Decisions on Bank Applications
First Alabama Bank
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: First Alabama Bank Birmingham, Alabama
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal, Through a Wholly-Owned Subsidiary, in an Activity That May Not Be Permissible for a Subsidiary of a National Bank
ORDER
The Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") has fully considered all available facts and information relevant to section 24 of the Federal Deposit Insurance Act, 12 U.S.C. section 1831a, and Part 362 of the FDIC's Rules and Regulations, relating to an application by First Alabama Bank, Birmingham, Alabama (the "Bank"), to indirectly engage as principal through its wholly-owned subsidiary, Regions Investment Company, Inc. (the "Company"), in the activity of trading equity securities for its own account, an activity that may not be permissible for the subsidiary of a national bank. The Bank has requested approval of a proposal under which the aggregate market value of the Company's portfolio of equity securities for trading will be limited to not more than $12 million, and the Company's trading activities will not involve options, futures, short sales, equity securities of foreign companies, derivative products, or margin trading. The Board has concluded that the application should be approved subject to certain conditions.
Accordingly, it is hereby ORDERED, for the reasons set forth in the attached Statement, that the application submitted by the Bank is hereby approved subject to the following conditions:
1. That, should the Company no longer be required to operate as a bona fide subsidiary pursuant to section 337.4 of the FDIC's Rules and Regulations, 12 C.F.R. section 337.4, the Company shall operate in a manner so as to ensure a separate corporate existence as a majority-owned subsidiary which: (a) is adequately- capitalized, and (b) maintains separate accounting and other corporate records.
2. That the Bank's investment, as defined in section 362.2(q) of the FDIC's Rules and Regulations, shall be deducted from the Bank's capital for regulatory reporting purposes and that the Bank shall remain "well-capitalized," as defined in section 325.103 of the FDIC's Rules and Regulations, after such deduction.
3. That transactions between the Bank and the Company shall be made in accordance with the restrictions of sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. section 371c and section 371c-l, to the same extent as though the Company were an affiliate as defined therein.
4. That transactions between the Company and Bank insiders, or related interests of Bank insiders, shall be prohibited.
5. That the consent granted herein is based on the facts and circumstances presented or otherwise known to the FDIC in connection with this application. The Bank shall notify the FDIC of any significant change in fact or circumstances. If the facts or circumstances change significantly, the FDIC shall have the right to alter, suspend, or withdraw its approval.
Dated at Washington, D.C., this 26th day of November, 1996.
BY ORDER OF THE BOARD OF DIRECTORS
Jerry L. Langley
Executive Secretary
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: First Alabama Bank Birmingham, Alabama
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Indirectly Engage as Principal, Through a Wholly-Owned Subsidiary, in an Activity That May Not Be Permissible for a Subsidiary of a National Bank
STATEMENT
Pursuant to the provisions of section 24 of the Federal Deposit Insurance Act (the "FDI Act"), an application has been filed with the Federal Deposit Insurance Corporation ("FDIC") by First Alabama Bank, Birmingham, Alabama (the "Bank"). The Bank requests the FDIC's consent for its wholly-owned subsidiary, Regions Investment Company, Inc. (the "Company"), to engage in the activity of stock trading for its own account (the "Activity"). The Bank has requested approval of a proposal under which the aggregate market value of the Company's portfolio of equity securities for trading will be limited to not more than $12 million, and the Company's trading activities will not involve options, futures, short sales, equity securities of foreign companies, derivative products, or margin trading. The Bank's proposal involves trading activity for the purpose of profiting from movements in equity share prices, and does not extend to dealing activity.
The Activity may not be a permissible activity for a national bank or a subsidiary of a national bank. National banks may invest in equity securities only in limited instances which do not appear to include the proposed Activity. Furthermore, subsidiaries of state-chartered, FDIC- insured banks may not engage as principal in an activity prohibited to subsidiaries of nationally- chartered banks unless they obtain consent from the FDIC. Consent may not be granted unless the bank is in compliance with applicable capital standards and the FDIC determines that the activity poses no significant risk to the deposit insurance fund. The Superintendent of the Alabama State Banking Department has opined that the Company's proposal to buy and sell equity securities for its own account is authorized by State law.
Trading in equity securities carries risks specific to the nature of this business, including risk of price volatility and substantial loss of principal. Due to these risks, equity securities trading activities appear suitable to a financial institution only on a very limited scale and under restrictive conditions designed to control the various risks posed to the financial institution and the deposit insurance fund. In addition, certain corporate structural requirements to protect the bank from liability are warranted.
Having reviewed the Bank's proposal -- including the provisions limiting the market value of the Company's equity trading portfolio to $12 million (1.5 percent of the Bank's Tier 1 capital after deduction for 100 percent of the equity investment in the Company) and provisions prohibiting trading in options, futures, short sales, equity securities of foreign companies, derivative products, and margin trading -- the FDIC has determined that the proposed Activity does not present a significant risk to the deposit insurance fund, provided that certain conditions are imposed. These conditions are in several respects similar to requirements already imposed on the Company under section 337.4 of the FDIC's Rules and Regulations, because the Company engages in underwriting, sale, and distribution of securities. The conditions are imposed here to ensure they will be observed if the Company ceases activities subject to section 337.4.
The Company presently operates as a bona fide subsidiary pursuant to the requirement established by section 337.4. If brokerage and underwriting activities were transferred to another entity and the Company was involved only in equity securities trading for its own account, the bona fide subsidiary requirement would no longer apply. In such a situation, the FDIC would want the Company to continue to operate separately from the Bank, although not necessarily to the extent required of a bona fide subsidiary. Consequently, this approval is being conditioned on the Company, should it no longer be required to operate as a bona fide subsidiary pursuant to section 337.4, operating as a separate, adequately-capitalized entity and maintaining separate accounting and corporate records from those of the Bank. The FDIC believes that requiring the Company to operate as a separate entity best serves to delineate banking activities from equity securities trading activities and that such a condition will best protect both the Bank and the deposit insurance fund from unnecessary risk.
Equity investments contain a great deal of variability of possible returns. Due to this risk and to encourage sufficient capital to be retained at the Bank level to support traditional banking operations, a condition of this approval is that the Bank remain "well-capitalized" pursuant to section 325.103 of the FDIC's Rules and Regulations. As such, on a "bank only" basis, the Bank must have not less than a Tier 1 leverage capital ratio of 5.0 percent, Tier 1 risk-based capital ratio of 6.0 percent, and a total risk-based capital ratio of 10.0 percent. Calculation of "bank only" capital ratios will exclude the Bank's equity investment in the Company as well as any assets of the Company from the Bank's capital and assets.
Sections 23A and 23B of the Federal Reserve Act ("sections 23A and 23B") provide limitations to prevent objectionable practices between a bank and its affiliates. While extensions of credit from the Bank to the Company are already subject to section 23A by virtue of the securities underwriting and brokerage operations conducted pursuant to section 337.4, it is desirable to make all transactions between the Bank and the Company on terms which will safeguard the Bank's interests. Therefore, as a condition of this approval, sections 23A and 23B will be made applicable to transactions between the Bank and the Company to the same extent as though the Company were an affiliate for purposes of sections 23A and 23B.
Management indicated that it is currently their policy that no director, executive officer, or principal shareholder of the Bank, or any related interest of such a person, have any involvement in Company transactions. Due to the potential for abuse with regard to transactions with Bank insiders, a prohibition on any transaction involving an insider, or a related interest of an insider, appears to be prudent.
In connection with this application, the FDIC has also taken into consideration the favorable financial and managerial resources and future earnings prospects of the Bank and the Company.
Having found that the level of the Bank's investment in the Company compared to the Bank's capital is now, and is expected in the future to remain, a nominal portion of the Bank's capital; that the Bank's financial condition and management are adequate; that the Company has engaged individuals with a high level of expertise with regard to securities trading activity; that the State authority does not object to the proposed Activity; and that the Bank is in compliance with applicable capital standards, the Board concludes that the proposed Activity does not pose a significant risk to the deposit insurance fund provided certain restrictions addressing the risks of the proposed Activity are imposed. Finally, the Board shall retain the right to alter, suspend, or withdraw its approval if circumstances change significantly.
THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION