Opinion ID: 580887
Heading Depth: 2
Heading Rank: 1

Heading: the acquisitions

Text: 2 In August 1984, Security, a state-chartered federally insured thrift institution, merged with New North Mississippi Federal Savings and Loan Association (New North), a failing thrift under the conservatorship of the Federal Home Loan Bank Board (FHLBB). 2 Prior to undertaking this merger, Security and the Federal Savings and Loan Insurance Corporation (FSLIC) entered into an assistance agreement (New North Assistance Agreement), which set forth the terms and conditions of the merger, including the nature and extent of FSLIC's assistance to Security. Security agreed to issue a $7 million income capital certificate (ICC), and FSLIC agreed to purchase the ICC with a $7 million promissory note payable in 1991. An ICC is a security, representing an obligation to pay to FSLIC a principal sum plus a return on principal, that was created by FHLBB to provide a new method of FSLIC financial assistance so that the issuing association could treat the assistance as equity for regulatory net worth and reserve requirements, as well as for financial reporting in accordance with GAAP [Generally Accepted Accounting Principles]. 3 Section 3(a)(4) of the New North Assistance Agreement states that the ICC would be treated as a component of Security's regulatory net worth. 4 3 In further facilitation of this merger, FSLIC also agreed to give Security a $3.5 million cash contribution, which, according to section 3(a)(4) of the New North Assistance Agreement, was to be treated as a credit to regulatory capital under the heading FSLIC Capital Contribution. The cash contribution created an asset called RAP goodwill. 5 4 In addition, when Security acquired New North, GAAP purchase accounting standards and FSLIC's regulations permitted Security to treat the portion of the price in excess of value as an amortizable intangible asset, called supervisory goodwill, which was used as an element of regulatory capital. By this accounting device, New North's liabilities were turned into intangible assets, thus making it attractive for Security to acquire New North. Although there is no mention of supervisory goodwill in the New North Assistance Agreement, regulatory documents for the merger mention the treatment of intangible assets and approve the use of purchase accounting standards, thereby confirming that the parties anticipated creation of supervisory goodwill. The New North Assistance Agreement provided that it would terminate after three years. 6 5 In an unrelated transaction occurring in October 1985, Security acquired Security Trust Federal Savings and Loan Association (Security Trust), through Security's wholly-owned subsidiary, Bailey Mortgage Company (Bailey). This acquisition was also pursuant to an assistance agreement (Security Trust Assistance Agreement) with FSLIC, under which FSLIC agreed to purchase an ICC from Security for $2 million. Like the New North Assistance Agreement, the Security Trust Assistance Agreement specified that the ICC could be treated as capital. The Security Trust Assistance Agreement stated that it would terminate after five years. 7