# O

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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Central District Office

440 S. LaSalle St., Suite 2700

Chicago, IL 60605

> Corporate Decision #2002-06
>
> DECISION OF THE COMPTROLLER OF THE CURRENCY
>
> TO APPROVE THE APPLICATION OF CHARTER ONE BANK, F.S.B., CLEVELAND,
> OHIO, TO CONVERT TO A NATIONAL BANK
>
> **March 13, 2002**

**I. Introduction**

On January 7, 2002, Charter One Bank, F.S.B., Cleveland, Ohio, a Federal
savings bank (\"Bank\"), filed an application with the Office of the
Comptroller of the Currency (\"OCC\") to convert to a national bank
charter.[^1] The Bank is a Savings Association Insurance Fund member of
the Federal Deposit Insurance Corporation and has Bank Insurance
Fund-insured deposits. The Bank\'s federal deposit insurance will not be
affected by the conversion.

As of December 31, 2001, the Bank, a wholly-owned subsidiary of
Charter-Michigan Bancorp, Inc., which in turn is a wholly-owned
subsidiary of the Bank\'s ultimate parent company, Charter One
Financial, Inc.,[^2] had assets of approximately \$38.2 billion and
total deposits of approximately \$24.6 billion. Its main office is
located at 1215 Superior Avenue, Cleveland, Ohio, and it has 450
branches in Illinois, Massachusetts, Michigan, New York, Ohio, and
Vermont.[^3]

As discussed below, the Bank has applied to retain various subsidiaries
for purposes of continued operation where permissible for a national
bank.

**II. Legal Authority**

**A. Conversion of the Bank**

The Bank may convert into a national bank with OCC approval. Regulations
of both the OCC and the Office of Thrift Supervision (\"OTS\") permit
the direct conversion of a Federal savings bank to a national bank.[^4]
In approving a conversion application, OCC regulations provide that a
conversion will be permitted if the financial institution can operate
safely and soundly as a national bank and in compliance with applicable
laws.[^5] A review of the application for the proposed conversion
demonstrates that these criteria are met. Moreover, the regulation
provides that a conversion application may be denied if a significant
supervisory or compliance concern exists with regard to the applicant;
approval is inconsistent with law, regulation, or OCC policy; the
applicant fails to provide requested information; or the conversion
would permit the applicant to escape supervisory action by its current
regulator.[^6] A review of the record discloses nothing that indicates
that any of these factors are present.

#### B. Branch Retention

The Bank currently operates branches in Illinois, Massachusetts,
Michigan, New York, Ohio, and Vermont. It has requested OCC approval to
retain these branches after its conversion. The Bank's authority to
retain branches after the conversion is expressly permitted by a
provision in the Gramm-Leach-Bliley Act (\"GLBA\"):

> Any Federal savings association chartered and in operation before the
> date of enactment of the Gramm-Leach-Bliley Act, with branches in
> operation before such date of enactment in 1 or more States, may
> convert, at its option, with the approval of the Comptroller of the
> Currency or the appropriate State bank supervisor into 1 or more
> national or State banks, each of which may encompass 1 or more of the
> branches of the Federal savings association in operation before such
> date of enactment in 1 or more States, but only if each resulting
> national or State bank will meet all financial, management, and
> capital requirements applicable to the resulting national or State
> bank.[^7]

This provision directly permits a national bank resulting from the
conversion of a Federal savings association to retain its branches,
without regard to the geographic branching limits of 12 U.S.C. § 36,[^8]
provided the federal savings association is covered by the provision and
the resulting national bank meets the listed requirements. The Bank is
covered by section 1464(i)(5) because it was chartered and in operation
since before the date of enactment of the GLBA and it has had branches
in operation in Illinois, Massachusetts, Michigan, New York, Ohio, and
Vermont since before the date of enactment.[^9] The OCC has determined
that Charter One Bank, National Association, the national bank resulting
from this conversion, will meet all applicable financial, management,
and capital requirements, and that it will meet the capital requirements
for branches contained in 12 U.S.C. § 36(c). Thus, Charter One Bank,
National Association, may retain its branches in Illinois,
Massachusetts, Michigan, New York, Ohio, and Vermont.[^10]

**C. Subsidiaries**

**1. Operating Subsidiaries**

A national bank may conduct in an operating subsidiary activities that
are permissible for a national bank, either as part of or incidental to
the business of banking or otherwise under other statutory
authority.[^11] To qualify as an operating subsidiary, the parent bank
must own at least 50 percent of the voting stock of the
corporation.[^12]

The Bank is seeking OCC approval to retain a number of operating
subsidiaries upon its conversion to a national bank,[^13] all of which
are 100% owned by the Bank, with the exception of *1215 Financial Center
Associates, Ltd.*, which is 99% owned by the Bank. *CDC-Asbany Corp.* is
a community development corporation which makes community development
and public welfare investments permissible under 12 U.S.C. § 24(11) and
12 C.F.R. Part 24;[^14] *Liberty Financial Services, Inc.* sells
securities and annuities; *The First Financial Services and Development
Corp*. holds bank-permissible investments and is a holding company for
lower-level subsidiaries; *Bay Life Insurance Company, Inc.* reinsures
credit life insurance on loans held by the parent bank; *ICX Corp.*
engages in equipment leasing activities; *Charter One Auto Finance
Corp.* purchases and originates vehicle loans and leases; *Charter One
Mortgage Corp.* purchases, originates, and services residential mortgage
and consumer loans; *Real Estate Appraisal Services, Inc.* provides real
estate appraisal services; *AHF Securities, Ltd.* and *AHF Subordinated
Securities, Ltd.* hold subordinated interests in privately owned
mortgage-backed securities issued by *Charter One Mortgage Corp.;*[^15]
*Charter One Credit Corp.* purchases and holds mortgage loans; *GCCC,
Inc.* provides data processing services to the parent bank; *Investment
Network Advisors, Inc.* is a licensed investment advisor; *Superior
West, Inc.,* holds bank-permissible investments, provides investment
management services to the parent bank, and holds *Warm Springs
Investments, Inc.,* a real estate investment trust that holds mortgages
and mortgage-backed securities, as its subsidiary; and *1215 Financial
Center Associates, Ltd.* provides real estate management services for
the parent bank\'s headquarters facility. The OCC has previously
determined that all of the above activities are permissible activities
for national banks. Consequently, the OCC approves the Bank\'s retention
and continued operation of the above operating subsidiaries.[^16]

**2. Financial Subsidiaries**

The Bank also seeks permission to retain as financial subsidiaries three
subsidiaries that are engaged in the sale of insurance as agent or
broker \-- *Charter One Securities, Inc.* (also engages in securities
sales as agent)*, Charter One Insurance Agency, Inc., and Superior
Insurance and Financial Services, Inc*. Pursuant to 12 U.S.C. § 24a, a
national bank may control or own an interest in a financial subsidiary
provided that:

\(1\) the financial subsidiary engages in activities that are
\"financial in nature or incidental to a financial activity;\"

\(2\) the activities engaged in by the financial subsidiary as principal
do not include certain activities enumerated at 12 U.S.C. § 24a(a)(2)(B)
(including insurance sales as principal);

\(3\) the bank and each depository affiliate of the bank are
well-capitalized and well managed;[^17]

\(4\) the aggregate consolidated total assets of all of the bank's
financial subsidiaries do not exceed the lesser of 45% of the bank's
total assets or \$50 billion; and

\(5\) the OCC has granted approval for the subsidiary to engage in the
activities.

The sale of insurance as agent or broker is an activity that is
financial in nature.[^18] Furthermore, insurance sales as agent or
broker is not a prohibited activity for a financial subsidiary under 12
U.S.C. § 24a(a)(2)(B). The activities conducted by the three
subsidiaries are permissible for a financial subsidiary. The resulting
national bank and its depository institution affiliates are well
capitalized and well managed. Furthermore, the aggregate consolidated
assets of the resulting national bank's financial subsidiaries will not
exceed 45% of the resulting national bank's consolidated assets. The
Bank has also represented that it has in place policies and procedures
to preserve the separate corporate identity and limited liability of the
Bank and its financial subsidiaries, as well as procedures for
identifying and managing financial and operational risk within the Bank
and its financial subsidiaries that adequately protect the Bank from
such risk. The Bank will apply Sections 23A and 23B of the Federal
Reserve Act to its financial subsidiaries as required by 12 C.F.R.
§ 5.34(h)(5). Accordingly, we conclude that the Bank\'s retention and
continued operation of the above subsidiaries as financial subsidiaries
is legally authorized under 12 U.S.C. § 24a and 12 C.F.R. § 5.39. 

**D. Community Development Investments**

The Bank has requested permission from the OCC to retain one community
development corporation and several direct community development
investments upon its conversion to a national bank.[^19] *CDC - Asbany
Corp.* (the \"CDC\"), a subsidiary corporation of the Bank, will be
transferred to Charter One Bank, National Association. The CDC is
primarily engaged in making (or has committed to making) equity
investments, totaling \$18,072,819, which primarily benefit low- and
moderate-income persons, low- and moderate-income areas, and other areas
targeted for revitalization by federal, state, or local government. In
particular, the CDC has invested in thirteen limited partnerships that
provide or support affordable housing, primarily for low- and
moderate-income individuals or in low- and moderate-income areas. The
CDC\'s projects demonstrate nonbank community involvement because they
receive federal low-income housing tax credits or because they are
managed by a wholly-owned subsidiary of a non-profit community
development entity.

The Bank also has made and committed to make direct community
development investments of \$45,186,479, which will be transferred to
Charter One Bank, National Association. These investments primarily
benefit low- and moderate-income persons, low- and moderate-income
areas, or other areas targeted for redevelopment by federal, state, or
local government. These investments demonstrate nonbank community
involvement because they receive federal low-income housing tax credits
or represent projects that have received financial support from a
national community development intermediary.

Charter One Bank, National Association\'s aggregate community
development investments will total \$63,259,298, which will be an amount
that is less than 5 percent of Charter One Bank, National Association's
capital and surplus. The OCC has determined that all of these
investments are consistent with the requirements of 12 U.S.C. 24
(Eleventh) and the OCC\'s regulation on national bank investments in
community development corporations, community development projects, and
other public welfare investments, 12 C.F.R. Part 24. This determination
is based on the representations provided to the OCC in or in connection
with the application. Thus, we conclude that the Bank\'s retention of
the CDC and direct community development investments is legally
permissible.

**E. The Community Reinvestment Act**

The Community Reinvestment Act (\"CRA\") requires the OCC to take into
account the applicant\'s record of helping to meet the credit needs of
its entire community, including low- and moderate-income (\"LMI\")
neighborhoods, when evaluating certain applications, including
conversions.[^20]

The Office of Thrift Supervision (\"OTS\") assigned the Bank a
\"Satisfactory\" CRA rating at its most recent Performance Evaluation
(\"PE\") dated May 14, 2001. The OTS evaluated the Bank\'s performance
using criteria relative to its lending, investments, and services. The
three component ratings for the lending, investments, and services tests
were rated \"Low Satisfactory,\" \"High Satisfactory,\" and \"High
Satisfactory,\" respectively. The latest PE indicated that no credit
practices were identified that violated the substantive provisions of
federal lending discrimination laws and regulations.

Despite the fact that conversion applications do not generally have a
public comment period, pursuant to 12 C.F.R. § 5.24(d)(3), the OCC
received comments from two community organizations.[^21] Under 12 C.F.R.
§ 25.29(a)(4), however, the OCC will take into account views expressed
by interested parties regarding CRA performance in connection with an
application for conversion. One organization requested the OCC to
condition approval upon improved lending to LMI areas and to African
Americans in the Chicago Metropolitan Statistical Area (\"MSA\").[^22]
The other organization asked the OCC to investigate the Bank's lending
patterns, particularly in the Cleveland MSA.

Based upon the concerns raised by the commenters, the OCC removed the
application from expedited review processing on January 16, 2002, in
order to provide adequate time to investigate the concerns raised. The
OCC also directed an examiner with extensive consumer compliance
experience to conduct an investigation into these concerns. The findings
of the OCC's investigation are presented below. Based on the OCC's
investigation, we find that approval of the proposed transaction is
consistent with the Community Reinvestment Act. The conversion is not
expected to have an adverse effect on the CRA performance of the Bank.

**1. Lending to Low- and Moderate-Income Areas**

Both community organizations alleged that the Bank\'s lending
performance to LMI areas was poor in their respective MSAs. The
commenters cited numerous statistics to support that position for their
respective geographic areas, Chicago and Cleveland. The OCC examiner
investigated these allegations by reviewing the latest CRA PE and the
2000 Home Mortgage Disclosure Act (\"HMDA\") data.[^23] The examiner
found that while lending to several LMI areas was poor, the Bank\'s
overall lending throughout all of its assessment areas was satisfactory
due largely to the Bank\'s good record of lending to LMI individuals in
those areas. The OCC will monitor the Bank\'s progress in reviewing its
lending patterns and in improving its lending performance in LMI areas
as part of the OCC\'s ongoing supervision of the resulting national
bank.

**2. Lending to African Americans**

Both community organizations raised concerns about the Bank\'s record of
lending to African Americans in their respective MSAs. The commenters
cited numerous 1999 and 2000 HMDA statistics regarding origination rates
and denial rates disparities between African Americans and whites. The
OCC examiner reviewed the OTS\'s latest compliance examination, dated
May 14, 2001, and the work papers of that examination. After reviewing
and analyzing this information and the 2000 HMDA data for home purchase
and refinance loans, the examiner concluded that while the Bank had low
levels of lending to minorities and in minority areas, there was no
evidence of discrimination.[^24] This is another area where the OCC
intends to monitor the Bank\'s progress in reviewing its lending
patterns and in improving its lending performance to minorities and in
minority areas as part of the OCC\'s ongoing supervision of the
resulting national bank.

It is also important to note that HMDA data alone are inadequate to
provide a basis for concluding that a bank is engaged in lending
discrimination or in indicating whether its level of lending is
sufficient. HMDA data do not take into consideration borrower capacity,
housing prices, and other factors relevant in each of the individual
markets and do not illustrate the full range of the bank\'s lending
activities or efforts. Nevertheless, denial disparity ratios are of
concern to the OCC and are routinely evaluated in fair lending
examinations. The OCC will do so with respect to the resulting national
bank.

One commenter alleged that the Bank charged higher interest rates to
minority borrowers through Charter One Credit Corporation ("COCC") as a
result of higher commissions paid to mortgage brokers. In this regard,
the Bank has committed to establish a fair lending database for
monitoring brokerage compensation in 2002. [^25]

Based on the OCC\'s investigation, we find that approval of the proposed
transaction is consistent with the Community Reinvestment Act.

**III. Conclusion**

For the reasons set forth above, including the representations and
commitments of the applicant, we find that the conversion of Charter One
Bank, F.S.B., is legally authorized, the resulting national bank may
retain and operate branches and subsidiaries as described in the
analysis above, the transaction meets the other statutory criteria for
approval, and there are no supervisory or policy concerns. Accordingly,
the applications described herein are approved, effective upon receipt
of the approval of the holding company application by the Board of
Governors of the Federal Reserve System.

/s/ Carolina M. Ledesma

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Carolina M. Ledesma

National Bank Examiner

#2002 CE 01 001

[^1]: Following the conversion, the Bank will be known as Charter One
    Bank, National Association.

[^2]: Charter One Financial, Inc., is a registered bank holding company
    because it holds Charter One Commercial, a New York-chartered
    commercial bank. The Bank\'s holding companies have filed an
    application with the Federal Reserve Bank of Cleveland in connection
    with the conversion (\"holding company application\"). The OCC\'s
    approval of this application will be effective upon receipt of the
    Federal Reserve Bank\'s approval of the holding company application.

[^3]: The number of branches is as of March 13, 2002.

[^4]: 12 C.F.R. § 5.24; 12 C.F.R. §§ 552.2-7. The OCC has approved many
    such conversions. *See, e.g.,* Decision on the Applications by TCF
    Financial Corp. to convert Federal Savings Banks Located in
    Minnesota, Michigan, Illinois, and Wisconsin into National Banks
    (OCC Corporate Decision No. 97-13, February 24, 1997). In 1999,
    Congress added a provision to the Home Owners' Loan Act that
    confirmed this authority, while also addressing branch retention,
    for those federal savings association conversions into national
    banks covered by the new provision. *See* 12 U.S.C. § 1464(i)(5), as
    added by the Gramm-Leach-Bliley Act, Pub. L. No. 106-102, § 739,
    113 Stat. 1338, 1480 (November 12, 1999) (discussed *infra*).

[^5]: 12 C.F.R. § 5.24(d).

[^6]: 12 C.F.R. §§ 5.13 & 5.24(d).

[^7]: 12 U.S.C. § 1464(i)(5)(A), as added by the GLBA § 739.

[^8]: Decision of the Office of the Comptroller of the Currency on
    Applications involving Family Bank, FSB, Haverhill, Massachusetts;
    First Massachusetts Bank, N.A., Worcester, Massachusetts; Bank of
    New Hampshire, Manchester, New Hampshire; Farmington National Bank,
    Farmington, New Hampshire; Granite Savings Bank and Trust Company,
    Barre, Vermont; The Howard Bank, N.A., Burlington, Vermont; Franklin
    LaMoille Bank, St. Albans, Vermont; and First Vermont Bank and Trust
    Company, Brattleboro, Vermont (March 8, 2000) (the \"Family Bank
    Decision\"). As discussed in the Family Bank Decision, the branch
    retention authority of section 1464(i)(5) is clearly intended to
    operate independently of section 36. In particular, with respect to
    the Bank\'s branches in Illinois, Massachusetts, Michigan, New York,
    Ohio, and Vermont, the resulting national bank\'s retention of
    branches in a conversion under section 1464(i)(5) is not affected by
    section 36(e)(1), which states that a national bank may not acquire,
    establish, or operate a branch in a new state unless it is
    authorized under one of the provisions listed in section 36(e)(1).

[^9]: The Bank was chartered in 1934 and has operated with branches
    since then.

[^10]: The Bank has eight branches which were established after the
    effective date of the GLBA: three *de novo* branches in Michigan,
    one *de novo* branch in Ohio, and four *de novo* branches in New
    York. (Also, the OTS has recently approved a short distance
    relocation for the branch formerly located at 43030 Hayes Road,
    Clinton Township, MI 48038 in Macomb County. This branch is now
    located at 15342 19 Mile Road, Clinton Township, MI 48038 in Macomb
    County.) Retention of these branches is also authorized under 12
    U.S.C. § 36(c), which 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). Neither Michigan nor Ohio place geographical
    limits on intrastate branching, *see* Mich. Comp. Laws 487.13711 and
    Ohio Revised Code § 1117.01. New York does impose home office
    protection requirements in towns of 50,000 or less where another
    bank is chartered, *see* N.Y. Cons. Laws Ch. 2, Art. 3, § 105.
    However, only one of the four NY branches is in a town of 50,000 or
    less and there are no banking institutions in that town that qualify
    for home office protection under the statute.

[^11]: 12 C.F.R. § 5.34(e)(1).

[^12]: 12 C.F.R. § 5.34(d)(2).

[^13]: The Bank also owns the following inactive subsidiaries: Aplan
    Holding Company, Inc.; Shore Holdings, Inc.; and Preferred Mortgage
    Associates, Inc. The Bank understands that if it desires to conduct
    any future activity in the above subsidiaries, it must comply with
    applicable notice or application procedures and other requirements
    in 12 C.F.R. §§ 5.34, 5.35, or 5.39.

[^14]: *See* further discussion of this subsidiary in the Community
    Development Investments section of this document, *infra*.

[^15]: *AHF Securities, Ltd.* and *AHF Subordinated Securities, Ltd.*
    are in the process of being dissolved.

[^16]: The Bank also owns six operating subsidiaries that hold
    nonconforming assets: *Servco, Inc.*; *1001 Services, Inc.*;
    *Prestwick Joint Venture*; *Hudson Joint Venture*; *Southwest
    Service Corporation*; and *Hartz-Southwest Partnership*. OCC policy
    permits a reasonable divestiture period in these instances so that
    converting banks may be able to resolve nonconforming subsidiaries
    without hardship. *See, e.g.,* OCC Conditional Approval No. 319
    (July 26, 1999). The Bank has committed to divest its ownership
    interest in these subsidiaries within two years, a time period which
    is consistent with OCC policy.

[^17]: For the purposes of the capital requirements of the parent bank
    under 12 U.S.C. § 24a, the bank's aggregate investment in all
    financial subsidiaries is deducted from the bank's capital, and the
    assets and liabilities of the financial subsidiaries are not
    consolidated with those of the bank. *See* 12 U.S.C. § 24a(c); 12
    C.F.R. § 5.39(h)(1).

[^18]: *See* 12 U.S.C. §§ 24a(b)(1)(A) & 1843(k)(4); 12 C.F.R. §
    5.39(e)(1)(ii).

[^19]: The Bank currently holds another direct community development
    investment, valued at \$50,000, in *Lakewood Warren Detroit
    Partners*, which the OCC has determined is a nonconforming asset.
    The Bank has committed to divest this asset within two years. *See*
    discussion in fn. 16, *supra*.

[^20]: *See* 12 U.S.C. § 2903; 12 C.F.R. § 25.29.

[^21]: Both community organizations requested the OCC to delay the
    decision on the application until the Bank entered into written
    agreements to address lending patterns in their respective areas.
    One of the community organizations also asked that the OCC arrange
    the negotiations. The OCC does not intervene in private agreements
    between banks and community organizations, and accordingly, the OCC
    declines to act on the organizations\' requests.

    We note that both commenters previously provided the same comments
    to the OTS in connection with two thrift merger applications filed
    by the Bank in 2001. In addition, both commenters provided these
    comments to the Federal Reserve Bank of Cleveland in January 2002 in
    connection with Charter One Financial, Inc.\'s holding company
    application to merge with Charter One Michigan Bancorp, Inc.

[^22]: The Bank subsequently entered into an agreement with this
    community organization, establishing new target goals for
    residential lending to African Americans and lower-income
    individuals and communities in the Chicago area.

[^23]: The examiner reviewed 2000 HMDA data for the Bank, Charter One
    Mortgage Corporation, and Charter One Credit Corporation (COCC) for
    the following MSAs: Cleveland and Toledo, Ohio; Chicago, Illinois;
    Detroit, Michigan; and Rochester, Albany, and Buffalo, New York.

[^24]: *See* fn. 23, *supra*.

[^25]: The OCC notes that COCC, the only Bank entity engaged in subprime
    lending, has since discontinued originating subprime loans. In
    addition, the Bank expects to implement the Fannie Mae desktop
    underwriter program system company-wide by year-end.