of the 914 BIF-Oakar transactions and 89 (or 93 percent)
of the 96 SAIF-Oakar transactions, the institutions correctly reported the
new AADAs.19 Based on a review
triggered by this appeal, however, the staff
has discovered that during this same period there were 133 Oakar
transactions for which existing Oakar institutions that acquired new AADA
combined the new AADA with their previous AADA and “adjusted” the entire
Such a growth adjustment to the new AADA was erroneous and, as explained
above, contrary to the statutory prohibition against adjusting the AADA in
the period of acquisition. Upon review, the Committee believes the FDIC’s
AADA Growth Worksheet form and corresponding instructions were misleading
and resulted in the incorrect reporting. Moreover, in audits conducted at
the time staff did not realize that the Worksheet form effectively allowed
for AADA growth in the period of acquisition for existing Oakar institutions
and, in some cases, advised institutions to follow the Growth Worksheet form
and to include new AADA in the growth computation.
The Committee acknowledges the error involved in allowing existing Oakar
institutions to adjust new AADA in the period of acquisition. Accordingly,
the staff is reviewing, in the normal course of agency business, the options
for dealing with that error. The circumstances in which existing Oakar
institutions erroneously applied growth to their AADAs, however, do not
match the facts involved in this appeal. The Z Banks were not existing Oakar
institutions that added new AADA to existing AADA and adjusted the combined
amount in the period of acquisition of the new AADA. Both Z Banks were BIF-member
institutions that acquired their initial AADAs in the transactions subject
to this appeal. Thus, the Parent Oakar transactions are similar to the 876
Oakar transactions for which the institutions reported their newly acquired
AADAs correctly, without any adjustment for growth in the period of
acquisition. The Parent Oakar acquisitions are not similar to the 133 Oakar
acquisitions by existing Oakar institutions for which the institutions
erroneously adjusted their AADAs. In the Committee’s judgment, Parent has
simply discovered an error in the FDIC’s implementation of the AADA growth
procedures and requests, through this appeal, that the error be applied to
Specifically, Parent has requested that X and Y be allowed to apply an
annual growth increment to the applicable AADAs computed as of December 31
of the year in which the transactions occurred. As discussed above, during
the time periods at issue, Oakar institutions were not permitted to apply
the annual growth increment in that manner. That other institutions, which
engaged in Oakar transactions dissimilar to the Parent transactions, were
erroneously permitted to do so does not entitle Parent to do so.
* * *
For the reasons discussed herein, under authority delegated by the Board
of Directors of the Federal Deposit Insurance Corporation, the Committee
denies Parent’s appeal.
1 12 U.S.C. 1815(d)(3). 2
12 U.S.C. 1815(d)(3). The so-called “Oakar Amendment” was named
after Congresswoman Mary Rose Oakar, the primary sponsor of the amendment.
3 12 C.F.R. 327.8(j).
4Id. at 327.8(k).
5 12 U.S.C. 1821(a)(5)&(6) 6 12 U.S.C.1815 (d)(3)(G)
The Financial Institutions Reform, Recovery, and Enforcement
Act of 1989, Pub. L. 101-73, 103 Stat. 183 (1989).
8 In November 1996, the FDIC Board of Directors (“Board”)
finalized a rule that amended Part 327 of the FDIC’s regulations (12 C.F.R.
Part 327) concerning the AADA for Oakar institutions (the “1996 Amendment”).
In the rulemaking the FDIC moved from an annual to a quarterly adjustment of
an Oakar institution’s AADA. Because the appeal applies to periods prior to
the effective date of the 1996 Amendment (January 1, 1997), this decision
addresses only the growth calculation performed on an annual basis.
9 In the preamble to the 1996 Amendment, the FDIC Board explained
why the FDIC has decided to move from an annual to a quarterly AADA growth
The FDIC has previously interpreted the phrase ‘annual rate’ to mean a
rate determined over the interval of a full year. Under the procedures
prescribed by the FDIC, each Oakar institution has computed the ‘annual
rate of growth’ at the end of each calendar year, and has used this figure
calculate the AADA for use during the following year.
This procedure has a weakness. An Oakar institution’s AADA has tended
to drift out of alignment with its deposit base, because the AADA remains
constant while the deposit base changes
[61 Fed. Reg. 64967 (Dec. 10,
The Board concluded that the “quarterly approach is permissible under the
statute, and is preferable to any approach that relies on a yearly interval
to determine growth in the AADA.” Id. At 64977. The Board specified in the
rulemaking, however, that the new AADA procedures would be applied “on a
purely prospective basis. They come into play only for the purpose of
computing future AADAs.” Id. At 64980.
10 During this period Oakar institutions prepared and filed
annual Growth Worksheets with the FDIC. Since 1997 the FDIC has calculated
institutions’ AADAs, based on information in quarterly reports of condition.
11 The FDIC Board has delegated to the Assessment Appeals
Committee the authority to consider and decide deposit insurance assessment
12 The Committee recognizes that there may be other
interpretations of the various components within the Oakar Amendment;
however, right from the start, the FDIC adopted the annual growth concept
and applied it consistently to all insured depository institutions in a fair
and equitable manner. In December 1992, the annual growth adjustment was
calculated for all Oakar institutions, provided they had been an Oakar
institution by June 30, 1992. This included institutions that had become
Oakar institutions during the first half of the year. The growth calculation
was performed in an effort to synchronize the growth process to move all
Oakar institutions to the same reporting schedule.
13 The third component used in determining an institution's AADA
is: “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 institution minus the amount of any
deposits acquired through the acquisition…of another insured depository
12 U.S.C. 1815(d)(3)(C). 14 The FDIC originally crafted the annual cycle in the context of the
minimum seven percent growth rate. If the “annual rate of growth of
deposits” were measured on a semiannual basis, seasonal fluctuations in
deposits could have caused significant distortions in the relation of the
AADA to the overall deposit base. A rural bank could well have a low or
negative growth in the spring and a very high growth rate in the fall, for a
moderate overall growth rate. But the AADA would grow at the artificial
seven percent rate in the first semiannual period, and then at the equally
artificial “actual” growth rate in the second semiannual period. The effect
would be to ratchet the AADA upward much more rapidly than the Oakar
Amendment evidently contemplated when it spoke of the “annual rate of growth
15 12 U.S.C. 1815(d)(3). 16 12 U.S.C. 1815(d)(3)(E)(ii).
17 An AADA is used for just two purposes: It measures a portion
of an Oakar institution’s assessment base (for assessment by the
institution’s secondary fund); and it measures off a portion of the
institution’s deposit base (for insurance by the secondary fund). It is
evident that a negative number for an AADA has no meaning for either
61 Fed. Reg. 64960, 64978 (Dec. 10, 1996).
19The new Oakar institutions correctly reported their AADA on
the Reports of Condition filed after the date of the Oakar transactions.
20 The FDIC also has identified one acquisition by a new Oakar
bank for which the institution erroneously applied growth for the period of