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4000 - Advisory Opinions

Continuation of Separate Insurance Coverage for Time Deposits with Penalty-Free Midpoint Withdrawal


November 19, 1993

Joseph A. DiNuzzo, Counsel

This is in response to your letter of October 27, 1993, and our recent telephone conversation on whether certain time deposits recently acquired by [BANK X] from another FDIC-insured institution would be separately insured for six months from the date of the assumption. You note that the assumed deposits have a "one time midpoint feature" which allows the depositor to withdraw the funds without penalty and ask whether this feature would be construed as a maturity date for purposes of determining when the separate insurance on the deposits will terminate.

As correctly noted in your letter, federal law (namely, section 8(q) of the Federal Deposit Insurance Act and section 330.3(g) of the FDIC's regulations) provides, in relevant part, that separate insurance coverage will be provided for time deposits assumed by an FDIC-insured institution for six months from the date of the assumption or the earliest maturity date of the deposit after the six-month period. The time deposits described in your letter are of two different maturities: one for eighteen months and the other for twenty-four months. Both types of deposits indicate an explicit maturity period of either eighteen months or twenty-four months and each type permits a penalty-free withdrawal at the midpoint of the maturity period.

In my opinion, the maturity terms of the time deposits are, and should be considered, the full periods designated on the certificates and/or passbooks. The penalty-free withdrawal feature provides the depositor with the option to terminate the account before the stated maturity, but the deposit would continue to the stated maturity date if the depositor does not exercise the withdrawal option.

Based on the information provided in your letter and assuming the existence of no countervailing factors, in my opinion, the time deposits would be insured separately under section 8(q) of the FDI Act and section 330.3(q) of the FDIC's regulations until their stated maturity date, irrespective of the midpoint penalty-free withdrawal feature.

If you have any other questions or comments on this matter, feel free to call me at (202) 898-7349.

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