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Virgin Islands Community Bank

FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: Virgin Islands Community Bank Christiansted, St. Croix, U. S. Virgin Islands

Application for Consent to Purchase Certain Assets and to Assume the Liability to Pay Deposits and for Consent to Establish Seven Branches

BASIS FOR CORPORATION APPROVAL

Pursuant to section 18(c) and other provisions of the Federal Deposit Insurance Act ("FDI Act"), Virgin Islands Community Bank, Christiansted, St. Croix, U.S. Virgin Islands ("VICB" or "the Bank"), an insured state nonmember bank with total resources of $71,115,000 and total deposits of $62,025,000 as of June 30, 2000, has filed an application for the Federal Deposit Insurance Corporation's ("Corporation") consent to purchase certain assets of and to assume the liability to pay deposits made in the U. S. Virgin Islands branch offices of The Chase Manhattan Bank, New York, New York ("Chase"), a state member bank with total resources of $320,476,000,000 and total deposits of $195,919,000,000 as of June 30, 2000, and for consent to establish the seven U. S. Virgin Islands branches as branches of VICB. Notice of the proposed transaction, in a form approved by the Corporation, has been published pursuant to the FDI Act. As part of the proposed transaction, VICB will also acquire from The Chase Manhattan Corporation, New York, New York, the corporate parent of Chase, the capital stock of its wholly-owned subsidiary, Chase Trade, Inc. ("Chase Trade"). Chase Trade, a corporation organized under the laws of the State of Delaware, provides tax advisory and compliance services to foreign sales corporations of U.S. mainland-based companies formed to take advantage of tax benefits afforded under section 801 (a) of the Deficit Reduction Act of 1984. Chase Trade, which will be operated as a subsidiary of VICB, conducts its operations from a head office in St. Thomas, U.S. Virgin Islands ("U.S.V.I."), and a satellite office in Barbados.

Competition

The relevant geographic market ("RGM") for this proposed transaction is considered to be the island of St. Croix, U.S.V.l. St. Croix is approximately 30 miles south of both St. Thomas and St. John, which are the closest populated islands within the U.S.V.I. to St. Croix. St. Croix is accessible from the other islands only by water or air.

There are currently six banks, including VICB, in the business of taking deposits in the RGM. Of the four banks that would remain as competitors of VICB after consummation of the proposed transaction, only one is headquartered in the U.S.V.I. Bank of St. Croix, Inc. markets its services to higher income individuals. The other three competing banks FirstBank of Puerto Rico, Banco Popular de Puerto Rico, and Scotiabank (or Bank of Nova Scotia) - are based outside of the U.S.V.I. Scotiabank, headquartered in Canada, is a noninsured bank that holds the largest market share on St. Croix in terms of both deposits and loans.

The pre-transaction Herfindahl-Hirschman Index ("HHI") level is 2,054 and the post-transaction HHI level is 2,770, representing an increase of 716. VICB's market share, as defined by deposits, would increase from 16.2 percent to 38.0 percent. On that basis alone, the conclusion might be drawn that the proposed transaction would result in a significant reduction in competition; however, a number of other factors serve to mitigate such concern.

The predominant lending activity conducted by Chase in the U.S.V.I. and by VICB is real estate lending. Competition for residential mortgages among banks and other financial concerns is strong in the RGM. In addition to the four banks competing with VICB in the RGM, Merrill Lynch Credit Corporation, which has an office in St. Croix, is a major competitor in real estate lending. There is also significant competition in the RGM for consumer loans.

Since Chase is not actively involved in making commercial loans in the RGM, the proposed transaction is not expected to significantly affect competition for commercial loans. Scotiabank and Banco Popular de Puerto Rico dominate commercial lending in the U.S.V.I.

The RGM is a small market with a total population of only 48,000. It is expected that the five competing banks remaining after the transaction will be sufficient to provide active competitive interplay. Moreover, it appears that a significant portion of the population lives in condominiums and travels frequently to the mainland U.S. and other areas that provide viable alternatives to institutions located in the RGM for consumer services. With the increased availability of electronic delivery systems, the importance of off-shore financial services alternatives is worthy of consideration.

Three of VICB's competitors within the RGM - Scotiabank and the two Puerto Rican banks - are multi-billion dollar institutions with financial resources that dwarf those of VICB. To the extent that customers of Chase prefer to deal with a very large institution and switch their business away from the resulting institution, the concentration measures cited above could overstate the likely competitive impact of the proposed transaction.

By letter dated February 14, 2000, the U.S. Department of Justice advised that, if certain commitments made by VICB in a Letter of Agreement dated February 11, 2000, were fulfilled, the proposed transaction will not have a significantly adverse effect on competition. The commitments contained in that letter address the suspension of noncompete agreements with VICB or Chase officers and the future use of VICB and Chase branch offices located in St. Croix that might be closed by VICB after the transaction.

After giving consideration to the factors cited above, the Board of Directors is of the opinion that the proposed transaction would not substantially lessen competition, tend to create a monopoly, or in any other manner restrain trade or otherwise have an adverse competitive impact that would require disapproval under the Bank Merger Act.

Financial and Managerial Resources; Future Prospects

VICB was established on December 30, 1994. The proposed transaction will result in a significant increase in the size and operations of VICB. The current Chase management team in the U.S. Virgin Islands will form the core of the resultant bank's management. While the Chase team and management of VICB have experience in the area of lending, their combined work force may lack the expertise in areas such as accounting, liquidity, and funds management that is needed to successfully operate an institution the expected size (approximately $500 million) of the resultant bank. To address this matter, the Corporation has included in its approval ORDER a condition that requires the Bank to appoint a full-time chief financial officer or fill a like position. Also, the Corporation considered certain accounting adjustments that were included in the application's pro forma financial statements to be unacceptable. Therefore, the Corporation has imposed a condition that requires the Bank to have an independent auditing firm verify the appropriateness of all purchase accounting adjustments resulting from the proposed transaction and to submit to the New York Regional Office a description of, and supporting documentation for, those adjustments.

Jeffrey J. Prosser, Chairman of the Board and sole owner of VICB has considerable involvement in the affairs of the Bank and he is expected to be extensively involved in the operations of the resultant bank also. To avoid any disputes regarding whether Mr. Prosser is an executive officer of the resultant bank, the Corporation has imposed a condition in the ORDER that Mr. Prosser will be deemed to be an executive officer for purposes of applicable banking laws and regulations. Also, to provide additional oversight of the Bank's operations, a condition requiring the addition of independent directors is being imposed.

Mr. Prosser intends to acquire a branch of Chase that currently operates in the British Virgin Islands. It is not certain how such acquisition will be structured. VICB will not be a party to that transaction. A parallel banking situation would arise from Mr. Prosser's ownership of a bank in the British Virgin Islands. Parallel banks create concentrations of banking resources that can be susceptible to common risks, with some of those resources not being subject to U.S. supervision. To address any potential supervisory concerns, the Corporation has imposed a condition that requires prior Corporation approval of transactions between VICB and any affiliated non-U.S. financial institutions should Mr. Prosser acquire such non-U.S. financial institutions.

The degree to which current Chase customers will continue to support the locally owned and operated VICB is unknown. The current Chase management team in the U.S. Virgin Islands, which, as mentioned above, will form the core of the resultant bank's management, does not have experience in operating an independent entity. Further, the extent to which the management officials of VICB and Chase will be able to successfully meld their abilities is uncertain. For these reasons, and others noted above, the Corporation believes the risk profile associated with the resultant bank will be higher than desired for the next few years. To mitigate the increased risk, the Corporation has included in the approval ORDER a condition requiring the resultant bank to maintain a Tier 1 Leverage capital ratio of seven percent for the three years following the consummation of the transaction. Also, a condition requiring the Bank to maintain an allowance for loan and lease losses established in accordance with the Interagency Policy on the Allowance for Loan and Lease Losses (ALLL) has been imposed.

The Corporation has determined that Chase Trade's activities are not subject to section 24 of the FDI Act. Chase Trade is performing these activities, which are primarily administrative in nature, in its capacity as agent for the U.S. company-shareholder. After Corporation review of the activities of Chase Trade and the applicant's representation of the actions of Chase Trade employees who serve as directors of foreign sales corporations and who vote shares of foreign sales corporations by proxy, the Corporation has determined that Chase Trade does not control its foreign sales corporation clients. To ensure that the Corporation's determinations with respect to Chase Trade remain valid, VICB has committed, in writing, that Chase Trade employees will act within specific parameters when attending board and shareholder meetings of its foreign sales corporation clients.

Based on the above analysis, the Corporation finds favorably with respect to the financial and managerial resources and future prospects of the resultant bank.

Convenience and Needs of the Community to be Served

VICB's Community Reinvestment Act performance is currently rated as Outstanding. Consummation of the proposed transaction would provide residents of St. Croix with the ability to complete transactions with the resultant bank while on both St. Thomas and St. John. Over the last twenty years, several major financial institutions headquartered outside of the U.S.V.I. have exited that market after damaging hurricanes. Considering that trend, local consumers of financial services could arguably be better served through the creation of stronger locally-based competitors. Therefore, acquisition of the Chase branches by VICB, which is committed to serving the U.S.V.I., can be viewed as a favorable development with respect to the convenience and needs of the community.

Based on the foregoing, the Board of Directors has concluded that approval of the application is warranted.


FEDERAL DEPOSIT INSURANCE CORPORATION

IN RE: Virgin Islands Community Bank Christiansted, St. Croix, U. S. Virgin Islands

Application for Consent to Purchase Certain Assets and to Assume the Liability to Pay Deposits and for Consent to Establish Seven Branches

ORDER

Pursuant to section 18(c) and other provisions of the Federal Deposit Insurance Act ("FDI Act"), Virgin Islands Community Bank, Christiansted, St. Croix, U.S. Virgin Islands ("VICB" or "the Bank"), an insured state nonmember bank with total resources of $71,115,000 and total deposits of $62,025,000 as of June 30, 2000, has filed an application for the Federal Deposit Insurance Corporation's ("Corporation") consent to purchase certain assets of and to assume the liability to pay deposits made in the U. S. Virgin Islands branch offices of The Chase Manhattan Bank, New York, New York ("Chase"), a state member bank with total resources of $320,476,000,000 and total deposits of $195,919,000,000 as of June 30, 2000, and for consent to establish the seven U. S. Virgin Islands branches as branches of VICB. Notice of the proposed transaction, in a form approved by the Corporation, has been published pursuant to the FDI Act. As part of the proposed transaction, VICB will also acquire from The Chase Manhattan Corporation, New York, New York, the corporate parent of Chase, the capital stock of its wholly-owned subsidiary, Chase Trade, Inc. ("Chase Trade"). Chase Trade, a corporation organized under the laws of the State of Delaware, provides tax advisory and compliance services to foreign sales corporations of U.S. mainland-based companies formed to take advantage of tax benefits afforded under section 801 (a) of the Deficit Reduction Act of 1984. Chase Trade, which will be operated as a subsidiary of VICB, conducts its operations from a head office in St. Thomas, U.S. Virgin Islands, and a satellite office in Barbados.

Upon consideration of all relevant material, and having requested reports on the competitive factors from the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, and the Attorney General of the United States, the Board of Directors has concluded that the application should be and hereby is approved subject to the following conditions:

1. That the Bank appoint a full-time bank officer to the position of chief financial officer or like position and that, within ten days of the officer's appointment, a notice of the appointment, including a description of the position's duties and responsibilities and details of the appointed individual's qualifications, will be provided to the New York Regional Director of the FDIC's Division of Supervision ("Regional Director");

2. That, upon Jeffrey J. Prosser's acquisition of Chase's banking operations in the British Virgin Islands, or of any other financial institution outside of the U.S. or the U.S. Virgin Islands, prior written approval by the Regional Director will be required for any transaction between the Bank and the affiliated financial institution. At the Regional Director's discretion, such approval may be for individual transactions, a series of transactions, or types of transactions. Transactions between the Bank and Chase Trade will not require the prior written approval of the Regional Director.

Such approval does not exempt the Bank from the applicable limitations of sections 22(g), 22(h), 23A, and 23B of the Federal Reserve Act, as made applicable to insured state nonmember banks by section 18(j) of the FDI Act or other applicable Federal or State restrictions or limitations;

3. That the Bank have a Tier 1 Leverage capital ratio of 7 percent upon consummation of the proposed transaction and that the Tier 1 Leverage capital ratio be maintained at no less than 7 percent for the three years following consummation of the proposed transaction;

4. That Jeffrey J. Prosser will continue to be deemed an "executive officer" of the Bank under applicable banking laws and regulations;

5. That the Bank will, within six months after consummation of the proposed transaction unless such time frame is extended by the Regional Director, ensure that no less than 30 percent of all directors will be independent of the Bank as well as any other entity, affiliate, or subsidiary related by ownership to the Bank;

6. That an independent auditing firm verify the appropriateness of all purchase accounting adjustments which result from the proposed transaction (including, without limitation, asset write-ups) and that, within 10 days of such verification, a description of those adjustments and the supporting documentation for those adjustments be provided to the Regional Director. If the independent auditing firm has not verified the appropriateness of all purchase accounting adjustments within 120 days of the consummation of the proposed transaction, the Bank shall promptly notify the Regional Director as to the reason(s) why the verification has not yet occurred;

7. That, upon the date of consummation of the proposed transaction and thereafter, the Bank maintain an allowance for loan and lease losses established in accordance with the Interagency Policy on the Allowance for Loan and Lease Losses (ALLL);

8. That the transaction shall not be consummated before the fifteenth calendar day following the date of this ORDER or no later than six months after the date of this ORDER unless such period is extended for good cause by the Corporation;

9. That all necessary and final approvals be received from other regulatory authorities; and

10. That, inasmuch as the consent granted herein is based on facts, circumstances, and commitments presented to the Corporation in connection with this application, the Bank shall notify the Corporation of any significant change in facts or circumstances and, 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 7th day of November, 2000.

BY ORDER OF THE BOARD OF DIRECTORS

Robert E. Feldman
Executive Secretary



Last Updated 03/24/2011 Legal@fdic.gov