#  Conditional Approval #406

### July 2000

# DECISION OF THE COMPTROLLER OF THE CURRENCY

**ON THE APPLICATION OF**

**OLD NATIONAL BANK, LAWRENCEVILLE, ILLINOIS**

# JUNE 22, 2000

## INTRODUCTION

On March 30, 2000, an application was filed with the Office of the
Comptroller of the Currency ("OCC") for approval to merge Permanent
Bank, Evansville, Indiana ("Permanent") with and into Old National Bank,
Lawrenceville, Illinois ("ONB") under 12 U.S.C. §§ 215c, and 1828(c)(2)
and consistent with section 1815(d)(3) (the Oakar Amendment). ONB has
its main office in Lawrenceville, Illinois, and branch offices located
in Illinois, Indiana, and Kentucky. Permanent has its main office in
Evansville, Indiana, and branch offices located solely in Indiana.

As of December 31, 1999, ONB had assets of approximately \$6.6 billion
and deposits of approximately \$5 billion. As of that same date,
Permanent had assets of approximately \$497 million and deposits of
approximately \$345 million. ONB is a wholly owned subsidiary of Old
National Bancorp, Evansville, Indiana ("Old National"). Permanent is a
wholly owned subsidiary of Permanent Bancorp, Evansville, Indiana ("FSB
Bancorp"). ONB is a member of the Bank Insurance Fund ("BIF").
Permanent, a federally chartered savings bank, is a member of the
Savings Association Insurance Fund ("SAIF").

First, Old National will establish a merger subsidiary, Merger
Corporation I to facilitate the elimination of Permanent's immediate
holding company, FSB Bancorp. Second, Permanent will merge into ONB
pursuant to 12 U.S.C. §§ 215(c), 1815(d)(3), & 1828(c). Finally, FSB
Bancorp will merge into Merger Corporation I ("Company Merger"). [^1]
These steps will occur concurrently.

## STATUTORY AND POLICY REVIEWS

**A. Oakar Amendment**

The Oakar Amendment, section 1815(d)(3), permits merger transactions
between BIF- and SAIF-member institutions provided that both BIF and
SAIF proportionally insure the deposits of the resulting institution.
*See* 12 U.S.C. § 1815(d)(3)(A) & (B). These transactions may be
approved by the regulator of the acquiring institution if they are in
accordance with certain capital requirements.[^2] *See* 12 U.S.C. §
1815(d)(3)(E)(iii). Since Bank is a member of BIF and FSB is a member of
SAIF, their merger must comply with the provisions of the Oakar
Amendment. The OCC has determined that Bank, after the merger
transaction with FSB, will meet all applicable capital requirements.
Accordingly, the merger transaction complies with the provisions of the
Oakar Amendment.

**A. The Bank Merger Act.**

The Bank Merger Act, 12 U.S.C. § 1828(c), requires the OCC's approval
for mergers between insured institutions where the resulting institution
will be a national bank. Under the Act, the OCC generally may not
approve a merger that would substantially lessen competition. In
addition, the Act also requires the OCC to take into consideration the
financial and managerial resources and future prospects of the existing
and proposed institutions, and the convenience and needs of the
community to be served. For reasons stated below, we find the merger
involved may be approved under section 1828(c).

**1. Competitive Analysis.**

The OCC reviewed the impact of the proposed transaction on competition
for the cluster of products and services offered by depository
institutions in the areas surrounding the branches ONB is acquiring.
There are two relevant geographic markets for this proposal, which are
discussed below. The OCC finds that the markets are delineated in such a
way as to accurately measure any adverse competitive effects from the
proposed transaction and the effects of the proposed transaction, as now
structured, will not result in a monopoly or be in furtherance of any
combination or conspiracy to monopolize the business of banking in any
part of the United States, and will not substantially lesson competition
in any part of the country, or tend to create a monopoly, and will not
be in restraint of trade. [^3] In making this determination, the OCC
carefully considered the report of the Department of Justice, which
similarly found the proposed transaction would not have a significant
adverse effect on competition. [^4]

**a. Jasper Banking Market**

This market includes Dubois County, Indiana; Carter, Harrison and Clay
Townships in Spencer County, Indiana; and Clark township in Perry
County, Indiana, and is the area where the Permanent's Jasper branch
derives the bulk of its deposits, and where competition between ONB and
Permanent's Jasper branch is direct and immediate. Within this market,
ONB competes with seven other financial institutions for approximately
\$1 billion in deposits. ONB is the largest depository institution with
approximately twenty-eight percent of the market's total deposits.
Permanent's branch is the smallest competitor in the market with
approximately four percent of the deposits. While the proposed
transaction would eliminate some direct competition in the relevant
geographic market, any adverse competitive effects would be mitigated by
the presence of six other banking alternatives, and including one of the
largest regional banks in the nation.

## b. Evansville Banking Market

This market includes Vanderburgh, Posey and Warrick Counties, Indiana,
Henderson County, Kentucky, plus portions of Gibson County, Indiana
(Johnson, Barton, Union townships and the southern half of Montgomery
township), and Spencer County, Indiana (Grass, Luce, Jackson and Ohio
townships). This is where Permanent's Vanderburg County and Gibson
County branches derive the bulk of Permanent's deposits, and where
competition between ONB and Permanent is direct and immediate. Within
this market, ONB competes with thirteen other commercial banks and four
thrifts for approximately \$4.5 billion in deposits. ONB is the largest
depository institution with approximately thirty-seven percent of the
market's total deposits. Permanent's branches rank fourth with
approximately seven percent of the market's deposits. Upon consummation
of the proposed transaction and excluding the deposits to be divested,
ONB would remain the largest depository institution with approximately
forty-three of the market's deposits. While the proposed transaction
would eliminate some direct competition in the relevant geographic
market, any adverse competitive effects would be mitigated by the
presence of a number of other banking alternatives, including three of
the largest regional banks in the nation. Additionally, population
growth in the Evansville metropolitan statistical area ("MSA"), mirrored
by growth in deposits at depository institutions makes the market
attractive for entry by other financial institutions. The recent opening
of a de novo bank in March 2000 further indicates the attractiveness of
the market. In addition, there are 13 credit unions operating in the
Evansville market. Collectively, credit unions account for roughly 10
percent of combined bank-S&L-credit union deposits. The largest of
these, Evansville Teachers\' Credit Union, offers a relatively complete
line of financial products, including business loans. Recent legislative
change may indicate and increased potential for credit unions to act as
competitors with banks and thrifts. On August 7, 1998, the President
signed into law the Credit Union Membership Access Act (\"CUMAA\")[^5]
The CUMAA expanded the field of membership requirements so that credit
unions could accommodate new members, and promoted the creation of
\"multiple common-bond\" credit unions. [^6] While quantitative data on
the long run effects are not yet available, legislative and regulatory
changes may result in an increased competitive presence from credit
unions. Based on an analysis of these competitive factors, the merger
application may be approved under section 1828(c). [^7]

**2. Financial and Managerial Resources.**

The financial and managerial resources of ONB and Permanent are
presently satisfactory. The future prospects of the institutions,
individually and combined, are favorable. We find the financial and
managerial resources factor is consistent with approval of the merger.

**3. Convenience and Needs.**

The merger will not have an adverse impact on the convenience and needs
of the communities to be served. ONB will continue to serve the same
areas that it now serves. There will not be a reduction of products or
services as a result of the merger. The resulting bank is expected to
meet the convenience and needs of the community to be served. While ONB
anticipates that some overlapping branches of the resulting institution
will be closed as a result of the transaction, current ONB and Permanent
customers, as customers of the resulting bank, will have a greater
number of branches at which to bank. ONB represents that Permanent's
customers will benefit from resulting bank's enhanced product
availability such as fiduciary, insurance products and broker-dealer
services, higher lending limits and more attractive deposit account
terms. Accordingly, we believe the impact of the merger on the
convenience and needs of the communities to be served is consistent with
approval of the application.

**B. The Community Reinvestment Act.**

The Community Reinvestment Act ("CRA") requires the OCC to take into
account the applicants' record of helping to meet the credit needs of
the community, including low-and moderate-income neighborhoods, when
evaluating certain applications. 12 U.S.C. § 2903;

12 C.F.R. § 25.29(a). The OCC considers the CRA performance evaluation
of each institution involved in the transaction. Under the CRA
regulations, the OCC evaluates performance of most large banks using the
lending investment, and service criteria. In these evaluations, the OCC
considers the institution's capacity and constraints, including the size
and financial condition of the bank and its subsidiaries.

A review of the record of this application and other information
available to the OCC as a result of the its regulatory responsibilities
revealed no evidence that the applicants' record of helping to meet the
credit needs of their communities, including low-and moderate-income
neighborhoods is less than satisfactory. We further note that ONB
received a "Satisfactory" CRA rating as of July 7, 1998. Permanent
received a "Satisfactory" CRA rating as of November 3, 1997. We received
no public comments on this application.

The transaction is not expected to have an adverse effect on the
resulting bank's CRA performance. The resulting bank will continue to
serve the same communities the ONB currently serves. ONB will continue
its current CRA programs and policies. We find that approval of the
proposed transaction is consistent with the Community Reinvestment Act.

**D. Branch Retention Pursuant to 12 U.S.C. § 36(c)**

Branch retention following a merger with a federal thrift institution is
covered by the McFadden Act. *See* 12 U.S.C. § 36(c). [^8] Section 36(c)
authorizes a national bank to establish new branches:

> at any point within the State in which said association is situated,
> if such
>
> establishment and operation are at the time authorized to State banks
> by the
>
> statute law of the State in question \...(12 U.S.C. § 36(c)(2)).

Indiana law imposes no geographical limits on branching by state banks.
[^9] Consequently, there are no geographical limits to be incorporated
by 12 U.S.C. § 36 and applied to national bank branching in Indiana.
Thus, following the merger transaction, ONB may retain as branches the
main office and branches of Permanent.

## E. Retention of Subsidiaries

Permanent currently has direct and indirect investments in subsidiaries
that are engaged in activities that are permissible for a national bank
as well as entities engaged in non-conforming activities for national
banks. As a result of the merger ONB will acquire as operating
subsidiaries Permavest, Inc. ("Permavest") and Perma Service Corp.
("Perma Serve").

Permavest is a service corporation organized under the State of Delaware
that provides custody, safekeeping and bond accounting services for
Permanent's municipal bond portfolio. Permavest owns 99.5% of Permavest
Partners, which provides custody, safekeeping and bond accounting
services for approximately two-thirds of Permanent's taxable investment
portfolio. FSB Bancorp owns the remaining .5% of Permavest Partners.
Following the Company Merger, Merger Corporation I will own the .5%
investment in Permavest Partners.

Perma Serve is a service corporation organized under the laws of Indiana
that provides to its customers brokerage services through a third party
(INVEST). Perma Serve also owns approximately 14.28% of Family Financial
Life Insurance Company (the "Company"). The Company underwrites credit
life and health and accident insurance, mortgage life insurance and
mortgage disability insurance, and fixed annuities. The Company
reinsures 70% of the insurance and 100% of the annuities underwritten.
ONB requests that it be allowed two years in which to conform to
applicable laws or divest Perma Serve's investment in the Company. The
OCC has permitted similar transition periods in other contexts and find
this one to be reasonable. [^10]

Perma Serve owns 100% of the capital stock of Permanent Insurance, Inc.
("Permanent Insurance"). Permanent Insurance offers as agent, casualty,
life, accident, health, mortgage disability and consumer credit
insurance. ONB represents that at consummation of the merger, Orange
County Bank, a subsidiary of Old National will acquire Permanent
Insurance.

ONB may retain after the merger, Permanent's subsidiaries that engage in
a variety of activities that are permissible for national bank
subsidiaries under 12 U.S.C. § 24(Seventh) and § § 12 C.F.R. 5.34, and
5.39.

**CONCLUSION**

The legal, policy and procedural requirements for the proposal are
satisfied. ONB is in satisfactory condition and the transaction is
consistent with the Community Reinvestment Act. We have analyzed this
proposal pursuant to 12 U.S.C. §§ 215c, the Bank Merger Act (12 U.S.C.
1828(c)), 12 C.F.R. 5.33, and 1815(d)(3) (the Oakar Amendment).
Accordingly, the application is approved subject to the following
conditions:

1.  ONB must conform to applicable laws or divest of the investment in
    Family Life Insurance Company within two years from the date of
    consummation of the merger.

2.  ONB must comply with the divestiture agreement between the
    Department of Justice, ONB and Permanent dated June 20, 2000.

These conditions of approval are conditions "imposed in writing by the
agency in connection with the granting of any application or other
request" within the meaning of 12 U.S.C. § 1818. As such the condition
is enforceable under 12 U.S.C. § 1818.

[**-signed-**]{.underline} [June 22, 2000]{.underline}

Alan Herlands Date

Acting Deputy Comptroller

Bank Organization and Structure

Application Control Number: 2000-CE-02-0013

[^1]: The Federal Reserve of St. Louis, acting on behalf of the Board of
    Governors of the Federal Reserve System, waived the notice
    requirement for the proposed transaction under section 4 of the Bank
    Holding Company Act.

[^2]: The Oakar Amendment also imposes certain limitations on interstate
    transactions*. See* 12 U.S.C. §§ 1815(d)(3)(F) & 1842(d). Those
    limitations, however, are not applicable here since the principal
    office and branches of FSB, the SAIF-insured target, are all located
    within the home state of the acquiring bank's parent holding
    company.

[^3]: In defining the geographic markets, the OCC considered the Federal
    Reserve Bank of St. Louis' market delineation, as well as evidence
    of the areas from which the involved banks derive the bulk of their
    deposits.

[^4]: In reaching this conclusion, the Department of Justice relied on
    commitments by ONB that it would divest itself of Permanent's
    Bellemeade Avenue and University Avenue branches. This was
    stipulated in the divestiture agreement between the Department of
    Justice, ONB and Permanent, dated June 20, 2000. ONB agreed that it
    would not consummate the merger until a contract with a
    competitively suitable purchaser as determined by the Department of
    Justice is signed by ONB and Permanent for the sale of the divested
    branches.

[^5]: 12 U.S.C. §§ 1751-1795.

[^6]: [Id.]{.underline} at 1759(b).

[^7]: The Federal Reserve Bank of St. Louis, acting on behalf of the
    Board of Governors of the Federal Reserve System, reported that the
    merger could have a substantially adverse effect on competition,
    although it qualified its report by noting that it had not examined
    all the economic factors that may be relevant to the competitive
    effects of the proposal.

[^8]: *See* OCC Corporate Decision No. 97-70, August 14, 1997.

[^9]: *See* Ind. Code Ann. § 28-2-18-20.

[^10]: Conditional Approval No. 288 (September 30, 1998) (approving a
    merger of two banks and the continued operation for a two-year
    transition of a nonconforming insurance agency subsidiary);
    Conditional Approval No. 259 (October 31, 1997) (approving a
    two-year transition for nonconforming subsidiary engaged in
    credit-related insurance and annuity underwriting and sales that was
    being acquired by a national bank in the context of a merger of two
    bank holding companies); Corporate Decision 97-14 (March 4, 1997)
    (approving a conversion of a state bank to a national bank and
    granting a transition period in which to divest insurance agency
    subsidiaries or conform the activities to national banking law). See
    also 12 C.F.R. § 5.33(e)(5), dealing with business combinations,
    which provides:

    > An applicant shall identify any nonconforming activities and
    > assets, including nonconforming subsidiaries, of other
    > institutions involved in the business combination, that will not
    > be disposed of or discontinued prior to consummation of the
    > transaction. The OCC generally requires a national bank to divest
    > or conform nonconforming assets, or discontinue nonconforming
    > activities, with a reasonable time following the business
    > combination.