Legal Developments

ORDERS ISSUED UNDER BANK HOLDING

COMPANY ACT

Orders Issued Under Section 3 of the Bank Holding

Company Act

AllNations Bancorporation, Inc.

Shawnee, Oklahoma

Order Approving the Formation of a Bank Holding Company and the Acquisition of a Bank

AllNations Bancorporation, Inc. (‘‘AllNations’’) has

requested the Board’s approval under section 3(a)(1) of the

Bank Holding Company Act (‘‘BHC Act’’) (12 U.S.C.

§1842(a)(1)) to become a bank holding company by

acquiring all the voting shares of The First National Bank

of Calumet, Calumet, Oklahoma (‘‘Calumet Bank’’).

AllNations is wholly owned by the Absentee Shawnee

Tribe of Indians of Oklahoma (‘‘Tribe’’), a NativeAmerican tribe.

Notice of the proposal, affording interested persons an

opportunity to comment, has been published (68 Federal

Register 35,411 (2003)). The time for filing comments has

expired, and the Board has considered all the comments

received on the application in light of the factors enumerated in section 3 of the BHC Act.

Section 3 of the BHC Act prohibits the Board from

approving a proposal that would result in a monopoly or

would be in furtherance of a monopoly in any relevant

banking market. The BHC Act also prohibits the Board

from approving a proposed bank acquisition that would

substantially lessen competition in any relevant banking

market, unless the Board finds that the anticompetitive

effects of the proposal clearly are outweighed in the public

interest by the probable effect of the proposal in meeting

the convenience and needs of the community to be served.1

AllNations is a newly organized corporation that does

not control a depository institution and has been formed to

acquire Calumet Bank. Calumet Bank is the 261st largest

depository institution in Oklahoma,2 controlling $16.5 million in deposits, representing less than 1 percent of total

deposits in the state.3 The Board has reviewed carefully

all the facts of record and has concluded that consummation of the proposal likely would not have a significantly

adverse effect on competition or on concentration of banking resources in any relevant banking market. Accordingly,

the Board has determined that competitive factors are

consistent with approval of the proposal.

Section 3 of the BHC Act also requires the Board to

consider the effect of the transaction on the convenience

and needs of the community to be served.4 In evaluating

this factor, the Board places particular emphasis on the

ratings received by the depository institutions involved in

a proposal at their most recent examinations under the

Community Reinvestment Act (12 U.S.C. §2901 et seq.)

(‘‘CRA’’). Calumet Bank received a ‘‘satisfactory’’ CRA

rating from its primary federal supervisor, the Office of the

Comptroller of the Currency (‘‘OCC’’), as of May 3, 1999.

AllNations has stated that it intends to retain the bank’s

current retail banking activities in the Calumet community

and to offer retail banking services to Tribe and other

Native-American tribes. After reviewing all the information submitted by AllNations and Calumet Bank related to

the convenience and needs factor and based on all the facts

of record, the Board concludes that considerations relating

to convenience and needs are consistent with approval.

Section 3 of the BHC Act requires the Board to consider

the financial and managerial resources and future prospects

of the companies and banks involved in a bank acquisition

proposal as well as the principal shareholders.5 As part of

this analysis, the Board has reviewed confidential examination information about Calumet Bank and publicly reported

financial and other information about the bank, AllNations,

and the proposal. The Board has also considered confidential supervisory and other information provided by the

OCC, the primary federal supervisor for Calumet Bank. In

addition, the Board has reviewed AllNations’s operating

plan for Calumet Bank and the proposed management of

AllNations and the bank. The Board also has taken into

account the financial resources of AllNations, including its

capital levels and ability to serve as a source of strength to

the bank.

The principal shareholder of AllNations is Tribe.6 Tribe

has acknowledged that its interest in and relationship with

1. 12 U.S.C. § 1842(c)(1)(A) and (B).

2. In this context, the term ‘‘depository institution’’ includes commercial banks, savings banks, and savings associations.

3. The deposit and ranking data are as of June 30, 2002.

4. 12 U.S.C. §1842(c)(2).

5. 12 U.S.C. §1842(c).

6. The stock of AllNations will be voted by the Governor of Tribe

in his official capacity. The Board previously has recognized that

Native-American tribes such as Tribe are considered domestic sovereigns and are excluded from the BHC Act’s definition of ‘‘company.’’

E.g., Mille Lacs Bancorporation, 82 Federal Reserve Bulletin 336

68
AllNations and Calumet Bank would be subject to federal

banking laws. It has made commitments to ensure that

Tribe’s status as a domestic sovereign does not impede the

ability of the federal banking agencies to supervise and

enforce banking laws against any entity related to or affiliated with AllNations and Calumet Bank. Tribe also has

acknowledged the jurisdiction of the Board to enforce

compliance with applicable banking laws and has agreed to

the federal courts’ jurisdiction to enforce these laws. In

addition, Tribe has committed that the tribe and its affiliates will make available the information on their operations and activities necessary for the Board to determine

and enforce compliance with applicable federal banking

laws. After considering all the facts of record, including all

commitments made in connection with this proposal, the

Board concludes that the financial and managerial

resources and future prospects of AllNations and Calumet

Bank are consistent with approval, as are the other supervisory factors the Board is required to consider under the

BHC Act.

Based on the foregoing and after considering all the

facts of record, the Board has determined that the application should be, and hereby is, approved. In reaching its

conclusion, the Board has considered all the facts of record

in light of the factors that it is required to consider under

the BHC Act. The Board’s approval is specifically conditioned on compliance by AllNations, Tribe, and all affiliated entities with the commitments and representations

made in connection with the application, including the

commitments described in this order. These commitments

and conditions are deemed to be conditions imposed in

writing by the Board in connection with its findings and

decision and, as such, may be enforced in proceedings

under applicable law.

The acquisition of Calumet Bank may not be consummated before the fifteenth calendar day after the effective

date of this order, and the proposal may not be consummated later than three months after the effective date of this

order, unless such period is extended for good cause by the

Board or by the Federal Reserve Bank of Kansas City,

acting pursuant to delegated authority.

By order of the Board of Governors, effective November 12, 2003.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke, and Kohn.

Robert deV. Frierson

Deputy Secretary of the Board

The Desjardins Group

Montreal, Canada

Federation des caisses Desjardins du Quebec

Levis, Canada

La Caisse centrale Desjardins du Quebec

Montreal, Canada

Desjardins FSB Holdings, Inc.

Wilmington, Delaware

Order Approving the Formation of Bank Holding

Companies

The Desjardins Group, Montreal; Federation des caisses

Desjardins du Quebec, Levis (‘‘The Federation’’);

La Caisse centrale Desjardins du Quebec, Montreal

(’’CCD’’), all in Canada; and Desjardins FSB Holdings,

Inc., Wilmington, Delaware (‘‘Desjardins Holdings’’), have

requested the Board’s approval under section 3 of the Bank

Holding Company Act (12 U.S.C. §1842) (‘‘BHC Act’’) to

become bank holding companies. Applicants propose to

convert their wholly owned subsidiary federal savings

bank, Desjardins Federal Savings Bank, Hallandale,

Florida (‘‘Desjardins FSB’’), to a national bank that would

operate as Desjardins Bank, N.A. (‘‘Desjardins Bank’’),

also in Hallandale.

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published

(68 Federal Register 39,091 (2003)). The time for filing

comments has expired, and the Board has considered the

proposal and all comments received in light of the factors

set forth in section 3 of the BHC Act.

The Desjardins Group is a cooperative network of financial institutions operating primarily in the province of

Quebec, Canada, that functions in many respects as a

single financial organization. It includes approximately

750 depository institutions (‘‘caisses’’); the Federation and

CCD, also depository institutions under Quebec law; and

nonbanking companies engaged in securities, asset management, and insurance activities in Canada. Quebec law

controls the structure and supervision of the Desjardins

Group, The Federation and CCD, and the caisses.

The caisses are autonomous depository institutions chartered as savings and credit cooperatives and are required

by Quebec law to be members of The Federation.1

Together, the caisses control all the shares of The Federation, and the boards of directors of The Federation are

elected by the caisses.2 Quebec law requires The Federation to act as the coordinating and supervisory body for all

the caisses. The Federation is responsible for the auditing

and inspection of the caisses and is the regulatory authority

(1996). Four bank holding companies are wholly owned by NativeAmerican tribes. See Bay Bancorporation, 81 Federal Reserve Bulletin 791 (1995); Mille Lacs Bancorporation, supra; Native American

Bancorporation, 87 Federal Reserve Bulletin 747 (2001); Chickasaw

Banc Holding Company, 88 Federal Reserve Bulletin 99 (2002).

1. The principal activity of the caisses is accepting deposits from

members of the caisses and investing in designated assets, including

extensions of credit to those members, primarily through mortgage

loans. Membership is typically based on geographical areas or common workplaces or professions.

2. Approximately 80 of the 750 caisses are located outside Quebec

and are auxiliary, nonvoting members of The Federation.

69
for the caisses, particularly with respect to the their capital

adequacy, general reserves, liquid assets, and credit and

investment activities. The Federation also is the holding

company for CCD and the nonbanking companies of the

Desjardins Group. CCD primarily provides clearing services and funding for the caisses and The Federation, and it

directly holds all the shares of Desjardins Holdings, the

parent company of Desjardins FSB.

The Desjardins Group prepares consolidated financial

statements and has total consolidated assets equivalent

to approximately $67 billion. It is the largest financial

organization in Quebec and the sixth largest in Canada.3

Desjardins Bank would be the 200th largest banking organization in Florida, controlling total deposits of $74.6 million, which represents less than 1 percent of total deposits

in depository institutions in the state.4 On consummation of

the proposed conversion, the Desjardins Group would be a

qualifying foreign banking organization.

Competitive and Convenience and Needs Considerations

The BHC Act prohibits the Board from approving an

application under section 3 of the BHC Act if the proposal

would result in a monopoly. The BHC Act also prohibits

the Board from approving a proposed bank acquisition that

would substantially lessen competition in any relevant

banking market, unless the Board finds that the anticompetitive effects of the proposal are clearly outweighed in

the public interest by the probable effects of the proposal in

meeting the convenience and needs of the community to be

served.5

The proposal involves a charter conversion from a savings association to a bank. The proposed charter conversion would result in neither an expansion of operations nor

the acquisition of an additional depository institution in the

United States. Based on all the facts of record, the Board

concludes that consummation of the proposal would not

have a significantly adverse effect on competition or on the

concentration of banking resources in any relevant banking

market, and that competitive considerations are consistent

with approval.

The Board also is required to consider the convenience

and needs of the community to be served by the depository

institutions involved in a proposal, including their records

of performance under the Community Reinvestment Act

(‘‘CRA’’).6 Desjardins FSB received an ‘‘outstanding’’

CRA performance rating from the Office of Thrift Supervision (‘‘OTS’’) at its most recent examination, as of

September 2001. Based on this rating and other facts of

record, the Board concludes that considerations related to

the convenience and needs of the communities to be served

are consistent with approval of this proposal.

Financial, Managerial, and Supervisory Considerations

The BHC Act requires the Board to consider the financial

and managerial resources and future prospects of the companies and banks involved in a bank acquisition proposal.

In assessing the financial and managerial strength of the

Desjardins Group and its affiliates, the Board has reviewed

information concerning the proposal and the condition of

the Desjardins Group and the entities that comprise the

Desjardins Group, including information described below,

from the appropriate home country authority that supervises the Desjardins Group, The Federation, and CCD;

financial information from the Desjardins Group, The Federation, CCD, Desjardins Holdings, and Desjardins FSB;

and reports of examination from the OTS assessing the

financial and managerial resources of the organizations’

U.S. operations. The Desjardins Group’s capital levels

exceed the minimum levels that would be required under

the Basel Capital Accord and are considered equivalent to

the capital levels that would be required of a United States

banking organization under similar circumstances. Based

on all the facts of record, the Board concludes that the

financial and managerial resources and future prospects of

the organizations involved in this proposal are consistent

with approval.

Section 3 of the BHC Act also provides that the Board

may not approve an application involving a foreign bank

unless the bank is ‘‘subject to comprehensive supervision

or regulation on a consolidated basis by the appropriate

authorities in the bank’s home country.’’7 As provided in

Regulation Y, the Board determines whether a foreign bank

is subject to consolidated home country supervision under

the standards set forth in Regulation K.8 The Board’s

Regulation K provides that a foreign bank may be considered to be subject to comprehensive supervision or regulation on a consolidated basis if the Board determines that

the home country supervisor receives sufficient information on the foreign bank’s worldwide operations, including

the bank’s relationship to any affiliate, to assess the bank’s

overall financial condition and compliance with law and

regulation.9 For purposes of the proposal, this determination is being made for The Federation and CCD.

The Inspector General of Financial Institutions in

3. Asset data are as of June 30, 2003, and are based on exchange

rates then in effect.

4. Deposit and ranking data are as of June 30, 2002. In this context,

depository institutions include commercial banks, savings banks, and

savings associations.

5. 12 U.S.C. §1842(c).

6. 12 U.S.C. §2901 et seq.

7. 12 U.S.C. §1842(c)(3)(B).

8. 12 C.F.R. 225.13(a)(4).

9. In making this determination, the Board considers, among other

factors, the extent to which the home country supervisor:

(a) ensures that the bank has adequate procedures for monitoring and

controlling its activities worldwide;

(b) obtains information on the condition of the bank and its subsidiaries and offices outside the home country through regular reports

of examination, audit reports, or otherwise;

(c) obtains information on the dealings and relationships between the

bank and its affiliates, both foreign and domestic;

(d) receives from the bank financial reports that are consolidated on a

worldwide basis, or comparable information that permits analysis

of the bank’s financial condition on a worldwide, consolidated

basis;

(e) evaluates prudential standards, such as capital adequacy and

risk asset exposure, on a worldwide basis. See 12 C.F.R.

211.24(c)(1)(ii).

70 Federal Reserve Bulletin Winter 2004
Quebec, an agency official under the jurisdiction of

Quebec’s Ministry of Finance, is the supervisor for The

Federation and CCD.10 In this capacity, the Inspector General directly supervises and examines The Federation and

CCD and oversees The Federation’s direct supervision

and examination of the caisses. The Inspector General is

responsible for developing regulations to govern The Federation and CCD, and The Federation, with the concurrence of the Inspector General, is responsible for developing standards for the caisses. Prudential regulations and

standards address capital adequacy,11 asset classification

and provisioning, single-borrower exposures, liquidity,

equity investments, and transactions with affiliates.12 Quebec law vests the Inspector General with a range of enforcement powers to ensure compliance with these regulations and standards.13

The Inspector General conducts annual on-site examinations of The Federation and CCD that include risk management systems, financial condition, policies and practices,

internal control systems, and regulatory compliance. The

examinations of The Federation also include an assessment of its responsibility for supervising and auditing the

caisses. The examinations of CCD focus on asset quality,

earnings, capital, and information systems. The Inspector

General may conduct additional targeted examinations of

The Federation or CCD as the Inspector General deems

necessary.

The Federation and CCD provide the Inspector General

with annual financial statements. In addition, The Federation files with the Inspector General quarterly reports on its

capital adequacy and liquidity, as well as financial results

on a stand-alone basis and as consolidated with the caisses.

CCD also files with the Inspector General quarterly reports

on related-party and affiliate transactions.

The Bureau of Supervision and Financial Security, a

bureau in The Federation, evaluates the operations and

financial condition of the caisses through on-site examinations and off-site reviews. On-site examinations of each

caisse are conducted at least every 18 months and focus on

a review of financial policies and practices, asset quality

and capital adequacy, management, internal control systems, and compliance with governing laws and standards.

Examination results are reported to the Inspector General

and to the board of directors of the caisse. The Federation also receives periodic reports from each caisse,

including information relating to interest-rate-risk exposure, major loans and other significant risks acquired by

the caisse, loan loss provision, credit management, and

annual and monthly financial statements. Inspector General and Federation representatives meet periodically to

discuss financial and supervisory information on the

caisses.

The Federation oversees and coordinates the operations

of all the entities that comprise the Desjardins Group in

various other ways, including director interlocks, policies

and procedures, regular internal reporting requirements,

conduct of internal audits, reviews of internal and external

audit results, and on-site examinations. The Federation

uses and would continue to use these means for overseeing

the activities and operations of Desjardins Bank.

The Federation establishes internal audit policies, procedures, and plans for the entities that comprise the

Desjardins Group, which are subject to review by the

Inspector General. An office of the Bureau of Supervision

and Financial Security conducts audits of the caisses, verifying financial statements and assessing, among other

things, the adequacy of internal controls. Another office

of the bureau audits The Federation and ensures that

the activities, products, and services of the Desjardins

Group’s entities are consistent with The Federation’s

operational and strategic plans. CCD and the nonbanking

subsidiaries of The Federation have their own internal

auditors. All internal audit results are provided to the

Inspector General. In addition, The Federation provides the

Inspector General with periodic reports on the activities of

auditing staff.

The Desjardins Group, The Federation, and CCD also

undergo annual external audits. External auditors must be

members in good standing of a professional association of

accountants and must comply with the auditing standards

of the Canadian Institute of Chartered Accountants. External auditors must attest to the accuracy of financial statements and report on situations or transactions contrary

to sound and prudent management or applicable laws or

regulations. All external audit results are provided to the

Inspector General. External auditors, internal auditors, and

Inspector General representatives meet periodically to

share information.

The Inspector General assesses the Desjardins Group

through its direct supervision of The Federation and CCD

and through a review of information, including examina10. As noted above, Quebec law governs the establishment, operation, and activities of the caisses, The Federation, and CCD. These

entities are supervised by the Inspector General, and Canada’s federal

supervisor of financial institutions, the Office of the Supervisor of

Financial Institutions (‘‘OSFI’’), has no role in supervising the caisses,

The Federation, or CCD. Certain of the nonbanking subsidiaries in the

Desjardins Group, however, are regulated by both OSFI and the

authorities of the various Canadian provinces in which they operate.

11. Quebec law requires the Desjardins Group on a consolidated

basis to meet Basel capital guidelines as set forth by the Inspector

General, which require a total risk-based capital ratio of 8 percent.

The caisses have agreed to maintain CCD’s total risk-based capital

ratio at 8.5 percent and its capital-to-liabilities ratio at a minimum of

5 percent, whichever is higher. Each caisse is required by The Federation to maintain capital levels at least equal to the greater of 5.5 percent of growth assets or 8.8 percent of risk-weighted assets.

12. Regulations and standards generally require that transactions

with affiliates be on arm’s-length terms.

13. As of February 1, 2004, the entities of the Desjardins Group

supervised by the Inspector General will be supervised by a newly

created single financial regulator, the National Agency for Regulation

of the Financial Sector. This entity was created under a Quebec statute

enacted in December 2002 that mandates the merger of five administrative bodies, including the Inspector General, into a new agency

under the auspices of the Quebec Ministry of Finance. The functions

now performed by the Inspector General will be performed by the

Solvency Regulation Directorate, one of seven directorates that will

report to the new agency head. Inspector General personnel are to be

transferred to the new agency.

Legal Developments 71
tion reports, developed by The Federation on the individual caisses. The Desjardins Group regularly provides the

Inspector General with financial information, on a consolidated and unconsolidated basis, as well as with a copy of

the Desjardins Group’s annual report and business plans,

bylaws, and similar corporate information on entities comprising the Desjardins Group.

The Inspector General has direct supervisory responsibility for the insurance and trust subsidiaries of The Federation. The securities-related subsidiaries are supervised

by a separate Quebec securities regulator. For purposes

of supervising The Federation, the Inspector General may

examine or investigate any subsidiary of The Federation, if

deemed necessary, and has the authority to require special

audits and may appoint an external auditor. The Inspector

General shares supervisory information with other regulators that exercise jurisdiction over the subsidiaries of The

Federation.

For the reasons set forth above, and based on all the

facts of record, the Board concludes that The Federation

and CCD are subject to comprehensive supervision on a

consolidated basis by their home country supervisors, and

that supervision of the Desjardins Group is consistent with

approval.

Section 3 of the BHC Act also requires the Board to

determine that a foreign bank has provided adequate assurances that it will make available to the Board such information on its operations and activities and those of its affiliates that the Board deems appropriate to determine and

enforce compliance with the BHC Act.14 The Board has

reviewed the restrictions on disclosure in relevant jurisdictions in which the entities that comprise the Desjardins

Group operate and has communicated with relevant government authorities concerning access to information. In

addition, the Desjardins Group, The Federation, and CCD

have committed to make available to the Board such information on the operations of the Group, including all affiliated entities, that the Board deems necessary to determine

and enforce compliance with the BHC Act and other

applicable federal law and to cooperate with the Board to

obtain any waivers or exemptions that may be necessary to

enable these entities to make such information available to

the Board. In addition, subject to certain conditions, the

Inspector General may share information on the Desjardins

Group’s operations with other supervisors, including the

Board.

In light of the commitments provided by the Desjardins

Group, The Federation, and CCD, and other facts of record,

the Board concludes that the Desjardins Group has provided adequate assurances of access to any necessary

information the Board may request. For these reasons, and

based on all the facts of record, the Board concludes

that the supervisory factors it is required to consider

under section 3(c)(3) of the BHC Act are consistent with

approval.

Conclusion

Based on the foregoing, the Board has determined that the

applications should be, and hereby are, approved. In reaching this conclusion, the Board considered all the facts of

record in light of the factors that it is required to consider

under the BHC Act and other applicable statutes.

The Board’s approval is conditioned on compliance by

the Desjardins Group, The Federation, CCD, and Desjardins Holdings with all commitments made in connection

with the applications, and specifically the commitments

on access to information and on the Board’s receiving access to information on the operations or activities of

the Desjardins Group and the entities that comprise the

Desjardins Group that the Board determines to be appropriate to determine and enforce compliance with applicable

federal statutes. All the commitments and conditions on

which the Board has relied in granting its approval, including the commitments and conditions specifically described

above, are conditions imposed in writing by the Board in

connection with its findings and decisions and, as such,

may be enforced in proceedings under applicable law.

The transaction shall not be consummated before the

fifteenth calendar day after the effective date of this order

or later than three months after the effective date of this

order, unless such period is extended for good cause by the

Board or by the Federal Reserve Bank of Atlanta, acting

pursuant to delegated authority.

By order of the Board of Governors, effective December 4, 2003.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke, and Kohn.

Robert deV. Frierson

Deputy Secretary of the Board

The PNC Financial Services Group, Inc.

Pittsburgh, Pennsylvania

PNC Bancorp, Inc.

Wilmington, Delaware

Order Approving the Acquisition of a Bank Holding

Company and Merger of Bank Holding Companies

The PNC Financial Services Group, Inc. (‘‘PNC Financial’’), a financial holding company within the meaning of

the Bank Holding Company Act (‘‘BHC Act’’), has

requested the Board’s approval under section 3 of the BHC

Act (12 U.S.C. §1841 et seq.), to acquire all the voting

shares of United National Bancorp (‘‘United National’’),

and thereby indirectly acquire UnitedTrust Bank, both in

Bridgewater, New Jersey. PNC Bancorp, Inc. (‘‘PNC

Bancorp’’), a bank holding company controlled by PNC

Financial, also has requested the Board’s approval to merge

with United National.

Notice of the proposal, affording interested persons an

14. See 12 U.S.C. §1842(c)(3)(A); 12 C.F.R. 225.13(a)(3). opportunity to submit comments, has been published

72 Federal Reserve Bulletin Winter 2004
(68 Federal Register 55,057 (2003)). The time for filing

comments has expired, and the Board has considered the

proposal and all comments received in light of the factors

set forth in section 3 of the BHC Act.

PNC Financial, with total consolidated assets of approximately $72.3 billion, is the 20th largest commercial banking organization in the United States. PNC Financial’s

subsidiary depository institutions operate in Delaware,

Florida, Indiana, Kentucky, New Jersey, and Pennsylvania.

In Pennsylvania, PNC Financial is the largest commercial

banking organization, controlling $24.4 billion in deposits,

representing approximately 13 percent of total deposits in

depository institutions in the state (‘‘state deposits’’).1 In

New Jersey, PNC Financial is the third largest commercial

banking organization, controlling $13.3 billion in deposits,

representing 7.2 percent of state deposits.

United National also operates a subsidiary depository

institution in Pennsylvania and New Jersey. In Pennsylvania, United National is the 142nd largest commercial

banking organization, controlling deposits of approximately $155 million, representing less than 1 percent

of state deposits. In New Jersey, United National is the

19th largest commercial banking organization, controlling

$1.5 billion in deposits, representing less than 1 percent

of state deposits. On consummation of this proposal, PNC

Financial would remain the largest commercial banking

organization in Pennsylvania, controlling deposits of

approximately $24.6 billion, representing approximately

13 percent of state deposits, and the third largest commercial banking organization in New Jersey, controlling deposits of $14.5 billion, representing approximately 8 percent

of state deposits.

Interstate Analysis

Section 3(d) of the BHC Act allows the Board to approve

an application by a bank holding company to acquire

control of a bank located in a state other than the home

state of such bank holding company if certain conditions

are met.2 For purposes of the BHC Act, the home state of

PNC Financial is Pennsylvania, and UnitedTrust Bank

is located in New Jersey and Pennsylvania.3 Based on a

review of all the facts of record, including relevant state

statutes, the Board finds that all the conditions for an

interstate acquisition enumerated in section 3(d) are met in

this case.4 In light of all the facts of record, the Board is

permitted to approve the proposal under section 3(d) of the

BHC Act.

Competitive Considerations

Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or would be

in furtherance of any attempt to monopolize the business of

banking in any relevant market. The BHC Act also prohibits the Board from approving a proposed bank acquisition

that would substantially lessen competition in any relevant

banking market unless the anticompetitive effects of the

proposal are clearly outweighed in the public interest by

the probable effect of the proposal in meeting the convenience and needs of the community to be served.5

PNC Financial and United National compete directly

in the Lehigh Valley, Pennsylvania, and Metropolitan

NY–NJ–PA–CT (‘‘New York’’) banking markets.6 Neither

market is concentrated, and numerous competitors would

remain in these markets after consummation of the transaction. Consummation of the proposal would also be consistent with the Department of Justice Merger Guidelines

(‘‘DOJ Guidelines’’).7 PNC Financial would remain the

fourth largest commercial banking organization in the

Lehigh Valley banking market, controlling deposits of

$661.5 million, representing 8.1 percent of total deposits in

depository institutions in the market (‘‘market deposits’’),8

1. Asset, deposit, and ranking data are as of June 30, 2002. In this

context, depository institutions include commercial banks, savings

banks, and savings associations.

2. A bank holding company’s home state is that state in which the

total deposits of all banking subsidiaries of such company were the

largest on the later of July 1, 1966, or the date on which the company

became a bank holding company. 12 U.S.C. §1841(o)(4)(C).

3. For purposes of section 3(d) of the BHC Act, the Board considers a bank to be located in the states in which the bank is chartered,

headquartered, or operates a branch.

4. See 12 U.S.C. §1842(d)(1)(A) and (B), 1842(d)(2)(A) and (B).

PNC Financial is adequately capitalized and adequately managed,

as defined by applicable law. In addition, on consummation of the

proposal, PNC Financial would control less than 10 percent of the

total amount of deposits of insured depository institutions in the

United States and less than 30 percent of the total deposits of insured

depository institutions in each of New Jersey and Pennsylvania. See

N.J. Stat. Ann. § 17:9A-413 (2003). New Jersey and Pennsylvania do

not have minimum age requirements applicable to the proposal.

5. 12 U.S.C. §1842(c)(1).

6. The Lehigh Valley banking market is defined as Carbon, Lehigh,

and Northampton Counties in Pennsylvania. The New York banking

market is defined as New York City; Dutchess, Nassau, Orange,

Putnam, Rockland, Suffolk, Sullivan, Ulster, and Westchester Counties, all in New York; Bergen, Essex, Hudson, Hunterdon, Middlesex,

Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, and

Warren Counties, and portions of Mercer County, all in New Jersey;

Pike County in Pennsylvania; and Fairfield County and portions of

Litchfield and New Haven Counties, all in Connecticut.

7. Under the DOJ Guidelines, 49 Federal Register 26,823 (1984), a

market is considered unconcentrated if the post-merger HHI is below

1000, and a market is considered moderately concentrated if the

post-merger HHI is between 1000 and 1800. The Department of

Justice has informed the Board that a bank merger or acquisition

generally will not be challenged (in the absence of other factors

indicating anticompetitive effects) unless the post-merger HHI is at

least 1800 and the merger increases the HHI by more than 200 points.

The Department of Justice has stated that the higher than normal HHI

thresholds for screening bank mergers for anticompetitive effects

implicitly recognize the competitive effects of limited-purpose lenders

and other nondepository financial institutions.

8. Market share data are as of June 30, 2003, and are based on

calculations in which the deposits of thrift institutions are included at

50 percent. The Board previously has indicated that thrift institutions

have become, or have the potential to become, significant competitors

of commercial banks. See, e.g., Midwest Financial Group, 75 Federal

Reserve Bulletin 386 (1989); National City Corporation, 70 Federal

Reserve Board 743 (1984). Thus, the Board regularly has included

thrift deposits in the market share calculation on a 50 percent weighted

basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve Bulletin 52

(1991).

Legal Developments 73
and the HHI would increase 24 points to 1193. PNC

Financial would become the seventh largest commercial

banking organization in the New York banking market,

controlling deposits of approximately $12.2 billion, representing 2.2 percent of market deposits, and the HHI would

increase 2 points to 981.

Based on all the facts of record, the Board concludes that

consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of banking resources in any relevant banking market,

and that competitive considerations are consistent with

approval.

Financial, Managerial, and Other Supervisory Factors

Section 3 of the BHC Act requires the Board to consider

the financial and managerial resources and future prospects

of the companies and banks involved in the proposal and

certain other supervisory factors. The Board has considered, among other things, confidential reports of examination, other confidential supervisory information received

from the primary federal banking agency that supervises

each institution, and public comments.9 PNC Financial is

and will remain well capitalized on consummation of the

proposal. Based on all the facts of record, the Board has

concluded that considerations relating to the financial and

managerial resources and future prospects of PNC Financial, PNC Bancorp, United National, and the institutions

involved are consistent with approval, as are the other

supervisory factors under the BHC Act.10

Convenience and Needs Considerations

In acting on a proposal under section 3 of the BHC Act, the

Board is required to consider the effects of the proposal on

the convenience and needs of the communities to be served

and to take into account the records of the relevant insured

depository institutions under the Community Reinvestment

Act (‘‘CRA’’).11 The CRA requires the federal financial

supervisory agencies to encourage financial institutions to

help meet the credit needs of the local communities in

which they operate, consistent with their safe and sound

operation, and requires the appropriate federal financial

supervisory agency to take into account an institution’s

record of meeting the credit needs of its entire community,

including low- and moderate-income (‘‘LMI’’) neighborhoods, in evaluating bank expansionary proposals. In

reviewing the convenience and needs factor and the CRA

performance records of the subsidiary depository institutions of PNC Financial and United National, the Board also

has carefully considered public comments submitted in

connection with this proposal that criticize PNC Financial’s lending record with respect to minorities and PNC

Financial’s failure to publicly identify the number and

location of bank branches that it might close after consummation of this transaction.

A. CRA Performance Evaluations

As provided in the CRA, the Board has evaluated the

convenience and needs factor in light of examinations by

the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution’s most recent CRA performance

evaluation is a particularly important consideration in the

applications process because it represents a detailed,

on-site evaluation of the institution’s overall record of

performance under the CRA by its appropriate federal

supervisor.12

PNC Financial’s lead bank, PNC Bank, received an

‘‘outstanding’’ rating at its most recent CRA performance

evaluation by the OCC, as of April 15, 2002.13 PNC

9. A commenter expressed concerns about PNC Financial’s managerial record in light of recent enforcement actions against the organization, including enforcement actions by the Department of Justice

(‘‘DOJ’’), Federal Reserve Bank of Cleveland (‘‘Reserve Bank’’) and

the Office of the Comptroller of the Currency (‘‘OCC’’). The enforcement actions required PNC Financial to implement risk management

systems, internal controls, and compliance procedures to ensure the

continued safe and sound operation of the PNC Financial organization. PNC Financial has developed a new ethics policy and training

program, an enterprisewide risk management program, and enhanced

credit administration procedures, internal controls, and corporate governance procedures. After a careful review of PNC Financial’s efforts

to meet the requirements of the enforcement actions, the Federal

Reserve and the OCC terminated their respective Written Agreements

in September 2003.

In announcing its deferred prosecution agreement in June 2003, the

DOJ noted that PNC Financial and PNC ICLC Corp., also in Wilmington, the PNC Financial affiliate involved in the transactions that gave

rise to the enforcement actions, had fully accounted for their behavior

in the transactions by providing for restitution to victims, acknowledging responsibility for the conduct of the organization, demonstrating

compliance with securities law and generally accepted accounting

principles, and pledging continued cooperation with respect to investigations of the transactions. The Board has reviewed the managerial

factors in this case in light of the enforcement actions and the steps

taken by PNC Financial to address these issues. The Board will

carefully monitor PNC Financial’s efforts to comply with its agreement with the DOJ and its efforts to meet the Board’s standards.

10. The commenter also expressed concern about allegations of

wrongful termination and employment discrimination by former

employees of PNC Bank, National Association, Pittsburgh, Pennsylvania (‘‘PNC Bank’’). These contentions and concerns are outside the

limited statutory factors that the Board is authorized to consider when

reviewing an application under the BHC Act. See Western Bancshares, Inc. v. Board of Governors, 480 F.2d 749 (10th Cir. 1973). The

Board also notes that the Equal Employment Opportunity Commission has jurisdiction to determine whether banking organizations like

PNC Financial are in compliance with federal equal employment

opportunity statutes under the regulations of the Department of Labor.

11. 12 U.S.C. §2901 et seq.

12. See Interagency Questions and Answers Regarding Community

Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).

13. The overall rating for PNC Bank was a composite of its

state/multistate ratings. In assigning an overall rating to PNC Bank,

examiners weighted the bank’s performance in some areas more

heavily than others based on the percentage of the bank’s overall

deposits in those areas. In particular, approximately 88 percent of the

deposits controlled by PNC Bank were in three areas, Pennsylvania,

New Jersey, and the Philadelphia multistate Metropolitan Statistical

Area (‘‘MSA’’) (‘‘Philadelphia MSA’’). In evaluating PNC Bank’s

CRA performance, examiners considered the bank’s residential mortgage lending reportable under the Home Mortgage Disclosure Act

(‘‘HMDA’’) (12 U.S.C. § 2801 et seq.) and its small business lending

74 Federal Reserve Bulletin Winter 2004
Financial’s other depository institution, PNC Bank, Delaware, New Castle, Delaware, also received an ‘‘outstanding’’ rating at is most recent CRA performance evaluation

by the Federal Deposit Insurance Corporation (‘‘FDIC’’),

as of January 24, 2000. UnitedTrust Bank, the only subsidiary depository institution controlled by United National,

received a ‘‘satisfactory’’ rating at its most recent CRA

performance evaluation by the Federal Reserve Bank of

New York, as of March 4, 2002.

B. CRA Performance of PNC Bank

1. Lending Test

Overall, OCC examiners rated PNC Bank ‘‘high satisfactory’’ for lending, noting that the bank demonstrated excellent lending activity, with good distribution of loans across

geographic boundaries and to various borrowers. PNC

Bank’s lending data also demonstrated strong community

development lending for affordable housing, community

services, and economic revitalization.

Pennsylvania. PNC Bank’s lending rating for Pennsylvania also was ‘‘high satisfactory.’’14 The lending, investment, and service test ratings for PNC Bank for Pennsylvania were based primarily on the bank’s performance

in the two assessment areas that were subject to fullscope reviews, the Pittsburgh and Scranton/Wilkes-Barre

(‘‘Scranton’’) assessment areas, where approximately

77 percent of the bank’s deposits in Pennsylvania were

located. Examiners noted that PNC Bank’s geographic

distribution of loans was good. Examiners considered the

volume of home mortgage lending by the bank to be

excellent and the volume of small business lending to be

good throughout PNC Bank’s assessment areas. Community development lending also was found to have had a

positive impact on PNC Bank’s rating in Pennsylvania

under the lending test. In the assessment areas subject to

a full-scope review, PNC Bank originated or purchased

approximately 61,600 small business, community development, and HMDA-reportable loans totaling approximately

$3.7 billion during the review period. Of the loans in these

assessment areas, HMDA-reportable loans accounted for

47,488 loans totaling $1.4 billion. In the rest of the state

during the review period, PNC Bank originated or purchased 39,364 HMDA-reportable loans totaling approximately $2.3 billion.

Examiners reported that the percentage of home purchase loans by PNC Bank in the Pittsburgh assessment

area’s low-income census tracts was comparable with

the percentage of owner-occupied housing units in those

tracts. Examiners also noted that, in the Pittsburgh and

Scranton assessment areas, the percentage of home purchase loans by PNC Bank in moderate-income census

tracts was comparable with the percentage of owneroccupied housing units in those areas. Based on market

share data for 2000 in the bank’s Pittsburgh assessment

area, PNC Bank ranked first for number of home purchase,

home improvement, and home refinance loans. In the

Scranton assessment area, PNC Bank ranked fifth for home

purchase loans and first for home improvement and home

refinance loans.

Examiners stated that PNC Bank had developed bankwide lending programs that demonstrated flexibility in

helping to meet the credit needs of the community, such

as the Basic Loan Program, which offered expanded credit

criteria, extended terms, and reduced minimum loan

amounts to LMI borrowers seeking home equity installment loans, personal unsecured loans, and home equity

lines of credit. The bank also had similar products tailored

to its Pennsylvania assessment areas, including the Primary

Access Mortgage Program, a home purchase loan program

sponsored by the Urban Redevelopment Authority of Pittsburgh, and other partnerships with municipal governmental

loan programs.

Examiners reported that PNC Bank originated 13,678

small loans to businesses totaling approximately $1.7 billion in the Pennsylvania assessment areas subject to fullscope reviews during the review period. PNC Bank ranked

fifth in the Pittsburgh assessment area and sixth in the

Scranton assessment area, which examiners found commendable in light of the competition faced by the bank

from large lenders that provided small business credit

cards. Examiners also commented that PNC Bank’s market

share for small loans to businesses in low-income geographies in the Pittsburgh and Scranton assessment

areas exceeded the bank’s overall market share for this

loan product in those assessment areas. In the rest of

the state during the review period, PNC Bank originated

8,540 small loans to businesses totaling approximately

$888 million.

Examiners also concluded that PNC Bank demonstrated

a good volume of loans to small businesses in the assessment areas receiving a full-scope review, because the

bank’s market share for loans to small businesses in the

Pittsburgh and Scranton assessment areas exceeded its

overall market share for small business loans in those

assessment areas.

According to examiners, PNC Bank’s community development lending record in Pittsburgh was good, and its

record in Scranton was excellent. In these assessment

areas, the bank originated 87 community development

loans during the review period totaling $87.9 million. For

the same period, PNC Bank originated 27 community

development loans totaling approximately $21.2 million in

the rest of Pennsylvania. Examiners favorably noted the

bank’s origination of small business loans for community

development. These loans included $4.3 million in construction financing to redevelop public housing in a lowincome area in Pittsburgh and to develop 86 Hope VI

from January 1, 1998, through December 31, 2001, and the bank’s

community development lending from July 6, 1998, through December 31, 2001 (together, the ‘‘review period’’).

14. PNC Bank’s ratings for Pennsylvania did not include data from

the bank’s branches in the Philadelphia MSA.

Legal Developments 75
rental units, two-thirds of which will be affordable for LMI

residents.15

New Jersey. PNC Bank also received a ‘‘high satisfactory’’ rating under the lending test in New Jersey.16 The

lending, investment, and service test ratings for PNC Bank

in New Jersey were based primarily on the bank’s performance in the two assessment areas that were subject to

full-scope reviews, the Bergen–Passaic and Newark assessment areas, where approximately 48 percent of the bank’s

deposits in New Jersey were located. Examiners concluded

that PNC Bank’s performance under the lending test was

good in the Bergen–Passaic assessment area and excellent

in the Newark assessment area, where the bank demonstrated a high level of community development lending.

In the two assessment areas, PNC Bank originated or

purchased approximately 27,400 small business, community development, and HMDA-reportable loans totaling

approximately $2.5 billion during the review period, of

which 20,606 loans totaling approximately $1.9 billion

were HMDA-reportable. In the rest of the state during the

review period, PNC Bank originated or purchased 27,966

HMDA-reportable loans totaling approximately $2.4 billion. Examiners noted that the percentage of home purchase, home improvement, and home refinance loans by

PNC Bank to LMI census tracts in the Bergen-Passaic

assessment area significantly or substantially exceeded the

percentage of owner-occupied units in this area. Examiners

characterized the geographic distribution of these categories of loans as excellent. With respect to home purchase,

home improvement, and home refinance loans in the

Newark assessment area, examiners considered the bank’s

geographic distribution to be adequate. In addition to offering its bankwide lending programs with flexible terms

to meet the community’s credit needs, PNC Bank offered

products that were tailored to the needs of its New Jersey

assessment areas, such as Hurricane Floyd Loans and

Micro Loans.17

Examiners reported that PNC Bank originated 6,795

small loans totaling $578.5 million during the review

period to businesses in the assessment areas subject to

full-scope review. Examiners characterized the geographic

distribution of these loans as excellent in both the Bergen–

Passaic and Newark assessment areas. In the rest of the

state during the review period, examiners reported that

PNC Bank originated 6,194 small loans to businesses

totaling approximately $613.1 million. In the BergenPassaic assessment area, the percentage of PNC Bank’s

loans to small businesses in LMI census tracts significantly

exceeded the percentage of small businesses in these tracts.

In each of these assessment areas, PNC Bank’s market

share of loans to small businesses was almost twice as

large as its market share of loans to businesses of all sizes.

According to examiners, the level and type of community development lending by PNC Bank was responsive

to the credit needs of the communities it served in its

New Jersey assessment areas. In the assessment areas

subject to full-scope review, PNC Bank originated 25 community development loans totaling $55.9 million during

the review period. In the rest of the state, PNC Bank

originated 11 community development loans totaling

approximately $19.7 million during the review period.

These loans included a $15 million loan to the operator of

a large apartment complex in a low-income community in

Newark that provided housing for elderly or disabled LMI

tenants, and a line of credit to provide working capital to a

Bergen-Passaic community development corporation that

administered programs beneficial to LMI individuals by

providing housing, a men’s shelter, and job development

and adult education programs.

Philadelphia MSA. PNC Bank’s lending rating for the

Philadelphia MSA also was ‘‘high satisfactory,’’18 with

examiners commending PNC Bank’s geographic distribution of loans. PNC Bank originated or purchased 50,238

small business, community development, and HMDAreportable loans totaling approximately $3.9 billion in the

Philadelphia MSA during the review period. Of the loans

in this assessment area, 38,577 loans totaling approximately $2.4 billion were HMDA-reportable. Examiners

noted that PNC Bank’s market share for HMDA-reportable

loans in LMI geographies was more than its overall market

share for these loans in the assessment area. The bank’s

percentage of home purchase loans in LMI census tracts

exceeded the percentage of owner-occupied units in those

geographies. In addition, the bank demonstrated a good

distribution of HMDA-reportable loans to borrowers of all

income levels.

PNC Bank offered bankwide and locally adapted loan

products that demonstrated flexibility in meeting the credit

needs of communities in the Philadelphia MSA. The local

initiatives included PNC Bank’s Philadelphia Home

Improvement Loan (‘‘PHIL’’) program, a program sponsored by the City of Philadelphia to provide home purchase

loans with 3 percent interest rates and no home equity

requirements to residents of LMI areas. During the review

period, PNC Bank originated 233 of these loans, representing 61 percent of PHIL loans by all participating lenders.

Examiners stated that PNC Bank had a good volume and

an excellent geographic distribution of small loans to businesses in the Philadelphia MSA. The bank originated

11,571 small loans to businesses totaling approximately

15. Hope VI is a Department of Housing and Urban Development

program designed, in part, to lessen concentrations of poverty by

placing public housing in nonpoverty neighborhoods and promoting

mixed-income communities.

16. PNC Bank’s ratings for New Jersey did not include data from

the bank’s branches in the Philadelphia MSA.

17. The Hurricane Floyd Loans were offered to New Jersey residents in the fall of 1999. These loans products included flexible

underwriting criteria, below-market interest rates, and 90-day deferrals of initial payments. PNC Bank’s Micro Loans were offered in

connection with the City of Paterson’s microlending program, in

which a 50 percent guarantee by the city allowed small businesses

in predominantly LMI communities to qualify for otherwise unavailable small loans.

18. PNC Bank’s Philadelphia MSA assessment area included the

Philadelphia MSA, except Salem County, New Jersey.

76 Federal Reserve Bulletin Winter 2004
$1.4 billion during the review period. The percentage of

small loans by PNC Bank to businesses in LMI geographies was comparable with the percentage of businesses in

those geographies. The bank’s market share of small loans

to businesses in LMI areas was significantly greater than

its market share for small loans to businesses in the Philadelphia MSA overall.

According to examiners, PNC Bank’s community development lending in the Philadelphia MSA during the review

period was considered good because it addressed a broad

array of community needs. Examiners reported that PNC

Bank originated 89 community development loans to

50 borrowers during the review period totaling $28.4 million. Approximately 54 percent of these loans related to

affordable housing, which had been an identified community credit need. A large number of the bank’s community

development loans also went to various nonprofit organizations that provided services to LMI individuals and families. Examiners noted that several of PNC Bank’s community development loans were complex, and their structure

required coordination among multiple lenders, community

organizations, and governmental entities. The bank’s community development lending activities included $1.5 million to help finance a collaborative effort to build a grocery

store in an LMI neighborhood in Philadelphia. The project

involved PNC Bank, a local community development corporation, the City of Philadelphia, and Local Initiatives

Support Corporation. PNC Bank also provided a $2 million

line of credit to Collaborative Lending Initiative, a community development financial institution (‘‘CDFI’’) that lends

money to affordable housing developers.

2. Investment Test

Overall, PNC Bank received an ‘‘outstanding’’ rating under

the investment test. Examiners reported that the bank’s

community development investments demonstrated an

excellent level of responsiveness to specific credit needs

of the community.19 According to examiners, PNC Bank

made 833 qualifying community development investments

and grants totaling approximately $88.5 million in those

areas in Pennsylvania and New Jersey subject to full-scope

reviews and in the Philadelphia MSA during the CRA

evaluation period. These investments and grants included

investments in low-income housing tax credits for projects

that created affordable housing units, a collaboration with

the New Jersey Department of Community Affairs to contribute to predevelopment costs for the rehabilitation of a

rental apartment building for low-income families, and an

investment in a large CDFI to support its affordable housing programs in the Philadelphia area.

3. Service Test

PNC Bank received an ‘‘outstanding’’ rating under the

service test. Examiners noted that the bank’s systems were

readily accessible to geographies and individuals of different income levels, and that the bank provided an excellent

level of community development service that assisted LMI

individuals and areas.20 In those areas in Pennsylvania and

New Jersey subject to full-scope reviews and in the Philadelphia MSA, PNC Bank operated 379 branches during

the review period, of which approximately 21 percent

were in LMI geographies. In addition, PNC Bank opened

18 branches and closed 40 branches in those areas. Examiners reported that the bank’s record of opening and closing branches did not adversely affect the accessibility of

systems for delivering banking services in the Pittsburgh,

Scranton, Bergen–Passaic, Newark, or Philadelphia MSA

assessment areas. In the Pennsylvania and New Jersey

areas subject to full-scope reviews and in the Philadelphia

MSA during the review period, the bank increased by

44 the number of ATMs it operated in LMI geographies.

C. HMDA and Fair Lending Record

The Board also has carefully considered PNC Financial’s

lending record in light of comments on HMDA data

reported by its subsidiaries. The commenter alleged that

PNC Financial denies a higher percentage of loan requests

by minority applicants than does the aggregate of all lenders (‘‘aggregate’’) in the following MSAs: Bergen–Passaic;

Harrisburg, Pennsylvania; Jersey City, New Jersey;

Newark; Newburgh, Pennsylvania–New York; Philadelphia; Pittsburgh; Louisville, Kentucky–Indiana; and Wilmington.21 The 2001 and 2002 HMDA data 22 indicate that

PNC Financial generally had a somewhat better record

than the aggregate for lending to African Americans and a

somewhat worse record than the aggregate for lending to

Hispanics, as measured by denial disparity ratios.23 The

19. In its Pennsylvania, New Jersey, and Philadelphia MSA assessment areas, PNC Bank received ratings of ‘‘outstanding,’’ ‘‘high

satisfactory,’’ and ‘‘outstanding,’’ respectively, for the investment test.

The evaluation period for PNC Bank’s performance under the investment test was July 6, 1998, through March 31, 2002.

20. In its Pennsylvania, New Jersey, and Philadelphia MSA assessment areas, PNC Bank received ratings of ‘‘outstanding,’’ ‘‘high

satisfactory,’’ and ‘‘outstanding,’’ respectively, for the service test. The

evaluation period for PNC Bank’s performance under the service test

was July 6, 1998, through March 31, 2002.

21. The commenter also alleged that the data PNC Financial submitted to the Board in response to its comment were inconsistent with

data reported under HMDA. PNC Financial noted that the data in the

response were derived from its HMDA data. The discrepancies noted

by the commenter appear to have resulted from different categorizations of the data by PNC Financial in its response. For purposes of the

response, PNC Financial designated the race for joint loan applicants

based on the race of the primary applicant. For purposes of HMDA,

however, joint applicants are categorized as ‘‘joint minority’’ applicants if one applicant is white and other applicant is a minority and are

so categorized based on the information provided by the primary

applicant if the individuals are members of different minority groups.

22. The Board analyzed 2001 and 2002 HMDA data for PNC

Financial’s lending affiliates in the MSAs cited by the commenter and

in the four statewide assessment areas that include these markets. The

Board’s review included the HMDA data reported by PNC Bank and

PNC Bank, Delaware.

23. The denial disparity ratio compares the denial rate for minority

loan applicants with the rate for white applicants.

Legal Developments 77
data also indicate, however, that PNC Financial generally

originated a higher percentage of its HMDA-reportable

loans to applicants in minority census tracts than the aggregate in 2001 and 2002.24

The Board is concerned when HMDA data for an institution indicate disparities in lending and believes that all

banks are obligated to ensure that their lending practices

are based on criteria that ensure not only safe and sound

lending, but also equal access to credit by creditworthy

applicants regardless of their race or income level. The

Board recognizes, however, that HMDA data alone provide

an incomplete measure of an institution’s lending in its

community because these data cover only a few categories

of housing-related lending. HMDA data, moreover, provide only limited information about the covered loans.25

HMDA data, therefore, have limitations that make them an

inadequate basis, absent other information, for concluding

that an institution has not assisted adequately in meeting its

community’s credit needs or has engaged in illegal lending

discrimination.

Because of the limitations of HMDA data, the Board

has considered these data carefully in light of other

information, including examination reports that provide an

on-site evaluation of compliance by the subsidiary depository institutions of PNC Financial with fair lending laws.

Examiners found no evidence of prohibited discrimination

or other illegal credit practices at any of PNC Financial’s

subsidiary depository institutions. Examiners also identified no substantive violations of applicable fair lending

laws and regulations at these institutions.

The record also indicates that PNC Financial has taken

steps to ensure compliance with fair lending laws. PNC

Financial’s corporate fair lending statement of policy

includes a commitment to conduct credit, marketing, and

pricing activities for all borrowers while maintaining safe

and sound credit standards. To implement this commitment, PNC Financial has devised a fair lending program

that includes employee training and a review by senior

management of credit decisions, pricing, marketing, and

fair credit-related policies and procedures.

The Board has also considered the HMDA data in

light of the performance of PNC Financial’s subsidiary

banks under the CRA and the programs described above.

These established efforts demonstrate that the banks are

active in helping to meet the credit needs of their entire

communities.

D. Branch Closings

One commenter expressed concern about PNC Financial’s

stated intention of closing branches after the merger of

PNC Bank/UnitedTrust Bank. PNC Bank has represented

that any consolidations or branch closings would comply

with PNC Bank’s branch closing policy and all applicable

rules and regulations, and that no branches in LMI census

tracts would be affected. The policy includes a review

of the performance of a branch proposed for relocation,

closure, or consolidation; the potential adverse impact

of that the closing on the branch’s local community, with

special emphasis on LMI communities; and the bank’s

ability to serve communities where a branch is relocated,

closed, or consolidated through other PNC Bank branches

and departments.

The Board also has considered that federal banking law

provides a specific mechanism for addressing branch closings.26 Federal law requires an insured depository institution to provide notice to the public and the appropriate

federal supervisory agency before closing a branch. In

addition, the Board notes that the OCC and FDIC, as the

appropriate federal supervisors of PNC Financial’s subsidiary banks, will continue to review the branch closing

records of the banks in the course of conducting CRA

performance examinations.

E. Conclusion on Convenience and Needs

Considerations

In reviewing the effect of the proposal on the convenience

and needs of the communities to be served, the Board has

carefully considered the entire record, including comments

received and responses to the comments, evaluations of

the performance of the insured depository institution

subsidiaries of PNC Financial and United National under

the CRA, and confidential supervisory information. The

Board also considered information submitted by PNC

Financial concerning its subsidiary banks’ performance

under the CRA since their last CRA performance evaluations and the policies and procedures in place to ensure

compliance with fair lending laws, HMDA, and other

applicable laws.

Based on all the facts of record, and for reasons discussed above, the Board concludes that considerations

relating to the convenience and needs factors, including the

CRA performance records of the relevant depository institutions, are consistent with approval of the proposal.

24. For purposes of this HMDA analysis, minority census tract

means a census tract with a minority population of 80 percent or more.

25. The data, for example, do not account for the possibility that an

institution’s outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not

provide a basis for an independent assessment of whether an applicant

who was denied credit was, in fact, creditworthy. Credit history

problems and excessive debt levels relative to income (reasons most

frequently cited for a credit denial) are not available from HMDA

data.

26. Section 42 of the Federal Deposit Insurance Act (12 U.S.C.

§1831r-1), as implemented by the Joint Policy Statement Regarding

Branch Closings (64 Federal Register 34,844 (1999)), requires that a

bank provide the public with at least 30 days’ notice and the appropriate federal supervisory agency with at least 90 days’ notice before the

date of the proposed branch closing. The bank also is required to

provide reasons and other supporting data for the closure, consistent

with the institution’s written policy for branch closings.

78 Federal Reserve Bulletin Winter 2004
Conclusion

Based on the foregoing and in light of all the facts of

record, the Board has determined that the applications

should be, and hereby are, approved.27 In reaching this

conclusion, the Board has considered all the facts of record

in light of the factors that it is required to consider under

the BHC Act and other applicable statutes. The Board’s

approval is specifically conditioned on compliance by PNC

Financial with all the representations and commitments

made in connection with the applications and the receipt

of all other regulatory approvals. These representations,

commitments, and conditions are deemed to be conditions

imposed in writing by the Board in connection with its

findings and decision and, as such, may be enforced in

proceedings under applicable law.

The transaction shall not be consummated before the

fifteenth calendar day after the effective date of this order,

and the proposal may not be consummated later than three

months after the effective date of this order, unless such

period is extended for good cause by the Board or by the

Reserve Bank, acting pursuant to delegated authority.

By order of the Board of Governors, effective November 19, 2003.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Bernanke. Absent and not

voting: Governors Gramlich and Kohn.

Robert deV. Frierson

Deputy Secretary of the Board

S&T Bancorp, Inc.

Indiana, Pennsylvania

Order Approving Acquisition of Shares of a Bank Holding Company

S&T Bancorp, Inc. (‘‘S&T’’), a financial holding company

within the meaning of the Bank Holding Company Act

(‘‘BHC Act’’), has requested the Board’s approval under

section 3 of the BHC Act (12 U.S.C. §1842) to acquire up

to 9.9 percent of the voting shares of CBT Financial Corp.

(‘‘CBT’’), and thereby indirectly acquire an interest in

CBT’s subsidiary bank, Clearfield Bank & Trust Company

(‘‘Clearfield Bank’’), both in Clearfield, Pennsylvania.1

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published

(68 Federal Register 60,105 (2003)). The time for filing

comments has expired, and the Board has considered the

proposal and all comments received in light of the factors

set forth in section 3 of the BHC Act.

S&T, with consolidated assets of $2.8 billion, is the

18th largest banking organization in Pennsylvania, controlling total deposits of $1.9 billion, which represents 1.1 percent of total deposits in banking organizations in the

state (‘‘state deposits’’).2 CBT, with consolidated assets of

$254 million, is the 121st largest banking organization in

Pennsylvania, controlling $187.1 million in deposits, which

represents less than 1 percent of state deposits.3 If S&T

were deemed to control CBT on consummation of the

proposal, S&T would remain the 18th largest banking

organization in Pennsylvania, controlling approximately

$2.1 billion in deposits, which would represent 1.2 percent

of state deposits.

The Board received a comment from CBT objecting to

the proposal on the grounds that the proposed investment

could adversely affect the financial condition of both CBT

and S&T. The Board has considered carefully CBT’s comment in light of the factors that the Board must consider

under section 3 of the BHC Act.

The Board previously has stated that the acquisition of

less than a controlling interest in a bank or bank holding

company is not a normal acquisition for a bank holding

company.4 However, the requirement in section 3(a)(3) of

the BHC Act that the Board’s approval be obtained before

a bank holding company acquires more than 5 percent of

the voting shares of a bank suggests that Congress contemplated the acquisition by bank holding companies of

between 5 and 25 percent of the voting shares of banks.5

27. The commenter requested that the Board hold a public hearing

on the proposal. Section 3 of the BHC Act does not require the Board

to hold a public hearing on an application unless the appropriate

supervisory authority for any of the banks to be acquired makes a

timely written recommendation of denial of the application. The

Board has not received such a recommendation from the appropriate

supervisory authority. Under its rules, the Board also may, in its

discretion, hold a public meeting or hearing on an application to

acquire a bank if a meeting or hearing is necessary or appropriate to

clarify factual issues related to the application and to provide an

opportunity for testimony. 12 C.F.R. 225.16(e). The Board has considered carefully the commenter’s request in light of all the facts of

record. In the Board’s view, the public has had ample opportunity to

submit comments on the proposal, and in fact, the commenter has

submitted written comments that the Board has considered carefully

in acting on the proposal. The commenter’s request fails to demonstrate why written comments do not present its views adequately or

why a meeting or hearing otherwise would be necessary or appropriate. For these reasons, and based on all the facts of record, the Board

has determined that a public hearing or meeting is not required or

warranted in this case. Accordingly, the request for a public hearing

on the proposal is denied.

In addition, the commenter has alleged that Federal Reserve System

staff have not complied with the Board’s ex parte communication

policies in this case, including an allegation of inappropriate communications with PNC Financial before it filed these applications. PNC

informed Reserve Bank staff of the United National proposal before

submitting the applications. It is fully consistent with federal law and

the Board’s rules for companies considering acquisitions to provide

advance notice of an acquisition proposal to the Federal Reserve

System and to identify issues that might be raised by the proposal. The

Board finds no basis for the commenter’s claim that the applications

were preapproved or that the staff engaged in any inappropriate

communications.

1. S&T owns 4.99 percent of CBT’s voting shares. S&T proposes

to acquire the additional shares of CBT through a cash purchase or

series of purchases on the open market.

2. Asset data for S&T are as of September 30, 2003. Deposit and

ranking data are as of June 30, 2002.

3. Asset data for CBT are as of June 30, 2003. Deposit and ranking

data are as of June 30, 2002.

4. See, e.g., Brookline Bancorp, MHC, 86 Federal Reserve Bulletin

52 (2000) (‘‘Brookline’’); North Fork Bancorporation, Inc. 81 Federal Reserve Bulletin 734 (1995); First Piedmont Corp., 59 Federal

Reserve Bulletin 456, 457 (1973).

5. See 12 U.S.C. §1842(a)(3).

Legal Developments 79
On this basis, the Board previously has approved the

acquisition by a bank holding company of less than a

controlling interest in a bank or bank holding company.6

S&T has stated that the acquisition is intended as a

passive investment and that it does not propose to control

or exercise a controlling influence over CBT or Clearfield

Bank. S&T has agreed to abide by certain commitments

previously relied on by the Board in determining that an

investing bank holding company would not be able to

exercise a controlling influence over another bank holding company or bank for purposes of the BHC Act.7 For

example, S&T has committed not to exercise or attempt to

exercise a controlling influence over the management or

policies of CBT or any of its subsidiaries; not to seek

or accept representation on the board of directors of CBT

or any of its subsidiaries; and not to have any director,

officer, employee, or agent interlocks with CBT or any of

its subsidiaries. S&T also has committed not to attempt to

influence the dividend policies, loan decisions, or operations of CBT or any of its subsidiaries. Moreover, the BHC

Act prohibits S&T from acquiring additional shares of

CBT or attempting to exercise a controlling influence over

CBT without the Board’s prior approval.

The Board has adequate supervisory authority to monitor compliance by S&T with the commitments, and the

ability to take enforcement action against S&T if it violates

any of the commitments.8 The Board also has authority to

initiate a control proceeding against S&T if facts presented

later indicate that S&T or any of its subsidiaries or affiliates in fact controls CBT for purposes of the BHC Act.9

Based on these considerations and all other facts of record,

the Board has concluded that S&T would not acquire

control of, or the ability to exercise a controlling influence

over, CBT through the proposed acquisition of voting

shares.

Competitive Considerations

In considering an application under section 3 of the BHC

Act, the Board is required to evaluate a number of factors,

including the competitive effects of the proposal. S&T and

CBT compete directly in the Clearfield-Jefferson, Pennsylvania, banking market.10 S&T is the largest depository

institution11 in the market, controlling $425.1 million in

deposits, which represents 24.7 percent of the total deposits in depository institutions in the market (‘‘market deposits’’).12 CBT is the fourth largest depository institution in

the market, controlling $154.8 million in deposits, which

represents 9 percent of market deposits. If considered a

combined organization on consummation of the proposal,

S&T and CBT would be the largest depository institution

in the Clearfield-Jefferson banking market, controlling

$579.9 million in deposits, which would represent 33.7 percent of market deposits. The Herfindahl–Hirschman Index

(‘‘HHI’’) for the Clearfield–Jefferson banking market

would increase 444 points to 2,119.13

The Board believes that the proposal would raise serious

competitive concerns in the Clearfield-Jefferson banking

market if S&T were to acquire control of CBT. Based

on all the facts of record, including S&T’s commitments

discussed above, the Board has concluded that S&T would

not acquire control of, or exercise a controlling influence

over, CBT or its subsidiaries, including Clearfield Bank, as

a result of the proposed acquisition. The Board’s inquiry

does not end, however, with its finding that S&T will not

control CBT. The Board previously has noted that one

company need not acquire control of another company

to lessen competition between them substantially.14 The

Board has found that noncontrolling interests in directly

competing depository institutions may raise serious

questions under the BHC Act and has concluded that

the specific facts of each case will determine whether

the minority investment in a company would be

anticompetitive.15

In this case, the Board has concluded, after careful

analysis of the record, that no significant reduction in

competition is likely to result from the proposed acquisition. The record shows that S&T intends the acquisition to

6. See, e.g., Brookline (acquisition of up to 9.9 percent of the

voting shares of a bank holding company); GB Bancorporation,

83 Federal Reserve Bulletin 115 (1997) (acquisition of up to 24.9 percent of the voting shares of a bank); Mansura Bancshares, Inc.,

79 Federal Reserve Bulletin 37 (1993) (‘‘Mansura’’) (acquisition of

9.7 percent of the voting shares of a bank holding company).

7. See, e.g., Emigrant Bancorp, Inc., 82 Federal Reserve Bulletin

555 (1996); First Community Bancshares, Inc., 77 Federal Reserve

Bulletin 50 (1991). These commitments are set forth in the Appendix.

8. See 12 U.S.C. §1818(b)(1).

9. See 12 U.S.C. §1841(a)(2)(C).

10. The Clearfield-Jefferson market is defined as Clearfield and

Jefferson Counties and North Mahoning, Canoe, and Banks Townships in Indiana County, all in Pennsylvania.

11. In this context, depository institutions include commercial

banks, savings banks, and savings associations. Market share data are

based on calculations that include the deposits of thrift institutions at

50 percent. The Board previously has indicated that thrift institutions

have become, or have the potential to become, significant competitors

of commercial banks. See, e.g., Midwest Financial Group, 75 Federal

Reserve Bulletin 386, 387 (1989); National City Corporation, 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board regularly has

included thrift deposits in the calculation of market share on a 50 percent weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal

Reserve Bulletin 52, 55 (1991).

12. Market deposit data are as of June 30, 2002, and reflect

mergers and acquisitions through November 11, 2003..

13. Under the revised Department of Justice Merger Guidelines,

49 Federal Register 26,823 (June 29, 1984), a market in which the

post-merger HHI is above 1800 is considered highly concentrated.

The Department of Justice has informed the Board that a bank merger

or acquisition generally will not be challenged (in the absence of other

factors indicating anticompetitive effects) unless the post-merger

HHI is at least 1800 and the merger increases the HHI by more than

200 points. The Department of Justice has stated that the higher than

normal thresholds for an increase in the HHI when screening bank

mergers and acquisitions for anticompetitive effects implicitly recognize the competitive effects of limited-purpose and other nondepository financial entities.

14. See, e.g., SunTrust Banks, Inc., 76 Federal Reserve Bulletin

542 (1990); First State Corp., 76 Federal Reserve Bulletin 376, 379

(1990); Sun Banks, Inc., 71 Federal Reserve Bulletin 243 (1985)

(‘‘Sun Banks’’).

15. See, e.g., BOK Financial Corp., 81 Federal Reserve Bulletin

1052, 1053–54 (1995); Mansura at 38; Sun Banks at 244.

80 Federal Reserve Bulletin Winter 2004
be a passive investment, and that there will be no officer or

director interlocks between S&T and CBT and their respective subsidiaries, including Clearfield Bank. There is no

evidence that S&T, by virtue of holding 9.9 percent of the

voting shares of CBT, would have access to confidential

information that would enable it to engage in anticompetitive behavior with respect to CBT or Clearfield Bank.

Moreover, S&T has committed not to exercise a controlling influence over CBT and, therefore, may not direct

CBT or Clearfield Bank to act in coordination with S&T in

a manner that reduces competition.

The Board has also considered the market conditions in

the Clearfield-Jefferson banking market. The Board notes

that, in addition to S&T and CBT, eleven other bank and

thrift competitors, including four competitors with market

shares of at least 8 percent each, provide additional sources

of banking services to the market. Moreover, ClearfieldJefferson is a large rural market with total deposits of more

than $1.7 billion, and its population per banking office and

deposits per banking office exceed the averages for other

counties in Pennsylvania, indicating that the market is

attractive for new entry. In fact, a savings bank established

a de novo branch in the market in 2002. The Department of

Justice has also reviewed the proposal and has advised the

Board that it does not believe that the proposed acquisition

would likely have a significantly adverse effect on competition in any relevant banking market.

Based on these considerations and other facts of record,

the Board has concluded that competitive considerations

are consistent with approval.

Other Factors

The Board also is required under section 3 of the BHC Act

to consider the financial and managerial resources and

future prospects of the companies and banks concerned.16

The Board notes that S&T is well managed and well

capitalized and would remain so after the proposed acquisition. The Board has reviewed the financial and managerial

resources of S&T and CBT and has concluded on the basis

of all the facts of record that these resources, the future

prospects of S&T, CBT, and their subsidiaries, and the

other supervisory factors the Board must consider are

consistent with approval of this application. In addition,

considerations relating to the convenience and needs of the

communities to be served, including the records of performance of the institutions involved under the Community

Reinvestment Act, 12 U.S.C. §2901 et seq. (‘‘CRA’’), are

consistent with approval of the application.17

Conclusion

Based on the foregoing and all other facts of record, the

Board has determined that this application should be, and

hereby is, approved. In reaching this conclusion, the Board

has considered all the facts of record in light of the factors

that it is required to consider under the BHC Act and other

applicable statutes. The Board’s approval is specifically

conditioned on compliance by S&T with all representations and commitments made in connection with this application, including the commitments discussed in this order.

These representations and commitments are deemed to

be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be

enforced in proceedings under applicable law.

The acquisition of CBT’s voting shares shall not be

consummated before the fifteenth calendar day after the

effective date of this order, or later than three months after

the effective date of this order, unless such period is

extended for good cause by the Board or by the Federal

Reserve Bank of Cleveland, acting pursuant to delegated

authority.

By order of the Board of Governors, effective November 25, 2003.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Olson, and Bernanke. Absent and not

voting: Governors Bies and Kohn.

Jennifer J. Johnson

Secretary of the Board

Appendix

As part of this proposal, S&T Bancorp, Inc. (‘‘S&T’’),

Indiana, Pennsylvania, commits that S&T will not, without

the prior approval of the Federal Reserve, directly or

indirectly:

(1) Exercise or attempt to exercise a controlling influence

over the management or policies of CBT Financial

Corporation (‘‘CBT’’) or any of its subsidiaries;

(2) Seek or accept representation on the board of directors of CBT or any of its subsidiaries;

(3) Have or seek to have any employee or representative

serve as an officer, agent, or employee of CBT or any

of its subsidiaries;

16. CBT asserts that S&T’s ownership of a large percentage of

CBT’s shares could adversely affect the price of CBT’s stock. CBT

notes that its stock is thinly traded and contends that if S&T sold a

large number of shares at once, the price could change precipitously.

CBT further argues that this result could adversely affect S&T’s

financial resources by diminishing the value of S&T’s investment in

CBT. The Board is limited under the BHC Act to the consideration of

factors specified in the Act. See Western Bancshares, Inc. v. Board of

Governors, 480 F.2d 749 (10th Cir. 1973). The potential effect of

future events on the price of a company’s shares is not among the

factors the Board is charged with considering under the BHC Act

or other applicable statutes. Moreover, as noted, S&T is and would

continue to be well capitalized after the proposed acquisition, and

other considerations relating to the financial resources and future

prospects of S&T and CBT are consistent with approval.

17. S&T’s lead subsidiary bank, S&T Bank, also in Indiana, and

Clearfield Bank each received ‘‘satisfactory’’ ratings at their most

recent examinations for CRA performance by the Federal Deposit

Insurance Corporation, as of January 1, 2003, and January 1, 1999,

respectively.

Legal Developments 81
(4) Take any action that would cause CBT or any of its

subsidiaries to become a subsidiary of S&T, or any of

S&T’s subsidiaries;

(5) Acquire or retain shares that would cause the combined interests of S&T and any of S&T’s subsidiaries

and their officers, directors, and affiliates to equal or

exceed 25 percent of the outstanding voting shares of

CBT or any of its subsidiaries;

(6) Propose a director or slate of directors in opposition

to a nominee or slate of nominees proposed by the

management or board of directors of CBT or any of

its subsidiaries;

(7) Solicit or participate in soliciting proxies with respect

to any matter presented to the shareholders of CBT or

any of its subsidiaries;

(8) Attempt to influence the dividend policies or practices; the investment, loan, or credit decisions or

policies; the pricing of services; personnel decisions;

operations activities (including the location of any

offices or branches or their hours of operation, etc.);

or any similar activities or decisions of CBT or any of

its subsidiaries;

(9) Dispose or threaten to dispose of shares of CBT or

any of its subsidiaries as a condition of specific action

or nonaction by CBT or any of its subsidiaries; or

(10) Enter into any other banking or nonbanking transactions with CBT or any of its subsidiaries, except that

S&T may establish and maintain deposit accounts

with CBT’s subsidiary depository institution, provided that the aggregate balance of all such deposit

accounts does not exceed $500,000 and that the

accounts are maintained on substantially the same

terms as those prevailing for comparable accounts

of persons unaffiliated with CBT or any of its

subsidiaries.

S&T Bancorp, Inc.

Indiana, Pennsylvania

Order Approving Acquisition of Shares of a Bank

Holding Company

S&T Bancorp, Inc. (‘‘S&T’’), a financial holding company

within the meaning of the Bank Holding Company Act

(‘‘BHC Act’’), has requested the Board’s approval under

section 3 of the BHC Act (12 U.S.C. §1842) to acquire up

to 9.9 percent of the voting shares of IBT Bancorp, Inc.

(‘‘IBT’’), and thereby indirectly acquire an interest in IBT’s

subsidiary bank, Irwin Bank & Trust Company (‘‘Irwin

Bank’’), both in Irwin, Pennsylvania.1

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published

(68 Federal Register 57,462 (2003)). The time for filing

comments has expired, and the Board has considered the

proposal and all comments received in light of the factors

set forth in section 3 of the BHC Act.

S&T, with consolidated assets of $2.8 billion, is the 18th

largest banking organization in Pennsylvania, controlling

deposits of $1.9 billion, which represents 1.1 percent of

total deposits in banking organizations in the state (‘‘state

deposits’’).2 IBT, with consolidated assets of $609 million,

is the 52nd largest banking organization in Pennsylvania,

controlling $450.4 million in deposits, which represents

less than 1 percent of state deposits.3 If S&T were deemed

to control IBT after the proposed acquisition, S&T would

become the 16th largest banking organization in Pennsylvania, controlling approximately $2.4 billion in deposits,

which would represent 1.3 percent of state deposits.

The Board received a comment from IBT objecting to

the proposal on the grounds that the proposed investment

would adversely affect the financial and managerial

resources of IBT and competition in the banking market

where the subsidiary banks of S&T and IBT compete. The

Board has considered carefully IBT’s comment in light of

the factors that the Board must consider under section 3 of

the BHC Act.

The Board previously has stated that the acquisition of

less than a controlling interest in a bank or bank holding

company is not a normal acquisition for a bank holding

company.4 However, the requirement in section 3(a)(3) of

the BHC Act that the Board’s approval be obtained before

a bank holding company acquires more than 5 percent of

the voting shares of a bank suggests that Congress contemplated the acquisition by bank holding companies of

between 5 and 25 percent of the voting shares of banks.5

On this basis, the Board previously has approved the

acquisition by a bank holding company of less than a

controlling interest in a bank or bank holding company.6

IBT asserts that the proposal constitutes a controlling

investment in IBT and would enable S&T to influence the

affairs of Irwin Bank. Because S&T would not control

25 percent or more of the outstanding shares of any class of

voting securities of IBT or Irwin Bank and would not be

able to elect a majority of directors of IBT or Irwin Bank,

S&T could only be deemed to control IBT or Irwin Bank

for purposes of the BHC Act if the Board determines that

S&T, by virtue of its proposed investment, would be able

to exercise a controlling influence over the management or

policies of IBT or Irwin Bank.

S&T has stated that the acquisition is intended as a

passive investment and that it does not propose to control

1. S&T owns 4.1 percent of IBT’s voting shares. S&T proposes to

acquire the additional voting shares of IBT through a cash purchase or

series of purchases on the open market.

2. Asset data for S&T are as of September 30, 2003. Deposit and

ranking data are as of June 30, 2002.

3. Asset data for IBT are as of June 30, 2003. Deposit data and

ranking data are as of June 30, 2002.

4. See, e.g., Brookline Bancorp, MHC, 86 Federal Reserve Bulletin

52 (2000) (‘‘Brookline’’); North Fork Bancorporation, Inc. 81 Federal Reserve Bulletin 734 (1995); First Piedmont Corp., 59 Federal

Reserve Bulletin 456, 457 (1973).

5. See 12 U.S.C. §1842(a)(3).

6. See, e.g., Brookline (acquisition of up to 9.9 percent of the

voting shares of a bank holding company); GB Bancorporation,

83 Federal Reserve Bulletin 115 (1997) (acquisition of up to 24.9 percent of the voting shares of a bank); Mansura Bancshares, Inc.,

79 Federal Reserve Bulletin 37 (1993) (‘‘Mansura’’) (acquisition of

9.7 percent of the voting shares of a bank holding company).

82 Federal Reserve Bulletin Winter 2004
IBT or Irwin Bank. S&T has agreed to abide by certain

commitments previously relied on by the Board in determining that an investing bank holding company would not

be able to exercise a controlling influence over another

bank holding company or bank for purposes of the BHC

Act.7 For example, S&T has committed not to exercise or

attempt to exercise a controlling influence over the management or policies of IBT or any of its subsidiaries; not

to seek or accept representation on the board of directors of

IBT or any of its subsidiaries; and not to have any director,

officer, employee, or agent interlocks with IBT or any of its

subsidiaries. S&T also has committed not to attempt to

influence the dividend policies, loan decisions, or operations of IBT or any of its subsidiaries. Moreover, the BHC

Act prohibits S&T from acquiring additional shares of IBT

or attempting to exercise a controlling influence over IBT

without the Board’s prior approval.

IBT asserts that the commitments are insufficient to

prevent S&T from exercising a controlling influence over

IBT. IBT notes that, after completing the proposed acquisition of voting shares, S&T would be the largest shareholder of IBT, and that S&T’s interest in IBT would

exceed the combined interests of all the members of IBT’s

board of directors.

The Board, however, concludes, based on past experience, that the commitments made by S&T in connection

with this application are sufficient to prevent S&T from

exercising a controlling influence over IBT. The Board has

adequate supervisory authority to monitor compliance by

S&T with the commitments, and the ability to take enforcement action against S&T if it violates any of the commitments or exercises a controlling influence over IBT.8 The

Board also has authority to initiate a control proceeding

against S&T if facts presented later indicate that S&T or

any of its subsidiaries or affiliates in fact controls IBT for

purposes of the BHC Act.9 Based on these considerations

and all other facts of record, the Board has concluded that

S&T would not acquire control of, or the ability to exercise

a controlling influence over, IBT through the proposed

acquisition of voting shares.

Competitive Considerations

In considering an application under section 3 of the BHC

Act, the Board is required to evaluate a number of factors,

including the competitive effects of the proposal. The

Board previously has noted that one company need not

acquire control of another company to lessen competition

between them substantially.10 The Board has found that

noncontrolling interests in directly competing depository

institutions may raise serious questions under the BHC

Act, and has concluded that the specific facts of each case

will determine whether the minority investment in a company would be anticompetitive.11

S&T and IBT compete directly in the Pittsburgh, Pennsylvania, banking market.12 S&T is the ninth largest

depository institution13 in the Pittsburgh banking market,

controlling $649.6 million in deposits, which represents

1.6 percent of total deposits in depository institutions in

the market (‘‘market deposits’’).14 IBT is the 14th largest

depository institution in the Pittsburgh banking market,

controlling $343.7 million in deposits, which represents

less than 1 percent of market deposits. If considered a

combined banking organization on consummation of the

proposal, S&T and IBT would become the eighth largest

depository institution in the Pittsburgh banking market,

controlling approximately $993.4 million in deposits,

which would represent 2.5 percent of market deposits. The

Herfindahl–Hirschman Index (‘‘HHI’’) for the Pittsburgh

banking market would increase 3 points to 1,537, and

numerous competitors would remain in the market.15

IBT asserts that S&T’s ownership of 9.9 percent of

IBT’s voting shares would provide S&T with the ability to

influence the affairs of Irwin Bank, with a resulting adverse

effect on competition. The Board concludes that the commitments made by S&T to maintain its investment as a

passive investment and not to exercise a controlling influ7. See, e.g., Emigrant Bancorp, Inc., 82 Federal Reserve Bulletin

555 (1996); First Community Bancshares, Inc., 77 Federal Reserve

Bulletin 50 (1991). These commitments are set forth in the Appendix.

8. See 12 U.S.C. §1818(b)(1).

9. See 12 U.S.C. §1841(a)(2)(C).

10. See, e.g., SunTrust Banks, Inc., 76 Federal Reserve Bulletin

542 (1990); First State Corp., 76 Federal Reserve Bulletin 376, 379

(1990); Sun Banks, Inc., 71 Federal Reserve Bulletin 243 (1985)

(‘‘Sun Banks’’).

11. See, e.g., BOK Financial Corp., 81 Federal Reserve Bulletin

1052, 1053–54 (1995); Mansura at 38; Sun Banks at 244.

12. The Pittsburgh banking market is defined as all of Allegheny,

Beaver, and Washington Counties; Westmoreland County except

St. Clair Township; South Buffalo, Gilpin, Parks, and Kiskiminetas

Townships in Armstrong County; Muddy Creek, Lancaster, Jackson,

Forward, Penn, Jefferson, Winfield, Middlesex, Clinton, Cranberry,

Adams, and Buffalo Townships in Butler County; Washington,

Jefferson, Perry, Lower Tyrone, Upper Tyrone, Bullskin, and

Salt Lick Townships in Fayette County; Conemaugh, Burrell, and

West Wheatfield Townships in Indiana County; and Little Beaver,

New Beaver, Wayne, and Perry Townships in Lawrence County, all in

Pennsylvania.

13. In this context, depository institutions include commercial

banks, savings banks, and savings associations. Market share data are

based on calculations that include the deposits of thrift institutions at

50 percent. The Board previously has indicated that thrift institutions

have become, or have the potential to become, significant competitors

of commercial banks. See, e.g., Midwest Financial Group, 75 Federal Reserve Bulletin 386, 387 (1989); National City Corporation,

70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board regularly has included thrift deposits in the calculation of market share

on a 50 percent weighted basis. See, e.g., First Hawaiian, Inc.,

77 Federal Reserve Bulletin 52, 55 (1991).

14. Market deposit data are as of June 30, 2002, and reflect

mergers and acquisitions through September 2, 2003.

15. Under the revised Department of Justice Merger Guidelines,

49 Federal Register 26,823 (June 29, 1984), a market in which the

post-merger HHI is between 1000 and 1800 is considered moderately

concentrated. The Department of Justice has informed the Board that a

bank merger or acquisition generally will not be challenged (in the

absence of other factors indicating anticompetitive effects) unless the

post-merger HHI is at least 1800 and the merger increases the HHI by

more than 200 points. The Department of Justice has stated that the

higher than normal thresholds for an increase in the HHI when

screening bank mergers and acquisitions for anticompetitive effects

implicitly recognize the competitive effects of limited-purpose and

other nondepository financial entities.

Legal Developments 83
ence over IBT reduce the potential adverse effects of the

proposal. Moreover, the Board notes that in light of the

above analysis of the Pittsburgh banking market, if S&T

and IBT were viewed as a combined organization on

consummation of the proposal, the elimination of competition between the two entities would not appear to lessen

substantially competition in any relevant banking market.

The Department of Justice has also reviewed the proposal

and has advised the Board that it does not believe that the

acquisition would likely have a significantly adverse effect

on competition in any relevant banking market.

Accordingly, in light of all the facts of record, the Board

has concluded that competitive considerations are consistent with approval of the proposal.

Other Factors

The Board also is required under section 3(c) of the BHC

Act to consider the financial and managerial resources and

future prospects of the companies and banks concerned.

IBT contends that S&T’s investment would distract the

attention of IBT’s management from the operation of IBT

and Irwin Bank, cause customer confusion about the continued independence of Irwin Bank, and adversely affect

the price of IBT’s shares.16 The Board believes that the

commitments made by S&T to maintain its investment as a

passive investment and not to exercise a controlling influence over IBT reduce the potential adverse effects of the

proposal. As noted above, S&T has committed that it will

not attempt to influence the operations or activities, or the

dividend, loan, or credit policies of IBT. No evidence has

been presented to show that the purchase of shares of IBT

on the open market by S&T would adversely affect the

financial condition of IBT or S&T. The Board notes that

S&T is well capitalized and would remain so on consummation of the proposal. Based on all the facts of record, the

Board has concluded that the financial and managerial

resources and the future prospects of S&T, IBT, and their

subsidiaries are consistent with approval of this application, as are the other supervisory factors the Board must

consider under section 3 of the BHC Act. In addition,

considerations relating to the convenience and needs of the

communities to be served, including the records of performance of the institutions involved under the Community

Reinvestment Act, 12 U.S.C. §2901 et seq. (‘‘CRA’’), are

consistent with approval of the application.17

Conclusion

Based on the foregoing and all other facts of record, the

Board has determined that this application should be, and

hereby is, approved. In reaching this conclusion, the Board

has considered all the facts of record in light of the factors

that it is required to consider under the BHC Act and other

applicable statutes. The Board’s approval is specifically

conditioned on compliance by S&T with all representations and commitments made in connection with this application, including the commitments discussed in this order.

These representations and commitments are deemed to be

conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be

enforced in proceedings under applicable law.

The acquisition of IBT’s voting shares shall not be

consummated before the fifteenth calendar day after the

effective date of this order, or later than three months after

the effective date of this order, unless such period is

extended for good cause by the Board or by the Federal

Reserve Bank of Cleveland, acting pursuant to delegated

authority.

By order of the Board of Governors, effective November 25, 2003.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Olson, and Bernanke. Absent and not

voting: Governors Bies and Kohn.

Jennifer J. Johnson

Secretary of the Board

Appendix

As part of this proposal, S&T Bancorp, Inc. (‘‘S&T’’),

Indiana, Pennsylvania, commits that S&T will not, without

the prior approval of the Federal Reserve, directly or

indirectly:

(1) Exercise or attempt to exercise a controlling influence

over the management or policies of IBT Bancorp,

Inc. (‘‘IBT’’) or any of its subsidiaries;

(2) Seek or accept representation on the board of directors of IBT or any of its subsidiaries;

(3) Have or seek to have any employee or representative

serve as an officer, agent, or employee of IBT or any

of its subsidiaries;

(4) Take any action that would cause IBT or any of its

subsidiaries to become a subsidiary of S&T, or any of

S&T’s subsidiaries;

(5) Acquire or retain shares that would cause the combined interests of S&T and any of S&T’s subsidiaries

and their officers, directors, and affiliates to equal or

exceed 25 percent of the outstanding voting shares of

IBT or any of its subsidiaries;

(6) Propose a director or slate of directors in opposition

to a nominee or slate of nominees proposed by the

16. IBT also contends that the proposal might create the perception

that it is a candidate for acquisition. The Board is limited under the

BHC Act to the consideration of factors specified in the Act. See

Western Bancshares, Inc. v. Board of Governors, 480 F.2d 749 (10th

Cir. 1973). The potential effect of a proposal on the behavior of others

in the market is not among the factors the Board is charged with

considering under the BHC Act or other applicable statutes. The

Board also notes that IBT has stated publicly its intention to maintain

the independence of Irwin Bank as a local community bank.

17. S&T’s lead subsidiary bank, S&T Bank, also in Indiana, and

Irwin Bank each received ‘‘satisfactory’’ ratings at their most recent

examinations for CRA performance by the Federal Deposit Insurance

Corporation, as of January 1, 2003, and August 1, 2001, respectively.

84 Federal Reserve Bulletin Winter 2004
management or board of directors of IBT or any of its

subsidiaries;

(7) Solicit or participate in soliciting proxies with respect

to any matter presented to the shareholders of IBT or

any of its subsidiaries;

(8) Attempt to influence the dividend policies or practices; the investment, loan, or credit decisions or

policies; the pricing of services; personnel decisions;

operations activities (including the location of any

offices or branches or their hours of operation, etc.);

or any similar activities or decisions of IBT or any of

its subsidiaries;

(9) Dispose or threaten to dispose of shares of IBT or any

of its subsidiaries as a condition of specific action or

nonaction by IBT or any of its subsidiaries; or

(10) Enter into any banking or nonbanking transactions

with IBT or any of its subsidiaries, except for the

following:

• S&T may establish and maintain deposit accounts

with any depository institution subsidiaries of IBT,

provided that the aggregate balance of all such

accounts does not exceed $500,000 and that the

accounts are maintained on substantially the same

terms as those prevailing for comparable accounts

of persons unaffiliated with IBT or any of its

subsidiaries.

• Irwin Bank and Trust Company (‘‘Irwin Bank’’),

Irwin, Pennsylvania, and S&T Bank, Indiana, Pennsylvania, may continue to sell loan participations to

each other, provided that the aggregate balance of

such loan participations purchased by Irwin Bank

from S&T Bank does not exceed 5 percent of Irwin

Bank’s total loans outstanding, and provided further, that the aggregate of any such loan participations sold by Irwin Bank to S&T Bank does not

exceed 5 percent of Irwin Bank’s total loans

outstanding.

Shinhan Financial Group Co., Ltd.

Seoul, Korea

Order Approving the Formation of a Bank Holding

Company and Control of a Bank

Shinhan Financial Group Co., Ltd. (‘‘SFG’’) has requested

the Board’s approval under section 3 of the Bank Holding

Company Act (‘‘BHC Act’’) (12 U.S.C. §1842) to become

a bank holding company and to control CHB America

Bank, New York, New York (‘‘CHB’’). SFG’s proposal is

part of the privatization of Chohung Bank, Seoul, Korea,

by the Korea Deposit Insurance Corporation (‘‘KDIC’’).1

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published

(68 Federal Register 52,770 (2003)). The time for filing

comments has expired, and the Board has considered the

proposal in light of the factors set forth in section 3 of the

BHC Act.

Before its acquisition of Chohung, SFG had total consolidated assets of $56 billion and was the sixth largest

banking organization in Korea.2 SFG’s wholly owned subsidiary, Shinhan Bank, also in Seoul (‘‘Shinhan’’), operates

a branch in New York City.

Before its acquisition by SFG, Chohung was the fifth

largest banking organization in Korea and had total consolidated assets of $56 billion.3 Chohung operates a branch

in New York City. CHB has total consolidated assets of

$293 million and controls deposits of $217 million, representing less than 1 percent of total deposits in insured

depository institutions in the United States.4 CHB operates

branches in California and New York City.

Competitive and Convenience and Needs Considerations

Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or be in

furtherance of a monopoly. The BHC Act also prohibits

the Board from approving a proposed bank acquisition that

would substantially lessen competition in any relevant

banking market unless the anticompetitive effects of the

proposal in that banking market are clearly outweighed in

the public interest by the probable effects of the proposal

in meeting the convenience and needs of the community to

be served.5 This proposal represents SFG’s initial entry

into retail banking in the United States. Although Shinhan,

Chohung, and CHB all operate branches in New York City,

there are numerous competitors for banking services in the

relevant banking markets. Based on all the facts of record,

the Board has concluded that consummation of the proposal would not have a significantly adverse effect on

competition or on the concentration of banking resources

in any relevant banking market, and that competitive considerations are consistent with approval.

The Board also has considered the effect of the proposal

on the convenience and needs of the communities to be

served in light of all the facts of record, including the

performance record of CHB under the Community Reinvestment Act.6 In light of all the facts of record, the Board

has concluded that considerations relating to the conve1. The KDIC acquired control of Chohung in 1999. In August

2003, SFG acquired approximately 80 percent of the voting shares of

Chohung from the KDIC. The shares of CHB, Chohung’s wholly

owned subsidiary bank, were placed in a temporary trust (‘‘CHB

Trust’’) pending the submission of this application.

2. Foreign asset and ranking data are as of December 31, 2002, and

use exchange rates then in effect.

3. SFG has indicated that Chohung will remain a separate legal

entity for approximately three years after its acquisition by SFG.

4. Domestic asset and deposit data are as of March 31, 2003.

Insured depository institutions include commercial banks, savings

banks, and savings associations.

5. 12 U.S.C. §1842(c)(1).

6. 12 U.S.C. § 2901 et seq. CHB was formed in March 2003 by the

merger of California Chohung Bank with and into Chohung Bank of

New York. Before this merger, each bank had received a ‘‘satisfactory’’ rating at the most recent CRA performance evaluation by its

appropriate federal supervisor, the Federal Deposit Insurance Corporation: California Chohung Bank, as of April 2001; and Chohung Bank

of New York, as of June 1998.

Legal Developments 85
nience and needs of the communities to be served are also

consistent with approval of this proposal.

Financial, Managerial, and Other Supervisory Factors

The BHC Act requires the Board to consider the financial

and managerial resources and future prospects of the companies and banks involved in an acquisition.7 In assessing

the financial and managerial strength of SFG, Chohung,

and CHB, the Board has reviewed information provided by

SFG, confidential supervisory and examination information, and publicly reported and other financial information.

In addition, the Board has consulted with relevant supervisory authorities, including the Financial Supervisory Service (‘‘FSS’’),8 which is responsible for the supervision

and regulation of Korean financial institutions. The Board

notes that the overall financial strength and future prospects of the combined organization will likely be enhanced

by the privatization transaction. SFG’s capital levels are

considered equivalent to those that would be required of a

U.S. banking organization under similar circumstances.

Based on all the facts of record, the Board concludes that

the financial and managerial resources and future prospects

of SFG, Chohung, and CHB are consistent with approval.

Section 3 of the BHC Act also provides that the Board

may not approve an application involving a foreign bank

unless the bank is subject to comprehensive supervision or

regulation on a consolidated basis by the appropriate

authorities in the bank’s home country.9 As noted, the

home country supervisor of SFG, Shinhan, and Chohung

is the FSS. The Board has previously determined, in an

application under the BHC Act involving Woori Bank,

Seoul, that Woori Bank was subject to comprehensive

consolidated supervision by the FSS.10 In this case, the

Board has determined that Chohung and Shinhan are supervised on substantially the same terms and conditions as

Woori Bank. Based on all the facts of record, the Board has

concluded that Chohung and Shinhan are subject to comprehensive supervision and regulation on a consolidated

basis by their home country supervisor.11

In addition, section 3 of the BHC Act requires the Board

to determine that an applicant has provided adequate assurances that it will make available to the Board such information on its operations and activities and those of its affiliates that the Board deems appropriate to determine and

enforce compliance with the BHC Act.12 The Board has

reviewed the restrictions on disclosure in jurisdictions in

which SFG, Shinhan, and Chohung have material operations and has communicated with relevant government

authorities concerning access to information. SFG, Shinhan, and Chohung have committed that, to the extent not

prohibited by applicable law, each will make available to

the Board such information on the operations of its affiliates that the Board deems necessary to determine and

enforce compliance with the BHC Act and other applicable

federal law.

SFG, Shinhan, and Chohung also have committed to

cooperate with the Board to obtain any waivers or exemptions that may be necessary to enable their affiliates to

make any such information available to the Board. In light

of these commitments, the Board has concluded that SFG,

Shinhan, and Chohung have provided adequate assurances

of access to any appropriate information the Board may

request. For these reasons, and based on all the facts of

record, the Board has concluded that the supervisory factors it is required to consider under section 3(c)(3) of the

BHC Act are consistent with approval.

Conclusion

Based on the foregoing and in light of all the facts of

record, the Board has determined that the application

should be, and hereby is, approved. In reaching this conclusion, the Board has considered all the facts of record in

light of the factors that it is required to consider under

the BHC Act and other applicable statutes. The Board’s

approval is specifically conditioned on compliance by SFG

and its affiliates with all the representations and commitments made in connection with the application, prior commitments made in connection with establishment of the

CHB Trust, and the receipt of all other regulatory approvals. These representations, commitments, and conditions

are deemed to be conditions imposed in writing by the

Board in connection with its findings and decision and, as

such, may be enforced in proceedings under applicable

law.

The transfer of the CHB voting shares from the CHB

Trust to SFG shall not be consummated before the fifteenth

calendar day after the effective date of this order, and the

proposal may not be consummated later than three months

after the effective date of this order, unless such period is

extended for good cause by the Board or by the Federal

Reserve Bank of New York, acting pursuant to delegated

authority.

7. 12 U.S.C. §1842(c)(2).

8. The FSS is the executive body of the Financial Supervisory

Commission, which is responsible for promulgating supervisory regulations, making policy decisions about supervision, and imposing

sanctions on financial institutions. See Woori Finance Holdings Co.,

Ltd. and Woori Bank, 89 Federal Reserve Bulletin 436 (2003) (‘‘Woori

Order’’).

9. 12 U.S.C. § 1842(c)(3)(B). As provided in Regulation Y, the

Board determines whether a foreign bank is subject to consolidated

home country supervision under the standards set forth in Regulation K. See 12 C.F.R. 225.13(a)(4). Regulation K provides that a

foreign bank will be considered to be subject to comprehensive

supervision or regulation on a consolidated basis if the Board determines that the bank is supervised or regulated in such a manner that its

home country supervisor receives sufficient information on the worldwide operations of the bank, including its relationship to any affiliates,

to assess the bank’s overall financial condition and its compliance

with laws and regulations. See 12 C.F.R. 211.24(c)(1).

10. See Woori Order.

11. The FSS also has supervisory authority with respect to SFG

and its nonbanking subsidiaries. The FSS conducts inspections of SFG

and its subsidiaries and requires SFG to submit reports about its

operations on a consolidated basis. The FSS also may review transactions between SFG and its subsidiaries and has authority to require

SFG to take measures necessary to ensure the safety and soundness of

SFG’s organization.

12. See 12 U.S.C. §1842(c)(3)(A).

86 Federal Reserve Bulletin Winter 2004
By order of the Board of Governors, effective November 20, 2003.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, and Bernanke. Absent and

not voting: Governor Kohn.

Robert deV. Frierson

Deputy Secretary of the Board

Orders Issued Under Section 4 of the Bank Holding

Company Act

The Royal Bank of Scotland Group plc

Edinburgh, Scotland

The Royal Bank of Scotland plc

Edinburgh, Scotland

RBSG International Holdings Ltd.

Edinburgh, Scotland

Citizens Financial Group, Inc.

Providence, Rhode Island

Order Approving the Acquisition of a Savings

Association

The Royal Bank of Scotland Group plc (‘‘RBS Group’’),

The Royal Bank of Scotland plc (‘‘RBS’’), RBSG International Holdings Ltd., and Citizens Financial Group, Inc.

(‘‘Citizens Financial’’) (collectively, ‘‘Notificants’’) have

requested the Board’s approval under sections 4(c)(8) and

4(j) of the BHC Act (12 U.S.C. §1843(c)(8) and (j)) and

section 225.24 of the Board’s Regulation Y (12 C.F.R.

225.24) to acquire all the voting shares of Thistle Group

Holdings, Co. (‘‘Thistle’’) and thereby indirectly acquire

all the voting shares of Thistle’s wholly owned subsidiary

savings association, Roxborough-Manayunk Bank, (‘‘Roxborough’’), both in Philadelphia, Pennsylvania.

The proposed transaction is primarily a merger of Roxborough into Citizens Financial’s wholly owned subsidiary

bank, Citizens Bank of Pennsylvania (‘‘Citizens PA’’), also

in Philadelphia.1 The merger transaction was approved

by the Federal Deposit Insurance Corporation (‘‘FDIC’’)

under the Bank Merger Act (12 U.S.C. §1828(c)) on

December 15, 2003. The Board has consulted with the

FDIC on its review of Citizens PA’s proposal under the

Bank Merger Act.

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published

(68 Federal Register 62,080 (2003)), and the time for filing comments has expired. The Board has considered the

notice and all comments received in light of the factors set

forth in section 4 of the BHC Act.

RBS Group, with total consolidated assets equivalent

to approximately $663 billion, is the fifth largest banking

organization in the world.2 Citizens Financial, with total

consolidated assets of approximately $73 billion, is the

nineteenth largest commercial banking organization in the

United States.3 Citizens Financial operates subsidiary

depository institutions in Rhode Island, Massachusetts,

Connecticut, New Hampshire, Delaware, and Pennsylvania

that control approximately $53.6 billion in deposits, which

represents approximately 1 percent of total deposits in

insured depository institutions in the United States (‘‘total

U.S. insured deposits’’).4

Thistle has one subsidiary depository institution that

operates in Pennsylvania and Delaware and controls

$822 million in deposits, which represents less than 1 percent of total U.S. insured deposits. On consummation

of this proposal, Citizens Financial, with total consolidated assets of $73 billion, would remain the nineteenth

largest commercial banking organization in the United

States, controlling deposits of $54.4 billion. Citizens

Financial would remain the third largest banking organization in Pennsylvania and fifteenth largest in Delaware,

controlling deposits of $18.6 billion and $854 million,

respectively.

The Board previously has determined by regulation that

the operation of a savings association by a bank holding

company is closely related to banking for purposes of

section 4(c)(8) of the BHC Act.5 The Board requires that

savings associations acquired by bank holding companies

conform their direct and indirect activities to those permissible for bank holding companies under section 4 of the

BHC Act and Regulation Y. Notificants have committed

to conform all the activities of Thistle and Roxborough

as required. Thistle also engages in printing and selling

checks and related documents and in providing certain data

processing services, which are activities that the Board has

determined to be closely related to banking.6

In reviewing the proposal, the Board is required by

section 4(j)(2)(A) of the BHC Act to determine that the

acquisition of Thistle, Roxborough, and Thistle’s other

subsidiaries by Notificants ‘‘can reasonably be expected to

produce benefits to the public... that outweigh possible

adverse effects, such as undue concentration of resources,

decreased or unfair competition, conflicts of interests, or

unsound banking practices.’’7 As part of its evaluation of

the proposal under these public interest factors, the Board

reviews the financial and managerial resources of the companies involved, as well as the effect of the proposal on

competition in the relevant markets.8 In acting on notices

to acquire a savings association, the Board also reviews the

records of performance of the relevant insured depository

1. In addition, the Delaware branch of Roxborough would be sold

to Citizens Bank, Wilmington, Delaware (‘‘Citizens DE’’), a subsidiary bank of Notificants.

2. Global asset and ranking data are as of December 31, 2002.

3. Asset and domestic ranking data are as of September 30, 2003.

4. Deposit data are as of June 30, 2003, unless otherwise noted.

5. 12 C.F.R. 225.28(b)(4)(ii).

6. 12 C.F.R. 225.28(b)(10)(ii) and (14).

7. 12 U.S.C. §1843( j)(2)(A).

8. See 12 C.F.R. 225.26.

Legal Developments 87
institutions under the Community Reinvestment Act

(‘‘CRA’’) (12 U.S.C. §2901 et seq.).

9

The Board has considered these factors in light of a

record that includes information provided by Notificants,

confidential supervisory and examination information, publicly reported financial and other information, and public

comments submitted on the proposal. The Board also has

consulted with, and considered information provided by,

the primary home country supervisor of RBS Group and

various federal and state supervisory agencies, including

the FDIC, the Office of Thrift Supervision (‘‘OTS’’), the

Massachusetts Division of Banks, and the Pennsylvania

Department of Banking.

Competitive Considerations

As part of its consideration of the public interest factors

under section 4 of the BHC Act, the Board has considered

carefully the competitive effects of the proposal in light of

all the facts of record.10 Notificants and Thistle compete

directly in the Philadelphia, Pennsylvania, and Wilmington, Delaware, banking markets.11 The Board has reviewed

carefully the competitive effects of the proposal in both

banking markets in light of all the facts of record, including

the number of competitors that would remain in the markets, the relative share of total deposits in depository

institutions controlled by Notificants and Thistle in the

markets (‘‘market deposits‘’),12 the concentration levels of

market deposits and the increases in this level as measured

by the Herfindahl–Hirschman Index (‘‘HHI’’) under the

Department of Justice Guidelines (‘‘DOJ Guidelines’’),13

and other characteristics of the markets.

Consummation of the proposal would be consistent with

Board precedent and the DOJ Guidelines in each relevant

banking market. In addition, no agency has indicated that

competitive issues are raised by the proposal. After consummation of the proposal, one banking market would

remain unconcentrated and the other would remain moderately concentrated, as measured by the HHI.14 Numerous

competitors would remain in both banking markets. Based

on these and all other facts of record, the Board concludes

that consummation of the proposal is not likely to result in

any significantly adverse effects on competition or on the

concentration of banking resources in the two banking

markets noted above or any other relevant banking market.

Financial and Managerial Factors

In reviewing the proposal under section 4 of the BHC Act,

the Board has carefully considered the financial and managerial resources of Notificants and Thistle and their respective subsidiaries. The Board also has reviewed the effect

the transaction would have on those resources in light of all

the facts of record.15

The Board’s review of these factors has considered,

among other things, confidential reports of examination

and other supervisory information received from the primary federal supervisors of the organizations involved,

publicly reported and other financial information provided

by Notificants and Thistle, and public comments.16 In

addition, the Board has consulted with the relevant supervisory agencies, including the FDIC, the OTS, and the

relevant supervisory authorities in the United Kingdom.

In evaluating financial factors in expansion proposals by

banking organizations, the Board consistently has considered capital adequacy to be especially important. The capital ratios of RBS would continue to exceed the minimum

levels that would be required under the Basel Capital

9. See, e.g., BancOne Corporation, 83 Federal Reserve Bulletin

602 (1997).

10. See First Hawaiian, Inc., 79 Federal Reserve Bulletin 966

(1993).

11. These markets are described in Appendix A.

12. Deposit and market share data are based on annual branch

reports filed as of June 30, 2003, and on calculations in which the

deposits of thrift institutions are included at 50 percent. The Board has

previously indicated that thrift institutions have become, or have the

potential to become, significant competitors of commercial banks.

See, e.g., Midwest Financial Group, 75 Federal Reserve Bulletin 386

(1989); National City Corporation, 70 Federal Reserve Bulletin 743

(1984). Thus, the Board regularly has included thrift deposits in the

calculation of market share on a 50 percent weighted basis. See, e.g.,

First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991). Because

the Board has analyzed the competitive factors in this case as if

Notificants and Thistle were a combined entity, the deposits of Roxborough were included at 100 percent in the calculation of pro forma

market share. See Norwest Corporation, 78 Federal Reserve Bulletin

452 (1992).

13. Under the DOJ Guidelines, 49 Federal Register 26,823 (1984),

a market is considered unconcentrated if the post-merger HHI is under

1000 and moderately concentrated if the post-merger HHI is between

1000 and 1800. The DOJ has informed the Board that a bank merger

or acquisition generally will not be challenged (in the absence of other

factors indicating anticompetitive effects) unless the post-merger

HHI is at least 1800 and the merger increases the HHI by more than

200 points. The DOJ has stated that the higher than normal HHI

thresholds for screening bank mergers for anticompetitive effects

implicitly recognize the competitive effects of limited-purpose lenders

and other nondepository financial institutions.

14. In the Philadelphia banking market, the HHI would increase

12 points to 947, and the HHI would remain unchanged at 1793 in the

Wilmington banking market. The effects of the proposal on the

concentration of banking resources in these markets are detailed in

Appendix B.

15. See 12 C.F.R. 225.26.

16. One commenter opposing this proposal repeated allegations

that the Board previously considered in its decisions to approve

Notificants’ applications to acquire Port Financial (the ‘‘Port Financial

proposal’’) and Citizens PA and Citizens DE (the ‘‘Mellon proposal’’),

particularly that Notificants had inadequate records on human rights

and the environment. The commenter’s assertions were based on

actions taken outside the United States; specifically, it was asserted

that the activities of RBS Group and its affiliates in Indonesia ignored

human rights concerns, damaged the environment, or caused other

societal harm. The Board noted in its approvals of the Port Financial

and Mellon proposals, and reaffirms in this case, that these contentions

contained no allegations of illegality or of actions that would affect the

safety and soundness of the institutions involved in the proposals, and

that the allegations were outside the limited statutory factors that the

Board is authorized to consider when reviewing an application under

the BHC Act. See The Royal Bank of Scotland Group plc, 89 Federal

Reserve Bulletin 386 (2003) (‘‘RBS/Port Order’’); The Royal Bank of

Scotland Group plc, 88 Federal Reserve Bulletin 51 (2002) (‘‘RBS/

Mellon Order’’) (citing Western Bancshares, Inc. v. Board of Governors, 480 F.2d 749 (10th Cir. 1973).

88 Federal Reserve Bulletin Winter 2004
Accord, and RBS Group’s capital levels are considered

equivalent to those that would be required of a U.S. banking organization. The Board notes that Citizens Financial,

its subsidiary depository institutions, and Roxborough are

well capitalized and would remain well capitalized on

consummation of the proposal.

The Board also has considered the managerial resources

of Notificants and Thistle, particularly the supervisory

experience and assessments of management by the various

bank supervisory agencies and the organizations’ records

of compliance with applicable banking laws. The Board

also has carefully reviewed the examination records of

Citizens Financial and its subsidiary depository institutions, including assessments of their risk management systems and other policies. In addition, the Board has considered Citizens Financial’s plans to implement the proposed

acquisition, including its available managerial resources,

and Citizens Financial’s record of successfully integrating

recently acquired institutions into its existing operations.

Based on these and all the facts of record, the Board

concludes that the financial and managerial resources of

the organizations involved in the proposal are consistent

with approval under section 4 of the BHC Act.

Records of Performance Under the Community

Reinvestment Act

As previously noted, the Board reviews the records of

performance under the CRA of the relevant insured depository institutions when acting on a notice to acquire a

savings association.17 The CRA requires the Board to

assess each insured depository institution’s record of meeting the credit needs of its entire community, including lowand moderate-income (‘‘LMI’’) neighborhoods, consistent

with the institution’s safe and sound operation, and to take

this record into account in evaluating bank holding company notices.18

The Board has carefully considered the CRA performance records of each subsidiary insured depository institution of Citizens Financial and Thistle in light of all the

facts of record, including comments received on the effect

of the proposal on the communities to be served by the

relevant insured depository institutions. The Board recently

conducted a detailed review of the CRA performance

records of the insured depository institutions controlled by

Citizens Financial (the ‘‘Citizens Banks’’) and found those

records to be consistent with approval of a bank expansion

proposal.19 The Board’s analysis of the CRA performance

records of the Citizens Banks, as detailed in the Citizens/

Port Order, is incorporated herein by reference.

Two commenters opposed the current proposal. One

commenter expressed concern that Citizens Financial’s

provision of loans and retail banking services in LMI areas

in Philadelphia was not as extensive as the current array of

products and services provided by Roxborough. The other

commenter alleged, based on data submitted under the

Home Mortgage Disclosure Act (‘‘HMDA’’),20 that Citizens Financial and Roxborough engaged in disparate treatment of minority individuals in their assessment areas with

respect to home mortgage lending.21 This commenter also

expressed concern about possible branch closings resulting

from this proposal.22

A. CRA Performance Examinations

As provided in the CRA, the Board has evaluated the

convenience and needs factor in light of examinations of

the CRA performance records of the relevant insured

depository institutions. An institution’s most recent CRA

performance evaluation is a particularly important consideration in the applications process because it represents

a detailed, on-site evaluation of the institution’s overall

record of performance under the CRA by its appropriate

federal supervisor.23

Citizens MA and the other Citizens Financial subsidiary

depository institutions that have been rated for CRA performance all received ‘‘outstanding’’ ratings at their most

recent CRA performance examinations by the FDIC, as

of December 2, 2002.24 Roxborough received a ‘‘satisfactory’’ rating at its most recent CRA performance examination by the OTS, as of April 22, 2002.

Citizens PA and Citizens DE (together, the ‘‘MidAtlantic Banks’’) are newly chartered and have not

received ratings for performance under the CRA. Notifi17. See, e.g., Northfork Bancorporation, Inc., 86 Federal Reserve

Bulletin 767 (2000).

18. 12 U.S.C. §2903.

19. See RBS/Port Order at 387–89.

20. 12 U.S.C. §2801 et seq.

21. The commenter also alleged that Citizens Financial engaged in

discriminatory employment practices, citing a news report of a complaint filed with the Massachusetts Commission Against Discrimination (‘‘MCAD’’) by a former employee. These allegations are outside

the limited statutory factors that the Board is authorized to consider

when reviewing a notice under the BHC Act. See Western Bancshares,

480 F.2d at 752. The Board also notes that the Equal Employment

Opportunity Commission has jurisdiction to determine whether banking organizations like Citizens Financial are in compliance with

federal equal employment opportunity statutes under the regulations

of the Department of Labor. In addition, matters related to private

employment are governed by state law and, in this case, are being

reviewed by MCAD.

22. The commenter also expressed concern about the small business lending of Citizens Bank of Massachusetts, Boston, Massachusetts (‘‘Citizens MA’’), in one county in the Boston metropolitan area,

alleging that Citizens MA made few small business loans in LMI

census tracts. The commenter also raised this issue in the Port Financial proposal. The Board carefully considered this comment and

Notificants’ response in light of all the facts of record in approving the

proposal. See RBS/Port Order at 389. The commenter has not provided any new information that would warrant a different conclusion

in this proposal, and the Board reaffirms its findings in the RBS/Port

Order.

23. See Interagency Questions and Answers Regarding Community

Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).

24. Citizens Bank of Rhode Island, Providence, Rhode Island

(‘‘Citizens RI’’); Citizens Bank of Connecticut, New London, Connecticut; and Citizens Bank of New Hampshire, Manchester,

New Hampshire (together with Citizens MA, the ‘‘New England

Banks’’), all received ‘‘outstanding’’ ratings at their most recent CRA

performance examinations. United States Trust Company, Boston,

Massachusetts, a subsidiary of Citizens, is a limited-purpose trust

company and, therefore, is not subject to the CRA.

Legal Developments 89
cants have represented that the Mid-Atlantic Banks are

subject to the same CRA and fair lending policies as the

New England Banks. Accordingly, the Board has particularly considered the 2002 performance evaluations of

the New England Banks and the fair lending policies and

procedures of Citizens Financial and the Citizens Banks.

The Board notes that the CRA performance records of the

New England Banks demonstrate the Notificants’ ability

and willingness to help meet effectively the credit needs

of the communities served by their subsidiary depository

institutions.

Because the Mid-Atlantic Banks are recently chartered

and yet to be examined, the Board also has evaluated

substantial information submitted by Citizens Financial

concerning the CRA performance of the Citizens Banks,

especially the Mid-Atlantic Banks. This information

includes reviews of the Mid-Atlantic Banks’ CRA-related

activities; loan programs designed to address the needs of

LMI borrowers and communities; community development

lending and investments; retail banking products and services; data from Citizens Banks’ affiliate, Citizens Mortgage Company (‘‘CMC’’);25 and confidential supervisory

information from the FDIC.

Notificants state that the Mid-Atlantic Banks have

endeavored to continue Notificants’ success in meeting the

credit needs of the communities they serve, including LMI

areas. In general, the 2002 HMDA data indicate that the

loans to LMI borrowers and to borrowers in LMI census

tracts made by the Mid-Atlantic Banks and CMC, as a

percentage of their total HMDA-reportable loans, exceeded

or were comparable with that percentage for the aggregate

of lenders.26 For example, in 2002, Citizens PA originated

approximately 14.3 percent of its HMDA-reportable loans

in its Philadelphia assessment area to borrowers in LMI

census tracts (the aggregate of lenders made approximately

11.6 percent) and 25.8 percent of such loans to LMI

borrowers (the aggregate of lenders made 25.2 percent).

According to Notificants, the Mid-Atlantic Banks and

CMC offer approximately 22 programs that feature home

purchase, refinance, and home improvement loans specifically designed to address the needs of LMI borrowers and

communities (‘‘CRA-program loans’’).27 These programs

provide LMI borrowers with affordable home mortgage

and home improvement loans using flexible underwriting guidelines. Notificants report that, in 2002, the MidAtlantic Banks and CMC originated more than 900 loans,

totaling more than $81 million, under their CRA-program

loans.

In addition, Notificants state that the Mid-Atlantic Banks

made numerous community development loans to and

investments in a diverse group of organizations and programs in Pennsylvania and Delaware. Notificants state that,

since January 2002, Citizens PA and Citizens DE have

provided more than $62 million and $11 million, respectively, in community development lending to support various organizations involved in affordable housing development, economic development, and job creation. During the

same time period, Citizens PA made more than $5.5 million in investments, sponsorships, and grants, and Citizens

DE funded $315,000 of its $3.5 million in community

development investment commitments.

The Mid-Atlantic Banks generally provide the same

services as the New England Banks, such as a full-service

ATM network, 24-hour telephone banking, bank-by-mail,

and internet banking services. In addition, all the Citizens

Banks provide a number of community development services, such as financial education seminars.

B. HMDA Data and Fair Lending Record

The Board also has carefully considered the HMDA data

reported by subsidiaries of Citizens Financial in light of the

comments received on these data. Based on 2001 and 2002

HMDA data, a commenter alleged that the Citizens Banks

disproportionately excluded African-American and Hispanic applicants for home mortgage loans in various Metropolitan Statistical Areas (‘‘MSAs’’) in Connecticut, Delaware, Massachusetts, Pennsylvania, and Rhode Island.

Substantially similar comments regarding Connecticut,

Massachusetts, and Rhode Island were considered by the

Board in the Port Financial proposal, and the Board’s

analysis of the Citizens Banks’ HMDA data in the RBS/

Port Order is incorporated herein by reference.

As noted in the RBS/Port Order, the Citizens Banks’

denial disparity ratios reported for African-American and

Hispanic applicants in 2002 were generally lower than or

comparable with those ratios reported by the aggregate of

lenders in each of the markets reviewed.28 In their Pennsylvania and Delaware assessment areas, the Mid-Atlantic

Banks’ denial disparity ratios reported for AfricanAmerican and Hispanic applicants in 2002 were lower than

those ratios reported by the aggregate of lenders in these

assessment areas.

Importantly, the HMDA data do not indicate that the

Citizens Banks have excluded any segment of the population or geographic areas on a prohibited basis. The Board,

nevertheless, is concerned when the record of an institution

indicates disparities in lending and believes that all banks

are obligated to ensure that their lending practices are

based on criteria that ensure not only safe and sound

lending, but also equal access to credit by creditworthy

25. CMC is a subsidiary of Citizens RI. CMC’s HMDA data were

considered in the 2002 evaluation of the lending records of the

Citizens Banks by the FDIC.

26. In this context, ‘‘HMDA-reportable loans’’ refers to loans that

are required to be reported under HMDA: home purchase, home

improvement, and multifamily mortgage loans and refinancings of

those types of loans. Loans made by the aggregate of lenders refers to

all HMDA-reportable loans made in the assessment area by all lenders

required to report under HMDA.

27. These programs include the EZ Home Improvement Loan, the

ACORN Housing Partnership Loan, and the Philadelphia Home

Improvement Loan Program, which is offered in partnership with the

Philadelphia Redevelopment Authority and the Greater Philadelphia

Urban Affairs Coalition.

28. The denial disparity ratio is the denial rate of a particular racial

category (e.g., African Americans) divided by the denial rate for

whites.

90 Federal Reserve Bulletin Winter 2004
applicants regardless of their race or income level. The

Board recognizes, however, that HMDA data alone provide

an incomplete measure of an institution’s lending in its

community because these data cover only a few categories

of housing-related lending. HMDA data, moreover, provide only limited information about covered loans.29 Therefore, HMDA data have limitations that make them an

inadequate basis, absent other information, for concluding

that an institution has not assisted adequately in meeting its

community’s credit needs or has engaged in illegal lending

discrimination.

Because of the limitations of HMDA data, the Board has

considered these data carefully in light of other information, including examination reports that provide an on-site

evaluation of compliance by the Citizens Banks with fair

lending laws. Examiners found no evidence of prohibited

discrimination or other illegal credit practices at any of

Citizens Financial’s subsidiary depository institutions. The

record also indicates that Citizens Financial has taken a

number of affirmative steps to ensure compliance with fair

lending laws. The Citizens Banks have a ‘‘second-look’’

policy with two procedures for reviewing credit decisions

for compliance with their fair lending policy. Under this

policy, a committee conducts a weekly review of marginal

approvals and denials for consistency in the application of

investor underwriting guidelines, and the quality control

department conducts a quarterly statistically based regression analysis of all applications to identify possible

instances or indications of disparate treatment. In addition,

Citizens Financial has established a fair lending committee

and a mandatory, ongoing employee training program on

compliance with fair lending and other consumer protection laws.

The Board also has considered the HMDA data in light

of the Citizens Banks’ overall performance under the CRA,

which demonstrates that these institutions are actively helping to meet the credit needs of their entire communities.30

The Board believes that, when viewed in light of the entire

record, the HMDA data and other CRA-related information indicate that the Citizens Banks’ records of performance in helping to serve the credit needs of their communities are consistent with approval of the proposal.

C. Branch Closings

A commenter expressed concern about the possible effect

of branch closings that might result from this proposal, and

the Board has considered these comments in light of all the

facts of record. Citizens Financial has represented that it

will apply its current branch closing policy to any potential

closing or consolidation of a branch acquired under this

proposal. Accordingly, the Board has carefully reviewed

Citizens Financial’s branch closing policy. The policy

provides that Citizens Financial will review a number of

factors before closing or consolidating a branch, including

the impact on the community, the business viability of the

branch, and the impact on access to credit, as well as

ensuring that the branch closing has no discriminatory

effect. The most recent CRA examinations of the Citizens

Banks indicated that they had satisfactory records of opening and closing branches. The Board expects that Citizens

Financial would continue to apply a branch closing policy

to any branch closed in connection with the proposed

transaction that is satisfactory to examiners.

The Board also has considered that federal banking law

provides a specific mechanism for addressing branch closings.31 Federal law requires an insured depository institution to provide notice to the public and to the appropriate

federal supervisory agency before closing a branch. In

addition, the Board notes that the FDIC, as the appropriate

federal supervisor of the Citizens Banks, will review the

branch closing records of the banks in the course of conducting CRA performance examinations.

D. Conclusion on Convenience and Needs

Considerations

In reviewing the proposal’s effect on the convenience and

needs of the communities to be served by the combined

organization, the Board has carefully considered the entire

record, including the public comments received, reports of

examinations of the CRA performance of the institutions

involved, and confidential supervisory information from

the FDIC. The record and examinations show that Citizens

Financial’s subsidiary banks have a variety of programs in

place that are designed to meet the credit and banking

needs of their communities, including LMI borrowers and

areas. Based on all the facts of record, and for the reasons

discussed above, the Board concludes that considerations

relating to the convenience and needs of the communities

to be served, including the CRA performance records of

29. The data, for example, do not account for the possibility that an

institution’s outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not

provide a basis for an independent assessment of whether an applicant

who was denied credit was, in fact, creditworthy. Credit history

problems and excessive debt levels relative to income (reasons most

frequently cited for a credit denial) are not available from HMDA

data.

30. A commenter reiterated an allegation, considered previously by

the Board in both the Mellon and Port Financial proposals, that

Notificants indirectly supported predatory lending activities that were

conducted by a number of unaffiliated consumer lenders through the

securitization activities and warehouse-lending services of Notificants’ subsidiary, Greenwich Capital Markets, Greenwich, Connecticut (‘‘GCM’’). Notificants have stated that GCM conducts periodic

due diligence reviews in connection with its securitization activities. The Board carefully considered this comment and Notificants’

response in light of all the facts of record in approving the Mellon and

Port Financial proposals. See RBS/Mellon Order and RBS/Port Order.

Commenter has not provided any new information that would warrant

a different conclusion in this proposal.

31. Section 42 of the Federal Deposit Insurance Act (12 U.S.C.

§1831r-1), as implemented by the Joint Policy Statement Regarding

Branch Closings (64 Federal Register 34,844 (1999)), requires that a

bank provide the public with at least 30 days’ notice and the appropriate federal supervisory agency with at least 90 days’ notice before the

date of the proposed branch closing. The bank also is required to

provide reasons and other supporting data for the closure, consistent

with the institution’s written policy for branch closings.

Legal Developments 91
the relevant depository institutions, are consistent with

approval of the proposal.

Public Benefits and Other Considerations

As part of its evaluation of the public interest factors, the

Board also has reviewed carefully the other public benefits

and possible adverse effects of the proposal. The record

indicates that consummation of the proposal would result

in benefits to consumers and businesses. The proposal

would enable Notificants to provide Thistle’s customers

with access to a broader array of products and services,

including commercial and investment banking products, in

an expanded service area. Among the Citizens Financial

products that would become available to customers of

Roxborough are products specifically designed for smalland medium-size businesses and trust and asset management services. Customers of Roxborough would have

access to an expanded branch and ATM network and

internet banking services. Based on the foregoing and all

the facts of record, the Board has determined that consummation of the proposal can reasonably be expected to

produce public benefits that would outweigh any likely

adverse effects under the standard of section 4(j)(2) of the

BHC Act.

Conclusion

Based on the foregoing and all the facts of record, the

Board has determined that the notice should be, and hereby

is, approved.32 In reaching its conclusion, the Board has

considered all the facts of record in light of the factors that

it is required to consider under the BHC Act and other

applicable statutes. The Board’s approval is specifically

conditioned on compliance by Notificants with all the

representations and commitments made in connection with

the notice and all the conditions in this order.

The Board’s determination also is subject to all the

conditions set forth in Regulation Y, including those

in sections 225.7 and 225.25(c) (12 C.F.R. 225.7 and

225.25(c)), and to the Board’s authority to require such

modification or termination of the activities of a bank

holding company or any of its subsidiaries as the Board

finds necessary to ensure compliance with, and to prevent

evasion of, the provisions of the BHC Act and the Board’s

regulations and orders thereunder. For purposes of this

action, the representations, commitments, and conditions

relied on by the Board in reaching its decision are deemed

to be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be

enforced in proceedings under applicable law.

The transaction shall not be consummated later than

three months after the effective date of this order, unless

such period is extended for good cause by the Board or by

the Federal Reserve Bank of Boston, acting pursuant to

delegated authority.

By order of the Board of Governors, effective December 19, 2003.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke, and Kohn.

Robert deV. Frierson

Deputy Secretary of the Board

Appendix A

Banking Markets in which Citizens Financial Competes

Directly with Thistle

A. Philadelphia Banking Market

Bucks, Chester, Delaware, Montgomery, and Philadelphia

Counties in Pennsylvania; and Burlington, Camden, Gloucester, and Salem Counties and a portion of Mercer County

in New Jersey.

B. Wilmington Banking Market

New Castle County in Delaware; and Cecil County in

Maryland.

Appendix B

Market Data

Philadelphia Banking Market

Notificants operate the third largest depository institution

in the market, controlling deposits of approximately

$9.5 billion, which represents approximately 10.6 percent

of market deposits. Thistle operates the twenty-eighth largest depository institution in the market, controlling deposits of approximately $503 million, which represents less

than 1 percent of market deposits. On consummation of the

proposal, Citizens would operate the second largest depository institution in the market, controlling deposits of

approximately $10 billion, which represents approximately

32. One commenter requested that the Board hold a public meeting

on the proposal. Section 4 of the BHC Act and the Board’s rules

thereunder provide for a hearing on a notice to acquire nonbanking

companies if there are disputed issues of material fact that cannot be

resolved in some other manner. 12 C.F.R. 225.25(a)(2). Under its

rules, the Board also may, in its discretion, hold a public meeting

if appropriate to allow interested persons an opportunity to provide

relevant testimony when written comments would not adequately

present their views. The Board has considered carefully the commenter’s request in light of all the facts of record. In the Board’s view, the

public has had ample opportunity to submit comments on the proposal

and, in fact, the commenter has submitted extensive written comments

that the Board has considered carefully in acting on the proposal. The

commenter failed to identify disputed issues of fact that are material to

the Board’s decision that would be clarified by a public meeting. In

addition, the commenter failed to demonstrate why its written comments did not adequately present its views, evidence, and allegations.

For these reasons and based on all the facts of record, the Board has

determined that a public meeting is not required or warranted in this

case. Accordingly, the request for a public meeting on the proposal is

denied.

92 Federal Reserve Bulletin Winter 2004
11.2 percent of market deposits. One hundred twenty-four

depository institutions would remain in the market, and the

HHI would increase 12 points to 947.

Wilmington Banking Market

Notificants operate the twelfth largest depository institution in the market, controlling deposits of approximately

$568 million, which represents approximately 1.5 percent

of market deposits. Thistle operates the twenty-sixth largest depository institution in the market, controlling deposits of approximately $48 million, which represents less

than 1 percent of market deposits. On consummation of the

proposal, Citizens would remain the twelfth largest depository institution in the market, controlling deposits of

approximately $616 million, which represents less than

1 percent of market deposits. Thirty-two depository institutions would remain in the market, and the HHI would

remain unchanged at 1793.

Orders Issued Under Sections 3 and 4 of the Bank

Holding Company Act

Central Pacific Financial Corp.

Honolulu, Hawaii

Order Approving the Acquisition of a Bank Holding

Company

Central Pacific Financial Corp. (‘‘Central Pacific’’), a bank

holding company within the meaning of the Bank Holding

Company Act (‘‘BHC Act’’), has requested the Board’s

approval under section 3 of the BHC Act (12 U.S.C.

§1842) to acquire CB Bancshares, Inc. (‘‘CBBI’’), and

CBBI’s subsidiary bank, City Bank (‘‘City Bank’’), both in

Honolulu, Hawaii. Central Pacific also has requested the

Board’s approval under sections 4(c)(8) and 4(j) of the

BHC Act (12 U.S.C. §1843(c)(8) and 1843(j)) to acquire

Datatronix Financial Services, Inc., also in Honolulu

(‘‘Datatronix’’), a nonbanking subsidiary of CBBI that

engages in data processing and data transmission activities.

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published

(68 Federal Register 24,478 (2003)). The time for filing

comments has expired, and the Board has considered the

proposal and all comments received during the comment

period in light of the factors set forth in sections 3 and 4 of

the BHC Act.

Central Pacific is the third largest commercial banking

organization in Hawaii and controls Central Pacific Bank

in Honolulu (‘‘CP Bank’’), with total deposits of approximately $1.7 billion, which represent approximately 8.3 percent of total deposits in depository institutions in the state

(‘‘state deposits’’).1 CBBI is the fourth largest commercial

banking organization in Hawaii and controls City Bank,

with total deposits of approximately $1.2 billion, which

represent approximately 5.7 percent of state deposits. On

consummation of the proposal, Central Pacific would

remain the third largest commercial banking organization

in Hawaii, controlling deposits of approximately $2.9 billion, which represent 14 percent of state deposits.

The proposal by Central Pacific to acquire CBBI and

City Bank is opposed by management of CBBI, and CBBI

has submitted comments to the Board urging denial on

several grounds. The Board previously has stated that, in

evaluating acquisition proposals, it must apply the criteria

in the BHC Act in the same manner to all proposals,

whether they are supported or opposed by the management

of the institutions to be acquired.2 Section 3(c) of the BHC

Act requires the Board to review each application in light

of certain factors specified in the Act. These factors require

consideration of the effects of the proposal on competition,

the financial and managerial resources and future prospects

of the companies and depository institutions concerned,

and the convenience and needs of the communities to be

served.3 Section 4(j) of the BHC Act requires the Board to

consider whether the nonbanking aspects of the transaction

can reasonably be expected to produce benefits to the

public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse

effects, such as undue concentration of resources,

decreased or unfair competition, conflicts of interests, or

unsound banking practices.

In considering these factors, the Board is mindful of the

potential adverse effects that contested acquisitions might

have on the financial and managerial resources of the

company to be acquired and the acquiring organization. In

addition, the Board takes into account the potential for

adverse effects that a prolonged contest may have on the

safe and sound operation of the institutions involved. The

Board has long held that, if the statutory criteria are met,

withholding approval based on other factors, such as

whether the proposal is acceptable to the management of

the organization to be acquired, would be outside the limits

of the Board’s discretion under the BHC Act.4

As explained below, the Board has carefully considered

the statutory criteria in light of all of the comments and

information provided by CBBI and the responses submitted by Central Pacific.5 The Board also has carefully con1. In this context, depository institutions include commercial banks,

savings banks, and savings associations. Deposit data are as of

June 30, 2003.

2. See North Fork Bancorporation, Inc., 86 Federal Reserve Bulletin 767, 768 (2000) (‘‘North Fork’’); The Bank of New York Company,

Inc., 74 Federal Reserve Bulletin 257, 259 (1988) (‘‘BONY’’).

3. In addition, the Board is required by section 3(c) of the BHC Act

to disapprove a proposal if the Board does not have adequate assurances that it can obtain information on the activities or operations of

the company and its affiliates, or in the case of a foreign bank, if such

bank is not subject to comprehensive supervision on a consolidated

basis. See 12 U.S.C. §1842(c).

4. See FleetBoston Financial Corporation, 86 Federal Reserve

Bulletin 751, 752 (2000); North Fork; BONY.

5. CBBI has provided comments and information on a number of

issues, including the competitive impact of the proposal; potential

branch closures; the accuracy and sufficiency of Central Pacific’s

financial projections and resources; the managerial resources of Central Pacific; the ability of Central Pacific to consummate the proposed

acquisition in light of CBBI’s corporate defenses and opposition,

ongoing litigation, and provisions of Hawaiian corporate law; the

Legal Developments 93
sidered all other information available, including information accumulated in the application process, supervisory

information of the Board and other agencies, relevant

examination reports, and information provided by the

Hawaii Division of Financial Institutions (‘‘DFI’’) and the

Federal Deposit Insurance Corporation (‘‘FDIC’’). In considering the statutory factors, particularly the effect of the

proposal on the financial and managerial resources of Central Pacific, the Board has received detailed financial information, including the terms and cost of the proposal and

the resources that Central Pacific proposes to devote to the

transaction.

After reviewing the proposal in light of the requirements

of the BHC Act, and for the reasons explained below, the

Board has determined to approve the application and notice

subject to Central Pacific’s commitments and the conditions established herein by the Board. The Board’s decision is conditioned on the requirement that Central Pacific’s offer not differ in any material aspect from the terms

that it has provided to the Board. Accordingly, if Central

Pacific amends or alters the terms of the offer as described

by Central Pacific to the Board or is unable to complete all

aspects of its proposal, it must consult with the Board to

determine whether the difference is material to the Board’s

analysis and conclusions regarding the statutory factors

and, therefore, would require a modification to this order, a

new application, or further proceedings before the Board.

In reviewing this proposal, the Board has taken into

account the potential for adverse effects on the financial

and managerial resources of the companies involved if

there is prolonged opposition to the proposal. As discussed

below, the Board has followed its standard practice of

requiring that consummation of the proposal, including the

acquisition of at least a majority of the shares of CBBI, be

completed within three months from the date of this order.

If the transaction is not concluded within this period, the

Board will review carefully any requests by Central Pacific

to extend the consummation period and would expect to

grant an extension of the period only if the Board is

satisfied that the statutory factors continue to be met.

The Board’s decision and conclusions on this proposal

are limited to the application of the statutory factors set out

in the BHC Act to the proposal. The Board expresses no

view or recommendation on whether this transaction is in

the best interests of the shareholders or whether it should

be accepted by the management or shareholders of CBBI.

Competitive Considerations

Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or would be

in furtherance of any attempt to monopolize the business of

banking in any relevant banking market. The BHC Act also

prohibits the Board from approving a proposed bank acquisition that would substantially lessen competition in any

relevant banking market, unless the Board finds that the

anticompetitive effects of the proposal clearly are outweighed in the public interest by the probable effect of the

proposal in meeting the convenience and needs of the

community to be served.6

The proposed merger of Central Pacific and CBBI would

combine the third and fourth largest commercial banking

organizations in Hawaii. The Board has reviewed carefully

the competitive effects of the proposal in each relevant

banking market in light of all the facts of record, including

information collected by the Federal Reserve System,

information provided by Central Pacific and CBBI, information provided by the Department of Justice and other

relevant agencies, and public information. The Board also

has carefully considered comments submitted by CBBI

on the competitive effects of the proposal. CBBI contends

that the merger would reduce competition for several

reasons, including alleging that the transaction will result

in a reduction in banking services, higher fees, the elimination of certain banking products, and reduced customer

convenience.

To determine the effect of a particular transaction on

competition, it is necessary to designate the area of effective competition between the parties, which the courts have

held is decided by reference to the relevant ‘‘line of commerce,’’ or product market, and the geographic market.

CBBI contends that the competitive analysis should focus

on the impact of the merger on the provision of banking

services to small- and medium-size businesses and consumers. On this basis, CBBI contends that the proposed

merger would have anticompetitive effects in certain

Hawaiian banking markets as well as the entire state.

The Board and the courts consistently have recognized

that the appropriate product market for analyzing the competitive effects of bank mergers and acquisitions is the

cluster of products (various kinds of credit) and services

(such as checking accounts and trust administration)

offered by banking institutions.7 According to the Supreme

Court, the clustering of banking products and services

facilitates convenient access to these products and services,

and vests the cluster with economic significance beyond

the individual products and services that constitute the

cluster.8 Several studies support the conclusion that both

businesses and households continue to seek this cluster of

services.9 Consistent with these precedents and studies,

potential loss of CBBI’s status as a minority-owned depository institution; and the effect of the proposed acquisition on the convenience and

needs of the communities served by CBBI and Central Pacific.

6. 12 U.S.C. §1842(c)(1).

7. See Chemical Banking Corporation, 82 Federal Reserve Bulletin 239 (1996) (‘‘Chemical’’), and the cases and studies cited therein.

The Supreme Court has emphasized that it is the cluster of products

and services that, as a matter of trade reality, makes banking a distinct

line of commerce. See United States v. Philadelphia National Bank,

374 U.S. 321, 357 (1963) (‘‘Philadelphia National’’); accord United

States v. Connecticut National Bank, 418 U.S. 656 (1974); United

States v. Phillipsburg National Bank, 399 U.S. 350 (1969) (‘‘Phillipsburg National’’).

8. See Phillipsburg National, 399 U.S. at 361.

9. Cole and Wolken, Financial Services Used by Small Businesses:

Evidence from the 1993 National Survey of Small Business Finance,

81 Federal Reserve Bulletin 629 (1995); Elliehausen and Wolken,

Banking Markets and the Use of Financial Services by Households,

78 Federal Reserve Bulletin 169 (1992); Elliehausen and Wolken,

94 Federal Reserve Bulletin Winter 2004
and on the basis of the facts of record in this case, the

Board concludes that the cluster of banking products and

services represents the appropriate product market for analyzing the competitive effects of this proposal.

In defining the relevant geographic market, the Board

consistently has sought to identify the area in which the

cluster of banking products and services is provided by

competing institutions and in which purchasers of the

products and services seek to obtain these products and

services.10 In applying these standards to bank acquisition

proposals, the Board and the courts repeatedly have held

that the geographic market for the cluster of banking

products and services is local in nature.11 In delineating the

relevant geographic market in which to assess the competitive effects of a bank merger or acquisition, the Board

reviews population density; worker commuting patterns;

the usage and availability of banking products; advertising

patterns of financial institutions; the presence of shopping,

employment, and other necessities; and other indicia of

economic integration and transmission of competitive

forces among banks.12 In Hawaii, the Board has paid

particular attention to an analysis of relevant commuting

data, the state’s mountainous island geography, the economic integration of the local areas, and evidence of where

customers conduct their banking business.13

In applying these principles in Hawaii, the Board previously has identified five local geographic markets in which

effects of bank expansion proposals on competition must

be analyzed.14 Based on these and all other facts of record

in this case, the Board continues to believe that Hawaii is

comprised of five local banking markets and that the record

in this case supports a competitive analysis based on these

five local markets.

Central Pacific and CBBI compete directly in four of

these local banking markets: East Hawaii Island (Hilo),

Honolulu, Kauai and West Maui.15 The Board has reviewed

carefully the competitive effects of the proposal in each of

these banking markets in light of all the facts of record,

including the number of competitors that would remain in

the market, the relative share of total deposits in depository

institutions controlled by Central Pacific and CBBI in the

markets (‘‘market deposits’’),16 the concentration level of

market deposits and the increase in this level as measured

by the Herfindahl–Hirschman Index (‘‘HHI’’) under the

Department of Justice Guidelines (‘‘DOJ Guidelines’’),17

and other characteristics of the markets.18 Consummation

of the proposal would be consistent with Board precedent and the DOJ Guidelines in each of the four banking

markets.19

The Department of Justice also has conducted a detailed

review of the expected competitive effects of the proposal.

The Department of Justice has advised the Board that

consummation of the proposal would not be likely to have

a significantly adverse effect on competition in any relevant banking market. The FDIC and the DFI have been

afforded an opportunity to comment and have not objected

to consummation of the proposal.

After carefully reviewing all the facts of record, including public comments on the competitive effects of the

proposal, and for the reasons discussed in the order and

appendices, the Board concludes that consummation of the

proposal would not be likely to result in a significantly

Banking Markets and the Use of Financial Services by Small- and

Medium-Sized Businesses, 76 Federal Reserve Bulletin 726 (1990).

10. See, e.g., Sunwest Financial Services, Inc., 73 Federal Reserve

Bulletin 463 (1987); Pikeville National Corporation, 71 Federal

Reserve Bulletin 240 (1985); Wyoming Bancorporation, 68 Federal

Reserve Bulletin 313 (1982), aff’d 729 F.2d 687 (10th Cir. 1984).

11. See Philadelphia National, 374 U.S. at 357; Phillipsburg

National; First Union Corporation, 84 Federal Reserve Bulletin 489

(1998); Chemical; St. Joseph Valley Bank, 68 Federal Reserve Bulletin 673 (1982) (‘‘St. Joseph’’).

12. See Crestar Bank, 81 Federal Reserve Bulletin 200, 201, n. 5

(1995); Pennbancorp, 69 Federal Reserve Bulletin 548 (1983);

St. Joseph.

13. See First Hawaiian, Inc., 77 Federal Reserve Bulletin 52, n. 13

(1991) (‘‘First Hawaiian’’). In reaching this conclusion, the Board

relied in part on evidence derived from a survey conducted by the

Federal Reserve Bank of San Francisco. All the consumers surveyed

reported that they maintained their primary transaction accounts in

local markets. All the businesses surveyed maintained their primary

transaction accounts with the local offices of depository institution,

and all the businesses that borrowed from depository institutions

obtained their loans from local offices. See id.

14. See Bancorp Hawaii, Inc., 76 Federal Reserve Bulletin 759

(1990), which identified the following Hawaiian banking markets:

East Hawaii Island (Hilo), Honolulu, Kauai, West Hawaii Island

(Kailua-Kona), and West Maui.

15. These markets are described in Appendix A.

16. Deposits and market share data are as of June 30, 2003, and are

based on calculations in which the deposits of thrift institutions are

included at 50 percent. The Board has previously indicated that thrift

institutions have become, or have the potential to become, significant

competitors of commercial banks. See, e.g., Midwest Financial Group,

75 Federal Reserve Bulletin 386 (1989); National City Corporation,

70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has

included thrift deposits in the calculation of market share on a 50 percent weighted basis. See, e.g., First Hawaiian.

17. Under the DOJ Guidelines, 49 Federal Register 26,823 (1984),

a market is considered highly concentrated if the post-merger HHI is

more than 1800. The Department of Justice has informed the Board

that a bank merger or acquisition generally will not be challenged (in

the absence of other factors indicating anticompetitive effects) unless

the post-merger HHI is at least 1800 and the merger increases the HHI

by more than 200 points. The Department of Justice has stated that the

higher than normal HHI thresholds for screening bank mergers for

anticompetitive effects implicitly recognize the competitive effects of

limited-purpose lenders and other nondepository financial institutions.

18. The effects of the proposal on the concentration of banking

resources in these markets are described in Appendix B.

19. As previously noted, CBBI contends that the competitive analysis should focus on the impact of the merger on providing banking

services to small- and medium-sized businesses and consumers. CBBI

provides no information that supports finding lending to small or

mid-size businesses as a separate product market. Even if the competitive analysis defined the relevant product market more narrowly to

comprise only lending to small or mid-size businesses, the Board does

not believe that consummation of the proposal would have a significantly adverse effect on competition in those products in any relevant

banking market. In each case there are numerous competitors, the

changes in market share resulting from this transaction are not significantly adverse, and the barriers to entry by depository institutions and

others are relatively low. CBBI argues that branch closures and the

elimination of services will hurt consumers. As discussed below,

Central Pacific has stated that it will open a new branch for every

branch closed. CBBI currently provides a wide array of services to its

customers and expects to integrate CBBI’s products and services into

its operations as appropriate.

Legal Developments 95
adverse effect on competition or on the concentration of

banking resources in any of the markets in which Central

Pacific and CBBI directly compete or in any other relevant

banking market. Accordingly, based on all the facts of

record, the Board has determined that competitive factors

are consistent with approval of the proposal.

Convenience and Needs Considerations

In acting on a proposal under section 3 of the BHC Act, the

Board is required to consider the effects of the proposal on

the convenience and needs of the communities to be served

and to take into account the records of the relevant insured

depository institutions under the Community Reinvestment

Act (‘‘CRA’’).20 The CRA requires the federal financial

supervisory agencies to encourage financial institutions to

help meet the credit needs of local communities in which

they operate, consistent with their safe and sound operation, and requires the appropriate federal financial supervisory agency to take into account an institution’s record of

meeting the credit needs of its entire community, including

low- and moderate-income (‘‘LMI’’) neighborhoods, in

evaluating bank expansionary proposals.

The Board has considered carefully the convenience and

needs factor and the CRA performance records of the

subsidiary depository institutions of Central Pacific and

CBBI in light of all the facts of record. As part of its

review, the Board carefully considered comments submitted by CBBI expressing concerns about the record of

Central Pacific in meeting the convenience and needs of

the communities it serves and Central Pacific’s responses

to those concerns.21 In particular, CBBI criticized Central

Pacific’s record of small business and home mortgage

lending to LMI borrowers and its record of lending in LMI

communities in Hawaii. In addition, CBBI expressed concern about potential branch closings.22

A. CRA Performance Evaluations

As provided in the CRA, the Board has evaluated the

convenience and needs factor in light of evaluations by the

appropriate federal supervisors of the CRA performance

records of the relevant insured depository institutions. An

institution’s most recent CRA performance evaluation is a

particularly important consideration in the applications process because it represents a detailed, on-site evaluation of

the institution’s overall record of performance under the

CRA by its appropriate federal supervisor.23

The subsidiary banks of Central Pacific and CBBI each

received ‘‘satisfactory’’ ratings at their most recent CRA

performance evaluations. Central Pacific’s subsidiary bank,

CP Bank, received a ‘‘satisfactory’’" rating by the FDIC, as

of August 23, 2002 (the ‘‘2002 Evaluation’’), and CBBI’s

subsidiary bank, City Bank, received a ’’satisfactory’’ rating by the FDIC, as of September 11, 2001 (the ‘‘2001

Evaluation’’). Examiners found no evidence of prohibited

discrimination or other illegal credit practices at either of

the insured depository institutions involved in this proposal

and found no violations of the substantive provisions of

fair lending laws.

B. CRA Performance of Central Pacific

1. Lending Test

CP Bank received a rating of ‘‘low satisfactory’’ under the

lending test in the 2002 Evaluation, in which examiners

concluded that CP Bank’s lending record reflected adequate responsiveness to community credit needs and adequate penetration throughout its assessment area.24 They

also commented that CP Bank had adopted a business

strategy that focused on commercial and industrial and

nonfarm, nonresidential loans, with residential lending correspondingly de-emphasized. As previously noted by the

Board, the CRA does not require financial institutions to

provide any particular type of products or services to its

customers.

The 2002 Evaluation reported that CP Bank’s lending

record demonstrated good penetration among business customers of different sizes, including loans to small businesses and small loans to businesses.25 During the review

period, CP Bank originated approximately $149.2 million

in small loans to businesses in its assessment areas, of

which approximately 18.6 percent by number were made

to businesses in LMI areas. Examiners also noted that

approximately 65 percent of CP Bank’s small loans to

businesses were made to small businesses, which significantly exceeded the record of lenders in the aggregate

(‘‘aggregate lenders’’), and concluded that CP Bank was

20. 12 U.S.C. §2901 et seq. clearly addressing the credit needs of small businesses.

21. In connection with this application, Central Pacific has also

publicly announced its willingness to commit an additional $1 million

in qualified investments and charitable donations to support local

community needs.

22. CBBI has expressed concern that the proposal might result in

the loss of jobs. Central Pacific has announced publicly its intention to

retain almost all the employees of City Bank after consummation of

this proposal. Moreover, the factors that the Board can consider when

reviewing an application are limited by applicable law. The effect of a

proposed transaction on employment in a community is not among the

factors included in the acts administered by the Board. The convenience and needs factor has been consistently interpreted by the

federal financial supervisory agencies, the courts, and Congress to

relate to the effects of a proposal on the availability and quality of

banking services in the community. See Wells Fargo & Company,

82 Federal Reserve Bulletin 455, 457 (1996).

23. See Interagency Questions and Answers Regarding Community

Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).

24. The review period was January 1, 2000, through June 30, 2002.

CP Bank’s assessment areas for the 2002 Evaluation included the

Honolulu Metropolitan Statistical Area (‘‘MSA’’) and the non-MSA

portions of Hawaii (‘‘Hawaii non-MSA’’), which together comprised

the entire state. CP Bank’s deposits and lending activities were more

heavily concentrated in its Honolulu MSA assessment area. Accordingly, examiners gave substantially more weight to CP Bank’s activities in the Honolulu MSA assessment area when determining the

bank’s overall CRA rating.

25. In this context, ‘‘loans to small businesses’’ includes loans to

businesses with gross annual revenues of $1 million or less, and

‘‘small loans to businesses’’ includes loans of $1 million or less to

businesses.

96 Federal Reserve Bulletin Winter 2004
Examiners also concluded that CP Bank’s lending to small

businesses in the Honolulu MSA was excellent relative to

aggregate lenders. In this assessment area, CP Bank originated 73.3 percent and 55.8 percent of its business loans to

small businesses in 2000 and 2001, respectively. In 2000

and 2001, CP Bank originated 83.6 percent and 63.6 percent, respectively, of its loans to small businesses in

amounts of $100,000 or less. In CP Bank’s Hawaii nonMSA assessment area, examiners found that 19 percent of

the loans CP Bank made to small businesses were made to

businesses in moderate-income tracts in 2000 (the only

year for which aggregate lending data were available),

which compared favorably with aggregate lenders. Moreover, the majority of CP Bank’s small loans to small

businesses in its Hawaii non-MSA assessment area were

extended to small businesses.

The 2002 Evaluation noted CP Bank’s participation in

flexible lending programs tailored to the needs of small

businesses and LMI individuals who might not qualify for

more traditional loan products. CP Bank, as a Small Business Administration (‘‘SBA’’) Preferred Lender, originated

approximately $9.7 million in SBA loan products during

the review period. Examiners reported that CP Bank

assisted new or very small businesses in qualifying for

credit by offering term business loans with minimum loan

amounts of $10,000 and business lines of credit with no

minimum loan amount.

During the review period, CP Bank originated approximately $149.4 million in loans reportable under the Home

Mortgage Disclosure Act (12 U.S.C. §2801 et seq.)

(‘‘HMDA’’) in its assessment areas, of which approximately 15.1 percent by number were in LMI geographies.26

In its Honolulu MSA assessment area, CP Bank extended

15.4 percent and 18.8 percent of its HMDA loans to

borrowers in moderate-income census tracts in 2000 and

2001, respectively, which examiners described as very

good relative to aggregate lenders. Examiners found that

CP Bank’s distribution of HMDA loans to moderateincome borrowers in the Hawaii non-MSA portions of its

assessment areas was comparable with the percentage of

moderate-income households in the area. Although CP

Bank did not originate a significant number of loans in

low-income areas in its assessment areas, examiners concluded that there were limited opportunities to make such

loans. Examiners noted that in the Honolulu MSA, owneroccupied housing represented less than 1 percent of housing units in low-income areas. In the Hawaii non-MSA

assessment areas, examiners noted that there were only two

low-income census tracts, that both were very isolated, and

that one had been partially evacuated.

The 2002 Evaluation also noted CP Bank’s participation

in mortgage loan programs sponsored at the federal, state,

and local level, including programs of the Federal National

Mortgage Association, the County of Kauai Home Buyer

Gap Mortgage program, and the Hula Mae program that

were designed to increase home ownership among LMI

individuals. Through these flexible lending programs and

CP Bank’s Affordable Program/First Time Homebuyer

Program, CP Bank originated more than $600,000 in mortgage loans during the reporting period.

Central Pacific represented that since the 2002 Evaluation, it has undertaken certain initiatives to further enhance

its lending performance, including hiring additional mortgage lending personnel and instituting a monetary incentive program for CRA-related mortgage loans. In addition,

CP Bank has instituted a new training program for branch

managers and loan officers with respect to flexible mortgage lending programs.

Examiners characterized CP Bank as a leader in making

community development loans and noted that the majority

of these loans addressed the need for financing for affordable rental housing. Examiners reported that CP Bank’s

emphasis on affordable housing and its investment in a

community loan fund that served LMI individuals and

provided loans to small business entrepreneurs demonstrated good responsiveness to the credit needs of its community. During the review period, CP Bank extended

$14.2 million in community development loans and a

$9 million standby letter of credit in its assessment area,

including $2.7 million in loans in its Hawaii non-MSA

assessment area. CP Bank’s community development loans

benefited affordable housing projects and community organizations, which included a 91-unit apartment complex

that provides affordable housing to low-income, disabled

persons; a hospital in a LMI community; and a microenterprise development program.

2. Investment Test

CP Bank received an ‘‘outstanding’’ rating for investment

activities in the 2002 Evaluation. During the review period,

CP Bank’s qualified investments in its assessment areas

totaled approximately $20.5 million. Examiners noted that

CP Bank’s investment, grant, and donation activities were

very responsive to the credit and economic needs of its

assessment areas. The 2002 Evaluation also reported that

CP Bank’s grants and donations benefited community organizations that provided affordable housing projects for LMI

individuals, financing and other services for small businesses, and community development services tailored to

LMI individuals.

3. Service Test

CP Bank received an ‘‘outstanding’’ rating for its retail

banking services in the 2002 Evaluation. Examiners

reported that CP Bank’s retail banking delivery services

were readily accessible to all portions of its assessment

areas. In addition, the 2002 Evaluation found that CP

Bank’s 14 full-service branches offered a full array of bank

products and services, and that all branches maintained

hours that did not inconvenience any portion of the bank’s

assessment areas or any group of individuals. Examiners

26. Although CP Bank increased both the number of and dollar

volume of its mortgage loans, the bank’s market share remained

almost unchanged, in part because of the increased number of lenders

in the market.

Legal Developments 97
noted that CP Bank maintained alternative delivery systems, including automated teller machines (‘‘ATMs’’),

24-hour telephone banking, and internet banking. The 2002

Evaluation also noted that since its previous CRA evaluation, CP Bank had initiated new banking products to help

meet certain retail banking needs of LMI individuals and

small businesses, including a low-cost checking account

with no minimum balance and unlimited check-writing

privileges.

C. CRA Performance of CBBI

1. Lending Test

City Bank received a ‘‘high satisfactory’’ rating for lending

activities at the 2001 Evaluation.27 Examiners reported that

City Bank’s overall lending performance in its assessment

areas reflected a responsiveness to community credit

needs.28 The 2001 Evaluation stated that City Bank’s lending record demonstrated good penetration among home

mortgage borrowers of different income levels. During

the review period, City Bank funded residential mortgage

loans totaling more than $347 million in its combined

assessment areas. Examiners found that the percentages of

City Bank’s total HMDA-reportable loans in LMI census

tracts and to LMI borrowers in its assessment areas during

the review period was comparable with those percentages

for aggregate lenders.

Examiners indicated that City Bank’s small business

lending in its combined assessment areas also reflected a

responsiveness to area credit needs. City Bank made small

loans to businesses totaling approximately $11.1 million

during the review period, including approximately

$5.1 million in loans to small businesses. In the 2001

Evaluation, examiners reported that approximately 31 percent of City Bank’s small loans to businesses, by number

and dollar volume, were extended to businesses in LMI

census tracts.

The 2001 Evaluation also found that City Bank had

made a relatively high level of community development

loans during the review period. Examiners noted that many

of City Bank’s community development loans had financed

affordable housing programs and were made in conjunction

with nonprofit community development organizations and

developers. During the review period, City Bank originated

approximately $27 million in community development

loans, including $8.9 million in multifamily affordable

housing loans and $14.2 million in loans that promoted

economic development.

2. Investment Test

City Bank received a ‘‘low satisfactory’’ rating for investment activities in the 2001 Evaluation. The 2001 Evaluation reported that City Bank maintained an adequate

level of community development investments. Examiners

noted that City Bank made qualified investments totaling approximately $3.3 million, including approximately

$1 million in qualified investments in low-income, community financial organizations and $1.2 million in securities

backed by mortgage loans to LMI borrowers.

3. Service Test

City Bank received a ‘‘high satisfactory’’ rating for retail

banking services in the 2001 Evaluation. Examiners

reported that the bank’s banking services were accessible

to essentially all portions of its assessment areas, and noted

that it offered alternative delivery systems, including

ATMs, 24-hour telephone banking, and internet banking.

During the review period, City Bank offered a low-cost

checking account for LMI customers.

D. Branch Closings

The Board has considered the public comments about

potential branch closings in light of all the facts of record.

Central Pacific has provided the Board with its branch

closing policy and states that it has not made final decisions about branches that may be closed after consummation of the proposal. Moreover, Central Pacific has represented that it will open a new branch for every branch of

CP Bank or City Bank that is closed as a result of this

merger. The Board has considered carefully CP Bank’s

branch closing policy and its record of opening and closing

branches. The branch closing policy provides that if CP

Bank considers closing a branch in a low-income or predominantly minority area, bank management must meet

with community representatives to discuss measures that

might keep the branch open. Examiners reviewed its

branch closing policy as part of the 2002 Evaluation and

found it to be in compliance with federal law. The Board

expects that Central Pacific would continue to follow a

branch closing policy satisfactory to examiners for any

branch closed in connection with the proposed transaction.

The Board also has considered that federal banking law

provides a specific mechanism for addressing branch closings.29 Federal law requires an insured depository institution to provide notice to the public and to the appropriate

federal supervisor before closing a branch. In addition, the

Board notes that the FDIC, as the appropriate federal

supervisor of CP Bank, will continue to review its branch

closing record in the course of conducting CRA performance evaluations.

27. The review period was January 1, 1999, through June 30, 2001.

28. City Bank’s assessment areas for the 2001 Evaluation included

the Honolulu MSA, Hawaii County, and Maui County, except for the

islands of Lanai and Molokai.

29. Section 42 of the Federal Deposit Insurance Act (12 U.S.C.

§1831r-1), as implemented by the Joint Policy Statement Regarding

Branch Closings (64 Federal Register 34,844 (1999)), requires that a

bank provide the public with at least 30 days’ notice and the appropriate federal supervisory agency and customers of the branch with at

least 90 days’ notice before the date of the proposed branch closing.

The bank also is required to provide reasons and other supporting data

for the closure, consistent with the institution’s written policy for

branch closings.

98 Federal Reserve Bulletin Winter 2004
E. Minority Depository Institution

CBBI also has expressed concern that the proposed transaction and merger of City Bank and CP Bank might result

in the termination of City Bank’s status as a minority

depository institution under Section 308 of the Financial

Institutions Reform, Recovery, and Enforcement Act

(‘‘FIRREA’’).30

The Board is mindful of the beneficial role played by

minority depository institutions in promoting access to

banking services for all communities. However, neither

section 308 of FIRREA nor the guidance issued under that

section by the relevant agencies prohibits bank holding

companies from acquiring minority depository institutions,

and the current proposal does not involve the types of

competing bids contemplated by section 308. In addition,

the Board notes that the FDIC would be required to review

the merger of CP Bank and City Bank before such a

merger could proceed. Central Pacific has stated that, after

consummation of the proposal, the resulting organization

will continue to have substantial minority ownership and

management participation. The Board expects Central

Pacific and CP Bank to continue to conduct their businesses in a manner that promotes equal access to banking

services for all segments of their communities, including

minority individuals.

F. Conclusion on Convenience and Needs Factor

The Board has carefully considered all the facts of record,

including reports of examination of CRA record of the

institutions involved, information provided by Central

Pacific, all comments received and responses to the comments, and confidential supervisory information.31 Based

on a review of the entire record, and for the reasons

discussed above, the Board concludes that considerations

relating to the convenience and needs factor, including the

CRA performance records of the relevant depository institutions, are consistent with approval.

Financial and Managerial Factors

Section 3 of the BHC Act requires the Board to consider

the financial and managerial resources and future prospects

of the companies and banks involved in the proposal and

certain other supervisory factors. The Board has carefully

considered these factors in light of all the facts of record,

including public comments, reports of examination, and

other confidential supervisory information assessing the

financial and managerial resources of the organizations.

The Board has also considered information provided by

other banking agencies, including the FDIC and the DFI.

In addition, the Board has considered publicly available

financial and other information on the organizations and

their subsidiaries, and all the information submitted on the

financial and managerial aspects of the proposal by Central

Pacific and CBBI. CBBI, in particular, has expressed concerns about the integration of the organizations’ operations, Central Pacific’s estimates of the cost savings that

might result from the proposed merger, and Central Pacific’s managerial depth and experience.32

In evaluating financial factors in expansion proposals by

banking organizations, the Board consistently has considered capital adequacy to be especially important.33 The

Board expects banking organizations contemplating expansion to maintain strong capital levels substantially in excess

of the minimum levels specified in the Board’s Capital

Adequacy Guidelines. Strong capital is particularly important in proposals that involve higher transaction costs or

risks, such as proposals that are contested.

Central Pacific, CP Bank, CBBI, and City Bank are

currently well capitalized. Central Pacific has described in

detail the terms and costs of its proposed offer to acquire

CBBI. Central Pacific proposes to acquire the shares of

CBBI with a combination of cash and shares of Central

Pacific’s common stock. Funds to acquire the common

stock of CBBI will come from Central Pacific’s available

cash on hand, dividends from CP Bank, funds that Central

Pacific has recently raised through the issuance of trust

preferred securities, and funds that Central Pacific anticipates raising in further issuances of trust preferred or other

securities. 30. Section 308 of FIRREA requires the Secretary of the Treasury 34 On consummation of the proposal, Central to consult with the Office of Thrift Supervision and the FDIC to devise

methods to achieve certain goals for minority depository institutions,

including preserving the number of such institutions and favoring bids

by minority depository institutions to acquire another minority depository institution over bids by other acquirers. See Pub. L. No. 101-73,

103 Stat. 354 (1989) (see 12 U.S.C.A. §1463 note). See also FDIC

Policy Statement Regarding Minority Depository Institutions, 67 Federal Register 18,618 (2002).

31. CBBI also expressed concern that the merger would result in a

diminution in products available to customers. Central Pacific indicates that it expects to integrate CBBI’s products and services into its

offices as appropriate, thereby providing customers with access to a

broader array of services. In analyzing the potential effects of this

proposal on the availability of banking products, the Board has placed

significant weight on Central Pacific’s actual record of performance in

meeting the convenience and needs of the communities it serves. The

Board expects Central Pacific to continue to meet the convenience and

needs of its communities, including LMI areas, by offering products

and services that help meet the banking needs of it customers, including LMI individuals and small businesses, after the acquisition of

CBBI.

32. CBBI alleges that integrating the organizations would be especially difficult for Central Pacific in light of the contested nature of the

transaction and the potential that officers and managers of CBBI might

leave the combined organization. CBBI also argues that Central

Pacific has not adequately accounted for the possible financial effects

if CBBI shareholders assert dissenter’s rights. In addition, CBBI

argues that information provided by Central Pacific to the Board and

to the public is insufficient to permit an analysis of the financial and

managerial aspects of the proposal, including the likely cost savings

from the proposal. After receiving Central Pacific’s initial application

and notice, the Board requested additional information on all aspects

of the proposal, including plans for integration and revised financial

projections and cost estimates, and has received substantial confidential and nonconfidential information that has been included in the

record.

33. See, e.g., First Union Corporation, 87 Federal Reserve Bulletin 683, 688 (2001); Chemical.

34. CBBI has expressed concerns about Central Pacific’s reliance

on trust preferred securities in light of recent opinions by the Financial

Legal Developments 99
Pacific, CP Bank, CBBI, and City Bank would have a

cushion above the minimum levels necessary to meet the

regulatory definition of well capitalized. In addition, Central Pacific has committed to the Board that Central Pacific

and CP Bank will remain well capitalized.

In addition to carefully reviewing the capital structure

of the resulting institution, the Board has considered the

impact of this transaction on the other financial resources

of Central Pacific. Central Pacific’s earnings historically

have exceeded those of institutions in its peer group. The

Board also has reviewed the financial resources of the

combined organization, taking into account Central Pacific’s projected costs as well as projections regarding potential customer attrition and cost savings.35 These projections

indicate that Central Pacific should be able to remain well

capitalized on consummation of this proposal and to continue to meet its cash obligations.36

The Board also has considered the managerial resources

of the entities involved and of the proposed combined

organization. CBBI alleges that the management of Central

Pacific is inexperienced in transactions involving bank

acquisitions and lacks the managerial skill to consummate

the transaction. CBBI also alleges that managing the combined entity would put severe strain on the management of

Central Pacific because the transaction would almost

double the size of Central Pacific.

The Board has carefully reviewed all available information on the management of Central Pacific, including confidential reports of examination, information submitted by

Central Pacific and CBBI, and publicly available information. In particular, the Board has reviewed the information

submitted by Central Pacific, including confidential information, about its plans for integrating and managing the

combined organization. Several factors reduce concern

with respect to the managerial resources of the combined

entity. Central Pacific, CBBI, and their subsidiary depository institutions currently are satisfactorily managed, with

appropriate risk management processes in place. Both institutions operate in the same markets and engage in similar

types of activities. In addition, Central Pacific has represented that both institutions use much of the same information technology for their banking operations. As mentioned

above, Central Pacific and City Bank are well capitalized,

and both institutions have records of positive earnings.

Central Pacific’s plan for integrating CBBI and its subsidiaries into Central Pacific appears adequate.37 Based on

these and all the facts of record, the Board concludes that

the financial and managerial resources and future prospects

of the organizations involved in the proposal are consistent

with approval, as are the other supervisory considerations

that the Board must consider under section 3 of the BHC

Act.

Provisions of Hawaiian Law and CBBI’s Shareholders’

Rights Plan

CBBI is a Hawaiian corporation and Hawaiian law contains various provisions governing proposals to acquire

Hawaiian corporations that are unsolicited by the management.38 In addition, CBBI’s bylaws provide certain

rights to shareholders that are intended to protect against

bidders that are not approved by CBBI’s management

Accounting Standards Board (‘‘FASB’’) regarding the status of trust

preferred securities. See Consolidation of Variable Interest Entities,

FASB Interpretation, No. 46 (2003); Accounting for Certain Financial

Instruments with Characteristics of Both Liabilities and Equity, Statement of Financial Accounting Standards, No. 150 (May 2003). Earlier

this year, the Board issued supervisory guidance directing bank holding companies to continue to include certain trust preferred securities

as tier 1 capital for regulatory capital purposes pending further review

of this matter by the Board. See Federal Reserve Board Supervisory

Letter, SR 03-13 (July 2, 2003). The Board is in the process of

considering the regulatory capital implications of the FASB opinions

and will provide further guidance as appropriate on the treatment of

trust preferred securities as capital. The Board has also considered

information provided by Central Pacific on its alternatives to using

trust preferred securities to meet its capital requirement.

35. Under Hawaiian law, dissenting shareholders in a merger

between corporations may request to receive cash consideration

instead of shares of the resulting company. CBBI has argued that there

would be adverse financial consequences to Central Pacific if 25 percent of CBBI’s shareholders dissent from the merger and elect to

receive a cash payment for their CBBI shares in an amount equal to

the value of Central Pacific’s tender offer or greater. In evaluating the

potential effects of this proposal on the financial resources of Central

Pacific, the Board has considered the effects of the assertion of

dissenter’s rights consistent with CBBI’s assumptions in light of

Central Pacific’s ability to raise additional funds to consummate this

transaction, its commitment to remain well capitalized, and the terms

and conditions of its proposal as outlined in the application process.

36. CBBI has expressed concern that Central Pacific’s projected

cost savings are unrealistic in light of Central Pacific’s representations

that it would retain almost all City Bank employees and would open a

new branch for every branch it closes in connection with the proposal.

The Board has evaluated the financial effects of this proposal under

the assumption that Central Pacific will not realize any cost savings

and that customer attrition will be greater than anticipated by Central

Pacific.

37. CBBI also expressed concern about the ability of Central

Pacific to manage and operate CBBI and City Bank in the event that

Central Pacific does not acquire sufficient shares of CBBI to effect a

corporate merger. The Board previously has noted that the BHC Act

permits a company to acquire less than all the shares of a bank or a

bank holding company. See North Fork, BONY. Central Pacific has

stated that it expects to acquire sufficient shares to effect a corporate

merger with CBBI and does not intend to be a minority shareholder of

CBBI. The Board is unable to predict at this time whether Central

Pacific will succeed with its proposal or whether the level it is able to

acquire will cause dissension in the ongoing operation of CBBI.

However, the Board notes that both Central Pacific and CBBI have

capable managements, and the Federal Reserve maintains sufficient

authority to take appropriate action if necessary to require the safe and

sound operation and management of the institutions.

38. See Haw. Rev. Stat. §414E (2003) (the ‘‘Hawaii Control Share

Acquisition Act’’ or ‘‘HCSAA’’) (any shares of a Hawaiian corporation held by a party that has acquired more than 10 percent of the

corporation without the approval of either the corporation’s directors

or a majority of the voting shares of the corporation are denied voting

rights for one year, are nontransferable, and may be redeemed at book

value by the acquired corporation). On May 28, 2003, CBBI convened

a shareholder meeting pursuant to the HCSAA. The shareholders

voting at this meeting failed to approve Central Pacific’s offer to

acquire CBBI. CBBI asserts that, in light of the results of the May 28

meeting, Central Pacific is barred from consummating its offer to

acquire CBBI.

100 Federal Reserve Bulletin Winter 2004
(‘‘CBBI rights plan’’).39 CBBI argues that the HCSAA and

the CBBI rights plan present insurmountable barriers to

Central Pacific’s contested acquisition of CBBI.40

The Board may not approve the acquisition of a bank by

a bank holding company if the acquisition is prohibited by

state law.41 The Board, however, has previously approved

transactions on condition that the particular transaction is

consummated only in compliance with applicable state

law.42

The HCSAA is part of the general corporate law, not a

statute governing the banking activities or operations of the

companies involved in the proposal. Whether the HCSAA

is an obstacle to consummation of this transaction depends

on the actions taken by the management and shareholders

of CBBI. For example, the HCSAA would not prevent

consummation of the proposal if either CBBI’s management or shareholders approve the transaction. Central

Pacific has stated that it will not consummate the proposal

unless it obtains approval as required by the HCSAA. The

Board’s approval is conditioned on compliance by Central

Pacific with all applicable Hawaiian law governing this

transaction.

CBBI’s board of directors has significant discretion in

determining whether the CBBI rights plan will become

effective in a particular case and, specifically, whether it

will have any effect on this proposal. Central Pacific has

stated that it will condition its tender offer for CBBI shares

on, among other things, the inapplicability of the CBBI

rights plan. Because the cost of consummating the transaction would be significantly affected if the CBBI rights plan

is triggered, the Board’s approval is limited to consummation of the proposal without applying the CBBI rights plan.

Nonbanking Activities

Central Pacific also has filed a notice under sections 4(c)(8)

and 4(j) of the BHC Act to acquire Datatronix, a nonbanking subsidiary of CBBI that engages in data processing and

data transmission activities. The Board has determined by

regulation that the activity for which notice has been

provided is closely related to banking for purposes of

section 4(c)(8) of the BHC Act and, therefore, permissible

for bank holding companies.43 Central Pacific has committed to conduct this activity in accordance with the Board’s

regulations and orders governing this activity for bank

holding companies.

In order to approve this notice, the Board also must

determine that the acquisition of Datatronix and the performance of the proposed activities by Central Pacific can

reasonably be expected to produce benefits to the public

that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition,

conflicts of interests, or unsound banking practices.44 As

part of its evaluation of these factors, the Board considers

the financial and managerial resources of Central Pacific

and its subsidiaries, and the company to be acquired, and

the effect of the proposed transaction on those resources.

For the reasons noted above, and based on all the facts

of record, the Board has concluded that financial and

managerial considerations are consistent with approval of

the notice.

The Board has considered the competitive effects of

Central Pacific’s proposed acquisition of Datatronix in

light of all the facts of record. The markets for data

processing and data transmission activities are national and

unconcentrated. The record in this case also indicates that

there are numerous providers of these services. Based on

all the facts of record, the Board concludes that consummation of the proposal would have a de minimis effect on

competition for the proposed services. Accordingly, the

Board concludes that it is unlikely that significantly adverse

competitive effects would result from the nonbanking

acquisition proposed in the transaction.

Central Pacific has indicated that the proposal would

enable it, through its bank and nonbank subsidiaries, to

provide CBBI and Datatronix customers with access to

certain investment and trust products and services that

CBBI and Datatronix currently do not offer. Furthermore,

customers of CBBI would have an expanded service area,

with numerous offices and ATMs throughout the state. In

addition, Central Pacific has stated that it might integrate

Datatronix with Central Pacific’s existing bank servicing

data processing assets, which could yield cost savings to

consumers through the elimination of certain operational

and administrative redundancies.

The Board also concludes that the conduct of the proposed nonbanking activities within the framework established in this order and Regulation Y is not likely to result

in adverse effects, such as undue concentration of

resources, decreased or unfair competition, conflicts of

interests, or unsound banking practices, that would not be

outweighed by the public benefits of the proposal, such as

increased customer convenience and gains in efficiency.

Accordingly, based on all the facts of record, the Board has

39. Under the CBBI rights plan, rights to purchase additional

shares of CBBI or any successor corporation at a set price will be

distributed to all shareholders of CBBI at a specified time. CBBI’s

board of directors may cause the company to redeem these rights at

any time before the distribution date.

40. CBBI has initiated a lawsuit alleging that Central Pacific and

other parties violated the HCSAA through a voting agreement and

Central Pacific has initiated a lawsuit challenging the validity of the

CBBI rights plan. CBBI asserts that the Board should delay consideration of the Central Pacific/CBBI application until the legal actions

are resolved. The matters raised by CBBI and Central Pacific are

matters of general corporate law appropriately within the jurisdiction

of the courts to determine, and Board action under the BHC Act

would not interfere with judicial review of the pending lawsuits. In

light of this order’s condition, discussed in this section, that Central

Pacific must comply with state law in consummating the transaction,

the Board does not believe that a delay in its review under the BHC

Act is warranted.

41. See Whitney National Bank of Jefferson Parish v. Bank of New

Orleans and Trust Company, 379 U.S. 411 (1965); Security Pecos

Bancshares, Inc., 85 Federal Reserve Bulletin 640, 641 (1999).

42. See North Fork; BONY.

43. See 12 C.F.R. 225.28(b)(14).

44. See 12 U.S.C. §1843( j)(2)(A).

Legal Developments 101
determined that the balance of public interest factors that

it must consider under the standard of section 4(j) of the

BHC Act is favorable and consistent with approval of the

proposal.

Conclusion

Based on the foregoing and all the facts of record, the

Board has determined that the proposed transaction should

be, and hereby is, approved.45 In reaching its conclusion,

the Board has considered all the facts of record in light of

the factors that it is required to consider under the BHC

Act and other applicable statutes. The Board’s approval is

specifically conditioned on compliance by Central Pacific

with the conditions imposed in this order and the commitments made in connection with the application and notice,

including compliance with state law. In particular, in the

event of any material change in the transaction, such as a

material change in the price, financing, terms, conditions,

or structure of the transaction, or an inability to complete

all the aspects of the transaction as proposed, Central

Pacific must consult with the Board to determine whether

the change is consistent with the Board’s action in this

case, or whether further Board action is necessary. The

Board reserves the right in the event of significant changes

in the proposal to require a new application from Central

Pacific. The Board’s approval of the nonbanking aspects of

the proposal also is subject to all the conditions set forth

in Regulation Y, including those in sections 225.7 and

225.25(c) of Regulation Y (12 C.F.R. 225.7 and 225.25(c)),

and to the Board’s authority to require such modification or

termination of the activities of a bank holding company or

any of its subsidiaries as the Board find necessary to ensure

compliance with, and to prevent evasion of, the provisions

of the BHC Act and the Board’s regulations and orders

issued thereunder. The commitments made in the application process are deemed to be conditions imposed in writing by the Board in connection with its findings and

decision and, as such, may be enforced in proceedings

under applicable law.

In previous cases, the Board has recognized that a prolonged contest for ownership of a banking institution might

result in adverse effects on the financial and managerial

resources of the organizations or other factors.46 CBBI has

expressed concern that a prolonged, contested acquisition

of CBBI would be costly to CBBI and Central Pacific and

would divert the time and resources of the management of

these institutions.

The BHC Act does not provide a specific time period for

consummation of a transaction. Generally, however, the

Board requires consummation of an approved transaction

within three months from the date of the Board’s order to

ensure that there are no substantial changes in an applicant’s or target’s condition or other factors that might

require the Board to reconsider its approval.

In this case, although prolonged delay may have a negative impact on Central Pacific and CBBI, a short delay

should not affect the financial or managerial resources of

either organization or other factors so severely as to warrant denial of the proposal. Accordingly, the Board has

followed its standard practice and requires that the transaction, including the acquisition of at least a majority of the

shares of CBBI, be consummated within three months after

the effective date of this order unless that period is

extended by the Board. If Central Pacific requests an

extension of time to consummate the proposal, the Board

will examine carefully all relevant circumstances, and may

require Central Pacific to provide supplemental information if necessary to evaluate the managerial and financial

resources of Central Pacific and CBBI or other factors at

the time any extension is requested, and the impact of any

extension on those resources and on the other statutory

factors that the Board must consider under the BHC Act.

The Board would extend the consummation period only if

the Board is satisfied that the statutory factors continue

to be met. The proposed banking acquisition may not be

consummated before the fifteenth calendar day after the

effective date of this order.

By order of the Board of Governors, effective December 15, 2003.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke, and Kohn.

Robert deV. Frierson

Deputy Secretary of the Board

Appendix A

Hawaiian Banking Markets in which Central Pacific Competes Directly with CBBI

45. CBBI requested that the Board hold a public meeting or hearing on the proposal. Section 3(b) of the BHC Act does not require the

Board to hold a public hearing on an application unless the appropriate supervisory authority for the bank to be acquired makes a timely

written recommendation of denial of the application. The Board has

not received such a recommendation from the appropriate supervisory

authorities.

Under its regulations, the Board also may, in its discretion, hold a

public meeting or hearing on an application to acquire a bank if a

meeting or hearing is necessary or appropriate to clarify factual issues

related to the application and to provide an opportunity for testimony.

12 C.F.R. 225.16(e). Section 4 of the BHC Act and the Board’s

regulations provide for a hearing on a notice to acquire nonbanking

companies if there are disputed issues of material fact that cannot be

resolved in some other manner. 12 U.S.C. §1843(c)(8); 12 C.F.R.

225.25(a)(2). The Board has considered carefully CBBI’s request in

light of all the facts of record. In the Board’s view, CBBI has had

ample opportunity to submit its views, and has submitted written

comments that have been considered carefully by the Board in acting

on the proposal. CBBI’s request fails to demonstrate why its written

comments do not present its evidence adequately and fails to identify

disputed issues of fact that are material to the Board’s decision that

would be clarified by a public meeting or hearing. For these reasons,

and based on all the facts of record, the Board has determined that a

public meeting or hearing is not required or warranted in this case.

Accordingly, the request for a public meeting or hearing on the

proposal is denied. 46. See North Fork at 775; BONY at 259, 272.

102 Federal Reserve Bulletin Winter 2004
East Hawaii Island (Hilo)

Eastern portion of the island of Hawaii, including the Hilo

Ranally Metro Area (‘‘RMA’’) and the town of Pahoa.

Honolulu

Honolulu RMA.

Kauai

The island of Kauai, including the towns of Eleele, Hanalei, Hanapepe, Kapaa, Koloa, Lihue, Princeville, and

Waimea.

West Maui

Western portion of the island of Maui, including the towns

of Kahului, Kihei, Lahaina, Paia, Pukalani, Wailea, and

Wailuku.

Appendix B

Banking Markets

East Hawaii Island (Hilo)

Central Pacific operates the fourth largest depository institution in the market, controlling deposits of approximately

$59.1 million, which represent approximately 8.5 percent

of market deposits. CBBI operates the fifth largest depository institution in the market, controlling deposits of

approximately $30.3 million, which represent approximately 4.3 percent of market deposits. On consummation

of the proposal, Central Pacific would operate the third

largest depository institution in the market, controlling

deposits of approximately $89.4 million, which represent

approximately 12.8 percent of market deposits. Seven

depository institutions would remain in the market. The

HHI would increase by 73 points to 2727.

Honolulu

Central Pacific operates the fourth largest depository institution in the market, controlling deposits of approximately

$1.5 billion, which represent approximately 10.1 percent of

market deposits. CBBI operates the fifth largest depository

institution in the market, controlling deposits of approximately $1.1 billion, which represent approximately 7.5 percent of market deposits. On consummation of the proposal,

Central Pacific would operate the third largest depository

institution in the market, controlling deposits of approximately $2.6 billion, which represent approximately

17.6 percent of market deposits. Eight depository institutions would remain in the market. The HHI would increase

by 150 points to 2659.

Kauai

Central Pacific operates the fourth largest depository institution in the market, controlling deposits of approximately

$47.4 million, which represent approximately 6.8 percent

of market deposits. CBBI operates the sixth largest depository institution in the market, controlling deposits of

approximately $1.1 million, represent less than 1 percent of

market deposits. On consummation of the proposal, Central Pacific would remain the fourth largest depository

institution in the market, controlling deposits of approximately $48.6 million, which represent approximately 7 percent of market deposits. Five depository institutions would

remain in the market. The HHI would increase by 2 points

to 3598.

West Maui

Central Pacific operates the fourth largest depository institution in the market, controlling deposits of approximately

$79 million, which represent approximately 5.6 percent of

market deposits. CBBI operates the fifth largest depository

institution in the market, controlling deposits of approximately $51.8 million, which represent approximately

3.7 percent of market deposits. On consummation of the

proposal, Central Pacific would remain the fourth largest

depository institution in the market, controlling deposits of

approximately $130.7 million, which represent approximately 9.3 percent of market deposits. Six depository institutions would remain in the market. The HHI would

increase by 42 points to 3095.

ORDERS ISSUED UNDER INTERNATIONAL

BANKING ACT

HBOS Treasury Services plc

London, United Kingdom

Order Approving Establishment of a Branch

HBOS Treasury Services plc (‘‘Bank’’), London, United

Kingdom, a foreign bank within the meaning of the International Banking Act (‘‘IBA’’), has applied under section 7(d) of the IBA (12 U.S.C. §3105(d)) to establish a

branch in New York, New York. The Foreign Bank Supervision Enhancement Act of 1991, which amended the IBA,

provides that a foreign bank must obtain the approval of

the Board to establish a branch in the United States.

Notice of the application, affording interested persons an

opportunity to comment, has been published in newspapers

of general circulation in New York, New York (New York

Post, July 10, 2003). The time for filing comments has

expired, and all comments have been considered.

Bank, with total assets of $272 billion, is a wholly

owned subsidiary of The Governor and Company of the

Bank of Scotland (‘‘Bank of Scotland’’), Edinburgh, United

Kingdom. Bank of Scotland, in turn, is a wholly owned

subsidiary of HBOS plc (‘‘HBOS’’), also in Edinburgh,

which is the top tier holding company for the HBOS group.

HBOS, with consolidated assets of $631 billion, is the third

Legal Developments 103
largest banking organization in the United Kingdom.1 The

shares of HBOS plc are publicly traded, and no person

holds more than 5 percent of its voting shares. Bank

provides global treasury services and serves as the main

funding source for HBOS. HBOS is primarily engaged in

banking, insurance, and investment and has operations

throughout the world. HBOS, Bank of Scotland, and Bank

are qualifying foreign banking organizations pursuant to

Regulation K.

Bank currently has no operations in the United States. Its

parent, Bank of Scotland, operates a branch in New York

and representative offices in Chicago, Houston, Los Angeles, Minneapolis, Seattle, and Boston and engages through

nonbank subsidiaries in a range of financial activities.

Bank’s proposed New York branch would assume the

treasury functions of Bank of Scotland’s New York

branch, which include deposit taking, issuance of highdenomination certificates of deposit, purchases of mediumterm notes, and interbank lending and borrowing.

In order to approve an application by a foreign bank to

establish a branch in the United States, the IBA and Regulation K require the Board to determine that the foreign

bank applicant engages directly in the business of banking

outside of the United States and has furnished to the Board

the information it needs to assess the application adequately. The Board also shall take into account whether the

foreign bank and any foreign bank parent is subject to

comprehensive supervision or regulation on a consolidated basis by its home country supervisor (12 U.S.C.

§3105(d)(2); 12 C.F.R. 211.24).2 The Board may also take

into account additional standards as set forth in the IBA

and Regulation K (12 U.S.C. §3105(d)(3)–(4); 12 C.F.R.

211.24(c)(2)–(3)).

As noted above, Bank engages directly in the business

of banking outside the United States. Bank also has provided the Board with information necessary to assess the

application through submissions that address the relevant

issues.

With respect to supervision by home country authorities,

the Board previously has determined, in connection with

applications involving other banks in the United Kingdom,

including Bank of Scotland, that those banks were subject

to home country supervision on a consolidated basis.3

Bank is, and Bank of Scotland remains, supervised by the

Financial Services Authority (‘‘FSA’’) on substantially the

same terms and conditions as those other banks. Based on

all the facts of record, it has been determined that Bank and

Bank of Scotland are subject to comprehensive supervision

on a consolidated basis by their home country supervisor.

The Board has also taken into account the additional

standards set forth in section 7 of the IBA and Regulation K (see 12 U.S.C. §3105(d)(3)–(4); 12 C.F.R.

211.24(c)(2)–(3)). The FSA has no objection to the establishment of the proposed branch.

The United Kingdom’s risk-based capital standards are

consistent with those established by the Basel Capital

Accord. Bank’s capital is in excess of the minimum levels

that would be required by the Basel Capital Accord and is

considered equivalent to capital that would be required of a

U.S. banking organization. Managerial and other financial

resources of Bank also are considered consistent with

approval, and Bank appears to have the experience and

capacity to support the proposed branch. In addition, Bank

has established controls and procedures for the proposed

branch to ensure compliance with U.S. law, as well as

controls and procedures for its worldwide operations

generally.

The United Kingdom is a member of the Financial

Action Task Force and subscribes to its recommendations

on measures to combat money laundering. In accordance

with these recommendations, the United Kingdom has

enacted laws and created legislative and regulatory standards to deter money laundering. Money laundering is a

criminal offense in the United Kingdom, and financial

institutions are required to establish internal policies, procedures, and systems for the detection and prevention of

money laundering throughout their worldwide operations.

Bank has policies and procedures to comply with these

laws and regulations. Bank’s compliance with applicable

laws and regulations is monitored by Bank’s internal auditors and the FSA.

With respect to access to information about Bank’s

operations, the Board has reviewed the restrictions on

disclosure in relevant jurisdictions in which Bank operates

and has communicated with relevant government authorities regarding access to information. Bank and its ultimate

parent, HBOS, have committed to make available to the

Board such information on the operations of Bank and any

of its affiliates that the Board deems necessary to determine

and enforce compliance with the IBA, the Bank Holding

Company Act, and other applicable federal law. To the

extent that the provision of such information to the Board

may be prohibited by law or otherwise, Bank and its

ultimate parent have committed to cooperate with the

Board to obtain any necessary consents or waivers that

might be required from third parties for disclosure of such

1. Asset data are as of June 30, 2003.

2. In assessing this standard, the Board considers, among other

factors, the extent to which the home country supervisors:

(i) ensure that the bank has adequate procedures for monitoring and

controlling its activities worldwide;

(ii) obtain information on the condition of the bank and its subsidiaries and offices through regular examination reports, audit

reports, or otherwise;

(iii) obtain information on the dealings with and relationship between

the bank and its affiliates, both foreign and domestic;

(iv) receive from the bank financial reports that are consolidated on a

worldwide basis or comparable information that permits analysis

of the bank’s financial condition on a worldwide consolidated

basis;

(v) evaluate prudential standards, such as capital adequacy and risk

asset exposure, on a worldwide basis. These are indicia of comprehensive, consolidated supervision. No single factor is essential, and other elements may inform the Board’s determination.

3. See, e.g., The Royal Bank of Scotland, 89 Federal Reserve

Bulletin 386 (2003); Abbey National Treasury Services plc, 87 Federal Reserve Bulletin 750 (2001); see also Bank of Scotland, 84 Federal Reserve Bulletin 230 (1998).

104 Federal Reserve Bulletin Winter 2004
information. In addition, subject to certain conditions, the

FSA may share information on Bank’s operations with

other supervisors, including the Board. In light of these

commitments and other facts of record, and subject to the

condition described below, it has been determined that

Bank has provided adequate assurances of access to any

necessary information that the Board may request.

On the basis of all the facts of record, and subject to

the commitments made by Bank and its ultimate parent,

as well as the terms and conditions set forth in this

order, Bank’s application to establish a branch is hereby

approved.4 Should any restrictions on access to information on the operations or activities of Bank and its affiliates

subsequently interfere with the Board’s ability to obtain

information to determine and enforce compliance by Bank

or its affiliates with applicable federal statutes, the Board

may require termination of any of Bank’s direct or indirect

activities in the United States, or in the case of any such

operation licensed by the Office of the Comptroller of

the Currency, recommend termination of such operation.

Approval of this application also is specifically conditioned

on compliance by Bank with the commitments made in

connection with this application and with the conditions in

this order.5 The commitments and conditions referred to

above are conditions imposed in writing in connection with

this decision and may be enforced in proceedings under

12 U.S.C. §1818 against Bank and its affiliates.

By order, approved pursuant to authority delegated by

the Board, effective November 7, 2003.

Robert deV. Frierson

Deputy Secretary of the Board

Macquarie Bank Limited

Sydney, Australia

Order Approving Establishment of Representative Offices

Macquarie Bank Limited (‘‘Bank’’), Sydney, Australia, a

foreign bank within the meaning of the International Banking Act (‘‘IBA’’), has applied under section 10(a) of the

IBA (12 U.S.C. §3107(a)) to establish representative offices

in New York, New York, and Houston, Texas. The Foreign Bank Supervision Enhancement Act of 1991, which

amended the IBA, provides that a foreign bank must obtain

the approval of the Board to establish a representative

office in the United States.

Notice of the application, affording interested persons an

opportunity to comment, has been published in a newspaper of general circulation in New York, New York

(New York Post, March 28, 2003), and Houston, Texas

(Houston Chronicle, April 17, 2003). The time for filing

comments has expired, and all comments have been

considered.

Bank, with total assets of approximately $25 billion, is

the sixth largest bank in Australia.1 Bank’s shares are

publicly traded. The largest shareholder, Commonwealth

Bank of Australia Group, holds 12 percent of Bank’s

shares.2 Bank is engaged substantially in investment banking activities. It is the parent of the Macquarie Group and

conducts a wide range of nonbanking activities through its

subsidiaries, including investment management and advisory services, investment in infrastructure projects, and

underwriting and dealing as principal and agent in securities and derivatives. Bank currently operates a number of

nonbanking subsidiaries in the United States engaged in

real estate financing, commodities trading, and investment

banking.

Bank seeks to establish representative offices in

New York and Houston to provide liaison services and to

market corporate loans, project finance loans, commodities

forwards, options, swaps, and other structured derivatives.

The representative offices will not make any credit decisions; will not have responsibility for the execution, delivery, or performance of any contract; and will not bind Bank

to any contract other than contracts necessary for the

operation of the offices, such as leases and personnel

contracts.

In order to approve an application by a foreign bank to

establish a representative office in the United States, the

IBA and Regulation K require the Board to determine that

the foreign bank applicant engages directly in the business

of banking outside the United States and has furnished to

the Board the information it needs to assess the application

adequately. The Board also shall take into account whether

the foreign bank and any foreign bank parent is subject

to comprehensive supervision or regulation on a consolidated basis by its home country supervisor (12 U.S.C.

§3107(a)(2); 12 C.F.R. 211.24(d)(2)).3 In the case of an

4. Approved by the Director of the Division of Banking Supervision and Regulation, with the concurrence of the General Counsel,

pursuant to authority delegated by the Board.

5. The Board’s authority to approve the establishment of the proposed branch parallels the continuing authority of the Office of the

Comptroller of the Currency to license offices of a foreign bank. The

Board’s approval of this application does not supplant the authority of

the Office of the Comptroller of the Currency to license the proposed

office of Bank in accordance with any terms or conditions that it may

impose.

1. Asset data are as of September 30, 2003.

2. Substantially all these shares are held by fund management

entities in the Commonwealth Bank of Australia Group in trust for

investors. In addition, the Permanent Trustee Company Limited holds

7.21 percent, Deutsche Australia Limited holds 6.08 percent, Merrill

Lynch Investment Management holds 5.27 percent, and ING Australia

Holdings Limited holds 5 percent of Bank’s shares. No other shareholder holds 5 percent or more of the Bank’s shares.

3. In assessing this standard, the Board considers, among other

factors, the extent to which the home country supervisors:

(i) ensure that the bank has adequate procedures for monitoring and

controlling its activities worldwide;

(ii) obtain information on the condition of the bank and its subsidiaries and offices through regular examination reports, audit

reports, or otherwise;

(iii) obtain information on the dealings with and relationship between

the bank and its affiliates, both foreign and domestic;

(iv) receive from the bank financial reports that are consolidated on a

worldwide basis or comparable information that permits analysis

of the bank’s financial condition on a worldwide consolidated

basis;

Legal Developments 105
application to establish a representative office, the standard

with respect to home country supervision will be met if the

applicant bank is subject to a supervisory framework that is

consistent with the activities of the proposed office, taking

into account the nature of the activities and the operating

record of the applicant. (12 C.F.R. 211.24(d)(2)). The

Board may also take into account additional standards

as set forth in the IBA and Regulation K (12 U.S.C.

§3105(d)(3)–(4); 12 C.F.R. 211.24(c)(2)).

As noted above, Bank engages directly in the business of

banking outside the United States. Bank also has provided

the Board with information necessary to assess the application through submissions that address the relevant issues.

With respect to supervision of Bank by home country

authorities, the Board has considered the following information. Bank is an authorized deposit-taking institution

and is supervised by the Australian Prudential Regulation

Authority (‘‘APRA’’). APRA supervises and regulates Bank

through a combination of regular on-site reviews and offsite monitoring. On-site examinations cover the areas of

credit quality, balance sheet and market risk, insurance

risk and operational risk. Off-site monitoring is conducted

through a monthly review of Bank’s balance sheet for

domestic operations and a quarterly review of Bank’s

international operations and consolidated balance sheets.

APRA also obtains quarterly global consolidated data on

capital adequacy, market risk, impaired assets, large exposures and profit and loss.

Bank is subject to annual statutory audit, the results of

which are communicated to APRA. Bank, its external

auditors, and APRA meet annually to discuss any issues

arising from reports of the external auditors. Bank’s internal controls are also subject to review by the external

auditors.

Based on all the facts of record, it has been determined

that factors relating to the supervision of Bank by its home

country supervisor are consistent with approval of the

proposed representative offices.

The additional standards set forth in section 7 of the

IBA and Regulation K (see 12 U.S.C. §3105(d)(3)–(4);

12 C.F.R. 211.24(c)(2)) have also been taken into account.

APRA has no objection to the establishment of the proposed representative office.

With respect to the financial and managerial resources of

Bank, taking into consideration Bank’s record of operation

in its home country, its overall financial resources, and its

standing with its home country supervisor, it has been

determined that financial and managerial factors are consistent with approval of the proposed representative offices.

Bank appears to have the experience and capacity to support the proposed representative offices and has established

controls and procedures for the proposed representative

offices to ensure compliance with U.S. law.

Australia is a member of the Financial Action Task

Force and subscribes to its recommendations on measures

to combat money laundering. In accordance with these

recommendations, Australia has enacted laws and developed regulatory standards to deter money laundering.

Money laundering is a criminal offense in Australia, and

Bank has established internal policies, procedures, and

systems for the detection and prevention of money laundering throughout its worldwide operations. Bank’s antimoney laundering policies and procedures are monitored

by the Australian Transaction Reports and Analysis Centre, which is Australia’s financial intelligence unit and

anti-money laundering agency.

With respect to access to information about Bank’s

operations, the restrictions on disclosure in relevant jurisdictions in which Bank operates have been reviewed and

relevant government authorities have been communicated

with regarding access to information. Bank has committed

to make available to the Board such information on the

operations of Bank and any of its affiliates that the Board

deems necessary to determine and enforce compliance with

the IBA, the Bank Holding Company Act, and other applicable federal law. To the extent that the provision of such

information to the Board may be prohibited by law or

otherwise, Bank has committed to cooperate with the

Board to obtain any necessary consents or waivers that

might be required from third parties for disclosure of such

information. In light of these commitments and other facts

of record, and subject to the conditions described below, it

has been determined that Bank has provided adequate

assurances of access to any necessary information that the

Board may request.

On the basis of all the facts of record, and subject to the

commitments made by Bank, as well as the terms and

conditions set forth in this order, Bank’s application to

establish representative offices in New York and Houston

is hereby approved.4 Should any restrictions on access to

information on the operations or activities of Bank or any

of its affiliates subsequently interfere with the Board’s

ability to obtain information to determine and enforce

compliance by Bank or its affiliates with applicable federal

statutes, the Board may require or recommend termination

of any of Bank’s direct or indirect activities in the United

States. Approval of this application also is specifically

conditioned on compliance by Bank with the commitments

made in connection with this application and with the

conditions in this order.5 The commitments and conditions

referred to above are deemed to be conditions imposed in

(v) evaluate prudential standards, such as capital adequacy and risk

asset exposure, on a worldwide basis. These are indicia of comprehensive, consolidated supervision. No single factor is essential, and other elements may inform the Board’s determination.

4. Approved by the Director of the Division of Banking Supervision and Regulation, with the concurrence of the General Counsel,

pursuant to authority delegated by the Board. See 12 C.F.R.

265.7(d)(12).

5. The authority to approve the establishment of the proposed

representative offices parallels the continuing authority of New York

and Texas to license offices of a foreign bank. Approval of this

application does not supplant the authority of those states or their

agents to license the proposed representative offices of Bank in

accordance with any terms or conditions that they may impose.

106 Federal Reserve Bulletin Winter 2004
writing in connection with these findings and decision and

may be enforced in proceedings under applicable law.

By order, approved pursuant to authority delegated by

the Board, effective November 26, 2003.

Robert deV. Frierson

Deputy Secretary of the Board

Legal Developments 107