Federal Deposit
Insurance Corporation

Under the Oakar Amendment, 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.³ The “primary fund” is the deposit insurance fund of which the institution is a member.⁴ The “secondary fund” is the insurance fund that is not the member’s primary fund.⁵ For example, a “BIF Oakar” is a member of the BIF, but a portion of its assessment base is 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 assessed at the SAIF rate and are paid into the SAIF; the assessments on the remainder of the assessment base are assessed at the BIF rate and are paid into the BIF.⁶ Also, FDIC losses resulting from the failure of an Oakar institution are shared, pro rata, by BIF and SAIF.⁷ The AADA is the means by which an Oakar institution’s deposits are allocated for assessment and fund loss-allocation purposes.

When the Oakar Amendment was enacted in 1989,⁸ the FDIC developed a program to administer its provisions and developed a procedure to calculate AADAs. In an interpretative rulemaking proceeding in 1996⁹ (“AADA Regulation”), the FDIC overhauled its procedures for attributing deposits to the two insurance funds and for computing the growth of the amounts so attributed, with the goal of correcting weaknesses and deficiencies. The changes were expressly intended to apply prospectively.¹⁰

B. The AADA Statute and Implementation Thereof.
1. The AADA Statute.
The statutory provision that governs this matter is paragraph (C) of the Oakar Amendment and, in particular, Clause (iii) thereof. Paragraph (C) reads as follows:

(C) Determination of adjusted attributable deposit amount.
Except as provided in subparagraph (K), the adjusted attributable deposit amount 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.¹¹

Clause (i) of paragraph (C) says that the first component of an Oakar institution’s AADA for any semiannual period is the amount of secondary-fund deposits that the institution has acquired at the time of the transaction. Clause (iii) says that another component of the AADA is a growth increment, the amount of which is computed by measuring the institution’s overall growth during the “preceding semiannual period.” But Clause (iii) also specifies that no growth increment is to be included as part of the AADA when the increment is computed with respect to a semiannual period “beginning before the date of” the transaction.

Here the semiannual period in question – the one for which the assessment is due – is July/December, 1997. The “preceding semiannual period” – the one with respect to which a growth increment would be computed – is the January/June 1997, period. The start of this period predates the transactions of June 26, 1997. Accordingly, Clause (iii) on its face indicates no growth increment is to be computed with respect to this period. The July/December AADAs should therefore have the same value as the initial AADAs.

Despite the plain language of Clause (iii), the Bank contends that its July/December AADAs should include an increment of growth, and that the increment should reflect the Bank’s overall growth during the January/June 1997, period. The Bank does not rely on the express language of Clause (iii), but rather on language found in a note in the guidelines (“Guidelines”) that accompanied a FDIC-supplied AADA Growth Worksheet form (“Worksheet”).¹² The FDIC provided these materials to BIF-member Oakar banks in years prior to 1997 when a growth computation should have been made. In those years Oakar banks were required to compute their own AADAs and report them in their quarterly reports of condition and income. The FDIC provided the material in order to help Oakar banks make the necessary calculations.

The type of seller affected the period in which the AADA could be adjusted. If the seller was a SAIF member, then the period in which the AADA could not be adjusted was the period of the Oakar transaction. If the seller was an existing Oakar institution, then the AADA from that Oakar transaction represented the re-transfer of SAIF-insured deposits from one BIF-member bank to another. The buyer was viewed as “standing in the shoes” of the Oakar seller, and the buyer’s AADA was a mere “continuation” of the seller’s pre-existing AADA. The prohibition against growing the AADA in the period of acquisition applied to the original Oakar transaction, and not to the period in which the AADA was re-transferred.

The pre-1997 Worksheet was designed for Oakar banks eligible to make an adjustment to their AADAs. The Worksheet and the Guidelines applied the “no growth in the period of acquisition” concept to the original Oakar transaction and allowed for “continuation” AADA that was eligible for growth in its own right. The Worksheet included the eligible AADA that was acquired from an existing Oakar institution with any previous AADA of the acquiring bank in the total AADA that was subject to the growth adjustment. This treatment reflected the concept that the buyer “stood in the shoes” of the Oakar seller. Thus, the “continuation” AADA was augmented by a growth increment in the period it was re-transferred, just as the seller’s pre-existing AADA would have been so augmented.

In the preamble and continuing through each aspect of the AADA Regulation, the FDIC emphasized the treatment to be afforded all AADAs prospectively. The treatment included:

• establishing the initial value of the AADA as the amount of deposits acquired that were insured by the secondary deposit insurance fund;
• treating any re-transfer of secondary fund deposits as a separate transaction and analyzed independently from any previous Oakar transaction;
• considering the “conduit principle” with its special divestiture requirements as the only exception to the normal treatment of any subsequent re-transfer of secondary fund deposits;
• adhering to the statutory limitation that AADA did not include a growth increment computed for the period in which the Oakar transaction occurred; and
• allowing negative AADA growth within reasonable limits (particularly in cases of bulk transfer of deposits).

For example, the Board stated:

When an AADA is first generated, its value is equal to the amount of the secondary-fund deposits that the buyer has acquired from the seller. The value remains constant until the end of the semiannual period in which the transaction occurs.¹³

Any subsequent re-transfer of the deposits would be treated as a separate transaction, and analyzed independently of the Oakar transaction.¹⁴

The FDIC continues to believe that the terms “growth” and “increase” as used in the statute are broad enough to refer to a negative rate as well as a positive one. But the FDIC does not consider that it is required to extend these terms beyond reasonable limits. In particular, the FDIC does not believe that it must necessarily interpret these terms to include a decrease that is attributable to a bulk transfer of deposits.¹⁵

The Board did not suggest in any way that these rules might only apply to some Oakar transactions and not to others. In particular, the Board did not suggest or imply that there might be an exception to this rule for the case of “continuation” transfers.

The AADA Regulation also made several other important changes in the computation of AADAs. The Board eliminated the “annual cycle” method of computing AADA growth, declaring that growth was to be measured on a quarterly basis.¹⁶ The Board eliminated the AADA Growth Worksheet (and Guidelines) in which the “continuation” AADA concept was embodied. The Board also transferred the burden of computing AADAs under the policies prescribed by the revised AADA Regulation from the Oakar institutions to the FDIC.

The revised AADA Regulation prescribed that the FDIC would compute the AADAs in the future based on Oakar institutions supplying three data elements on the quarterly report of condition. Those elements were:

• The total amount of the deposits acquired during the quarter;
• The total amount of those acquired deposits that were insured by the secondary insurance fund; and
• The total amount of deposits that had been sold during the reporting period.

There was no requirement to segregate the deposits acquired between those acquired from a member of the “other” deposit insurance fund (a normal Oakar transaction) and those acquired from an existing Oakar bank (“continuation” AADA). Without the separation of the deposit acquired between the two different sources, it is impossible to apply the “continuation” methodology. The proposed rulemaking specifically requested comments on FDIC computing AADAs based on the information provided.¹⁷ Under the proposed rulemaking, all AADAs from every Oakar transaction had to be treated in the same manner.

In light of these changes, the staff did not publish revisions to the AADA Growth Worksheet or to the Guidelines. The Board eliminated them. The basis for the “continuation” treatment of AADAs generated in the acquisition of existing Oakar banks was not compatible with the board’s interpretation of the AADA statute in the AADA Regulation. The “continuation” methodology for computing AADAs was changed to treat all AADAs the same as provided by the revised AADA Regulation.

The invoices emanating from the revised AADA Regulation reflected each institution’s AADA and how it was computed, and the amount of the resulting assessment. The invoices showed that AADAs were calculated in accordance with the Board’s statements in the AADA Regulation, and not in accordance with the “continuation” treatment. The invoices did not expressly call attention to the fact that any methodology had been changed.

The 1996 rulemaking also codified the concept of negative AADA. The Board adopted that concept for sound and appropriate reasons. But the Board also stated that it did not consider itself to be bound to apply the negative AADA growth concept “beyond reasonable limits” particularly in the case of bulk transfers of deposits.¹⁸

In each of these periods, the Bank was subject to assessment by two entities: The FDIC and FICO. The Bank’s request for refund of assessments is for the assessments paid to the FICO. In each semiannual period, there are two FICO rates: one to be applied against an institution’s BIF-assessable deposits, and the other (five times higher through December 1999) to be applied against the institution’s SAIF-assessable deposits. The Bank paid approximately $5.7 million to FICO over the course of the three semiannual periods at issue. The Bank claims that its FICO assessments were too high because the FDIC overstated the amount of the Bank’s SAIF-insured deposits. Should the Bank prevail, then any future assessment by either the BIF or the SAIF would be impacted by the revised assessment base.

The Bank’s appeal focuses on the three AADAs that were generated in the transactions involving the Oakar-bank Sellers. The initial value of each AADA – that is, its value on the date it was generated, namely, June 26, 1997 – was equal to the volume of SAIF-insured deposits that the bank acquired from the relevant Seller on that date.

The Bank’s SAIF assessment for the following semiannual period (July/December, 1997) was based on the AADAs generated in these transactions. The substantive question in this appeal is whether the AADAs used to compute that assessment (“July/December AADAs”) should be equal in value to the initial AADAs, or whether they should include a growth increment: that is, an extra component that would reflect the growth (or shrinkage) of the Bank’s overall deposit-base during the semiannual period in which the acquisition transaction took place (January/June, 1997).²⁰

The FDIC did not include a growth increment in the July/December AADAs. The Bank contends that the FDIC should have done so. By including the acquisitions of the affiliated Oakar institutions in the growth computation, the adjustment component would have been a negative 121 percent. If the component were applied to the Bank’s July/December AADAs, the result would have eliminated the AADAs altogether and the Bank would have paid approximately $2 million less in assessments to FICO.

The Committee also concludes that the concept of a “continuation” AADA is not compatible with paragraph (C)(iii) of the Oakar Amendment as interpreted by the Board’s 1996 revision to the AADA Regulations. The Committee finds that the Board formally articulated the treatment that would be afforded to AADAs and specified that no growth increment was to be computed for an AADA with respect to the assessment period in which the AADA was generated. The Board did not suggest or imply that “continuation” AADAs might be an exception to this rule. The 1996 rulemaking prescribed the treatment to be afforded institutions prospectively. The Committee believes that there was ample notice of an opportunity to comment on the treatment intended by the Board for the allocation of deposits insured by the secondary deposit insurance fund and for the computation of growth of AADAs. Accordingly, the “continuation” concept cannot be used to determine the value of the AADAs generated in the X transactions after the effective date of the 1996 AADA rulemaking.

The interpretative 1996 rulemaking was intended to correct prospectively weaknesses revealed in the FDIC’s procedures for allocating deposits between the two deposit insurance funds and for computing the growth of the amounts so attributed.

The Committee concludes that a note contained in a guide to aid in the completion of a form intended to assist institutions in calculating their AADA was merely a note and not the equivalent of an FDIC rule. The AADA Growth Worksheet and the Guidelines were ministerial in nature and did not themselves purport to state or interpret agency policy. The Worksheet and Guidelines neither identified the “continuation” concept nor explained the rationale for it. They served no more purpose than to provide assistance to institutions in computing their AADAs.

The Bank contends that the FDIC did not expressly discuss the “continuation” principle in the AADA Regulation and, therefore, did not repudiate it; and that, even if the FDIC meant to repudiate the    “continuation” principle, the repudiation was unsuccessful because the FDIC did not provide notice and opportunity for public comment on this point in the AADA Regulation.

The Committee finds that the Board did not expressly discuss “continuation” AADAs in the 1996 AADA Rulemaking. However, the Committee also finds that the Board stated throughout the text of the proposed and final rulemaking notices the intended treatment to be afforded AADAs in the future. Repeatedly, the Board provided in the rulemaking that new AADAs were not subject to growth or shrinkage in the period in which they were acquired. At no time did the Board state or imply that this principle was less than uniform. In particular, the Board did not state or imply that some new AADAs might be exempted from this principle, or that the fund-membership of the seller might make a difference in how a new AADA was treated.

In keeping with their limited purposes, the materials were neither detailed nor exhaustive. For example, the Worksheet and Guidelines did not address the case in which a buyer acquired only part of a seller’s secondary-fund deposits.²¹ Buyers were left to themselves to make any adjustments needed to apply the AADA Growth Worksheet to special situations.²² The staff provided oral advice where necessary. In short, the AADA Growth Worksheet and the Guidelines had no higher standing than informal advice.

In the preamble to the proposed version of the AADA Regulation, the Board noted that several AADAs could be treated as a single, composite AADA:

The composite AADA can generally be treated as a unit as a practical matter, because all the constituent AADAs (except initial AADAs) grow at the same rate.²³

In proposing to assume the administrative chore of computing AADAs, the Board said:

The FDIC currently requires all institutions that assume secondary-fund deposits in an Oakar transaction to submit an Oakar transaction worksheet for the transaction. The FDIC provides the worksheet. The FDIC provides the name of the buyer and the seller, and the consummation date of the transaction. The buyer provides the total deposits acquired, and the value of the AADA thereby generated. In addition, Oakar institutions must complete a growth adjustment worksheet to re-calculate their AADA as of December 31 of each year. Finally, Oakar banks report the value of their AADA, on a quarterly basis, in their quarterly reports of condition (call reports).

To implement the proposal to adjust AADAs on a quarterly basis, and to ensure compliance with the statutory requirement that an AADA does not grow during the semiannual period in which it is acquired, see 12 U.S.C. 1815(d)(3)(C)(iii), the FDIC initially considered replacing the current annual growth adjustment worksheet with a slightly more detailed quarterly worksheet.²⁴

When discussing the Board’s then-prevailing view that an AADA had a constant value throughout a semiannual period, and proposing to replace it with the notion that an AADA had two quarterly components, the Board carefully noted that newly generated AADAs would not be subject to growth:

The FDIC is therefore proposing to revise its view, and take the position that – after the end of the semiannual period in which an institution’s AADA has been established – the AADA grows and shrinks at the same basic rate as the institution’s domestic deposit base (that is, excluding acquisitions and deposit sales), measured contemporaneously on a quarter-by-quarter basis.²⁵

In discussing the principles for determining the initial value of a newly generated AADA, the Board declared:

The general rule is that a buyer’s initial AADA equals the full nominal amount of the assumed deposits. 12 C.F.R. 327.32(a)(3)(4).

The FDIC is proposing to retain the substance of this provision. The proposed rule would continue to emphasize the point that the amount of the transferred deposits is to be measured by focusing on the volume divested by the seller. The purpose of the rule is to make it clear that post-transaction events – such as deposit run-off – have no bearing on the calculation of the buyer’s AADA.

The FDIC considers that the nominal-value rule is appropriate for two chief reasons. Most importantly, it reflects the manifest intent of the statute, which says that the volume of the acquired deposits are to be “determined at the time” of the transaction. Second, the nominal-value rule has the virtues of clarity and precision. A buyer and a seller will both know precisely the value of an AADA that is generated in an Oakar transaction. The buyer’s expected secondary-fund assessments can be an important cost for the parties to consider when deciding on an acceptable price. The FDIC considers that the nominal-value rule reduces uncertainty on this point.²⁶

As part of this discussion, the Board noted that the Oakar Amendment did not contemplate a transaction in which the seller was an Oakar institution in its own right. The Board specified that “[t]he proposed rule would make it clear that the nominal-amount rule applies to all Oakar transactions.”²⁷ The Board specifically asked for public comment on this point.²⁸

The preamble to the final version of the AADA Regulation repeated much of the language of the preamble of the proposed rule. But the Board made certain changes to the preamble that have the effect of highlighting the point at issue here. The changes made it clear that the Board explicitly embraced the principle that each new AADA remained constant from the date the AADA was generated through the end of the semiannual period. For example, when introducing the concept of the AADA, the Board said:

An AADA is an artificial construct: a number, expressed in dollars, that is generated in the course of an Oakar transaction, and that pertains to the buyer. When an AADA is first generated, its value is equal to the amount of the secondary-fund deposits that the buyer has acquired from the seller. The value remains constant until the end of the semiannual period in which the transaction occurs.

Thereafter the AADA increases or decreases at the same underlying rate as the buyer’s overall deposit base….²⁹

The preamble to the final rule, like the preamble to the proposed rule, remarked that an Oakar institution could have several AADAs treated on a composite basis and, in particular, repeated the following sentence:

The composite AADA can generally be treated as a unit, however, because all the constituent AADAs (except initial AADAs) grow at the same rate.³⁰

When discussing the quarterly-growth concept for AADAs (as opposed to holding the value of an AADA constant throughout the semiannual period), the FDIC observed:

The FDIC is therefore revising its view, and is taking the position that – after the end of the semiannual period in which an institution’s AADA has been established – the AADA grows and shrinks at the same underlying rate as the institution’s domestic deposit base (that is, excluding acquisitions and deposit sales), measured contemporaneously on a quarter-by-quarter basis.³¹

Finally, in adopting the interpretive rule regarding the value of an initial AADA, the Board declared:

The FDIC has adopted an interpretive regulation specifying that the “amount of any deposits acquired” by the buyer – and therefore the value of the buyer’s initial AADA -- is (generally) equal to the full nominal amount of the deposits that the buyer assumes from the seller. 12 CFR 327.32(a)(3)(4). The FDIC is retaining the substance of this provision. The final rule continues to emphasize the point that the amount of the transferred deposits is measured by focusing on the volume divested by the seller. The FDIC’s purpose is to make it clear that post- transaction events – such as deposit run-off – have no bearing on the calculation of the buyer’s AADA.³²

The discussion of the initial value of the AADA in the final rule repeats the wording in the proposed rule and concludes that the nominal-amount principle applies to all deposit-transfer transactions in which the buyer acquires secondary-fund deposits.³³

The AADA Regulation also indicated in another way that newly generated AADAs were not subject to growth. The AADA Regulation provided that the FDIC would absorb the obligation and expense of computing AADAs in the future. The FDIC said that, in order for it to be able to carry out this task, an Oakar institution’s quarterly call report would have to contain the following three pieces of information: total deposits acquired during the quarter; secondary-fund deposits acquired in the quarter; and total deposits sold in the quarter.³⁴

The FDIC did not ask for, and acquiring Oakar institutions were not required to provide, any information about the source of acquired secondary-fund deposits. Accordingly, the FDIC intended – and manifestly could not do otherwise – to treat the deposits acquired from a member of the opposite fund and deposits acquired from a member of the same fund in the same manner. The AADA Regulation’s procedures made it impossible for the FDIC to make a separate identification of the AADAs that would previously have been given “continuation” treatment.

Finally, after the Board adopted the AADA Regulation, the FDIC sent out assessment invoices to all insured institutions. Each invoice showed the amount that the institution was obliged to pay to the FDIC. In the case of an Oakar institution, the invoice was accompanied by a worksheet showing how the AADA was determined. These invoices made it clear that new AADAs were not subject to growth. The worksheets did not make any special provision for AADAs generated in “continuation” transfers.

Given these facts, the Committee rejects the Bank’s basic claim that the FDIC failed to give the public adequate notice that AADAs generated in Oakar-seller transactions would be computed in accordance with the general rules for computing AADAs, and would no longer be computed in accordance with the “continuation” procedures. The Board gave ample notice of this proposition and the policies and treatment regarding assessment of Oakar institutions in the adoption of the Assessment Regulation.

Under the Bank’s interpretation of negative AADA growth, a negative 121% AADA adjustment would be applied to the AADA from the three merged affiliated banks. This would eliminate that AADA three days after the merger was accomplished. Thus, the Bank would cease to be an Oakar institution with regard to the merged BIF Oakar banks in the period of acquisition.

The Committee believes that this would be an unreasonable application of the negative growth concept and rejects the Bank’s interpretation of negative growth.

The Committee also notes that the treatment sought by the Bank does not comply with the FDI Act. The bank seeks to effect a transfer of deposit insurance responsibility from the Savings Associations Insurance Fund to the Bank Insurance Fund. The statute pertaining to the determination of the AADA provides that it cannot be construed as authorizing transactions that result in the transfer of deposit insurance from one fund to the other.

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