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April 23, 2001 – The approval process facing Jeffrey Prosser as he seeks to absorb seven Chase Bank branches in the U. S. Virgin Islands contains more potential obstacles than previously realized.
— If the merger of the Chase branches and Prosser's Virgin Islands Community Bank is not consummated by May 7, as seems likely, the Federal Deposit Insurance Corporation must reapprove the deal.
— The existing FDIC approval document, while favorable to the VICB in some respects, contains many cautions and conditions.
— His Virgin Islands Community Bank has not received a $100 million letter of credit from the New York Federal Home Loan Bank that was a condition insisted upon by the Virgin Islands Banking Board.
— Prosser's proposed personal acquisition of an eighth Chase branch, in the British Virgin Islands, is subject to a complicated bi-national approval process.
These main points emerge from a study of the FDIC's seven-page document approving the sale (click here for FDIC approval document), the Virgin Islands Banking Board document approving the sale, and information supplied by banking industry sources not connected with the proposed sale.
The Expiring FDIC Approval
The FDIC approval, dated Nov. 7, 2000, called for VICB to take over the Chase branches by May 7 of this year. VICB recently reported it did not believe the merger could be accomplished until July.
This means the FDIC will, at least nominally, look at the situation again as it considers whether to extend its earlier approval. Any new information received by the FDIC during the past year conceivably could cause the federal agency to decide against extending the earlier approval.
Cautions and Conditions
The seven-page FDIC decision document of Nov. 7, 2000, not seen widely here until the Source obtained a copy, is a public document that, in effect, nods approvingly at some of the expected results of the merger. At the same time, however, the federal agency peppered its approval with cautions and conditions.
— In studying the issue of competition, the FDIC looked only at the island of St. Croix, site of the VICB, despite the fact only two of the seven Chase branches are there.
— The agency concluded the proposed sale "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."
— Noting that VICB's performance under the Community Reinvestment Act is "outstanding," the FDIC decided acquisition of the Chase branches "can be viewed as a favorable development with respect to the convenience and needs of the community."
— But the FDIC clearly saw some risks involved with Prosser's venture. "To mitigate the increased risk," the federal agency mandated that the post-merger VICB maintain for at least three years a "Tier 1 Leverage capital ratio" of at least 7 percent. The lower this ratio, the more of its depositers' money a bank can use for investment and other purposes. Banking sources said a 7 percent ratio is not unusual. Many banks voluntarily maintain a ratio of 8 percent or 9 percent, they added.
— The federal regulators questioned whether the combined work force of VICB and Chase has the expertise to operate the larger bank. The appointment of a chief financial officer was therefore made a condition of the FDIC's approval.
— Prosser himself will continue to be considered by the FDIC an "executive officer" of the bank for purposes of banking laws and regulations.
— Thirty percent of VICB's board of directors must be outside, i.e. independent of the bank and any other entity related to the bank.
— The FDIC found "unacceptable" certain accounting adjustments in VICB's application for approval of the merger. The regulators therefore imposed a condition that an independent auditing firm verify the adjustments.
These are not casual and routine observations by a federal regulatory agency, according to banking industry sources.
The Letter of Credit
When the local regulatory agency, the Virgin Islands Banking Board, approved Prosser's plans July 27, 2000, it attached a condition that VICB obtain a letter of credit in excess of $100 million from the Federal Home Loan Bank of New York. (click here for V.I. Banking Board approval.)
Banking sources told the Source that as of last week the letter of credit has not been transmitted to VICB. There were discussions, however, between VICB and the New York bank, these sources added.
The Virgin Islands Banking Board confirmed last Friday the condition still obtains.
A letter of credit is a written promise to lend someone a fixed sum of money. In banking circles, it is considered a vote of confidence.
There are 12 Federal Home Loan Banks; the one in New York is responsible for the Virgin Islands. Together, they are similar to the National Rural Utilities Cooperative Finance Corporation (CFC).
Both are federally chartered, non-profit wholesale banks whose function is to provide low-cost loans to its members. The members are rural utilities in the case of CFC and local banks in the case of the Federal Home Loan Bank (HLB).
Prosser's phone company, Vitelco, is a member of CFC, which has lent Prosser almost $600 million. His bank is a member of HLB, which has not yet answered his request for the $100 million letter of credit.
The Virgin Islands Banking Board also imposed three other conditions on the merger:
— VICB will be ineligible for Industrial Development Commission tax benefits after its current eligiblity expires in 2004.
— Until then, VICB must pay the local government an annual banking fee of $400,000.
— VICB must reorganize its board of directors to include an outside director from each of the three islands. This seems to mesh with the FDIC mandate as regards board membership.
The Proposed BVI Operation
The FDIC clearly does not view with enthusiasm the prospect of Prosser's personal acquisition of the Chase branch in Tortola. It expressed this notion in careful, governmental prose:
"….Mr. Prosser intends to acquire a branch of Chase that currently operates in the BVI. It is not certain how such [an] acquisition will be structured. VICB will not be a party to that transaction….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…."
With that in mind, the FDIC imposed yet another condition, requiring prior FDIC approval of "transactions between VICB and any affiliated non-U.S. financial institutions should Mr. Prosser acquire such non-U.S. financial institutions."
So, Prosser's proposed move into retail banking in the BVI will be subject to both U.S. government clearance (through the FDIC), as well as the approval of the BVI government.
While the BVI is home to many off-shore banks (which are not allowed to have local clients) it has only a handful of retail banks, with Chase being one of them. They are under the supervision of the locally elected government, rather than the BVI governor, a career British Foreign Service officer.
There are no indications from the BVI that the proposed Prosser acquisition of that Chase branch is moving swiftly. It will happen only if two quite different governments give their assent in such a way that one decision does not conflict with another.
Bernetia Akin and Frank Jordan contributed to this story.

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