Decisions on Bank Applications
FirstBank of Puerto Rico
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: FirstBank of Puerto Rico Santurce, Puerto Rico
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Continue to Indirectly Engage in an Activity That May Not Be Permissible for 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 FirstBank of Puerto Rico, Santurce, Puerto Rico (the "Bank"). The Bank requests the FDIC's consent for its wholly-owned subsidiary, First Lease and Rental Corporation ("First Lease"), to continue to engage in the activity of temporary or short-term vehicle rentals (the "activity").
The activity may not be a permissible activity for a national bank or a subsidiary of a national bank. Although the National Banking Act allows lease financing to the extent that it is the functional equivalent of an extension of credit, First Lease's rental activity does not appear to meet this requirement. 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. Pursuant to section 14(n)(6) of the Banking Act of the Commonwealth of Puerto Rico and the Commissioner of Financial Institutions' Interpretative Letter No. 89-55-2, a subsidiary of a bank is authorized to invest in incidental activities related to leasing, including short-term vehicle rentals, up to 5 percent of subsidiary assets. The Commissioner of Financial Institutions granted the Bank until October 31, 1996, to achieve this 5 percent limitation. Management of the Bank has assured FDIC staff that this limitation will be adhered to by the date specified.
Vehicle rental activities carry risks specific to the nature of this business. Due to these risks, vehicle rental 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 application, the Board of Directors of the FDIC ("Board") has determined that the continuation of the activity does not present a significant risk to the deposit insurance fund provided that certain conditions are imposed.
First Lease shall operate independently of the Bank, maintain separate recordkeeping, and maintain a separate board of directors and operating management. Recognizing the value contributed by outside directors, a requirement that at least one outside director be retained on the board of the subsidiary will be imposed. The Board believes that requiring that First Lease operate as a separate entity best serves to delineate banking activities from vehicle rental activities and that such a condition will best protect both the Bank and the deposit insurance fund from unnecessary risk. Adequate liability insurance is also necessary due to potential liability resulting from vehicle rental activities, and it shall be the responsibility of the board of directors of First Lease to ensure the adequacy of liability insurance maintained.
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 a bank and its subsidiaries are not included in the definition of "affiliate" under Sections 23A and 23B, limitations on the transactions between the Bank and First Lease are desirable in order to prevent objectionable practices addressed in these regulations. Therefore, as a condition of this approval, Sections 23A and 23B will be made applicable to transactions between the Bank and First Lease to the same extent as though First Lease were an affiliate for purposes of Sections 23A and 23B, with the exception that extensions of credit to fund the subsidiary's leasing operations will not be included in "covered transactions."
This exception to "covered transactions" is allowed because management indicated that a portion of the projected growth in lease financing is anticipated to be funded with extensions of credit from the bank. Under section 23A, however, all covered transactions contain collateral requirements and aggregate limitations compared to the Bank's Tier 1 capital. Imposition of section 23A, in whole, would unnecessarily restrict the leasing operations, an otherwise permissible activity of the Bank and First Lease.
Due to the potential for vehicle rental or sale transactions with insiders of the Bank, a requirement that preferential transactions with insiders are prohibited appears to be prudent. Management indicated that such a provision currently exists within the Bank's Code of Ethics Policy, which governs both Bank and subsidiary operations.
To avoid undue concentrations in investment in rental vehicles, limitations are placed on the maximum allowable investment, net of depreciation, in rental vehicles to the lesser of 5 percent of total assets of First Lease or 10 percent of the Bank's Tier 1 capital, on a Bank only basis before inclusion of the Bank's investment in the subsidiary, by October 31, 1996, and thereafter.
The Bank meets the definition of "well capitalized" within the meaning of Part 325 of the FDIC's Rules and Regulations, and is in compliance with applicable capital standards. The Bank's equity investment in First Lease is only 1.7 percent of the Bank's Tier 1 capital, and the Bank would continue to be "well capitalized" even in the event its entire interest in the subsidiary were deducted from its capital account. In connection with this application, the Board has also taken into consideration the favorable financial and managerial resources and future earnings prospects of the Bank.
Having found that the activity in question involves the continuation of an activity for which the level of related investment 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 Commonwealth authority authorizes the activity; that the activity is closely related to the leasing and automobile financing operations of the Bank; and that the Bank is in compliance with applicable capital standards--the Board concludes that continuation of this activity does not pose a significant risk to the deposit insurance fund, provided certain restrictions addressing the risks associated with vehicle rental activity are imposed. The Board shall retain the right to alter, suspend or withdraw its approval if circumstances change significantly.
Finally, the Board notes that the foregoing approval is unique to this application, that it was significantly influenced by the Bank's involvement in this activity before the effective date of section 24(d) of the FDI Act, and that its view of de novo acquisition of such interest might well be different.
THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: FirstBank of Puerto Rico Santurce, Puerto Rico
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Continue to Indirectly Engage in an Activity That May Not Be Permissible for 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. § 1831a, and Part 362 of the FDIC Rules and Regulations, 12 C.F.R. § 362, relating to an application by FirstBank of Puerto Rico, Santurce, Puerto Rico ("Bank"), for consent to continue to indirectly engage as principal through its wholly-owned subsidiary, First Lease and Rental Corporation ("First Lease"), in the activity of vehicle rentals, an activity that may not be permissible for the subsidiary of a national bank, and 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 for consent to continue to engage as principal through First Lease in the activity of vehicle rentals be and is hereby approved, subject to the following conditions:
1. That the Bank shall take the necessary actions to establish, and maintain the operations of First Lease as a separate corporate subsidiary which:
a) is adequately capitalized,
b) is physically separate and distinct in its operations from the operations of the Bank,
c) maintains separate accounting and other corporate records,
d) observes separate formalities such as separate board of directors' meetings,
e) maintains separate employees who are compensated by First Lease,
f) conducts business pursuant to separate policies and procedures designed to inform customers and prospective customers of First Lease that it is a separate organization from the Bank, and
(g) maintains at least one outside director on the board of directors.
2. That transactions between the Bank and First Lease shall be made in accordance with the restrictions of sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. § 371c and § 371c-1, to the same extent as though First Lease were an affiliate as defined therein, except that extensions of credit from the Bank to First Lease to fund First Lease's leasing operations will not be considered to be covered transactions;
3. That transactions involving First Lease and insiders of the Bank be on the same terms and basis as transactions with non-insiders;
4. That First Lease's investment, net of depreciation, in rental vehicles shall be limited to the lesser of 5 percent of subsidiary assets or 10 percent of Tier 1 capital, on a Bank only basis before inclusion of the Bank's investment in First Lease, by October 31, 1996, and thereafter;
5. That the Bank shall continue to meet all applicable capital standards; and
6. That the consent granted herein is based on the facts and circumstances presented or otherwise known to the FDIC in connection with this request. 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 4th day of June, 1996.
BY ORDER OF THE BOARD OF DIRECTORS
Robert E. Feldman
Deputy Executive Secretary