Decisions on Bank Applications
FirstBank of Puerto Rico
FEDERAL DEPOSIT INSURANCE CORPORATION
RE: FirstBank of Puerto Rico
Santurce, Puerto Rico
Application for Consent to Purchase Certain Assets and to Assume Liability to Pay Deposits, to Establish Seven Branches, and to Participate in an Optional Conversion Transaction
ORDER AND BASIS FOR CORPORATION APPROVAL
Pursuant to Section 18(c) and (d) and other provisions of the Federal Deposit Insurance ( "FDI Act, FirstBank of Puerto Rico, Santurce, San Juan County, Puerto Rico (“FirstBank”), an insured state nonmember bank and member of the Savings Association Insurance Fund (“SAIF”) with total resources of $8,570,989,000 and total deposits of $4,750,732,000 as of June 30, 2002, has filed an application for the Federal Deposit Insurance Corporation’s ("FDIC" or “Corporation”) consent to acquire assets of and assume the liability to pay deposits made in seven branches of JP Morgan Chase Bank, New York, New York (“Chase”), a state member bank and member of the Bank Insurance Fund (“BIF”) with total resources of $581,407,000,000 and total deposits of $287,766,000,000 as of June 30, 2002, and to establish these seven branches of Chase as branches of the resultant bank. The branches are located in the U.S. Virgin Islands (“USVI”)
FirstBank will also acquire certain assets and assume certain liabilities of Chase Trade, Inc. (“Chase Trade”), a subsidiary of Chase. Chase Trade provides tax advisory and compliance services to foreign sales corporations of U.S. mainland-based companies. FirstBank will form a new subsidiary corporation organized under Delaware law and transfer those assets and liabilities to the newly formed subsidiary corporation. FirstBank will also buy all the outstanding shares of Chase Agency Services, Inc. ("CAS" from another Chase affiliate, Chase Insurance Agency, Inc. CAS is an insurance broker engaged in the business of selling insurance products in the USVI, and is incorporated under the law of Delaware. The newly formed subsidiary corporation and CAS will be operated as subsidiaries of FirstBank and will be located in Barbados and the USVI, respectively. Since the applicant represents that each of these subsidiaries will be acting in an agent capacity only, and that each subsidiary either is, or will be, incorporated under the laws of the State of Delaware, FDIC’s specific approval under part 347 of the FDIC’s rules and regulations and FDIC’s consent under part 362 of the FDIC’s rules and regulations are not required.
Notice of the proposed transaction, in a form approved by the Corporation, has been published pursuant to the FDI Act. There will be no insurance fund conversion concurrent with the proposed transaction, and assessments will continue to be paid to the BIF pursuant to Section 5(d) (3) of the FDI Act.
Competitive Factors
The relevant geographic markets (“RGM”) for this proposed transaction are considered to be the islands of St. Croix, USVI and St. Thomas, USVI, respectively. St. Croix is approximately 30 miles south of both St. Thomas and St. John, which are the closest populated islands within the USVI to St. Croix. St. Croix, St. Thomas and St. John are accessible to each other only by water or air. Since FirstBank does not currently have a presence on St. John, the effect of the proposed merger on that location would simply be the replacement of one competitor with a new one. Thus, there would be no change in the number of competing institutions on St. John. However, FirstBank does currently have offices on both St. Thomas and St. Croix.
In terms of market shares within the St. Thomas RGM, as defined by deposits, FirstBank currently has three branches, and a 10.85 percent share, and Chase has four branches, and a 25.13 percent share. Subsequent to the transaction, the resultant bank will have a 35.98 percent share of the St. Thomas market. Post transaction, FirstBank’s current St. Thomas Market Square Branch will be consolidated into Chase’s Waterfront Branch. The pre transaction St. Thomas Herfandahl Hirschmann Index (“HHI”)1 is 4,469 and the post-transaction is 5,014, a change of 545 points.
In terms of market share within the St. Croix RGM, as defined by deposits, FirstBank currently has one branch, with an 8.89 percent share, and Chase has two branches, and a 26.77 percent share. Subsequent to the transaction, the resultant bank will have a 35.66 percent share in the St. Croix market. Post transaction, FirstBank’s St. Croix King Street Branch will be consolidated into Chase’s existing King Christian Branch. The pre-transaction St. Croix HHI is 2,528 and the post-transaction HHI is 3,004, a change of 476 points. The USVI has suffered from an exodus of banking companies in recent years due to lack of population growth, an economy heavily tied to tourism, and volatile weather patterns. Therefore, the competitive environment, in terms of deposit share, was already heavily concentrated before this transaction.
After the acquisition, FirstBank will continue to face significant competition from a variety of sources. In addition to the resultant bank, there will be five unaffiliated banking organizations and five credit unions operating in the USVI markets after the transaction. Key large bank competitors include Banco Popular in Puerto Rico and the non FDIC-insured Bank of Nova Scotia. The uninsured deposits of Bank of Nova Scotia are not included in the HHI calculations, although the bank has an approximate 15 percent share of the market for deposits and a 35 percent share of outstanding loans in the USVI. Banco Popular has also been a significant competitor in the USVI, operating nine branches and controlling the largest amount of USVI deposits overall. Banco Popular has the largest share of deposits in St. Thomas and its share is virtually equal to FirstBank’s post-transaction share. Other entities, such as credit card lenders, finance companies, and the like, provide competition and offer various specialized financial services.
On July 16, 2002, the U.S. Department of Justice ("DOJ”) concluded that the proposed transaction would not have a significant adverse effect on competition. The Federal Reserve Bank of New York advised that the proposed transaction could have a significant adverse effect on competition in the relevant banking markets, but qualified that opinion to the extent that its analysis did not consider all of the economic factors that may be relevant to the competitive effects of the proposal. The other federal regulatory authorities offered no comments. The U.S. Virgin Islands Banking Board approved the transaction on August 8, 2002.
After giving consideration to the factors cited above, the FDIC Board of Directors has determined that the proposed merger would not substantially lessen competition, tend to create a monopoly, or in any manner restrain trade or otherwise have an adverse competitive impact that would require disapproval under the Bank Merger Act.
Financial and Managerial Resources
FirstBank is financially sound with satisfactory capital, asset quality, earnings, management, liquidity and sensitivity to market risk.
Future Prospects
The proposed transaction will not significantly affect FirstBank’s capital. The acquisition of Chase’s USVI operation will increase FirstBank’s assets by 8.4 percent and its retail branch network from 50 to 57 branches. FirstBank has experience in absorbing branch networks, having previously successfully purchased four branches, including one in the USVI, from another major bank. Future prospects for the resultant institution after the acquisition are favorable.
Convenience and Needs of the Community
A review of available information, including the Community Reinvestment Act (“CRA”) performance of the proponent, discloses no inconsistencies with the purposes of the CRA. The FDIC received one protest from a non-profit Community Development Financial Institution that has been favorably resolved. FirstBank has been rated “Satisfactory” for the last four CRA evaluations dating back to 1994, while Chase has been rated “Outstanding” by the Federal Reserve Bank of New York dating back to 1993. The resultant institution is expected to continue to meet the credit needs of its entire community, consistent with the safe and sound operation of the institution.
Patriot Act
The USA Patriot Act was signed into law on October 26, 2001. Title III of the law places responsibility on the banking agencies to monitor institutions under their supervision with regard to compliance with anti-money laundering (“AML”) laws and regulations. Section 327 of the law amends Section 18(c) of the FDI Act, adding a new factor for consideration in deciding covered merger transactions. The factor reads, “In every case, the responsible agency shall take into consideration the effectiveness of any insured depository institution involved in the proposed merger transaction in combating money laundering activities, including overseas branches.”
A review of the Bank Secrecy Act (“BSA”) and AML efforts of both FirstBank and Chase disclosed no violations of any applicable statute and satisfactory operating environments. Compliance with BSA/AML regulations, as it relates to Chase’s Virgin Islands operation, will become a function of FirstBank’s compliance program. FirstBank has the operating capacity and ability to properly monitor BSA/AML compliance for the resultant bank.
Based on the foregoing, the FDIC Board of Directors has concluded that approval of the application is warranted and is hereby approved subject to the following conditions:
1. The transaction shall not be consummated before the sixteenth calendar day following the date of this Order or later than six months after the date of this Order, unless such period is extended for good cause by the Corporation.
2. That all necessary and final approvals are received from other regulatory authorities.
3. That until the proposed transaction becomes effective, the Corporation shall have the right to alter, suspend or withdraw its approval should any interim development be deemed to warrant such action
Dated at Washington, D.C., this 27 day of September, 2002.
BY ORDER OF THE BOARD OF DIRECTORS
Valerie J. Best
Assistant Executive Secretary
FEDERAL DEPOSIT INSURANCE CORPORATION
1 The HHI for a given market is calculated by squaring each individual competitor’s percentage share of total deposits within the market and then summing the squared market share products. The HHI for the market is the sum of the HHI’s for all competitors in the geographic market. For example, the HHI for a market with a single competitor would be 1002 or 10,000; for a market with five competitors with equal market shares, the HHI would be 2,000 calculated as 202+202+202+202+202.