Legal Developments

ORDERS ISSUED UNDER BANK HOLDING

COMPANY ACT

Orders Issued Under Section 3 of the Bank Holding

Company Act

Capital One Financial Corporation

McLean, Virginia

Order Approving the Formation of a Bank Holding

Company

Capital One Financial Corporation (‘‘Capital One’’) has

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

Holding Company Act (‘‘BHC Act’’)1 to become a bank

holding company after amending the charter of its subsidiary, Capital One Bank, Glen Allen, Virginia (‘‘Capital One

Bank’’), from a limited-purpose, credit-card bank charter

to a full-service bank charter. Capital One Bank is not a

‘‘bank’’ for purposes of the BHC Act,2 but it proposes to

become a full-service bank under the amended charter.

Capital One Bank, a state member bank, also has requested

the Board’s permission under section 9 of the Federal

Reserve Act and section 208.3 of the Board’s Regulation H

to change the general character of its business.3

In addition, Capital One has requested the Board’s

approval under sections 4(c)(8) and 4(j) of the BHC Act

and sections 225.28(b)(1), (2), (4), (6), and (12) of the

Board’s Regulation Y to retain certain nonbanking subsidiaries of Capital One and thereby engage in permissible

activities related to extending credit, providing investment

advice, engaging in community development, and retaining

Capital One’s wholly owned savings association, Capital

One, F.S.B., McLean, Virginia (‘‘Capital One FSB’’).4

Capital One also has filed notices under section 4(c)(13)

of the BHC Act and the Board’s Regulation K to retain

certain foreign operations of Capital One.5

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published

(69 Federal Register 11,017 (2004)). 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 sections 3 and 4 of the BHC Act and the

Federal Reserve Act.

Capital One, with total consolidated assets of $39.8 billion, is and would remain the second largest depository

organization in Virginia, controlling deposits of approximately $18.6 billion, which represents 14.4 percent of the

total deposits in insured depository institutions in the state.6

Competitive Considerations

Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly. It also

prohibits the Board from approving a proposal 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.7

As stated above, the proposal involves a charter amendment that would result in Capital One Bank becoming a

‘‘bank’’ for purposes of the BHC Act and does not involve

the acquisition of an additional depository institution.

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

Considerations

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.8 The Board has reviewed

these factors in light of all the facts of record, including

supervisory reports of examination assessing the financial

and managerial resources of Capital One Bank and Capital

One FSB, information provided by Capital One, publicly

reported and other financial information, and public comment on the proposal.9

1. 12 U.S.C. § 1842.

2. See 12 U.S.C. §1841(c)(2)(F).

3. 12 U.S.C. § 321; 12 CFR 208.3.

4. 12 U.S.C. §§1843(c)(8) and 1843(j); 12 CFR 225.28(b)(1), (2),

(4), (6), and (12).

5. 12 U.S.C. § 1843(c)(13); 12 CFR 211.9.

6. Asset data are as of March 31, 2003. Deposit and ranking data

are as of June 30, 2003.

7. 12 U.S.C. §1842(c).

8. 12 U.S.C. §1842(c)(2).

9. A commenter expressed concern about Capital One’s lobbying

efforts in the Virginia legislature. Such matters are outside the limited

479
Capital One is well capitalized and will remain so on

consummation of the proposal. In addition, the Board has

considered the financial and managerial resources and

examination records of Capital One’s subsidiary depository institutions, Capital One Bank and Capital One FSB.

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

the financial and managerial resources and future prospects

of the institutions involved are consistent with approval of

the proposal, as are the other supervisory factors under the

BHC Act.

Convenience and Needs Considerations

In acting on the proposal, the Board must consider the

effects of the proposal on the convenience and needs of the

communities to be served and take into account the records

of the relevant insured depository institutions under the

Community Reinvestment Act (‘‘CRA’’).10 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.11

The Board has carefully considered the effects of the

proposal on the convenience and needs of the communities

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

the CRA performance records of Capital One Bank and

Capital One FSB, information provided by Capital One,

and public comment on the proposal. Capital One Bank

received an overall rating of ‘‘outstanding’’ at its most

recent CRA performance evaluation by the Federal Reserve

Bank of Richmond, as of April 28, 2003.12 Capital One

Bank is engaged exclusively in credit card operations and

has been designated as a limited purpose bank for purposes

of evaluating its CRA performance.13

At the most recent performance evaluation, examiners

characterized Capital One Bank’s community development

performance as excellent and highly responsive to community needs. Examiners noted that Capital One Bank had

made a number of investments, grants, and contributions to

a variety of community organizations that serve the needs

of LMI individuals and promote economic development in

LMI areas. Examiners commended Capital One Bank for

some of its innovative investments.

Based on these and all the facts of record, the Board has

concluded that considerations relating to the convenience

and needs of the communities to be served, including the

CRA performance records of the institutions involved, are

consistent with approval.

Nonbanking Activities

Capital One also has filed a notice under sections 4(c)(8)

and 4(j) of the BHC Act to retain its nonbanking subsidiaries. The subsidiaries engage in activities related to

extending credit, providing investment advice, engaging in

community development, and operating a savings association. The Board has determined by regulation that these

activities are permissible for a bank holding company

under Regulation Y,14 and Capital One has committed

to conduct these activities in accordance with the Board’s

regulations and orders for bank holding companies

engaged in these activities.

To approve the notice, the Board must determine that the

acquisition of the nonbanking subsidiaries and the performance of the proposed activities by Capital One ‘‘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.’’15

As part of its evaluation of these factors, the Board has

considered the financial and managerial resources of Capital One and its subsidiaries, the companies to be retained,

and the effect of the proposed transaction on those

resources. In evaluating the proposal to retain Capital One

FSB, the Board also has reviewed the CRA performance

record of the institutions involved.16 For the reasons noted

above, and based on all the facts of record, the Board has

concluded that financial, managerial, and CRA considerations are consistent with approval of the notice.

The Board also has considered the competitive effects of

Capital One’s retention of its nonbanking subsidiaries. As

noted above, this proposal involves a charter amendment

and would not result in the expansion of Capital One’s

operations. Accordingly, the Board concludes that it is

unlikely that significantly adverse competitive effects

would result from the retention of Capital One’s nonbanking subsidiaries. Capital One has indicated that the proposal would provide its customers a wider variety of banking services over time.

Based on 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)(A) of the BHC Act.

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).

10. 12 U.S.C. §2901 et seq.

11. Interagency Questions and Answers Regarding Community

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

12. Capital One FSB received an overall rating of ‘‘satisfactory’’ at

its most recent CRA performance evaluation by its primary federal

supervisor, the Office of Thrift Supervision (‘‘OTS’’), as of April 28,

2003.

13. See 12 CFR 228.25(a). A commenter expressed concern that

Capital One planned to expand the activities of Capital One Bank to

those of a full-service bank without submitting a CRA plan as part of

its proposal. Capital One has stated that it has no immediate plans to

engage in a broader range of activities that would change its designation as a limited purpose bank for purposes of the CRA. If Capital One

Bank engages in activities that cause the bank to lose this designation,

its CRA performance will be evaluated under the appropriate tests and

standards. See 12 CFR 228.25(b). Capital One has experience with

CRA evaluations of full-service institutions by virtue of operating

Capital One FSB, which, as noted above, received a ‘‘satisfactory’’

rating from the OTS.

14. See 12 CFR 225.28(b)(1), (2), (4), (6), and (12).

15. See 12 U.S.C. §1843(j)(2)(A).

16. See, e.g., Banc One Corporation, Inc., 83 Federal Reserve

Bulletin 602 (1997).

480 Federal Reserve Bulletin Autumn 2004
Capital One also engages in a limited number of activities that are impermissible, or that are only permissible for

financial holding companies, such as certain insurance

agency and venture capital investment activities. Section 4(a)(2) of the BHC Act requires each company that

becomes a bank holding company to conform its nonbanking activities and investments to the requirements of the

BHC Act within two years of the date it becomes a bank

holding company.17 The Board’s action on this proposal is

subject to the condition that Capital One take all actions

necessary to conform its activities and investments to the

requirements of the BHC Act and the Board’s regulations

thereunder in a manner acceptable to the Board, including

by divestiture if necessary, within two years of the date of

consummation of the proposal or such extended time

period that the Board, in its discretion, may grant.18

Membership Considerations

Under section 208.3(d)(2) of the Board’s Regulation H,19 a

member bank may not cause or permit any change in

the general character of its business or in the scope of the

corporate powers it exercises at the time of admission to

membership without the permission of the Board. In light

of the proposed charter amendment, and the evolving

nature of its business plan, Capital One Bank, a state

member bank, has requested permission under Regulation H for a change in the general character of the bank’s

business to operate as a full-service bank.

The Board has carefully reviewed the proposed business

plan of Capital One Bank and the powers it proposes to

exercise under state law as a full-service commercial bank.

In light of all the facts of record, the Board has determined

that this change in the general character of Capital One

Bank’s business is consistent with the terms of Federal

Reserve System membership and that Capital One Bank

may retain its System membership after amending its

charter.

Foreign Activities

Capital One also has requested the Board’s consent under

section 4(c)(13) of the BHC Act and section 211.9 of

Regulation K to retain its foreign operations.20 Based on all

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

required to be considered under the BHC Act and Regulation K are consistent with approval of this request.

Conclusion

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

Board has determined that the proposal 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 and other

applicable statutes. The Board’s approval is specifically

conditioned on compliance by Capital One with the conditions imposed in this order and the commitments made to

the Board in connection with the proposal. 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),21 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

issued thereunder. The commitments made to the Board are

deemed to be 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 to become a bank holding company 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 the Federal Reserve Bank of Richmond, acting pursuant to delegated authority.

By order of the Board of Governors, effective July 6,

2004.

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

F.N.B. Corporation

Hermitage, Pennsylvania

Order Approving the Acquisition of a Bank Holding

Company

F.N.B. Corporation (‘‘F.N.B.’’), 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 to acquire Slippery Rock

Financial Corporation (‘‘SRFC’’) and its subsidiary bank,

The First National Bank of Slippery Rock (‘‘Slippery Rock

Bank’’), both in Slippery Rock, Pennsylvania.1

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published

(69 Federal Register 43,848 (2004)). 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.

F.N.B., with total consolidated assets of $4.8 billion, is

the 13th largest depository organization in Pennsylvania,

17. 12 U.S.C. §1843(a)(2).

18. Section 4(a)(2) authorizes the Board, on request, to grant up to

three one-year extensions of this conformance period, if the Board

finds that the extensions ‘‘would not be detrimental to the public

interest.’’

19. 12 CFR 208.3(d)(2); see also SR Letter 02-9, March 20, 2002.

20. See 12 U.S.C. §1843(c)(13); 12 CFR 211.9.

21. 12 CFR 225.7 and 225.25(c).

1. 12 U.S.C. §1842.

Legal Developments 481
controlling approximately $3.1 billion in deposits.2 F.N.B.

operates principally through its wholly owned subsidiary,

First National Bank of Pennsylvania, Greenville, Pennsylvania (‘‘F.N.B. Bank’’).3 F.N.B. Bank also has branches in

Ohio.

SRFC, with total consolidated assets of approximately

$330 million, is the 94th largest depository organization in

Pennsylvania, controlling $274.1 million in deposits. SRFC

has one subsidiary insured depository institution, Slippery

Rock Bank, which has branches only in Pennsylvania.

On consummation of this proposal, F.N.B. would have

total consolidated assets of approximately $5.1 billion.

F.N.B. would remain the 13th largest depository organization in Pennsylvania, controlling approximately $3.3 billion in deposits, which represents 1.6 percent of the total

amount of deposits of insured depository institutions in the

state.

Competitive Considerations

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

would further any attempt to monopolize the business of

banking in any relevant banking market. It also prohibits

the Board from approving a proposal that would substantially lessen competition in any relevant banking market

unless the anticompetitive effects of the proposal clearly

are outweighed in the public interest by its effect in meeting the convenience and needs of the community to be

served.4

F.N.B. and SRFC compete directly in the New Castle

and Pittsburgh banking markets in Pennsylvania and the

Sharon banking market in Pennsylvania and Ohio (‘‘Sharon

Market’’).5 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. In particular,

the Board has considered the number of competitors that

would remain in the markets, the relative shares of total

deposits in depository institutions in the markets (‘‘market

deposits’’) controlled by F.N.B. and SRFC,6 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 Merger Guidelines (‘‘DOJ Guidelines’’),7 and other characteristics of the

markets.

Consummation of the proposal would be consistent with

Board precedent and the DOJ Guidelines in the Pittsburgh

and New Castle banking markets.8 After consummation,

the Pittsburgh banking market would remain moderately

concentrated, and the New Castle banking market would

remain highly concentrated. In both banking markets the

change in market shares would be small and numerous

competitors would remain.

In the Sharon Market the change in the HHI would

slightly exceed DOJ Guidelines on consummation. F.N.B.

is the largest insured depository organization in the market, controlling deposits of approximately $518 million,

which represent 30.3 percent of market deposits. SRFC

is the sixth largest depository organization with deposits

of approximately $58.9 million, which represent 3.4 percent of market deposits. On consummation of the merger,

F.N.B. would control deposits of $576.8 million, which

represent approximately 33.7 percent of market deposits.

The HHI would increase by 209 points to 2,233.

Several factors indicate that the proposal is not likely to

have a significantly adverse effect on competition in the

market. The presence and competitive strength of other

depository institutions are important factors in this market.

Nine bank and thrift competitors would remain in the

market after consummation. In addition, two large commercial banking organizations besides F.N.B. would each

control a significant share of market deposits, with approximately 25 percent and 17 percent of market deposits,

respectively. Both of these competitors also have a substantial branch network in the Sharon Market that is similar in

size to F.N.B.’s network. Moreover, one new competitor

entered the market de novo during the last four years.

The Board also has considered that the market has an

active credit union that offers a wide range of consumer

banking products. The Mercer County Community Federal

Credit Union, Sharon, Pennsylvania (‘‘Mercer Credit

Union’’), controls $29.2 million in deposits in the Sharon

Market. At least 90 percent of the residents in the market

are eligible to become members of Mercer Credit Union. In

addition, the credit union operates street-level branches

with drive-up service lanes in the market.

The Department of Justice has reviewed the proposal

and advised the Board that consummation of the proposal

2. Total asset data are as of June 30, 2004, and statewide deposit is not likely to have a significantly adverse competitive

and ranking data are as of June 30, 2003. Data reflect subsequent

merger activity through September 8, 2004.

3. F.N.B. also owns a minority interest in Sun Bancorp, Inc., which

wholly owns Sun Bank, both in Lewisburg, Pennsylvania.

4. 12 U.S.C. §1842(c)(1).

5. These banking markets are described in Appendix A.

6. 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).

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

market is considered moderately concentrated if the post-merger HHI

is between 1,000 and 1,800 and highly concentrated if the post-merger

HHI is more than 1,800. 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 1,800 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. The effects of the proposal on the concentration of banking

resources in these banking markets are described in Appendix B.

482 Federal Reserve Bulletin Autumn 2004
effect in the Sharon Market or in any other relevant banking market. Moreover, the other federal banking agencies

have been afforded an opportunity to comment on the

proposal and have not objected to the proposal.9

Based on these considerations and all the facts of record,

the Board concludes that consummation of the proposal

would not result in any significantly adverse effect on

competition or on the concentration of banking resources

in the Sharon Market or in any other relevant banking

market and that competitive factors are consistent with

approval.

Financial, Managerial, and Supervisory Considerations

Section 3 of the BHC Act requires the Board to consider

the financial and managerial resources and future prospects

of the companies and depository institutions 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 reports of examination, other

confidential supervisory information from the primary federal supervisors for the subsidiary banks of F.N.B. and

SRFC, publicly reported and other financial information,

and information provided by F.N.B. In addition, the Board

has consulted with the OCC, the primary federal supervisor

of F.N.B. Bank and Slippery Rock Bank on the proposal.

In evaluating financial factors in expansion proposals by

banking organizations, the Board consistently has considered capital adequacy to be especially important. F.N.B. is

well capitalized and would remain so on consummation of

the proposal. Moreover, F.N.B. has indicated that the cash

portion of the transaction would be funded with available

liquid resources.

The Board also has considered the managerial resources

of F.N.B. and SRFC and the bank to be acquired, and the

effect of the proposal on these resources. The Board has

reviewed assessments of their management and riskmanagement systems by the relevant bank supervisory

agencies and the organizations’ records of compliance with

applicable banking laws. In addition, the Board has considered F.N.B.’s plans to integrate SRFC and its subsidiary on

consummation of the proposal and the proposed management of the resulting organization.

Based on all the facts of record, the Board has concluded

that considerations relating to the financial and managerial

resources and future prospects of F.N.B., SRFC, and their

subsidiary banks are consistent with approval, as are the

other supervisory factors under the BHC Act.

Convenience and Needs Considerations

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

Board also 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’’).10 An institution’s most

recent CRA performance evaluation is a particularly important consideration in the application 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.11

The Board has carefully considered the effects of the

proposal on the convenience and needs of the communities

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

CRA performance records of the subsidiary banks of

F.N.B. and SRFC and other information from the banks. At

their most recent CRA performance evaluations by the

OCC, F.N.B. Bank and Slippery Rock Bank each received

a ‘‘satisfactory’’ rating.12 The Board notes that the proposal

would allow F.N.B. to provide a broader range of products

and services to SRFC’s customers.

Based on these and all the facts of record, the Board has

concluded that considerations relating to the convenience

and needs of the communities to be served, including the

CRA performance records of the institutions involved, are

consistent with approval.

Conclusion

Based on the foregoing and 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 and other

applicable statutes. The Board’s approval is specifically

conditioned on compliance by F.N.B. with the conditions

imposed in this order and the commitments made to the

Board in connection with the application, including compliance with state law. For purposes of this action, the

conditions and commitments are deemed to be 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 acquisition of Slippery Rock Bank 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 the Federal

Reserve Bank of Cleveland, acting pursuant to delegated

authority.

By order of the Board of Governors, effective September 23, 2004.

9. On September 8, 2004, the Office of the Comptroller of the

Currency (‘‘OCC’’) approved the application to merge Slippery Rock

Bank with and into F.N.B. Bank.

10. 12 U.S.C. §2901 et seq.

11. See Interagency Questions and Answers Regarding Community

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

12. The rating of F.N.B. Bank is as of August 13, 2001, and the

rating of Slippery Rock Bank is as of May 10, 1999. In addition, Sun

Bank received a ‘‘satisfactory’’ performance evaluation rating from

the Federal Deposit Insurance Corporation, as of April 1, 2004.

Legal Developments 483
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 Where F.N.B. and SRFC Compete

Directly

New Castle, Pennsylvania

Lawrence County, excluding the townships of Little

Beaver, New Beaver, Perry, and Wayne; and Wilmington

township in Mercer County.

Pittsburgh, Pennsylvania

Allegheny, Beaver, and Washington Counties; the townships of South Buffalo, Gilpin, Parks, and Kiskiminetas

in Armstrong County; the townships of Muddy Creek,

Lancaster, Jackson, Forward, Penn, Jefferson, Winfield,

Cranberry, Adams, Middlesex, Clinton, and Buffalo in

Butler County; the townships of Washington, Jefferson,

Perry, Lower Tyrone, Upper Tyrone, Bullskin, and Salt

Lick in Fayette County; the townships of Conernaugh,

Burrell, and West Wheatfield in Indiana County; the townships of Little Beaver, New Beaver, Perry, and Wayne in

Lawrence County; and Westmoreland County, excluding

St. Clair township.

Sharon, Pennsylvania and Ohio

Mercer County, excluding Wilmington township, and

Mercer township in Butler County, all in Pennsylvania; and

the townships of Brookfield and Hartford in Trumbull

County, Ohio.

Appendix B

Market Data

New Castle, Pennsylvania

F.N.B. operates the fourth largest depository institution in

the New Castle banking market, controlling $146.1 million

in deposits, which represents 8.5 percent of market deposits. SRFC operates the sixth largest depository institution

in the market, controlling $41.4 million in deposits, which

represents 2.4 percent of market deposits. On consummation of the proposal, F.N.B. would operate the third largest

depository institution in the market, controlling deposits of

$187.5 million, which represent approximately 10.9 percent of market deposits. Seven bank and thrift competitors

would remain in the market. The HHI would increase

118 points to 3,337.

Pittsburgh, Pennsylvania

F.N.B. operates the eighth largest depository institution in

the Pittsburgh banking market, controlling $689.3 million

in deposits, which represents 1.4 percent of market deposits. SRFC operates the 39th largest depository institution

in the market, controlling $26.9 million in deposits, which

represents less than 1 percent of market deposits. On

consummation of the proposal, F.N.B. would remain the

eighth largest depository institution in the market, controlling $716.2 million in deposits, which represent 1.5 percent

of market deposits. Fifty-three bank and thrift competitors

would remain in the market. The HHI would remain at

1,584.

Haines Financial Corp

Woodward, Oklahoma

Order Approving the Formation of a Bank Holding

Company and the Acquisition of a Bank

Haines Financial Corp (‘‘Haines Financial’’) 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 and to

acquire all the voting shares of The First National Bank of

Medford, Medford, Oklahoma (‘‘Medford Bank’’).

Notice of the proposal, affording interested persons an

opportunity to comment, has been published (69 Federal

Register 18,908 (2004)). The time for filing comments has

expired, and the Board has considered all the comments on

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

Haines Financial is a newly organized corporation that

does not control a depository institution, and it has been

formed to acquire Medford Bank. Medford Bank is one of

the smaller depository institutions in Oklahoma,1 controlling approximately $22.6 million in deposits, which represents less than 1 percent of total deposits in the state.2 The

Board has reviewed carefully all the facts of record and 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. Accordingly, the Board has determined that the

competitive factors under section 3 of the BHC Act 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.3 In evaluating

this factor, the Board places particular emphasis on the

ratings that the relevant depository institutions received at

their most recent examinations under the Community Rein1. In this context, the term ‘‘depository institution’’ includes commercial banks, savings banks, and savings associations.

2. Deposit and ranking data are as of March 31, 2004.

3. 12 U.S.C. §1842(c)(2).

484 Federal Reserve Bulletin Autumn 2004
vestment Act (12 U.S.C. §2901 et seq.) (‘‘CRA’’). Medford

Bank received a ‘‘satisfactory’’ CRA rating from its primary federal supervisor, the Office of the Comptroller of

the Currency (‘‘OCC’’), as of December 31, 2001.

Haines Financial has stated that it intends to retain the

bank’s current retail banking activities in the Medford

community. After reviewing all the information submitted

by Haines Financial and Medford 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, including the CRA performance of

the institution to be acquired, 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 the proposal as

well as the principal shareholders.4 As part of this analysis,

the Board has reviewed confidential examination information about Medford Bank and publicly reported financial

and other information about the bank, Haines Financial,

and the proposal. The Board has also consulted with the

OCC, the primary federal supervisor for Medford Bank,

and considered confidential supervisory and other information from the banking agency. In addition, the Board has

reviewed Haines Financial’s operating plan for Medford

Bank and the proposed management of Haines Financial

and the bank.

The Board notes that Haines Financial intends to retain

Medford Bank’s management and that the bank would

have a five-member board of directors that would include

two of the bank’s current senior officers. Three of the five

members of the proposed board of directors, which would

include one of the principal shareholders of Haines Financial, are experienced bankers. Experienced individuals

would also be responsible for managing the bank on a daily

basis after consummation. In addition, the Board has taken

into account the financial resources of Haines Financial,

including its capital levels and ability to serve as a source

of strength to the bank, as well as the proposed business

plan for Medford Bank.

After considering all the facts of record, including all

commitments made to the Board in connection with this

proposal, the Board concludes that the financial and managerial resources and future prospects of Haines Financial

and Medford 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 the 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 Haines Financial and all affiliated entities

with the commitments and representations made to the

Board in connection with the application. 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 Medford Bank may 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 Kansas City, acting pursuant to delegated

authority.

By order of the Board of Governors, effective July 1,

2004.

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

LBT Bancshares, Inc.

Litchfield, Illinois

Order Approving the Acquisition of Shares of a Bank

Holding Company

LBT Bancshares (‘‘LBT’’), 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 approximately 54 percent of the voting shares of Security Bancshares, Inc. (‘‘Security’’) and thereby acquire control of

Security’s subsidiary bank, Security National Bank

(‘‘Security Bank’’), both in Witt, Illinois.

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published

(69 Federal Register 5,957 (2004)). The time for filing

comments has expired, and the Board has considered the

proposal and the comments received in light of the factors

set forth in section 3 of the BHC Act.

LBT and Security are under the common control of the

Fleming family.1 LBT controls Bank & Trust Company,

Litchfield, Illinois (‘‘LBT Bank’’). LBT, with total consolidated assets of approximately $194.2 million, is the 198th

largest depository organization in Illinois, controlling

deposits of $168.5 million, which represents less than

1 percent of total deposits in insured depository institutions

in the state (‘‘state deposits’’).2 Security, with total consolidated assets of approximately $49.7 million, is the 504th

largest depository institution organization in Illinois, controlling deposits of $41.9 million, which represents less

4. Id.

1. Mr. David W. Fleming and his two sons, Daniel and William,

control more than 47 percent of the voting shares of LBT and more

than 28 percent of the voting shares of Security. Under the proposal,

LBT would acquire all the shares of Security held by the Fleming

family and shares of Security held by certain shareholders.

2. Asset data are as of December 31, 2003. Statewide deposit and

ranking data are as of June 30, 2003, and are derived from the

Summary of Deposits data collected annually by the Federal Deposit

Insurance Corporation.

Legal Developments 485
than 1 percent of state deposits. On consummation of the

proposal, LBT would become the 155th largest depository

organization in Illinois, with total consolidated assets of

approximately $243.6 million and total deposits of

$210.4 million, representing less than 1 percent of state

deposits.

LBT’s proposal to acquire Security and Security Bank is

opposed by the management of Security, which 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.3 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.4 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.5

The Board also has carefully considered all other information available, including information accumulated in the

applications process, supervisory information of the Board

and other agencies, relevant examination reports, and information provided by the Office of the Comptroller of the

Currency (‘‘OCC’’), the Federal Deposit Insurance Corporation (‘‘FDIC’’), and the Illinois Office of Banks and Real

Estate (‘‘Illinois OBRE’’).

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

LBT and Security compete in the Hillsboro, Illinois, banking market (‘‘Hillsboro banking market’’), which is defined

as Montgomery County, Illinois.7 The proposed transaction

involves the combination of two bank holding companies

that are affiliated with each other. These two organizations

are also affiliated with a third banking organization in the

Hillsboro banking market through common share ownership by Fleming family members.8

LBT proposes to acquire all the shares of Security

currently held by the Fleming family, along with shares of

Security held by other shareholders, in a reorganization

that does not change the longstanding affiliation of these

banking organizations.9 Members of the Fleming family

have owned a controlling interest in LBT and Security

Bank since 1993 and have controlled Country since at least

1987.10 The combination of LBT, Security Bank, and

Country into a single banking organization in 1993 would

3. See Central Pacific Financial Corp., 90 Federal Reserve Bulletin 93, 93 (2004) (‘‘Central Pacific’’); North Fork Bancorporation,

Inc., 86 Federal Reserve Bulletin 767, 768 (2000) (‘‘North Fork’’);

The Bank of New York Company, 74 Federal Reserve Bulletin 257,

259 (1988) (‘‘BONY’’).

4. 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).

5. See Central Pacific; FleetBoston Financial Corporation,

86 Federal Reserve Bulletin 751, 752 (2000); North Fork; BONY.

6. 12 U.S.C. §1842(c)(1).

7. Management of Security contended, without providing material

information, that the relevant geographic market for reviewing this

transaction is the eastern portion of Montgomery County in which

Security Bank maintains its banking offices and portions of the

adjacent Christian County. In reviewing this contention, the Board has

considered the geographic proximity of Montgomery County’s population centers, the county’s road network and average daily traffic

volumes on those roads, and the location of its cities. The Board also

has considered worker commuting data from the 2000 census, which

indicate that 69 percent of commuters living in Montgomery County

work at another location in the county, while only 4 percent of

Montgomery County commuters work in Christian County and only

2 percent of Christian County commuters work in Montgomery

County. In addition, the Board has considered evidence gathered from

interviews with bankers indicating that banks in Montgomery County

advertise regularly in local newspapers that circulate throughout

Montgomery County, but not in newspapers in other counties. Based

on these facts and other information, the Board concludes that the

facts of record do not support modifying the Hillsboro banking market

and that the appropriate geographic market for considering the competitive effects of the proposal is Montgomery County.

8. David Fleming controls more than 53 percent of the voting

shares of Country Bancorp, Inc. (‘‘Country’’), which controls National

Bank, both in Hillsboro.

9. In reviewing past proposals involving common share ownership

of banking organizations, the Board has considered the competitive

effects of a proposal at the time that the banking organizations came

under such ownership. See F.S.B., Inc., 78 Federal Reserve Bulletin

550 (1992); Mid-Nebraska Bancshares, Inc., 64 Federal Reserve

Bulletin 589 (1978), aff’d Mid-Nebraska Bancshares, Inc. v. Board of

Governors of the Federal Reserve System, 627 F.2d 266 (D.C. Cir.

1980); Mahaska Investment Co., 63 Federal Reserve Bulletin 579

(1977). The Board has approved proposals involving commonly controlled banking organizations in the same banking market when no

competitive issues were presented in that market at the time the

banking organizations came under common control. See Texas East

BanCorp, 69 Federal Reserve Bulletin 636 (1983); First Monco

Bancshares, Inc., 69 Federal Reserve Bulletin 293 (1983).

10. In 1993, David, Daniel, and William Fleming owned, respectively, 11.5 percent, 10.8 percent, and 10.8 percent of LBT and

9.8 percent, 9.0 percent, and 7.1 percent of Security Bank. They

collectively have owned more than 25 percent of the shares of LBT

and Security Bank since 1993 and, therefore, have controlled both

institutions. When Country applied in 1987 to acquire Montgomery

486 Federal Reserve Bulletin Autumn 2004
have resulted in an increase of 509 points to 1761 in the

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

banking market. The Hillsboro banking market would have

been moderately concentrated, and the affiliation at that

time was consistent with Board precedent and Department

of Justice Merger Guidelines (‘‘DOJ Guidelines’’).11 LBT’s

current proposal does not materially change this existing

affiliation.

The Department of Justice also has conducted a detailed

review of the probable competitive effects of the proposal

and 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

OCC and the Illinois OBRE have been afforded an opportunity to comment and have not objected to consummation

of the proposal.

After carefully reviewing all the facts of record and for

the reasons discussed in this order, the Board concludes

that consummation of the proposal would not be likely to

result in a significantly adverse effect on competition or on

the concentration of banking resources in the Hillsboro

market or in any other relevant banking market. Accordingly, the Board has determined that competitive factors

are consistent with approval.

Financial, Managerial, and 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.12 LBT, LBT Bank, and

Security Bank each are currently well capitalized and will

remain well capitalized on consummation of the proposal.

The Board has carefully reviewed confidential and other

information about the management and the principal owners of LBT.13 The Board has also reviewed, among other

things, the following information: confidential reports of

examination, including assessments of the managerial

resources of Security and the relevant depository institutions; other confidential supervisory information received

from the primary federal supervisors of each institution;

and public comments.14 In addition, the Board has considered LBT’s representation that it does not currently anticipate any changes in the management of Security after

consummation of the proposal. Based on all the facts of

record, the Board concludes that the financial and managerial resources and future prospects of LBT and the institutions involved in the proposal are consistent with approval,

as are the other supervisory considerations under the BHC

Act.

Convenience and Needs Considerations

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

Board is required to consider its effects 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’’).15 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.16

The Board has considered carefully the convenience and

needs factor and the CRA performance records of the

subsidiary depository institutions of LBT and Security

County National Bank, also in Hillsboro, and thereby enter the Hillsboro banking market, David Fleming owned 33.3 percent of Country

and, therefore, controlled Country.

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

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

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.

12. Management of Security asserted that the sellers of the Security

shares to LBT would not receive appropriate levels of consideration

for the shares and, therefore, that information provided by LBT about

the impact of the transaction on the financial resources of the institutions involved may be inaccurate. The fairness of the sales price

received by shareholders is not, by itself, within the statutory factors

the Board may consider. See Western Bancshares, Inc. v. Board of

Governors, 480 F.2d 749 (10th Cir. 1973). The Board has reviewed

confidential supervisory information and other information about the

cost of the proposal, in addition to information provided by LBT, in

considering the impact of the proposal on the financial resources and

future prospects of LBT and the banks involved.

13. Security’s management contended that members of the Fleming family did not comply with the Change in Bank Control Act,

12 U.S.C. §1817(j) (‘‘CIBC Act’’), in acquiring control of Security.

The review and approval of Security’s application under section 3 of

the BHC Act to become a bank holding company included consideration of the Fleming family members as the principal shareholders of

Security. Security Bancshares, Inc., 87 Federal Reserve Bulletin 279

(2001). No separate CIBC Act filing is required for a transaction that

is subject to approval under section 3 of the BHC Act. See 12 U.S.C.

§1817(j)(17)(A).

14. Management also asserted that certain directors of Security

have breached their fiduciary duties and have violated a resolution

adopted by the board of directors that requires any Security director

who becomes aware of the availability of the company’s shares for

purchase to notify Security. The resolution also gives Security a right

of first refusal before a director may purchase its shares. LBT has filed

suit to have this resolution declared null and void. The Board notes

that these contentions are matters of general corporate law under

applicable state law, which are currently under review in the appropriate legal forum, and that such matters are not within the Board’s

jurisdiction to adjudicate. Board action under the BHC Act would not

interfere with the ability of the courts to resolve any litigation pertaining to these matters and does not authorize consummation of a

proposal that a court determines to be a violation of applicable law.

The Board has considered these allegations in the context of the other

information about management, as noted above.

15. 12 U.S.C. §§1842(c)(2) and 2903(a)(2).

16. 12 U.S.C. §2901 et seq.

Legal Developments 487
in light of all the facts of record, including public comments on the proposal. In particular, several commenters

expressed general concern that the resulting banking organization would not meet the credit needs of communities in

Montgomery County. Among other things, these commenters asserted, without offering supporting evidence, that the

resulting banking reorganization would lead to disadvantageous changes in loan terms, increased fees, and fewer

services. LBT stated that it does not expect to discontinue

any of Security Bank’s products or services and that it

expects to expand the bank’s products and services after

consummation of the proposal.

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.17 The

subsidiary banks of LBT and Security each received ‘‘satisfactory’’ ratings at their most recent CRA performance

evaluations. LBT’s subsidiary bank, Bank and Trust Company (‘‘Trust Company’’), received a ‘‘satisfactory’’ rating

by the FDIC, as of July 16, 2003 (the ‘‘2003 Evaluation’’),

and Security Bank received a ‘‘satisfactory’’ rating by the

OCC, as of February 2, 1998. Examiners did not identify

any substantive violations of fair lending laws during these

evaluations.

In the 2003 Evaluation, examiners reported that Trust

Company had demonstrated a satisfactory level of helping

to meet the credit needs of its assessment areas18 under the

performance criteria for a small bank.19 Examiners found

that the bank had maintained a good record of lending

since the previous CRA evaluation and had an average

loan-to-deposit ratio of approximately 72 percent during

the preceding 18 quarters. Examiners characterized as

excellent the level of Trust Company’s lending in its

assessment areas, noting that 94 percent of its loans by

number and 92 percent of its loans by dollar volume were

made in the assessment areas.

Examiners concluded that Trust Company had a reasonable record of lending to borrowers of different income

levels and to businesses of different sizes. In its Non-MSA

Assessment Area, examiners considered Trust Company’s

level of LMI mortgage lending to be reasonable. Examiners characterized as excellent Trust Company’s record of

lending to small businesses in the Non-MSA Assessment

Area.20 During the evaluation period in this area, 92 percent of Trust Company’s business loans by number and

51 percent of its business loans by dollar volume were in

amounts of less than $100,000.

Examiners also found that the overall geographic distribution of Trust Company’s loans throughout its assessment

areas was reasonable. They noted that, during the first six

months of 2003, Trust Company increased the percentage

of all its mortgage loans in moderate-income census tracts

in the Non-MSA Assessment Area to a level that exceeded

the percentage of owner-occupied housing units in such

census tracts. In addition, the percentage of Trust Company’s loans to businesses in moderate-income census tracts

in the Non-MSA Assessment Area exceeded the percentage of total businesses in such census tracts.

The Board has carefully considered all the facts of

record, including reports of examination of CRA performance of the institutions involved, information provided

by LBT, all comments received and responses to those

comments, and confidential supervisory information. 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.

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.21 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 LBT with the

conditions imposed in this order and the commitments

17. See Interagency Questions and Answers Regarding Community

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

18. Trust Company’s assessment areas for the 2003 Evaluation

included Sangamon County in the Springfield Metropolitan Statistical

Area (‘‘MSA’’) and a non-MSA assessment area that included Greene,

Macoupin, and Montgomery Counties (‘‘Non-MSA Assessment

Area’’), all in Illinois.

19. Under the FDIC’s CRA regulations, the performance of a bank

with less than $250 million in total assets is evaluated based on the

following criteria: the bank’s loan-to-deposit ratio; the bank’s percentage of loans in its assessment areas; its lending to borrowers of

different incomes, and to businesses and farms of different sizes; the

geographic distribution of its loans by census tract or block numbering

area; and the bank’s response to any written complaints about its CRA

performance. 12 CFR 345.26.

20. In this context, ‘‘lending to small business’’ means loans made

to businesses with gross annual revenues of $1 million or less.

21. Several commenters requested that the Board hold a public

meeting or 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 the bank to be acquired

makes a timely written recommendation of denial of the application.

The Board has not received such a recommendation from any appropriate supervisory authority. 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 CFR 225.16(e). The Board

has considered carefully commenters’ requests 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, commenters have

submitted written comments that the Board has considered carefully

in acting on the proposal. Commenters’ requests fail to identify

disputed issues of fact that are material to the Board’s decisions that

would be clarified by a public hearing or meeting. Moreover, commenters’ requests fail to demonstrate why their written comments

do not present their 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

meeting or hearing is not required or warranted in this case. Accordingly, the requests for a public meeting or hearing on the proposal are

denied.

488 Federal Reserve Bulletin Autumn 2004
made to the Board in connection with the application. For

purposes of this action, these conditions 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 Security Bank 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 the Federal Reserve Bank of St. Louis, acting

pursuant to delegated authority.

By order of the Board of Governors, effective July 19,

2004.

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 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 Bank Holding

Company

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

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

Group, Inc. (‘‘Citizens Financial’’) (collectively, ‘‘Applicants’’) have requested the Board’s approval under section 3 of the Bank Holding Company Act (12 U.S.C.

§1842) (‘‘BHC Act’’) to merge with Charter One Financial, Inc. (‘‘Charter One’’) and to acquire its subsidiary

bank, Charter One Bank, National Association (‘‘Charter

One Bank’’), both in Cleveland, Ohio.1

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published

(69 Federal Register 29,538 (2004)). 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.

RBS Group, with total consolidated assets of approximately $812.3 billion, is the fifth largest banking organization in the world.2 Citizens Financial, with total consolidated assets of approximately $80 billion, is the 20th

largest depository organization in the United States, controlling approximately $61.5 billion in deposits, which

represents less than 1 percent of the total amount of deposits of insured depository institutions in the United States.3

Citizens Financial operates subsidiary depository institutions in Connecticut, Delaware, Massachusetts, New

Hampshire, New York, Pennsylvania, Rhode Island, and

Vermont and engages in nonbanking activities that are

permissible under the BHC Act.

Charter One, with total consolidated assets of approximately $41 billion, is the 30th largest depository organization in the United States. Charter One’s subsidiary

depository institution controls deposits of $27 billion, representing less than 1 percent of the total amount of deposits

of insured depository institutions in the United States, and

engages in a broad range of permissible nonbanking activities nationwide.

On consummation of the proposal, Citizens Financial

would become the 13th largest depository organization in

the United States, with total consolidated assets of approximately $121 billion and total deposits of $88.5 million,

which represent approximately 1.4 percent of the total

amount of deposits of insured depository institutions in the

United States.

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.4 For purposes of the BHC Act, the home state of

Citizens Financial is Rhode Island, and Charter One’s

subsidiary bank is located in Connecticut, Illinois, Indiana,

Massachusetts, Michigan, New Hampshire, New York,

Ohio, Pennsylvania, and Vermont.5

All the conditions for an interstate acquisition enumerated in section 3(d) of the BHC Act are met in this case.

Citizens Financial currently is adequately capitalized and

adequately managed, as defined by applicable law,6 and

would remain so on consummation of the proposal. Charter

One Bank has existed and operated for at least the mini1. Citizens Financial, a financial holding company, proposes to

acquire Charter One’s nonbanking subsidiaries pursuant to section 4(k) of the BHC Act and the post-transaction notice procedures of

section 225.87 of Regulation Y. 12 U.S.C. §1843(k); 12 CFR 225.87.

2. Worldwide and national asset data are as of March 31, 2004, and

ranking data are as of December 31, 2003.

3. Deposit data are as of June 30, 2003, and reflect the unadjusted

total of the deposits reported by each organization’s insured depository institutions in their Consolidated Reports of Condition and

Income for June 30, 2003. In this context, insured depository institutions include commercial banks, savings banks, and savings

associations.

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

total deposits of all subsidiary banks of the 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).

5. For purposes of section 3(d), the Board considers a bank to be

located in the states in which the bank is chartered or headquartered or

operates a branch. See 12 U.S.C. §1841(o)(4)–(7) and §1842(d)(1)(A)

and (d)(2)(B).

6. See 12 U.S.C. §1842(d)(1)(A).

Legal Developments 489
mum age requirements established by applicable state law.7

On consummation of the proposal, Citizens Financial and

its affiliates 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, or the appropriate

percentage established by applicable state law, of the total

amount of deposits of insured depository institutions in

each state in which both institutions currently are located.8

All other requirements of section 3(d) would be met in this

case. Accordingly, based on 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 that

would further any attempt to monopolize the business of

banking in any relevant banking market. It also prohibits

the Board from approving a proposal 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.9

Citizens Financial and Charter One compete directly in

nine local banking markets in Connecticut, Massachusetts,

New Hampshire, New York, Pennsylvania, and Vermont,

including six markets where Charter One opened a branch

on or after June 30, 2003.10 The Board has reviewed the

competitive effects of the proposal in each of these banking

markets in light of all the facts of record. In particular, the

Board has considered the number of competitors that would

remain in the markets, the relative share of total deposits in

depository institutions controlled by Citizens Financial and

Charter One in the markets (‘‘market deposits’’), 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 Merger Guidelines (‘‘DOJ Guidelines’’), and other characteristics of the

markets.

Consummation of the proposed acquisition of Charter

One would be consistent with Board precedent and the

DOJ Guidelines in all nine banking markets.11 As noted,

Charter One has opened branches in the following banking

markets after June 30, 2003, and controls less than 1⁄2 of

1 percent of market deposits in each market: Boston,

Pittsfield, and Worcester, all in Massachusetts; Metropolitan New York Area; Erie, Pennsylvania; and Hartford,

Connecticut. Accordingly, the impact on competition in

these markets would be de minimis. Consummation of the

proposal also would be consistent with Board precedent

and the DOJ Guidelines in the remaining banking markets

where both institutions compete: Springfield, Massachusetts; Hanover–Lebanon, New Hampshire; and Brattleboro, Vermont. Moreover, numerous competitors would

remain in all the banking markets.

The Department of Justice has reviewed the proposal

and advised the Board that consummation would not likely

have a significantly adverse effect on competition in any

relevant market. The appropriate banking agencies have

been afforded an opportunity to comment and have not

objected to the proposal.

Based on these and all other 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 the nine banking

markets discussed above or in any other relevant banking

market. Accordingly, based on all the facts of record, the

Board has determined that the competitive effects are consistent with approval.

Financial, Managerial, and Supervisory Considerations

Section 3 of the BHC Act requires the Board to consider

the financial and managerial resources and future prospects

of the companies and depository institutions 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 reports of examination, other

confidential supervisory information received from the primary federal banking agency that supervises each institution, information provided by Citizens Financial, publicly

reported and other financial information, and comments

received on the proposal.12 In addition, the Board has

7. See 12 U.S.C. §1842(d)(1)(B).

8. See 12 U.S.C. §1842(d)(2)(A) and (B).

9. 12 U.S.C. §1842(c)(1).

10. These banking markets are described in Appendix A. Deposit

and market share data are based on Summary of Deposits 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 indicated

previously 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).

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

a market is considered unconcentrated if the post-merger HHI is under

1000, moderately concentrated if the post-merger HHI is between

1000 and 1800, and 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.

Market data for each banking market are provided in Appendix B.

12. Various commenters expressed concerns about the following

matters: (1) press reports stating that RBS Group is a defendant in

litigation involving the former government’s apartheid policies in

South Africa, and (2) allegations that individuals at Charter One and

RBS Group engaged in illegal options trading close to the proposal’s

announcement. The first matter is not within the Board’s jurisdiction

to adjudicate and is not related to the limited statutory factors the

Board may consider when reviewing an application under the BHC

Act. See, e.g., Deutsche Bank AG, 85 Federal Reserve Bulletin 509

(1999); see also Western Bancshares, Inc. v. Board of Governors, 480

F.2d 749 (10th Cir. 1973) (‘‘Western Bancshares’’). The Securities and

490 Federal Reserve Bulletin Autumn 2004
consulted with the Federal Deposit Insurance Corporation

(‘‘FDIC’’) and the Office of the Comptroller of the Currency (‘‘OCC’’), the primary federal supervisors of Citizens Financial’s subsidiary banks and Charter One Bank,

respectively, and relevant supervisory authorities in the

United Kingdom.13

In evaluating financial factors in expansion proposals by

banking organizations, the Board consistently has considered capital adequacy to be especially important. Citizens

Financial, Charter One, and their subsidiary depository

institutions are well capitalized and will remain so on

consummation of the proposal. In addition, the capital

ratios of RBS would continue to exceed the minimum

levels that would be required under the Basel Capital

Accord, and RBS Group’s capital levels are considered

equivalent to those that would be required of a U.S. banking organization. The Board finds that the organization has

sufficient financial resources to effect the proposal.

The Board has considered the managerial resources of

RBS and Charter One, particularly the supervisory experience and assessments of management by the various bank

supervisory agencies and the organizations’ records of

compliance with applicable banking laws.14 The Board

also has carefully reviewed the examination records of

Citizens Financial, Charter One, and their subsidiary

depository institutions, including assessments of their riskmanagement systems.15 In addition, the Board has considered Citizens Financial’s plans for integrating the proposed

acquisition, including its available managerial resources

and proposed management after consummation, and the

company’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

the BHC Act.16

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 consolidated

supervision or regulation on a consolidated basis by the

appropriate authorities in the bank’s home country.17 The

home country supervisor of RBS Group is the Financial

Services Authority (‘‘FSA’’), which is responsible for the

supervision and regulation of United Kingdom financial

institutions.

In approving applications under the BHC Act and the

International Banking Act (‘‘IBA’’),18 the Board previously

has determined that various banks in the United Kingdom,

including RBS, were subject to home country supervision

on a consolidated basis by the FSA. In this case, the Board

finds that the FSA continues to supervise RBS in substantially the same manner as it supervised United Kingdom

banks at the time of those determinations.19 Based on this

finding and all the facts of record, the Board concludes that

RBS continues to be subject to comprehensive supervision

on a consolidated basis by its home country supervisor.

In addition, section 3 of the BHC Act 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.20 The Board

has reviewed the restrictions on disclosure in relevant

Exchange Commission (‘‘SEC’’), rather than the Board, has jurisdiction to investigate the second allegation and to adjudicate if any

violations of federal securities laws have occurred. The Board has

consulted with the SEC regarding this allegation.

13. One commenter, citing a press report, alleged that RBS Group

violated U.S. trade sanctions through its activities in Iraq and elsewhere. The Board has considered these allegations in light of confidential supervisory information and consultations with the FDIC and

other appropriate supervisory authorities, including confidential compliance examinations of the Citizens Financial subsidiary banks that

included a review of each institution’s compliance with the applicable

regulations of the Office of Foreign Assets Control.

14. A commenter opposing the proposal cited a press report of

RBSG’s connection to investigations, lawsuits, and settlements relating to a foreign subsidiary of RBSG and Enron Corporation and

asserted that these issues reflected unfavorably on the managerial

resources of RBSG. The Board has considered this comment in light

of the measures that RBSG has taken and is continuing to take

to address these matters and to strengthen the company’s riskmanagement practices; the information available to RBSG’s management at the time; the experience, policies, and procedures of its

management; and confidential supervisory information.

15. One commenter expressed concern about RBS Group’s financing of various activities and projects worldwide that allegedly damage

the environment or cause other social harm. This concern was previously addressed by the Board in connection with its approvals of

Applicants’ other recent proposals. The Board noted in those approvals, and affirms in this case, that the comment contains no allegations

of illegality or of actions that would affect the safety and soundness of

the institutions involved and is 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,

90 Federal Reserve Bulletin 87, 88 n.16 (2004) (‘‘Thistle Order’’);

The Royal Bank of Scotland Group plc, 89 Federal Reserve Bulletin

386, 389 n.26 (2003) (‘‘Port Financial Order’’); The Royal Bank of

Scotland Group plc, 88 Federal Reserve Bulletin 51, 57 n.32 (2002)

(‘‘Mellon Order’’). See also Western Bancshares.

16. A commenter also criticized RBS’s subsidiary, Greenwich

Capital Markets, Greenwich, Connecticut (‘‘Greenwich Capital’’), for

lobbying against state and local efforts to enact and enforce

antipredatory-lending laws and ordinances. The Board notes that the

commenter failed to allege or provide any evidence that RBS or

Greenwich Capital engaged in any illegal predatory lending activities;

engaged in any illegal activity or other action that has affected, or

might reasonably be expected to affect, the safety and soundness of

the institutions involved in this proposal; or engaged in any illegal

activity or other action related to the other factors that the Board is

authorized to consider under the BHC Act.

17. 12 U.S.C. §1842(c)(3)(B). Under Regulation Y, the Board uses

the standards enumerated in Regulation K to determine whether a

foreign bank that has applied under section 3 of the BHC Act is

subject to consolidated home country supervision. See 12 CFR

225.13(a)(4). Regulation K provides that a foreign bank will be

considered 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 law and regulation.

See 12 CFR 211.24(c)(1).

18. 12 U.S.C. §3101 et seq.

19. See HBOS Treasury Services plc, 90 Federal Reserve Bulletin

103 (2004); see also Port Financial Order.

20. See 12 U.S.C. §1842(c)(3)(A).

Legal Developments 491
jurisdictions in which RBS Group operates and has communicated with relevant government authorities concerning access to information. In addition, RBS Group and its

affiliates previously have committed to make available to

the Board such information on the operations of RBS

Group and its affiliates that the Board deems necessary to

determine and enforce compliance with the BHC Act, the

IBA, and other applicable federal law. RBS Group and

RBS also previously have committed to cooperate with the

Board to obtain any waivers or exemptions that may be

necessary to enable RBS Group and its affiliates to make

such information available to the Board. In light of these

commitments, the Board concludes that RBS Group and

RBS have provided adequate assurances of access to any

appropriate information that the Board may request. Based

on these and all the facts of record, the Board concludes

that the supervisory factors it is required to consider are

consistent with approval.21

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 institution under the Community Reinvestment

Act (‘‘CRA’’).22 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.23

The Board has considered carefully the convenience and

needs factor and the CRA performance records of the

subsidiary banks of Citizens Financial and Charter One

in light of all the facts of record, including comments

received on the proposal.24 Ten commenters opposed the

proposal and collectively asserted that Citizens Financial

and Charter One needed to provide more prime-rate home

mortgage loans to LMI and minority individuals, more

small business loans to businesses owned by minority

individuals or women, and more community development

investments in LMI and minority communities.25 Commenters also asserted that the data reported under the

Home Mortgage Disclosure Act (‘‘HMDA’’)26 indicated

that Citizens Financial and Charter One engaged in disparate treatment of African-American, Hispanic, and LMI

individuals in their home mortgage lending operations. In

addition, several commenters expressed concern about possible branch closings.27

A. CRA Performance Evaluations

As provided in the CRA, the Board has evaluated the

convenience and needs factor in light of the 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.28 The Board recently reviewed the CRA performance records of the insured depository institutions con21. Two commenters cited press reports alleging that RBS Group

does not maintain adequate antimoney-laundering controls or that

foreign regulators have fined RBS Group for noncompliance with

money-laundering regulations. The commenter also cited press reports

that RBS Group allegedly has furnished financial services to terrorist

organizations. These allegations were previously considered by the

Board and, as explained in the Port Financial Order, the Board

concluded that the financial, managerial, and other supervisory factors

were consistent with approval. See Port Financial Order, supra at

390 n.27. The commenters provided no new material information that

was not already part of the record considered by the Board in that

order.

22. 12 U.S.C. § 2901 et seq.

23. A commenter expressed concern that the proposal may result in

loss of jobs. The effect of a proposed transaction on employment in a

community is not among the factors that the Board is authorized to

consider under the BHC Act, and the federal banking agencies, courts,

and the Congress consistently have interpreted the convenience and

needs factor to relate to the effect of a proposal on the availability and

quality of banking services in the community. See, e.g., Wells Fargo &

Company, 82 Federal Reserve Bulletin 445, 457 (1996).

24. Several commenters urged the Board to encourage or require

Citizens Financial to make CRA-related commitments to certain community development organizations and to establish an advisory board

to promote community development. The Board has consistently

found that neither the CRA nor the federal banking agencies’ CRA

regulations require depository institutions to make pledges or enter

into commitments or agreements with any organization. See, e.g.,

J. P. Morgan Chase and Co., 90 Federal Reserve Bulletin 352

(2004); Citigroup Inc., 88 Federal Reserve Bulletin 485 (2002).

Several commenters also suggested that Citizens Financial should

make more charitable contributions or commit a specific percentage of

profits to philanthropic contributions. The Board notes that neither the

CRA nor the agencies’ implementing rules require that financial

institutions engage in any type of philanthropy.

25. Commenters also expressed concern about press reports of

alleged discrimination by RBSG’s management against minority

employees and Citizens Financial’s record of hiring minorities and

awarding supplier contracts to minority- and women-owned businesses. The Board previously has stated that its limited jurisdiction to

review applications under the BHC Act does not authorize the Board

to adjudicate disputes involving an applicant that arise under statutes

administered and enforced by another agency in areas such as employment discrimination. See, e.g., Norwest Corporation, 82 Federal

Reserve Bulletin 580 (1996); see also Western Bancshares.

26. 12 U.S.C. §2801 et seq.

27. Two commenters noted consumer complaints involving transactions at some of Citizens Financial’s subsidiary banks or involving

transactions outside the United States at RBSG’s foreign subsidiary

bank. These comments concern individual accounts and particular

transactions, and the comments involving the Citizens Banks have

been forwarded to the FDIC, the primary federal supervisor of the

banks.

28. See Interagency Questions and Answers Regarding Community

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

492 Federal Reserve Bulletin Autumn 2004
trolled by Citizens Financial (the ‘‘Citizens Banks’’) and

found those records to be consistent with approval of a

bank expansion proposal. Citizens CT, Citizens MA,

Citizens NH, and Citizens RI (collectively ‘‘Citizens New

England Banks’’) were all rated ‘‘outstanding’’ at their

most recent CRA performance evaluations by the FDIC, as

of December 2, 2002. In addition, Citizens Bank of Delaware (‘‘Citizens DE’’) and Citizens Bank of Pennsylvania

(‘‘Citizens PA’’) received ‘‘outstanding’’ ratings in their

most recent CRA performance evaluations by the FDIC, as

of November 12, 2003.29 Charter One Bank received a

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

evaluation by the Office of Thrift Supervision (‘‘OTS’’), as

of May 14, 2001.30

Citizens Financial has stated that on consummation of

the proposal, it would implement the Citizens Banks’

CRA-related programs, policies, and procedures at Charter

One Bank. In addition, Citizens Financial would augment

Charter One Bank’s existing products and services, including those products and services designed to serve the needs

of LMI individuals and LMI communities. In addition,

Citizens Financial anticipates integrating Charter One’s

community development lending and investment activities

with those of the Citizens Financial Community Development Corporation.

B. CRA Performance of the Citizens Banks

Citizens New England Banks. As noted, the Citizens New

England Banks each received an overall ‘‘outstanding’’

rating in its most recent CRA performance evaluations.31

Under the lending test, each bank was rated ‘‘outstanding,’’

except Citizens CT, which received a ‘‘high satisfactory’’

rating. Examiners commended the Citizens New England

Banks for good dispersion of loans among customers of

different income levels and businesses of different sizes

based on annual revenues.

In addition, examiners commended the Citizens

New England Banks for offering a variety of innovative

and flexible lending programs to help make their products available to LMI residents in their assessment

areas.32 Since their last CRA evaluations, the Citizens

New England Banks have continued their substantial levels

of lending to LMI and minority individuals. In 2003, the

banks made more than 1,360 affordable mortgage loans

totaling approximately $127 million.

Examiners also commended the Citizens New England

Banks for their small business lending activities. Citizens

MA was praised for its excellent responsiveness to the

credit needs of small businesses in all portions of its

assessment area, especially those in LMI census tracts.

Examiners particularly commended Citizens MA for

increasing the number of lending personnel to expand the

bank’s small business loan portfolio, which enabled the

bank to become the leading lender for loans approved by

the Small Business Administration (‘‘SBA’’) in Massachusetts in 2001 and 2002. Examiners noted that Citizens CT

was the second largest SBA lender in Connecticut during

the evaluation period, even though the bank did not operate

in Hartford or Bridgeport, which are two of the larger cities

in Connecticut. Examiners also praised Citizens RI for

making a greater proportion of its small business loans in

LMI areas than other lenders made in its assessment area.

In addition, examiners commended Citizens NH for its

streamlined application process, which helped increase the

bank’s small business loan originations in its assessment

area. Citizens NH has authorized its small business loan

officers to make lending decisions for loans of up to

$250,000 at the branch level and to notify potential borrowers within 24 hours.

Citizens Financial reported that the Citizens

New England Banks have continued their significant small

business lending since 2002, including in LMI census

tracts. In 2003, the Citizens New England Banks made

approximately 2,460 loans to small businesses33 in LMI

census tracts that totaled more than $213 million.

Examiners also commended the community development lending activity of the Citizens New England Banks.

Examiners characterized Citizens MA’s level of community development lending as very significant. Among the

more than $81 million in qualified community development loans the bank extended during the assessment

period, examiners specifically noted Citizens MA’s

$6 million loan to a nonprofit agency that constructed

22 duplexes to provide affordable housing for seniors in

Sudbury, Massachusetts. Examiners also favorably noted

Citizens CT’s high level of community development lending and highlighted the bank’s $1.25 million loan to a

29. The CRA performance ratings of the Citizens Banks are provided in Appendix C. Boston Trust & Management Investment Company, a subsidiary of Citizens Financial, is a limited-purpose trust

company and, therefore, not subject to the CRA.

30. Charter One Bank converted to a national charter in 2002. The

OCC has been monitoring the bank’s CRA performance in the course

of its ongoing supervisory process since its conversion. The Board has

consulted with the OCC on its most recent evaluations of Charter One

Bank. The OCC plans to conduct its first CRA examination of the

bank in mid-2005.

31. The evaluation period for the Citizens New England Banks was

October 12, 1999, through December 2, 2002, although the evaluation

considered the HMDA-reportable loans of the Citizens New England

Banks and Citizens Mortgage Corporation (‘‘CMC’’), a subsidiary of

Citizens RI, and the small business loans of the Citizens New England

Banks, from January 2000 through September 2002. ‘‘HMDAreportable loans’’ include home purchase, home refinance, home

improvement, and multifamily loan categories.

32. One commenter called on Citizens to offer LMI individuals

‘‘Individual Development Accounts,’’ which provide a means to educate accountholders in financial matters while matching their investments with grants. Neither the CRA nor the federal banking agencies’

CRA regulations require depository institutions to provide any specific types of banking products.

33. In this context, ‘‘loans to small businesses’’ includes loans with

originated amounts of $1 million or less that are either secured by

nonfarm, nonresidential properties or are classified as commercial and

industrial loans.

Legal Developments 493
nonprofit corporation to provide housing services to LMI

individuals.

Citizens Financial reported that the Citizens

New England Banks have continued their substantial level

of community development lending since 2002. In 2003,

the banks made community development loans totaling

almost $152 million to various organizations that support

affordable housing development, economic development,

and job creation.

The Citizens New England Banks each received an

‘‘outstanding’’ rating on the investment test in its most

recent CRA performance evaluations. Examiners found

that each bank demonstrated an excellent level of qualified

community development investments, which reflected outstanding responsiveness to the credit and community development needs of its assessment area. Citizens MA made

more than $85 million in qualified community development investments, which included a $1.7 million investment in 36 affordable housing units in Sandwich, Massachusetts. Examiners commended Citizens CT for its grant

program offering down-payment and closing-cost assistance to LMI individuals. Examiners particularly noted that

Citizens RI invested $1.5 million in the Rhode Island

Housing Equity Pool, which funds nonprofit organizations

that provide LMI housing, and a $4 million investment by

Citizens NH in affordable housing projects created through

low-income-housing tax credits.

The Citizens New England Banks have continued a high

level of community development investments since their

last CRA performance evaluations. In 2003, the Citizens

New England Banks made approximately 116 community

development investments totaling more than $19 million.

These investments were provided to numerous organizations in each bank’s assessment area that supported

objectives such as neighborhood revitalization, financial

education, and technical assistance and training to small

businesses.

In addition, the Citizens New England Banks each

received ‘‘outstanding’’ ratings under the service test at its

most recent CRA performance evaluations. Examiners

reported that Citizens MA provided a high level of retail

and community development services, made its services

available to geographies and individuals of all income

levels, and tailored its services to the convenience and

needs of its assessment area. Examiners similarly commended Citizens CT, noting that the bank’s website provided customers with access to the loan application process

and discussions with financial advisors, banking experts,

and community representatives. Citizens RI received very

favorable comments from examiners for having the most

extensive branch network in Rhode Island, bilingual branch

personnel, and extended hours to improve customer access

to its services. Examiners also reported that Citizens NH

provided an excellent level of community development

services during the evaluation period and highlighted the

bank’s use of focus groups to obtain community feedback

on its planned products and programs.

Citizens DE. As noted above, Citizens DE received an

overall ‘‘outstanding’’ rating for CRA performance at its

most recent CRA performance evaluation. The bank also

received an ‘‘outstanding’’ rating under each of the lending, investment, and service tests.

Examiners found that Citizens DE exhibited an excellent

level of responsiveness to the credit and community development needs of its assessment areas.34 During the evaluation period, Citizens DE originated or purchased more than

3,100 HMDA-reportable home mortgage loans totaling

approximately $437 million in its assessment areas. Examiners reported that the geographic distribution of HMDAreportable home mortgage and small business loans

reflected good penetration throughout the bank’s assessment areas, including LMI census tracts. Examiners also

noted that the bank exhibited excellent distribution of

HMDA-reportable home mortgage and small business

loans to borrowers of different income levels and businesses of different sizes by annual revenue.

In addition, examiners commended Citizens DE for

developing a mortgage loan program with flexible underwriting standards, including several products for first-time

homebuyers that assisted in meeting the credit needs of

its assessment areas. For example, the examiners cited the

Citizens Neighborhood Plus program that offers a 30-year

fixed rate for LMI borrowers or properties in LMI census

tracts. The program is tailored to meet the needs of LMI

applicants and offers an interest rate discount of 1 percent

for low-income borrowers and properties in low-income

census tracts, with grants of up to $2,000 for qualified

borrowers.

During the evaluation period, Citizens DE originated

more than 600 small business loans that totaled approximately $88 million. Examiners commended the bank’s

small business lending activity and reported that the bank’s

distribution of loans among businesses of different sizes by

annual revenue in its assessment areas was good. In addition, examiners noted that Citizens DE was an active

participant in the SBA’s loan programs.

Examiners reported that Citizens DE achieved an outstanding level of community development lending and

exercised leadership in addressing community development credit needs in its assessment areas. During the

evaluation period, Citizens DE originated or purchased six

community development loans that totaled $8.9 million.

These loans included a $2.5 million loan to a statewide,

nonprofit multibank community development corporation

that finances and invests in housing and related activities to

assist LMI persons and areas throughout Delaware.

During the evaluation period, the bank made investments and grants totaling $6.8 million that funded affordable housing, social services, and small business initiatives

34. The assessment areas of Citizens DE encompassed Wilmington, Dover, and the nonmetropolitan portion of Delaware. Examiners

noted, however, that no LMI geographies were in the Dover Metropolitan Statistical Area (‘‘MSA’’) or the non-MSA portion of Delaware. The evaluation period was December 1, 2001, through November 12, 2003, although the evaluation considered the HMDAreportable loans of Citizens DE and CMC and the small business

loans of Citizens DE from January 2002 through September 2003.

494 Federal Reserve Bulletin Autumn 2004
in its assessment areas. Examiners reported that Citizens

DE’s amount of investments and the range of initiatives

supported through its charitable contributions demonstrated

the bank’s outstanding level of commitment to community

development activities.

Citizens DE received an ‘‘outstanding’’ rating under the

service test. Examiners reported that the bank’s retail delivery systems were reasonably accessible to all parts of its

assessment areas, including LMI households. In addition,

examiners characterized Citizens DE as a leader in providing community development services in its assessment areas. Examiners favorably noted that Citizens DE

employed a full-time CRA Officer to manage the bank’s

community development efforts.

Citizens PA. As previously noted, Citizens PA received

an overall ‘‘outstanding’’ rating for performance under the

CRA. The bank also received an ‘‘outstanding’’ rating

under each of the lending, investment, and service tests.

Examiners found that Citizens PA exhibited an excellent

level of responsiveness to the credit and community development needs of its assessment areas. They noted that the

bank’s distribution of HMDA-reportable mortgage and

small business loans among geographies of different

income levels was well dispersed and that the bank also

provided excellent loan distribution to LMI borrowers and

small businesses. During the evaluation period, Citizens

PA originated or purchased more than 33,000 HMDAreportable home mortgage loans totaling almost $4.3 billion in its assessment areas.35

In addition, examiners commended Citizens PA for its

extensive use of innovative and flexible lending practices

that addressed the credit needs of LMI individuals and

geographies, as well as those of small businesses. In addition to the Citizens Neighborhood Plus lending products,

Citizens PA offered several programs sponsored by the

Federal Housing Administration and the Federal National

Mortgage Association for the purchase of owner-occupied

primary residences. Examiners noted that these programs

served LMI individuals by offering loans requiring little

or no down payment and featuring flexible underwriting

terms and a temporary reduction in principal and interest

payments.

During the evaluation period, Citizens PA originated

more than 9,000 small business loans that totaled almost

$1 billion in its assessment areas. Examiners noted that the

distribution of small business loans among businesses of

different sizes by annual revenue was strong in all the

bank’s assessment areas. They also noted that Citizens PA

was the leading SBA lender in Pennsylvania and that its

small business lending volume exceeded that of other

lenders in the Philadelphia PMSA.

Examiners reported that Citizens PA was a leader in

community development lending and extended a significant level of community development loans in its assessment areas. During the evaluation period, Citizens PA

originated 48 community development loans totaling

$62 million. These loans included a $7.7 million loan used

to refinance mortgages for 262 units of affordable rental

housing in several buildings in the University City area of

West Philadelphia.

Examiners noted that the bank had an excellent level of

qualified investments in community development that were

responsive to the needs of its assessment areas, including

significant investments in affordable housing, community

development initiatives, and financial education initiatives.

During the evaluation period, the bank made investments

that totaled $90.4 million in its assessment areas.

Examiners commended Citizens PA’s performance for

providing an excellent level of retail and community development services throughout its assessment areas. They

reported that the bank’s retail delivery systems were readily

accessible to all portions of its assessment areas, including

LMI households, and particularly noted the bank’s bilingual ATM network. Examiners also characterized Citizens

PA as a leader in providing community development services and commended the bank’s CRA staff for being

actively involved and the high levels of employee representation for the extent to which they served on the boards of

local community development organizations.

C. CRA Performance of Charter One Bank

As noted above, Charter One Bank received an overall

‘‘satisfactory’’ rating for performance under the CRA from

the OTS, as of May 2001.36 The institution received an

overall ‘‘low satisfactory’’ rating under the lending test.

During the evaluation period, Charter One Bank purchased

or originated more than 33,000 HMDA-reportable loans

that totaled more than $11 billion.37 Examiners characterized Charter One Bank’s overall lending to borrowers of

all income levels as adequate. Although examiners noted

Charter One Bank’s ‘‘poor’’ geographic distribution of

loans, they found that it had an overall good level of small

business lending and an overall high level of community

development lending.

During the evaluation period, Charter One Bank purchased or originated more than 1,900 small business loans

that totaled approximately $311 million. These small business loans totaled approximately $126 million in New

35. The assessment areas selected for a full-scope review of Citizens PA included the Philadelphia Primary Metropolitan Statistical

Area (‘‘PMSA’’) and the Pittsburgh MSA. These areas accounted for a

majority of the assessment areas’ population, LMI census tracts, and

LMI households, as well as a majority of the bank’s branches, loans,

and deposits. The evaluation period was December 1, 2001, through

November 12, 2003, although the review considered the HMDAreportable loans of Citizens PA and CMC, and the small business

loans of Citizens PA, from January 2002 through September 2003.

36. The evaluation period was April 1, 1998, through March 31,

2001, for the bank’s assessment areas in Ohio, Michigan, and

New York (Rochester and Buffalo). For the remaining assessment

areas, the evaluation period was January 1, 1999, to March 31, 2001.

Examiners noted that the institution’s overall rating was derived

from Charter One Bank’s performance in its Ohio, Michigan, and

New York assessment areas, which constituted the substantial majority of its resources and operations during this period.

37. Charter One elected not to include loans by its subsidiaries,

Charter One Mortgage Corporation or Charter One Credit Corporation, in these HMDA-reportable loans.

Legal Developments 495
York and approximately $72 million in Ohio.38 Examiners

particularly commended Charter One Bank’s support for

small business lending in Albany, citing its lines of credit

totaling $16 million to a financial intermediary that provides financing to small businesses and is a major source of

loans to businesses owned by women and minorities.

Examiners also commended Charter One Bank for its

overall high level of community development lending and

its particularly strong performance in Ohio and New York.

They noted that Charter One Bank’s community development lending focused on assisting the development of

affordable housing and the promotion of economic development to revitalize LMI areas in its assessment areas.

During the evaluation period, Charter One Bank originated

more than 90 community development loans that totaled

more than $170 million, including loans totaling $93 million in Ohio and more than $63 million in New York.

Examiners noted favorably that Charter One Bank provided $10.8 million in loans to finance housing projects

benefiting low-income and disabled individuals in Rochester and loans totaling $4.4 million to finance the revitalization of a low-income area of Buffalo.39 In Detroit, the

institution made a $2.9 million loan to finance the construction of 50 single-family-housing rental units, which were

made available to families whose incomes were at or

below 60 percent of the area median family income in

Detroit.

Charter One represented that since converting to a

national bank charter in 2002, it has taken steps to improve

its lending to LMI and minority borrowers and in LMI

and predominantly minority communities. Among other

changes, Charter One Bank stated that it substantially

increased the number of community loan officers working

in its major lending markets. In addition, the bank introduced special financial incentives to branch personnel who

refer home purchase or refinance mortgage loans in LMI

areas to its mortgage operations and to community loan

officers for loans they originate with low-income borrowers or in low-income census tracts. Charter One Bank also

enhanced its efforts to lend more to minorities through

increased print and radio advertising that focuses on minority communities.

Charter One stated that since the bank’s most recent

examination, the bank has increased lending to LMI borrowers and in LMI and minority census tracts40 in its major

assessment areas. In 2002, Charter One Bank originated

more than 15,000 HMDA-reportable loans totaling

approximately $1.5 billion to LMI borrowers and borrowers in LMI and minority census tracts in its major assessment areas. In 2003, those loans increased to more than

26,400 HMDA-reportable loans that totaled approximately

$2.4 billion.

Charter One Bank received a ‘‘high satisfactory’’ rating

under the investment test. During the evaluation period,

Charter One Bank made more than 50 community development investments that totaled more than $11.2 million in its

assessment areas. In Ohio, examiners also reported that the

institution made more than 25 community development

investments totaling $1.7 million, which were primarily

investments that qualified for low-income-housing tax

credits. In New York, Charter One Bank made at least

seven community development investments that totaled

more than $5 million.

Charter One stated that the bank has made numerous

investments in a variety of organizations and programs in

the bank’s assessment areas since its most recent examination. In 2002, Charter One Bank provided more than

$55 million in investments to organizations involved in

creating jobs, affordable housing, and economic development projects. In 2003, the bank provided approximately

$7.3 million in investments, grants, and donations in its

assessment areas.

Charter One Bank received an overall ‘‘high satisfactory’’ rating under the service test, which included a review

of its branch distribution and product offerings.41 Examiners reported that Charter One Bank’s branches and delivery

systems provided access to financial products and services

for consumers of different income levels. They noted that

the institution offered specific products designed for LMI

individuals and communities, including its Totally Free

Checking Account that featured a $50 minimum balance

and no check-writing charges. In addition, they reported

that Charter One Bank employed bilingual staff at selected

locations in Cleveland, New York, and Michigan and operated a customer call center that could translate calls into

more than 140 languages. Examiners also favorably noted

that Charter One Bank participated in the ‘‘Cleveland

Saves’’ program, which enables participants to open money

market savings accounts with an opening balance of only

$10. In several of its Ohio assessment areas, examiners

reported that the institution also provided a free checkcashing service for noncustomers at some branches in LMI

areas.

In several MSAs, Charter One also provided community

development services through its participation in the Federal Home Loan Bank (‘‘FHLB’’) Affordable Housing

Programs. Examiners commended Charter One Bank for

taking a leadership role in providing community development services, noting specifically the involvement of its

employees with organizations that promoted or provided

affordable housing for LMI individuals and the technical

assistance it provided to community development organizations applying to the FHLB Affordable Housing

Programs.

38. Two commenters criticized Charter One for failing to provide

adequate support to micro-credit organizations and small businesses.

39. Some commenters asserted that Charter One neglected the

community reinvestment and credit needs of New York after its recent

acquisitions and mergers. The Board has reviewed Charter One

Bank’s lending data since its most recent acquisitions in light of these

comments.

40. In this context, ‘‘minority census tracts’’ means census tracts

with a minority population of 50 percent or more.

41. One commenter asserted that Charter One does not adequately

serve LMI individuals due to an insufficient number of branches and

inadequate marketing and product offerings.

496 Federal Reserve Bulletin Autumn 2004
D. HMDA, Subprime, and Fair Lending Records

The Board has carefully considered the lending records of

Citizens Financial and Charter One in light of comments

received on the HMDA data for 2001 and 2002 reported by

the banks and their subsidiaries.42 Several commenters

alleged that the denial disparity ratios43 for some Citizen

Banks and Charter One Bank in certain MSAs indicated

that they disproportionately denied or excluded AfricanAmerican and Hispanic applicants for home mortgage

loans.44 The Board considered substantially similar comments about the HMDA-reportable lending of the Citizens

Banks to African Americans and Hispanics in Delaware,

Pennsylvania, Massachusetts, and Rhode Island in the Port

Financial and Thistle Orders, and those analyses are incorporated herein by reference.45

As noted in these Orders, the Citizens Banks’ denial

disparity ratios for African-American and Hispanic applicants in 2002 were generally lower than or comparable

with those ratios for the aggregate of lenders (‘‘aggregate

lenders’’) in each of the markets reviewed.46 In their Rhode

Island, Massachusetts, and Connecticut statewide assessment areas, the Citizens New England Banks’ denial disparity ratios for African-American and Hispanic applicants

in 2002 were lower than those ratios for the aggregate

lenders in these assessment areas. In their Delaware and

Pennsylvania statewide assessment areas, Citizens DE’s

and Citizens PA’s denial disparity ratios for AfricanAmerican and Hispanic applicants in 2002 were lower than

or comparable with those ratios for the aggregate lenders in

these assessment areas.

In 2003, the Citizens Banks’ HMDA data show that their

overall volume of applications and originations increased

substantially, including their total HMDA-reportable loans

originated to African-American and Hispanic applicants.

In addition, the denial disparity ratios of the Citizens Banks

generally approximated the ratios for the aggregate lenders

in their statewide assessment areas in 2003.

Charter One Bank’s 2002 HMDA data indicate that its

denial disparity ratios for African-American and Hispanic

applicants were generally higher than those ratios for the

aggregate lenders in each of the markets reviewed, but the

bank’s denial disparity ratios generally improved somewhat in 2003. In 2002, the percentage of Charter One

Bank’s total HMDA-reportable loans originated to Hispanics was comparable with the percentage for the aggregate

lenders in the MSAs reviewed. However, the percentage of

Charter One Bank’s total HMDA-reportable loans originated to African Americans was lower than the percentage

for the aggregate lenders in 2002 in a majority of the

MSAs reviewed. Although the bank’s percentage of total

HMDA-reportable loan originations to borrowers in LMI

census tracts generally lagged the percentage for the aggregate lenders in the areas reviewed, its percentage of total

HMDA-reportable loan originations to LMI individuals

generally was comparable with or exceeded the percentages for the aggregate lenders.

The 2003 HMDA data indicate that Charter One Bank

improved its lending to minority and LMI individuals and

to borrowers in LMI and minority census tracts.47 The

percentage of the bank’s total HMDA-reportable loans

originated to African Americans more closely approximated the percentage for the aggregate lenders in most of

the MSAs reviewed and exceeded their percentages in

Albany and Rochester. Charter One Bank’s percentage of

total HMDA-reportable loan originations for borrowers in

LMI census tracts similarly improved in 2003. Charter One

Bank supplemented its loan originations by purchasing a

number of HMDA-reportable loans to LMI and minority

individuals and to borrowers in LMI and minority census

tracts. The Board also has consulted with the OCC, which

is monitoring Charter One Bank’s lending to minorities

and in LMI and minority census tracts.

Although the HMDA data may reflect certain disparities

in the rates of loan applications, originations, and denials

among members of different racial groups and persons at

different income levels in certain local areas, the HMDA

data generally do not indicate that Charter One Bank or the

Citizens Banks are excluding any race or income segment

of the population or geographic areas on a prohibited basis.

The Board 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

applicants regardless of race or income level. The Board

recognizes, however, that HMDA data alone provide an

42. The Board analyzed HMDA data for 2001, 2002, and 2003

from the Citizens Banks and Charter One Bank. This review included

HMDA data for loan originations in a number of individual MSAs, as

well as in the metropolitan portions of Citizens Banks’ and Charter

One Bank’s assessment areas statewide.

43. The denial disparity ratio equals the denial rate for a particular

racial category (for example, African Americans) divided by the

denial rate for whites.

44. Commenters used 2002 HMDA data to allege that Citizens

Banks denied home mortgage loan applications from African Americans and Hispanics more frequently than applications from nonminorities in MSAs in Delaware, Pennsylvania, Massachusetts, and Rhode

Island. Some commenters alleged that Charter One Bank denied home

mortgage loan applications from African Americans and Hispanics

more frequently than applications from nonminorities in certain other

markets. In addition, several commenters expressed concern that

Charter One Bank was originating fewer loans to LMI individuals and

in LMI and minority census tracts than the aggregate of lenders

throughout its assessment areas.

45. See Port Financial Order, supra at 388; Thistle Order, supra at

90.

46. The lending data of the aggregate lenders represent the cumulative lending for all financial institutions that have reported HMDA

data in a given market.

47. One commenter criticized Charter One Bank for relying on

loan purchases instead of directly originating loans in LMI and

minority areas. The federal regulatory agencies’ regulations that

implement the CRA do not differentiate between loan originations and

purchases for purposes of evaluating an institution’s CRA lending

performance. See, e.g., 12 CFR 228.22. The commenter also urged

Charter One to increase its outreach efforts to underserved communities and to use more flexible underwriting standards to increase its

loan originations to LMI and minority borrowers. Citizens Financial

represented that it plans to increase Charter One Bank’s home mortgage loan originations.

Legal Developments 497
incomplete measure of an institution’s lending in its community because these data cover only a few categories of

housing-related lending and provide only limited information about covered loans.48 Moreover, HMDA data indicating that one affiliate is lending to minorities or LMI individuals more than another affiliate do not, without more

information, indicate that either affiliate has engaged in

illegal discriminatory lending activities.

Because of the limitations of HMDA data, the Board has

considered these data carefully in light of other information, including examination reports that provide on-site

evaluations of compliance with fair lending laws by the

Citizens Banks, Charter One Bank, and their lending

subsidiaries. Examiners found no evidence of prohibited

discrimination or other illegal credit practices at any of

these institutions at their most recent CRA performance

evaluations.

The record also indicates that Charter One and Citizens

Financial have taken several affirmative steps to ensure

compliance with fair lending laws. Charter One has

instituted corporate-wide policies and procedures to help

ensure compliance with all fair lending and other consumer

protection laws and regulations. Charter One’s compliance program includes compliance file reviews, an

antipredatory-lending policy, a fair-lending policy, product

guides, and credit counseling.49

Citizens Financial also has a centralized compliance

function and has implemented corporate-wide compliance

policies and procedures to help ensure that all Citizens

Financial’s business lines, including those offered by the

Citizens Banks and CMC, comply with fair lending and

other consumer protection laws and regulations. It employs

compliance officers and staff responsible for compliance

training and monitoring, and conducts file reviews for

compliance with federal and state consumer protection

laws and regulations for all product lines and sources of

loan originations. Citizens Financial also regularly performs self-assessments of its fair-lending-law compliance

and fair-lending-policy training for its employees. Citizens

Financial stated that its compliance program would be

implemented at Charter One after consummation of the

proposal.

The Board also has considered the HMDA data in light

of other information, including the CRA performance

records of the Citizens Banks and Charter One Bank.

These records demonstrate that Citizens Financial and

Charter One are active in helping to meet the credit needs

of their entire communities.

E. Branch Closings

The Board has considered the commenters’ concerns about

possible branch closings in light of all the facts of record.

One commenter expressed concern about Citizens Financial’s closure of branches after other acquisitions. In addition, several commenters requested RBS to commit to

maintaining its branches in LMI and minority census tracts.

Citizens Financial stated that it does not currently anticipate closing, relocating, or consolidating any branch of

Charter One Bank or the Citizens Banks in connection with

this proposal. Moreover, Citizens Financial indicated that it

intends to continue Charter One Bank’s plans to expand in

LMI markets by opening new branches inside retail outlets

in LMI census tracts. The Board has considered Citizens

Financial’s branch closing policy and its record of opening

and closing branches. Examiners reviewed the Citizen

Banks’ branch closing policy as part of the most recent

CRA evaluations of each bank and found that it complied

with federal law.

The Board also has considered the fact that federal

banking law provides a specific mechanism for addressing

branch closings.50 Federal law requires an insured depository institution to provide notice to the public and to the

appropriate federal supervisor before closing a branch.

Citizens Financial represented that if it decides to close,

relocate, or consolidate any branch of the Citizens Banks

or Charter One Bank in connection with this proposal, it

will comply with all applicable requirements of federal and

state law. The Board notes that the FDIC and the OCC, as

the appropriate federal supervisors of the Citizens Banks

and Charter One Bank, respectively, will continue to

review each bank’s branch closing record in the course of

conducting CRA performance evaluations.

48. 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.

49. Commenters asserted that CMC has referral relationships with

at least three high-cost subprime lenders and that CMC has failed to

implement adequate safeguards to ensure that it does not have relationships with lenders that violate consumer protection laws and regulations or otherwise engage in illegal predatory lending. Citizens Financial stated that CMC does not originate high-cost loans and that

CMC uses conventional underwriting standards to determine whether

a borrower qualifies for a conforming loan, coupled with a secondreview procedure to ensure that all applicants who qualify for a

conforming loan are offered one. If CMC is unable to offer a conforming loan to an applicant, it delivers the application to an unaffiliated

investor or lender who uses its own underwriting criteria to decide

whether to offer a loan to the applicant. Citizens Financial also

represented that CMC has no involvement in the underwriting processes or credit decisions of the unaffiliated investors or lenders. The

unaffiliated investor or lender, however, is selected under objective

criteria for determining that the investor or lender can meet the credit

needs of the borrower. In addition, Citizens Financial represented that

CMC attempts to help customers to resolve issues with those investors

or lenders if requested.

50. 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.

498 Federal Reserve Bulletin Autumn 2004
F. Conclusion on Convenience and Needs Factor

The Board has carefully considered all the facts of record,

including reports of examination of the CRA records of the

institutions involved, information provided by Charter One

and Citizens Financial, comments received on the proposal, confidential supervisory information, and Citizens

Financial’s plans to implement its CRA-related policies,

procedures, and programs at Charter One Bank.51 The

Board notes that the proposal would provide Charter One’s

customers with access to a broader array of products and

services in an expanded service area, including access to an

expanded branch and ATM network and internet banking

services. 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.

Conclusion

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

Board has determined that the application should be, and

hereby is, approved.52 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 Applicants with the conditions imposed in this order and the commitments made to

the Board in connection with the application. For purposes

of this action, 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 Charter One Bank 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 Boston, acting pursuant to delegated authority.

By order of the Board of Governors, effective

August 16, 2004.

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

not voting: Governor Olson.

Robert deV. Frierson

Deputy Secretary of the Board

Appendix A

Banking Markets in which Citizens Financial and Charter

One Compete Directly

Springfield, Massachusetts

The towns of Agawam, Amherst, Belchertown, Blanford,

Chester, Chesterfield, Chicopee City, Cummington, Deerfield, Easthampton, East Longmeadow, Granby, Feeding

Hills, Goshen, Granville, Hadley, Hampden, Hatfield,

Holyoke City, Huntington, Leverett, Longmeadow, Ludlow, Monson, Montgomery, Northampton City, Palmer,

Pelham, Plainfield, Russell, Springfield City, South Hadley, Shutesbury, Southampton, Southwick, Sunderland,

Three Rivers, Tolland, Ware, Warren, Westfield City,

Westhampton, West Springfield, Whately, Wilbraham,

Williamsburg, and Worthington.

51. Commenters alleged that RBS Group has indirectly supported

‘‘predatory lending’’ by a number of unaffiliated consumer lenders

through the securitization activities and warehouse lending services of

its subsidiaries, Greenwich Capital and Financial Assets Securities

Corp., also in Greenwich (‘‘FASC’’). Applicants stated that Greenwich Capital underwrites securities backed by mortgage loans, including subprime mortgage loans originated by unaffiliated third parties.

In addition, Greenwich Capital and its affiliate, Greenwich Capital

Financial Products, Inc., Greenwich (‘‘GCFP’’), provide warehouse

financing and repurchase facilities to unaffiliated mortgage originators, including some engaged in subprime lending. Greenwich Capital

also has invested in securities backed by subprime loan pools that are

issued by unaffiliated parties. Applicants stated that Greenwich Capital, GCFP, FASC, and Citizens Financial do not play any formal or

informal role in the unaffiliated lenders’ loan origination processes,

lending practices, or credit-approval processes. Applicants also stated

that Greenwich Capital conducts due diligence reviews in connection

with its securitization activities that typically include evaluations to

determine if the lenders are complying with federal and state laws.

The Board previously considered these allegations in the Thistle, Port

Financial, and Mellon Orders, and hereby affirms and adopts its

findings in those orders. See Thistle Order, supra at 91 n.30; Port

Financial Order, supra at 389 n.22; Mellon Order, supra at 57 n.30.

The commenters have not provided any new material information that

would warrant a different conclusion in this proposal. Moreover, the

Board notes that the Federal Trade Commission, Department of Housing and Urban Development, and Department of Justice have responsibility for enforcing compliance with fair lending laws by nondepository institutions and to date have not found any violations of fair

lending laws by these companies.

52. Several commenters 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 CFR 225.16(e). The Board has considered carefully the commenters’ requests in light of all the facts of

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

submit their views and have submitted written comments that have

been considered carefully by the Board in acting on the proposal. The

commenters’ requests fail to demonstrate why written comments do

not present their evidence adequately and fail 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 requests for a public meeting or hearing on the proposal are

denied.

Legal Developments 499
Hanover–Lebanon, New Hampshire

New Hampshire portion: the towns of Canaan, Enfield,

Grafton, Hanover, Lebanon, Lyme, Orange, Orford, and

Piermont in Grafton County; the towns of Grantham and

Plainfield in Sullivan County.

Vermont portion: the towns of Bradford, Corinth, Fairlee,

Strafford, Thetford, Vershire, and West Fairlee in Orange

County; and the towns of Hartford, Hartland, Norwich,

Sharon, West Windsor, and Windsor in Windsor County.

Brattleboro, Vermont

Vermont portion: the towns of Brattleboro, Brookline,

Dummerston, Guilford, Halifax, Marlboro, Newfane,

Putney, Townsend, and Vernon in Windham County.

New Hampshire portion: the town of Hinsdale in

Cheshire County.

Worcester, Massachusetts

Massachusetts portion: the towns of Auburn, Barre, Boylston, Brimfield, Brookfield, Charlton, Clinton, Douglas,

Dudley, East Brookfield, Grafton, Holden, Holland,

Hubbardston, Leicester, Millbury, New Braintree, Northboro, North Brookfield, Northbridge, Oakham, Oxford,

Paxton, Princeton, Rochdale, Rutland, Shrewsbury, Southbridge, Spencer, Sterling, Sturbridge, Sutton, Uxbridge,

Wales, Webster, Westboro, West Brookfield, West Boylston, Whitinsville, and Worcester City.

Connecticut portion: the town of Thompson.

Pittsfield, Massachusetts

Massachusetts portion: the towns of Adams, Becket,

Cheshire, Clarksburg, Dalton, Florida, Hancock, Hinsdale,

Lanesboro, Lee, Lenox, Middlefield, Monroe, New Ashford, North Adams, Peru, Pittsfield City, Richmond, Savoy,

Stockbridge, Tyringham, Washington, West Stockbridge,

Williamstown, and Windsor.

Vermont portion: the towns of Readsboro and Stamford.

Boston, Massachusetts

Massachusetts portion: the towns of Abington, Acton, Allston, Amesbury, Andover, Arlington, Ashburnham, Ashby,

Ashland, Auburndale, Avon, Ayer, Bedford, Bellingham,

Belmont, Berkley, Berlin, Beverly City, Billerica, Blackstone, Bolton, Boston City, Boxboro, Boxford, Braintree,

Bridgewater, Brighton, Brockton City, Brookline, Burlington, Cambridge, Canton, Carlisle, Carver, Charlestown,

Chelmsford, Chelsea, Chester, Chestnut Hill, Cochituate,

Cohasset, Concord, Danvers, Dedham, Dighton, Dorchester, Dover, Dracut, Dunstable, Duxbury, East Bridgewater,

East Maynard, Easton, East Weymouth, Essex, Everett,

Fitchburg City, Foxboro, Framingham, Franklin, Fremont,

Gardner City, Georgetown, Glouchester City, Groton,

Grove Hall, Groveland, Halifax, Hamilton, Hanover,

Hanson, Harvard, Haverhill City, Hingham, Holbrook,

Holliston, Hopedale, Hopkinton, Hudson, Hull, Hyde Park,

Ipswich, Jamaica Plain, Kingston, Lakeville, Lancaster,

Lawrence City, Leominster City, Lexington, Lincoln,

Littleton, Lowell City, Lunenburg, Lynn, Lynnfield,

Malden, Manchester, Manomet, Mansfield, Marblehead,

Marlborough City, Marshfield, Mattapan, Maynard, Medfield, Medford, Medway, Melrose, Mendon, Merrimac,

Methuen, Middleboro, Middleton, Milford, Millis,

Millville, Milton, Nahant, Natick, Needham, Newbury,

Newburyport City, Newton City, Newtonville, Norfolk,

North Abington, North Andover, North Beverly, North

Chelmsford, North Easton, North Plymouth, North Norton,

North Waltham, Norwell, Norwood, Peabody City, Pembroke, Pepperell, Plainville, Plymouth, Plympton, Quincy,

Randolph, Raymond, Raynham, Reading, Readville,

Revere, Rockland, Rockport, Rowley, Roxbury, Salem

City, Salisbury, Saugus, Scituate, Sharon, Sherborn,

Shirely, Somerville, Southborough, Stoneham, Stoughton,

Stow, Sudbury, Swampscott, Taunton City, Templeton,

Tewksbury, Topsfield, Townsend, Tyngsboro, Upton,

Waban, Wakefield, Walpole, Waltham City, Wareham,

Watertown, Wayland, Wellesley, Wentham, West Bridgewater, West Newbury, Westford, Westminster, Weston,

Westwood, Weymouth, Whitman, Wilmington, Winchendon, Winchester, Winthrop, Woburn, Wollaston, and

Wrenthan.

New Hampshire portion: the towns of Amherst, Atkinson, Brookline, Chester, Danville, Derry, East Hamstead,

Fremont, Greenville, Hampstead, Hollis, Hudson, Kingston, Litchfield, Lyndeboro, Mason, Merrimac, Milford,

Mount Vernon, Nashua City, New Ipswich, Newton,

Pelham, Plaistow, Raymond, Salem, Sandown, Seabrook,

South Hampton, Wilton, and Windham.

Hartford, Connecticut

The towns of Andover, Ashford, Avon, Barkhamsled, Berlin, Bloomfield, Bolton, Bristol City, Broad Brook, Burlington, Canton, Chaplin, Colchester, Collinsville, Columbia, Coventry, Cromwell, Durham, East Granby, East

Haddam, East Hampton, East Hartford, East Windsor,

Ellington, Enfield, Farmington, Forestville, Glastonbury,

Granby, Haddam, Hampton, Hartford City, Hartland,

Harwinton, Hebron, Higganum, Kensington, Lebanon,

Manchester, Mansfield, Marlborough, Middlefield, Middletown City, Moodus, New Britain City, New Hartford,

Newington, North Windham, Plainville, Plantsville,

Plymouth, Poquonock, Portland, Rockville City, Rocky

Hill, Scotland, Simsbury, Somers, South Glastonbury,

South Windsor, Southington, Southingtonboro, Stafford,

Stafford Springs, Storrs, Storrs Mansfield, Suffield,

Terryville, Thompsonville, Tolland, Union, Vernon,

Vernon-Rockville, Warehouse Point, West Hartford, West

Suffield, West Willington, Wethersfield, Willimantic City,

Willington, Winchester, Windham, Windsor, Windsor

Locks, and Winsted City.

Metropolitan New York Area

New York portion: the counties of Bronx, Dutchess,

Kings, Nassau, New York, Orange, Putnam, Queens,

500 Federal Reserve Bulletin Autumn 2004
Richmond, Rockland, Suffolk, Sullivan, Ulster, and

Westchester.

New Jersey portion: the counties of Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean,

Passaic, Somerset, Sussex, Union, and Warren and the

townships of Mercer County: East Windsor, Hightstown,

Hopewell, Pennington, Princeton, Princeton Borough,

Washington (excluding the city of Robbinsville), and West

Windsor. Pennsylvania portion: Pike County. Connecticut

portion: Fairfield County; the townships of Bridgewater,

Canaan, Kent, New Milford, Roxbury, Salisbury, and

Sharon in Litchfield County; the cities of Cornwall Bridge,

Falls Village, Lakeville, Marble Dale, New Preston, and

Washington Depot in Litchfield County; and the townships

of Ansonia, Beacon Falls, Derby, Milford, Oxford, and

Seymour in New Haven County.

Erie, Pennsylvania

Erie County; the townships of Bloomfield and Sparta in

Crawford County; and the townships of Columbus and

Spring Creek in Warren County.

Appendix B

Market Data

Unconcentrated Banking Markets

Metropolitan New York Area

Citizens Financial operates the 155th largest depository

institution in the market, controlling deposits of $147 million, which represent less than 1 percent of market deposits. Charter One has approval to operate four de novo

branches and has opened two of the branches in the banking market since March 31, 2004, and Citizens Financial

has three branches. FDIC deposit data reflecting the deposits of Charter One’s branches are not yet available. After

the proposed merger, 267 depository institutions would

remain in the banking market. The Board has considered

Citizens Financial’s deposits in the market, the number of

competing institutions and the deposits controlled by those

institutions, and the recent entry of Charter One’s branches.

As noted, the Board concludes that consummation of the

proposal would have a de minimis effect in the Metropolitan New York Area banking market. The HHI would

remain unchanged at 971.

Moderately Concentrated Banking Markets

Springfield, Massachusetts

Citizens Financial operates the 16th largest depository

institution in the market, controlling deposits of $82.5 million, which represent approximately 1 percent of market

deposits. Charter One operates the third largest depository

institution in the market, controlling deposits of

$416.7 million, which represent approximately 7 percent of

market deposits. After the proposed merger, Citizens

Financial would operate the third largest depository institution in the market, controlling deposits of approximately

$499.4 million, which represent approximately 7.8 percent

of market deposits. Twenty-three depository institutions

would remain in the banking market. The HHI would

increase by 17 points to 1155.

Hanover–Lebanon, New Hampshire

Citizens Financial operates the third largest depository

institution in the market, controlling deposits of

$121.6 million, which represent approximately 13 percent

of market deposits. Charter One operates the fifth largest

depository institution in the market, controlling deposits of

$81.2 million, which represent approximately 8 percent of

market deposits. After the proposed merger, Citizens

Financial would operate the third largest depository institution in the market, controlling deposits of $202.8 million,

which represent approximately 21.2 percent of market

deposits. Eleven depository institutions would remain in

the banking market. The HHI would increase by 215 points

to 1653.

Worcester, Massachusetts

Citizens Financial operates the 15th largest depository

institution in the market, controlling deposits of $69 million, which represent approximately 1.2 percent of market

deposits. Charter One opened a de novo branch in the

market on July 1, 2003, and Citizens Financial has six

branches. FDIC deposit data reflecting the deposits of

Charter One’s branch are not yet available. After the proposed merger, 28 depository institutions would remain in

the banking market. The Board has considered Citizens

Financial’s deposits in the market, the number of competing institutions and the deposits controlled by those institutions, and the recent entry of Charter One’s branch. As

noted, the Board concludes that consummation of the proposal would have a de minimis effect in the Worcester

banking market. The HHI would remain unchanged at

1,163.

Pittsfield, Massachusetts

Citizens Financial operates the 10th largest depository

institution in the market, controlling deposits of $19.5 million, which represent approximately 1.2 percent of market

deposits. Charter One opened a de novo branch in the

market on August 28, 2003, and Citizens Financial has

four branches. FDIC deposit data reflecting the deposits of

Charter One’s branch are not yet available. After the proposed merger, ten depository institutions would remain in

the banking market. The Board has considered Citizens

Financial’s deposits in the market, the number of competing institutions and the deposits controlled by those institutions, and the recent entry of Charter One’s branch. As

noted, the Board concludes that consummation of the proposal would have a de minimis effect in the Pittsfield

banking market. The HHI would remain unchanged at

1,569.

Legal Developments 501
Boston, Massachusetts

Citizens Financial operates the second largest depository

institution in the market, controlling deposits of $18.3 billion, which represent approximately 14.2 percent of market

deposits. Charter One opened a de novo branch in the

market on July 18, 2003, and Citizens Financial has 192

branches. FDIC deposit data reflecting the deposits of

Charter One’s branch are not yet available. After the proposed merger, 172 depository institutions would remain in

the banking market. The Board has considered Citizens

Financial’s deposits in the market, the number of competing institutions and the deposits controlled by those institutions, and the recent entry of Charter One’s branch. As

noted, the Board concludes that consummation of the proposal would have a de minimis effect in the Boston banking

market. The HHI would remain unchanged at 1,307.

Erie, Pennsylvania

Citizens Financial operates the fourth largest depository

institution in the market, controlling deposits of $310 million, which represent approximately 12.4 percent of market

deposits. Charter One opened two de novo branches in the

market on September 19, 2003, and Citizens Financial

has 11 branches. FDIC deposit data reflecting the deposits

of Charter One’s branches are not yet available. After the

proposed merger, nine depository institutions would remain

in the banking market. The Board has considered Citizens

Financial’s deposits in the market, the number of competing institutions and the deposits controlled by those institutions, and the recent entry of Charter One’s branches. As

noted, the Board concludes that consummation of the proposal would have a de minimis effect in the Erie banking

market. The HHI would remain unchanged at 1,739.

Highly Concentrated Banking Markets

Brattleboro, Vermont

Citizens Financial operates the sixth largest depository

institution in the market, controlling deposits of $11.7 million, which represent approximately 2.6 percent of market

deposits. Charter One operates the third largest depository

institution in the market, controlling deposits of $46.8 million, which represent approximately 10.5 percent of market

deposits. After the proposed merger, Citizens Financial

would operate the third largest depository institution in the

market, controlling deposits of $58.5 million, which represent approximately 13.1 percent of market deposits. Six

depository institutions would remain in the banking market. The HHI would increase by 55 points to 2,625.

Hartford, Connecticut

Citizens Financial operates the seventh largest depository

institution in the market, controlling deposits of $653 million, which represent approximately 3.3 percent of market

deposits. Charter One has opened five de novo branches in

the market since January 20, 2004, and Citizens Financial

has 11 branches. FDIC deposit data reflecting the deposits

of Charter One’s branches are not yet available. After the

proposed merger, 34 depository institutions would remain

in the banking market. The Board has considered Citizens

Financial’s deposits in the market, the number of competing institutions and the deposits controlled by those institutions, and the recent entry of Charter One’s branches. As

noted, the Board concludes that consummation of the

proposal would have a de minimis effect in the Hartford

banking market. The HHI would remain unchanged at

2,490.

Appendix C

CRA Performance Evaluations of Citizens Financial

Subsidiary Bank CRA Rating Date Supervisor

1. Citizens Bank of Massachusetts,

Boston, Massachusetts

Outstanding February 2000 FDIC

2. Citizens Bank of Rhode Island,

Providence, Rhode Island

Outstanding February 2000 FDIC

3. Citizens Bank of New Hampshire,

Manchester, New Hampshire

Outstanding February 2000 FDIC

4. Citizens Bank of Pennsylvania,

Philadelphia, Pennsylvania

Outstanding February 2000 FDIC

5. Citizens Bank of Connecticut,

Hartford, Connecticut

Outstanding February 2000 FDIC

6. Citizens Bank of Delaware,

Wilmington, Delaware

Outstanding February 2000 FDIC

7. Boston Trust & Management Investment

Company,

Boston, Massachusetts

Outstanding February 2000 State of Massachusetts

502 Federal Reserve Bulletin Autumn 2004
Orders Issued Under Section 4 of the Bank Holding

Company Act

Associated Banc-Corp

Green Bay, Wisconsin

Order Approving the Acquisition of a Savings

Association

Associated Banc-Corp (‘‘Associated’’), a bank holding

company within the meaning of the Bank Holding Company Act (‘‘BHC Act’’), has requested the Board’s

approval under sections 4(c)(8) and 4(j) of the BHC Act

and section 225.24 of the Board’s Regulation Y to acquire

First Federal Capital Corporation (‘‘First Federal Capital’’)

and its wholly owned subsidiary, First Federal Capital

Bank (‘‘FFCB’’), a federally chartered savings association,

both in La Crosse, Wisconsin.1

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published in the

Federal Register (69 Federal Register 39,935 (2004)). 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 4 of the BHC Act.

Associated, with total consolidated assets of $15.6 billion, is the 64th largest depository organization in the

United States, controlling deposits of $9.7 billion.2 Associated operates depository institutions in Illinois, Wisconsin, and Minnesota. Associated is the third largest depository organization in Wisconsin, controlling deposits of

$6.1 billion.

First Federal Capital, with total consolidated assets of

approximately $3.8 billion, is the eighth largest depository

organization in Wisconsin and operates one depository

institution in the state, FFCB, that controls deposits of

$2.7 billion. FFCB also has branches in Illinois and

Minnesota.

On consummation of the proposal, Associated would

have consolidated assets of approximately $19.4 billion

and would control deposits of $12.4 billion, which represent less than 1 percent of the total amount of deposits of

insured depository institutions in the United States. Associated would remain the third largest depository organization in Wisconsin, controlling deposits of approximately

$8.1 billion, which represent 8.4 percent of the total

amount of deposits of insured depository institutions in

Wisconsin.

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.3 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. Associated has committed to conform all

the activities of FFCB to those permissible under section 4(c)(8) of the BHC Act and Regulation Y.4

In reviewing the proposal, the Board is required by

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

proposed acquisition of First Federal Capital and FFCB

‘‘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.’’5 As part of its evaluation of the public interest

factors, the Board reviews the financial and managerial

resources of the companies involved, the effect of the

proposal on competition in the relevant markets, and the

public benefits of the proposal.6 In acting on notices to

acquire a savings association, the Board also reviews

the records of performance of the relevant insured depository institutions under the Community Reinvestment Act

(‘‘CRA’’).7

Competitive Considerations

As part of the Board’s 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. Associated’s subsidiary

banks and FFCB compete directly in 18 banking markets.8

The Board has reviewed carefully the competitive effects

of the proposal in 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 Associated’s subsidiary banks and FFCB in the market (‘‘market

deposits’’),9 the concentration level of market deposits and

1. 12 U.S.C. §§1843(c)(8) and (j); 12 CFR 225.24.

2. Asset data are as of March 31, 2004, and nationwide ranking

data are as of May 31, 2004. Statewide deposit and ranking data are as

of June 30, 2003. In this context, the term ‘‘insured depository

institution’’ includes insured commercial banks, savings associations,

and savings banks.

3. 12 CFR 225.28(b)(4)(ii).

4. FFCB also engages though its subsidiaries in credit insurance

activities and investing and trading activities that are permissible nonbanking activities under sections 225.28(b)(11)(i) and

225.28(b)(8)(ii) of Regulation Y. 12 CFR 225.28(b)(11)(i) and

225.28(b)(8)(ii).

5. 12 U.S.C. §1843(j)(2)(A).

6. See 12 CFR 225.26; see, e.g., BancOne Corporation, 83 Federal

Reserve Bulletin 602 (1997).

7. 12 U.S.C. §2901 et seq.

8. These banking markets are defined in Appendix A.

9. 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

Associated WI and FFCB were a combined entity, the deposits of

FFCB are included at 100 percent in the calculation of pro forma

market share. First Banks, Inc., 76 Federal Reserve Bulletin 669

(1990).

Legal Developments 503
the increase in this level as measured by the Herfindahl–

Hirschman Index (‘‘HHI’’) under the Department of Justice

Merger Guidelines (‘‘DOJ Guidelines’’),10 and other characteristics of the markets.

On consummation of the proposal, Associated’s market

share in the Green Bay, Wisconsin, banking market

(‘‘Green Bay Market’’) would increase by a small percentage to slightly more than 35 percent of market deposits.

Associated’s largest subsidiary bank, Associated Bank,

National Association, also in Green Bay (‘‘Associated

WI’’), is the largest depository organization in the market,

controlling approximately $1.5 billion in deposits, which

represents 33.7 percent of market deposits. FFCB is the

16th largest depository organization in the market, controlling deposits of approximately $42.8 million, which represent approximately 1 percent of market deposits. On consummation of the proposal, Associated WI would remain

the largest depository organization in the market, controlling deposits of $1.5 billion, representing approximately

35.4 percent of market deposits.

The Green Bay Market, however, would remain moderately concentrated. The HHI would increase 103 points to

1652, which is consistent with the DOJ Guidelines. In

addition, 21 other depository institutions would remain in

the market, including one large banking organization with

a market share of more than 10 percent and a larger branch

network than Associated WI’s network. The Green Bay

Market also has been attractive for entry. Five commercial

banks have entered the market de novo since 2000. Factors

also indicate that the Green Bay Market would remain

attractive for entry. For example, since 2000, total market

deposits in the Green Bay Metropolitan Statistical Area

(‘‘MSA’’) have increased by an annual average rate of

more than 25 percent, which exceeds the average rates for

all Wisconsin MSAs by 9.5 percentage points.

Consummation of the proposal would be consistent with

Board precedent and the DOJ Guidelines in each of the

other 17 banking markets.11 Moreover, in each of the

banking markets, the change in market concentration

would be relatively small and numerous competitors would

remain.

The Department of Justice has reviewed the proposal

and advised the Board that consummation is not likely to

have a significantly adverse effect on competition in the

Green Bay Market or in any other relevant banking market.

The other federal banking agencies also have been afforded

an opportunity to comment on the proposal and have not

objected.

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

consummation of the proposal would not result in any

significantly adverse effect on competition or on the concentration of banking resources in the Green Bay Market

or in any other relevant banking market.

Financial and Managerial Resources

In reviewing the proposal under section 4 of the BHC Act,

the Board has carefully considered the financial and managerial resources of Associated and First Federal Capital

and their subsidiaries. The Board also has reviewed the

effect the transaction would have on those resources in

light of all the facts of record. The Board’s review of these

factors has considered reports of examination, other confidential supervisory information received from the primary

supervisors for each subsidiary depository institution, and

information provided by Associated.

Associated and its subsidiary depository institutions are

well capitalized and would remain so on consummation

of the proposal. The acquisition would be effected by

an exchange of shares and a cash purchase. Associated

has represented that it would not incur debt to fund the

acquisition.

The Board also has considered the managerial resources

of Associated, First Federal Capital, and their subsidiary

depository institutions, particularly the supervisory experience and assessments of management by the organizations’

primary federal supervisors and the organizations’ records

of compliance with applicable banking laws. In addition,

the Board has reviewed the examination records of Associated and its subsidiary depository institutions, including

assessments of their risk management. The Board also has

considered Associated’s plans to implement the proposed

acquisition, including its available managerial resources.

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.

CRA Performance Records

As previously noted, the Board considers the records of

performance under the CRA of the relevant insured depository institutions when acting on a notice to acquire a

savings association. The CRA requires the Board to assess

each institution’s record of meeting the credit needs of its

entire community, including low- and moderate-income

(‘‘LMI’’) neighborhoods, consistent with the institution’s

safe and sound operation, and to take this record into

account in evaluating bank expansionary proposals.12

The Board has considered carefully the CRA performance records of the subsidiary insured depository institutions of Associated and First Federal Capital in light of all

the facts of record, including comments received on the

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

a market is considered unconcentrated if the post-merger HHI is under

1000, moderately concentrated if the post-merger HHI is between

1000 and 1800, and 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.

11. The effects of the proposal on the concentration of banking

resources in these banking markets are described in Appendix B. 12. 12 U.S.C. §2903.

504 Federal Reserve Bulletin Autumn 2004
proposal. A commenter alleged that Associated WI had a

low level of home mortgage lending to LMI borrowers in

La Crosse and an insufficient amount of community development investments in LMI census tracts throughout

Wisconsin.13 The commenter also expressed concern

about possible branch closings that would result from the

proposal.

Associated has indicated that on consummation of the

proposal, it would evaluate the best practices for CRArelated lending programs of Associated WI and FFCB,

with the goal of using the institutions’ combined resources

to meet the credit and banking needs of LMI individuals

and neighborhoods.

A. CRA Performance Evaluations

As provided in the CRA, the Board has evaluated the

proposal in light of the 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.14 At its most recent CRA

evaluation by the Office of the Comptroller of the Currency

(‘‘OCC’’), Associated WI, which is Associated’s largest

subsidiary bank in terms of assets and deposits, received

a ‘‘satisfactory’’ rating, as of November 10, 2003. Associated’s other two subsidiary banks that are evaluated

under the CRA also received ‘‘satisfactory’’ ratings at

their most recent CRA performance evaluations.15 FFCB

received an ‘‘outstanding’’ rating at its most recent CRA

performance evaluation by the Office of Thrift Supervision

(‘‘OTS’’), as of November 12, 2002.16

B. CRA Performance of Associated WI

As noted above, Associated WI received an overall ‘‘satisfactory’’ rating for performance under the CRA from the

OCC. Associated WI received ‘‘high satisfactory’’ ratings

under the lending and investment tests and a ‘‘low satisfactory’’ rating under the service test.17 Examiners reported

that the total volume of Associated WI’s housing-related

and small business loans demonstrated excellent responsiveness to the credit needs across the bank’s assessment

areas.18 For example, examiners noted favorably that the

bank’s market share percentage for all home mortgage loan

products (home purchase, home improvement, and home

refinance loans) was greater than the bank’s deposit market

share percentages in the Milwaukee and Green Bay MSAs

and the non-MSA assessment areas of Wisconsin.

Examiners also stated that the bank demonstrated good

loan distribution among borrowers of different geographies

and income levels. For example, examiners noted that in

the non-MSA assessment areas of Wisconsin, the percentage of the bank’s home purchase loan originations in

LMI areas was greater than both the percentage of owneroccupied units and the bank’s overall market share for

home purchase loans in these areas.19 In addition, examiners noted favorably that the bank’s market share of home

purchase loans to low-income areas was greater than its

overall market share in the Milwaukee MSA.

13. The commenter also expressed concern that Associated WI did

not extend any loans in the La Crosse MSA that were sponsored or

guaranteed by the federal government, such as the Department of

Veterans Affairs, and made few loans in the La Crosse MSA that were

administered by the Wisconsin Housing and Economic Development

Authority (‘‘WHEDA’’). Associated represented that it does participate in government loan programs throughout Wisconsin, including

programs administered by WHEDA. In 2003, Associated represented

that it funded 147 WHEDA loans, totaling more than $13 million.

Although the Board recognizes that banks help serve the credit needs

of communities by participating in government lending programs, the

CRA does not require an institution to participate in any specific loan

program or to provide any specific types of products and services in its

assessment areas.

14. See Interagency Questions and Answers Regarding Community

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

15. Associated Bank of Chicago, Chicago, Illinois, received a

‘‘satisfactory’’ rating from the Federal Deposit Insurance Corporation

(‘‘FDIC’’), as of December 1, 2003; Associated Bank Minnesota,

National Association, Minneapolis, Minnesota (formerly Signal Bank,

National Association, Eagan, Minnesota), received a ‘‘satisfactory’’

rating from the OCC, as of October 2, 2000. Associated Trust Company, National Association, Milwaukee, Wisconsin, is a limitedpurpose trust company that is not examined under the CRA. See

12 CFR 25.11(c)(3).

16. The commenter expressed concern that the proposed acquisition would negatively affect FFCB’s CRA performance.

17. Examiners evaluated Associated WI’s CRA performance in

its 12 assessment areas in Wisconsin and took into consideration the

home mortgage lending of the bank’s subsidiary, Associated Mortgage, Inc., De Pere, Wisconsin. The majority of the bank’s deposits,

loans, and branches were in the Milwaukee and Green Bay MSAs and

in the non-MSA areas of Wisconsin. These areas were selected for

full-scope reviews. The evaluation period for home mortgage loans

and loans to small businesses and farms was January 1, 1999, through

December 31, 2002. The evaluation period for community development loans and the investment and service tests was March 8, 1999, to

November 10, 2003.

18. The commenter expressed concern that Associated lagged its

competitors in lending to LMI individuals and to borrowers in LMI

census tracts in the La Crosse MSA. Loan data reported by Associated

under the Home Mortgage Disclosure Act (‘‘HMDA’’) (12 U.S.C.

§ 2801 et seq.) for Associated WI and Associated Mortgage, Inc. on a

combined basis indicate that Associated’s overall volume of HMDAreportable loans originated to borrowers in LMI census tracts in the

Wisconsin portion of the La Crosse MSA increased from 2002 to

2003, and its percentage of total HMDA-reportable loans originated to

borrowers in LMI census tracts was comparable to or exceeded the

percentage for the aggregate of lenders (‘‘aggregate lenders’’) in those

years. In this context, the lending data of the aggregate lenders

represent the cumulative lending for all financial institutions that have

reported HMDA data in a given area. Associated’s overall HMDA

lending to LMI individuals decreased slightly in 2003, and its percentage of total HMDA-reportable loans originated to LMI individuals

modestly lagged the percentage for the aggregate lenders in 2002 and

2003. However, examiners performed a limited-scope review of Associated WI’s performance under the lending test in the La Crosse MSA

and found that the bank’s performance was consistent with its overall

high satisfactory performance under the lending test.

19. The commenter also asserted that a significant portion of Associated’s HMDA loans in LMI census tracts has been to non-occupant

borrowers. Associated represented that it receives few applications for

owner-occupied home purchases in the La Crosse MSA, due in part to

a large student population in need of temporary housing.

Legal Developments 505
Examiners characterized Associated WI’s distribution

of small loans to businesses as excellent in the Green Bay

MSA and in the non-MSA assessment areas of Wisconsin

and as adequate in the Milwaukee MSA.20 In the Green

Bay MSA and the non-MSA assessment areas of Wisconsin, examiners noted favorably that the percentage of Associated WI’s small loans to businesses was greater than the

bank’s overall market share of business loans.

Examiners reported that the bank’s level of qualified

investments and grants was good, considering the needs

and opportunities available to the bank and its size and

financial capability. During the evaluation period, the

bank’s qualified investments in Wisconsin totaled more

than $14 million. Examiners stated that Associated WI’s

responsiveness to credit and community development

needs in the Milwaukee MSA was excellent and that

the bank was responsive to those identified needs of the

community.

With respect to retail services, examiners reported that

Associated WI had an adequate level of community development services. Examiners also determined that the

bank’s delivery systems were reasonably accessible to

geographies and individuals of different income levels.

C. CRA Performance Record of FFCB

As previously noted, FFCB received an overall ‘‘outstanding’’ rating for performance under the CRA.21 Examiners

also rated the thrift’s performance under the lending test as

‘‘outstanding’’ based on its level of HMDA-reportable

loans in LMI geographies. They characterized the thrift’s

record of lending to borrowers of different income levels

and its geographic distribution of loans as excellent.

Examiners reported that FFCB originated more than

22,500 HMDA-reportable loans totaling $2.2 billion in its

assessment areas during the evaluation period, noting that

the thrift was among the top three lenders by loan volume

in six of its assessment areas. Examiners also praised

FFCB for its loan distribution, noting that its lending to

LMI borrowers and the geographic distribution of loans

in LMI areas were excellent. In addition, examiners commended the thrift for its participation in grant programs

administered by the Wisconsin Public Housing Department

and the Department of Housing and Urban Development,

which provided down-payment and closing-cost assistance

to LMI residents in FFCB’s assessment areas.22

Although FFCB’s investment test performance was rated

‘‘low satisfactory,’’ examiners characterized the thrift’s

performance under this test as adequate. The institution’s

qualified community development investments included

financing for affordable housing for LMI individuals and

grants to 48 organizations that provided community development services in its assessment areas.

Examiners rated FFCB’s performance under the service

test as ‘‘outstanding.’’ Examiners commended the institution for expanding its branch network during the review

period and offering extended weekday and Sunday hours in

its new in-store supermarket branches. Examiners noted

that the thrift tailored its services to the customer base of

the institution’s combined assessment areas by providing

consumers the ability to apply for consumer loans and to

receive loan decisions by phone within 24 hours. In addition, examiners stated that the thrift’s personnel provided

numerous community development services in the assessment area, including homebuyer seminars, workshops on

financial management, savings account ownership, and

credit management.

D. Branch Closings

The Board has considered the commenter’s concerns about

potential branch closings in light of all the facts of record.

The Board has considered Associated’s branch closing

policy for its subsidiary banks and the banks’ record of

opening and closing branches. This policy includes procedures to address concerns of LMI communities. For example, the policy provides that before closing any branch in a

LMI or minority area, the bank will meet with neighborhood representatives to discuss ways to keep the branch

open or to mitigate the impact of the branch’s closure. In

addition, examiners did not note any adverse information

concerning Associated WI’s record of opening or closing

branches in its the most recent CRA evaluation.

The Board also has considered the fact that federal

banking law provides a specific mechanism for addressing

branch closings.23 Federal law requires an insured depository institution to provide notice to the public and to the

appropriate federal supervisor before closing a branch.

Associated has represented that if it decides to close,

relocate, or consolidate any branch of its subsidiary banks

or FFCB in connection with this proposal, it will comply

with all applicable federal and state law requirements. The

Board also notes that the OCC, FDIC, and OTS, the

appropriate federal supervisors of the depository institu20. Small loans to businesses are loans that are originated in tions involved in this proposal, will continue to review

amounts of $1 million or less that are either secured by nonfarm,

nonresidential properties or are classified as commercial and industrial

loans. A small business is a business with gross annual revenues of

$1 million or less.

21. The review period was from January 1, 2001, through June 30,

2002. FFCB’s assessment areas included the Minneapolis MSA and

the following areas in Wisconsin: Madison MSA, La Crosse MSA,

Janesville MSA, Eau Claire MSA, and the non-MSA areas of

Wisconsin.

22. The commenter urged Associated to discontinue selling singlepremium credit insurance on unsecured loans. Associated has represented that it ceased offering single-premium credit insurance in

September 2003 and that FFCB would discontinue offering singlepremium credit insurance on consummation of the proposal.

23. 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 an

insured depository institution 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 institution also is required to provide

reasons and other supporting data for the closure, consistent with its

written policy for branch closings.

506 Federal Reserve Bulletin Autumn 2004
each institution’s branch closing record in the course of

conducting CRA performance evaluations.

E. Conclusion on CRA Performance Records

The Board has carefully considered all the facts of record,

including reports of examination of the CRA records of the

institutions involved, information provided by Associated,

comments received on the proposal, and confidential supervisory information. Based on a review of the entire record,

and for the reasons discussed above, the Board concludes

that the CRA performance records of the relevant depository institutions are consistent with approval.24

Public Benefits

As part of its evaluation of the public interest factors under

section 4 of the BHC Act, the Board also has reviewed

carefully the other public benefits and possible adverse

effects of the proposal.25 The record indicates that consummation of the proposal would result in benefits to consumers and businesses currently served by FFCB by expanding

the number of available branches and providing customers

with greater access to the trust management, commercial,

and retail banking services of Associated WI, in addition to

drawing on Associated WI’s focus on commercial lending

and FFCB’s focus on mortgage lending. Based on these

and other matters discussed in this order, as well as 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 possible adverse

effects under the standard of review set forth in 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. 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

Associated with the conditions imposed in this order and

the commitments made to the Board in connection with

the notice. The Board’s approval also is subject to all

the conditions set forth in Regulation Y, including those

in sections 225.7 and 225.25(c) (12 CFR 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 issued thereunder. For purposes of

this action, these conditions and commitments are deemed

to be 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 acquisition 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 Chicago, acting pursuant to

delegated authority.

By order of the Board of Governors, effective

August 16, 2004.

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

not voting: Governor Olson.

Robert deV. Frierson

Deputy Secretary of the Board

Appendix A

Banking Markets in which Associated’s Subsidiary Banks

and First Federal Capital Bank Compete Directly

Appleton, Wisconsin

Outagamie County, excluding Oneida township; the townships of Winchester, Clayton, Neenah, and Menasha in

Winnebago County; and the townships of Harrison, Woodville, Brillion, and Rantoul in Calumet County.

Beloit–Janesville, Wisconsin

Rock County.

Eau Claire, Wisconsin

Chippewa, Dunn, and Eau Claire Counties; Pepin County,

excluding the townships of Stockholm and Pepin; the

townships of Mondovi, Naples, Gilmanton, Dover, and

Montana in Buffalo County; the townships of Albion,

Unity, Sumner, Chimney Rock, Hale, Burnside, and Pigeon

in Trempealeau County; and the townships of Garfield,

Cleveland, Northfield, Garden Valley, and Alma in Jackson

County.

Fond du Lac, Wisconsin

Fond du Lac County, excluding the townships of Ashford,

Auburn, and Calumet.

24. The commenter requested that the Board condition its approval

on a commitment by Associated to take affirmative steps to increase

Associated WI’s lending and qualified investments. The Board focuses

on the CRA performance record of an applicant and the programs that

an applicant has in place to serve the credit needs of its assessment

areas at the time the Board reviews a proposal under the CRA. See,

e.g., J.P. Morgan Chase & Co., 90 Federal Reserve Bulletin 352

(2004). For the reasons discussed above, the CRA performance

records of the subsidiary depository institutions of Associated and

First Federal Capital and their current programs for serving the credit

needs of their communities are consistent with approval, without the

imposition of any conditions related to future CRA performance.

25. The commenter also expressed concern that the proposal would

result in job losses. The effect of a proposed transaction on employment in a community is outside the limited factors that the Board is

authorized to consider under the BHC Act. See, e.g., J.P. Morgan &

Co. Inc., 87 Federal Reserve Bulletin 77, 88 (2001).

Legal Developments 507
Green Bay, Wisconsin

Brown and Kewaunee Counties; the townships of Morgan,

Abrams, Pensaukee, Chase, and Little Suamico in Oconto

County; the townships of Angelica and Maple Grove in

Shawano County; Oneida township in Outagamie County;

and Cooperstown township in Manitowoc County.

Jefferson, Wisconsin

The townships of Oakland, Jefferson, Sullivan, Sumner,

Koshkonong, Hebron, Cold Springs, and Palmyra in Jefferson County; the townships of York, Medina, Deerfield,

Christiana, and Albion in Dane County.

Kenosha–Racine, Wisconsin

Kenosha County, excluding the townships of Wheatland

and Randall; the townships of Caledonia, Mount Pleasant,

Yorkville, Dover, and Rochester in Racine County.

La Crosse, Wisconsin

Wisconsin portion: La Crosse County; Glencoe township

in Buffalo County; Arcadia, Preston, Ettrick, and Gale in

Trempealeau County; the townships of Curran, Springfield,

Franklin, North Bend, and Melrose in Jackson County.

Minnesota portion: the townships of Houston County;

Honier, Richmond, Pleasant Hill, New Hartford, and

Dresbach in Winona County.

Madison, Wisconsin

Dane County, excluding the townships of York, Medina,

Deerfield, Christiana, and Albion; the townships of

Dekorra, Lowville, Otsego, Fountain Prarie, Columbus,

Hampden, Leeds, Arlington, Lodi, and West Point in

Columbia County.

Manitowoc–Two Rivers, Wisconsin

Manitowoc County, excluding the townships of Schleswig,

Eaton, and Cooperstown.

Minneapolis–St. Paul, Minnesota

Minnesota portion: Anoka, Hennepin, Ramsey, Washington, Carver, Scott, and Dakota Counties; the townships of

Lent, Chisago Lake, Shafer, Wyoming, and Franconia in

Chisago County; the townships of Blue Hill, Baldwin,

Orrock, Livonia, and Big Lake and the city of Elk River in

Sherburne County; the townships of Monticello, Otsego,

Buffalo, Frankfort, Rockford, and Franklin in Wright

County; and Lanesburgh township in Le Sueur County.

Wisconsin portion: Hudson township in St. Croix County.

Oshkosh, Wisconsin

Winnebago County, excluding the townships of Winchester, Clayton, Menasha, and Neenah.

Rochester, Minnesota

Olmsted and Fillmore Counties; the townships of Wanamingo, Minneola, Zumbrota, Cherry Grove, Roscoe, and

Pine Island in Goodhue County; Wabasha County, excluding the townships of Mount Pleasant, Lake, Pepin, Glasgow, Greenfield, Watopa, and Minneiska and the city of

Wabasha; Dodge County, excluding the townships of

Ellington, Claremont, Ripley, and Westfield.

Rockford, Illinois

Winnebago and Boone Counties; the townships Byron,

Marion, Scott, and Monroe in Ogle County.

Sheboygan, Wisconsin

Sheboygan County, excluding the townships of Russell and

Rhine.

Walworth, Wisconsin

Walworth County, excluding East Troy township; Burlington township in Racine County; and the townships of

Wheatland and Randall in Kenosha County.

Wausau, Wisconsin

The townships of Corning, Harding, Rock Falls, Birch,

Russell, Merrill, Schley, Scott, and Pine River in Lincoln

County; Marathon County, excluding the townships of

Holton, Hull, Brighton, Spencer, McMillan, and Day; the

townships of Aniwa, Birnamwood, Wittenberg, and Germania in Shawano County.

Wood, Wisconsin

Wood County; the townships of Spencer, McMillan, and

Day in Marathon County.

Appendix B

Market Data1

Unconcentrated Banking Markets

Appleton, Wisconsin

Associated operates the second largest depository institution in the market, controlling deposits of $357 million,

which represent approximately 13.8 percent of market

deposits. First Federal Capital operates the 16th largest

depository institution in the market, controlling deposits of

$44 million, which represent approximately 2 percent of

market deposits. After the proposed acquisition, Associated would continue to operate the second largest depository institution in the market, controlling deposits of

1. The pre-consummation deposits of FFCB are weighted at

50 percent, and the post-consummation deposits are weighted at

100 percent.

508 Federal Reserve Bulletin Autumn 2004
$445 million, which represent approximately 16 percent

of market deposits. Twenty-seven depository institutions

would remain in the banking market. The HHI would

increase by 62 points to 925.

Eau Claire, Wisconsin

Associated operates the 17th largest depository institution

in the market, controlling deposits of $49 million, which

represent approximately 2 percent of market deposits. First

Federal Capital operates the 18th largest depository institution in the market, controlling deposits of approximately

$43 million, which represent approximately 2 percent of

market deposits. After the proposed acquisition, Associated would operate the seventh largest depository institution in the market, controlling deposits of approximately

$136 million, which represent approximately 6 percent of

market deposits. Thirty-one depository institutions would

remain in the banking market. The HHI would increase by

5 points to 552.

Walworth, Wisconsin

Associated operates the seventh largest depository institution in the market, controlling deposits of $118 million,

which represent approximately 8 percent of market deposits. First Federal Capital operates the 18th largest depository institution in the market, controlling deposits of

approximately $13 million, which represent less than 1 percent of market deposits. After the proposed acquisition,

Associated would operate the third largest depository institution in the market, controlling deposits of approximately

$144 million, which represent approximately 9 percent of

market deposits. Eighteen depository institutions would

remain in the banking market. The HHI would increase by

12 points to 975.

Wood, Wisconsin

Associated operates the second largest depository institution in the market, controlling deposits of $168 million,

which represent approximately 14 percent of market deposits. First Federal Capital operates the 17th largest depository institution in the market, controlling deposits of

$10 million, which represent less than 1 percent of market

deposits. After the proposed acquisition, Associated would

operate the largest depository institution in the market,

controlling deposits of approximately $188 million, which

represent approximately 16 percent of market deposits.

Sixteen depository institutions would remain in the banking market. The HHI would increase by 33 points to 969.

La Crosse, Wisconsin

Associated operates the 11th largest depository institution

in the market, controlling deposits of $66 million, which

represent approximately 4 percent of market deposits. First

Federal Capital operates the second largest depository institution in the market, controlling deposits of $197 million,

which represent approximately 11 percent of market deposits. After the proposed acquisition, Associated would operate the largest depository institution in the market, controlling deposits of approximately $461 million, which

represent approximately 23 percent of market deposits.

Twenty-seven depository institutions would remain in the

banking market. The HHI would increase by 287 points to

988.

Madison, Wisconsin

Associated operates the seventh largest depository institution in the market, controlling deposits of $303 million,

which represent approximately 4 percent of market deposits. First Federal Capital operates the eighth largest depository institution in the market, controlling deposits of

approximately $298 million, which represent approximately 4 percent of market deposits. After the proposed

acquisition, Associated would operate the third largest

depository institution in the market, controlling deposits of

approximately $898 million, which represent approximately 12 percent of market deposits. Thirty-six depository

institutions would remain in the banking market. The HHI

would increase by 54 points to 796.

Rochester, Minnesota

Associated operates the 16th largest depository institution

in the market, controlling deposits of $44 million, which

represent approximately 2 percent of market deposits. First

Federal Capital operates the 15th largest depository institution in the market, controlling deposits of $45 million,

which represent approximately 2 percent of market deposits. After the proposed acquisition, Associated would operate the fourth largest depository institution in the market, controlling deposits of $135 million, which represent

approximately 6 percent of market deposits. Thirty-one

depository institutions would remain in the banking market. The resulting HHI for this market, which would not

increase after consummation of the proposal, would be

871.

Moderately Concentrated Banking Markets

Rockford, Illinois

Associated operates the fourth largest depository institution in the market, controlling deposits of $503 million,

which represent approximately 10 percent of market deposits. First Federal Capital operates the 14th largest depository institution in the market, controlling deposits of

$64 million, which represent approximately 1 percent of

market deposits. After the proposed acquisition, Associated would operate the third largest depository institution in the market, controlling deposits of approximately

$631 million, which represent approximately 12 percent of

market deposits. Twenty-two depository institutions would

remain in the banking market. The HHI would increase by

12 points to 1621.

Legal Developments 509
Wausau, Wisconsin

Associated operates the fourth largest depository institution in the market, controlling deposits of $193 million,

which represent approximately 10 percent of market deposits. First Federal Capital operates the 14th largest depository institution in the market, controlling deposits of

$38 million, which represent approximately 2 percent of

market deposits. After the proposed acquisition, Associated would operate the third largest depository institution in the market, controlling deposits of approximately

$269 million, which represent approximately 14 percent

of market deposits. Twenty depository institutions would

remain in the banking market. The HHI would increase by

47 points to 1145.

Sheboygan, Wisconsin

Associated operates the fifth largest depository institution

in the market, controlling deposits of $110 million, which

represent approximately 7 percent of market deposits. First

Federal Capital operates the 15th largest depository institution in the market, controlling deposits of $13 million,

which represent less than 1 percent of market deposits.

After the proposed acquisition, Associated would operate

the fourth largest depository institution in the market,

controlling deposits of approximately $135 million, which

represent approximately 8 percent of market deposits. Sixteen depository institutions would remain in the banking

market. The HHI would increase by 8 points to 1080.

Oshkosh, Wisconsin

Associated operates the fourth largest depository institution in the market, controlling deposits of $114 million,

which represent approximately 13 percent of market deposits. First Federal Capital operates the eighth largest depository institution in the market, controlling deposits of

$23 million, which represent approximately 3 percent of

market deposits. After the proposed acquisition, Associated would operate the second largest depository institution in the market, controlling deposits of approximately

$159 million, which represent approximately 18 percent

of market deposits. Eleven depository institutions would

remain in the banking market. The HHI would increase by

89 points to 1411.

Kenosha–Racine, Wisconsin

Associated operates the 15th largest depository institution

in the market, controlling deposits of $22 million, which

represent less than 1 percent of market deposits. First

Federal Capital operates the 13th largest depository institution in the market, controlling deposits of $31 million,

which represent less than 1 percent of market deposits.

After the proposed acquisition, Associated would operate

the 11th largest depository institution in the market, controlling deposits of approximately $85 million, which represent approximately 3 percent of market deposits. Fifteen

depository institutions would remain in the banking market. The resulting HHI for this market, which would not

increase after consummation of the proposal, would be

1412.

Jefferson, Wisconsin

Associated operates the tenth largest depository institution

in the market, controlling deposits of $12 million, which

represent approximately 2 percent of market deposits. First

Federal Capital operates the ninth largest depository institution in the market, controlling deposits of $15 million,

which represent approximately 3 percent of market deposits. After the proposed acquisition, Associated would operate the seventh largest depository institution in the market,

controlling deposits of approximately $43 million, which

represent approximately 8 percent of market deposits. Ten

depository institutions would remain in the banking market. The resulting HHI for this market, which would not

increase after consummation of the proposal, would be

1485.

Fond du Lac, Wisconsin

Associated operates the ninth largest depository institution

in the market, controlling deposits of $38 million, which

represent approximately 3 percent of market deposits. First

Federal Capital operates the 13th largest depository institution in the market, controlling deposits of $15 million,

which represent approximately 1 percent of market deposits. After the proposed acquisition, Associated would operate the seventh largest depository institution in the market,

controlling deposits of approximately $67 million, which

represent approximately 6 percent of market deposits. Thirteen depository institutions would remain in the banking

market. The resulting HHI for this market, which would

not increase after consummation of the proposal, would be

1744.

Beloit–Janesville, Wisconsin

Associated operates the 12th largest depository institution

in the market, controlling deposits of $25 million, which

represent approximately 2 percent of market deposits. First

Federal Capital operates the sixth largest depository institution in the market, controlling deposits of $63 million,

which represent approximately 4 percent of market deposits. After the proposed acquisition, Associated would operate the fourth largest depository institution in the market,

controlling deposits of approximately $152 million, which

represent approximately 10 percent of market deposits.

Eighteen depository institutions would remain in the banking market. The resulting HHI for this market, which

would not increase after consummation of the proposal,

would be 1270.

Highly Concentrated Banking Markets

Minneapolis–St. Paul, Minnesota

Associated operates the fifth largest depository institution

in the market, controlling deposits of $1 billion, which

510 Federal Reserve Bulletin Autumn 2004
represent approximately 2 percent of market deposits. First

Federal Capital operates the 21st largest depository institution in the market, controlling deposits of $218 million,

which represent less than 1 percent of market deposits.

After the proposed acquisition, Associated would operate

the fourth largest depository institution in the market,

controlling deposits of approximately $1.4 billion, which

represent approximately 3 percent of market deposits. One

hundred and twenty-six depository institutions would

remain in the banking market. The resulting HHI for this

market, which would not increase after consummation of

the proposal, would be 1980.

Manitowoc–Two Rivers, Wisconsin

Associated operates the second largest depository institution in the market, controlling deposits of $205 million,

which represent approximately 21 percent of market deposits. First Federal Capital operates the ninth largest depository institution in the market, controlling deposits of

$14 million, which represent approximately 1 percent of

market deposits. After the proposed acquisition, Associated would continue to operate the second largest depository institution in the market, controlling deposits of

approximately $234 million, which represent approximately 24 percent of market deposits. Eleven depository

institutions would remain in the banking market. The HHI

would increase by 76 points to 1896.

Barclays Bank PLC

London, England

Order Approving Notice to Engage in Activities

Complementary to a Financial Activity

Barclays Bank PLC (‘‘Barclays’’), a foreign bank that is

treated as a financial holding company (‘‘FHC’’) for purposes of the Bank Holding Company Act (‘‘BHC Act’’),

has requested the Board’s approval under section 4 of the

BHC Act (12 U.S.C. §1843) and the Board’s Regulation Y

(12 CFR Part 225) to engage in physical commodity trading in the United States. Barclays currently conducts physical commodity trading outside the United States.

Regulation Y authorizes bank holding companies

(‘‘BHCs’’) to engage as principal in derivative contracts

based on financial and nonfinancial assets (‘‘Commodity

Derivatives’’). Under Regulation Y, a BHC may conduct

Commodity Derivatives activities subject to certain restrictions that are designed to limit the BHC’s activity to

trading and investing in financial instruments rather than

dealing directly in physical nonfinancial commodities.1

Under these restrictions, a BHC generally is not allowed to

take or make delivery of nonfinancial commodities underlying Commodity Derivatives. In addition, BHCs generally

are not permitted to purchase or sell nonfinancial commodities in the spot market.

The BHC Act, as amended by the Gramm–Leach–Bliley

Act (‘‘GLB Act’’), permits a BHC to engage in activities

that the Board had determined were closely related to

banking, by regulation or order, prior to November 12,

1999.2 The BHC Act permits an FHC to engage in a broad

range of activities that are defined in the statute to be

financial in nature.3 Moreover, the BHC Act allows FHCs

to engage in any activity that the Board determines, in

consultation with the Secretary of the Treasury, to be

financial in nature or incidental to a financial activity.4

In addition, the BHC Act permits FHCs to engage in any

activity that the Board (in its sole discretion) determines is

complementary to a financial activity and does not pose a

substantial risk to the safety or soundness of depository

institutions or the financial system generally.5 This authority is intended to allow the Board to permit FHCs to

engage on a limited basis in an activity that appears to be

commercial rather than financial in nature, but that is

meaningfully connected to a financial activity such that it

complements the financial activity.6 The BHC Act provides

that any FHC seeking to engage in a complementary activity must obtain the Board’s prior approval under section 4(j) of the BHC Act.7

Barclays regularly engages as principal in BHCpermissible Commodity Derivatives based on a variety of

commodities, including natural gas and electricity. Barclays has requested that the Board permit it to purchase and

sell these and other physical commodities in the spot

market and take and make delivery of physical commodities to settle Commodity Derivatives (‘‘Commodity Trading Activities’’). The Board previously has determined that

Commodity Trading Activities involving a particular commodity complement the financial activity of engaging regularly as principal in BHC-permissible Commodity Derivatives based on that commodity.8 In light of the foregoing

and all other facts of record, the Board believes that

Commodity Trading Activities are complementary to the

Commodity Derivatives activities of Barclays.

To authorize Barclays to engage in Commodity Trading

Activities as a complementary activity under the GLB Act,

the Board also must determine that the activities do not

pose a substantial risk to the safety or soundness of deposi1. Commodity Derivatives permissible for BHCs under Regulation Y are hereinafter referred to as ‘‘BHC-permissible Commodity

Derivatives.’’

2. 12 U.S.C. §1843(c)(8).

3. The Board determined by regulation before November 12, 1999,

that engaging as principal in Commodity Derivatives, subject to

certain restrictions, was closely related to banking. Accordingly,

engaging as principal in BHC-permissible Commodity Derivatives is

a financial activity for purposes of the BHC Act. See 12 U.S.C.

§1843(k)(4)(F).

4. 12 U.S.C. §1843(k)(1)(A).

5. 12 U.S.C. §1843(k)(1)(B).

6. See 145 Cong. Rec. H11529 (daily ed. Nov. 4, 1999) (Statement

of Chairman Leach) (‘‘It is expected that complementary activities

would not be significant relative to the overall financial activities of

the organization.’’).

7. 12 U.S.C. §1843(j).

8. See Citigroup Inc., 89 Federal Reserve Bulletin 508 (2003);

UBS AG, 90 Federal Reserve Bulletin 215 (2004). For example,

Commodity Trading Activities involving all types of crude oil would

be complementary to engaging regularly as principal in BHCpermissible Commodity Derivatives based on Brent crude oil.

Legal Developments 511
tory institutions or the U.S. financial system generally.9 In

addition, the Board must determine that the performance of

Commodity Trading Activities by Barclays ‘‘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.’’10

Approval of the proposal likely would benefit Barclays’

customers by enhancing the ability of the bank to provide

efficiently a full range of commodity-related services.

Approving Commodity Trading Activities for Barclays

also would enable the company to improve its understanding of physical commodity and commodity derivatives

markets and its ability to serve as an effective competitor in

physical commodity and commodity derivatives markets.

Barclays has established and maintains policies for

monitoring, measuring, and controlling the credit, market, settlement, reputational, legal, and operational risks

involved in its Commodity Trading Activities. These policies address key areas, such as counterparty credit risk,

value-at-risk methodology and internal limits with respect

to commodity trading, new business and new product

approvals, and identification of transactions that require

higher levels of internal approval. The policies also

describe critical internal control elements, such as reporting lines, and the frequency and scope of internal audit of

Commodity Trading Activities. Barclays has integrated the

risk management of Commodity Trading Activities into the

bank’s overall risk management framework. Based on the

above and all the facts of record, the Board believes that

Barclays has the managerial expertise and internal control

framework to manage adequately the risks of taking and

making delivery of physical commodities as proposed.

To limit the potential safety and soundness risks of

Commodity Trading Activities, as a condition of this order,

the market value of commodities held by Barclays as a

result of Commodity Trading Activities must not exceed

5 percent of Barclays’ consolidated tier 1 capital (as calculated under its home country standard).11 Barclays also

must notify the Federal Reserve Bank of New York if the

market value of commodities held by Barclays as a result

of its Commodity Trading Activities exceeds 4 percent of

its tier 1 capital.

In addition, Barclays may take and make delivery only

of physical commodities for which derivative contracts

have been authorized for trading on a U.S. futures

exchange by the Commodity Futures Trading Commission

(‘‘CFTC’’) (unless specifically excluded by the Board) or

that have been specifically approved by the Board.12 This

requirement is designed to prevent Barclays from becoming involved in dealing in finished goods and other items,

such as real estate, that lack the fungibility and liquidity of

exchange-traded commodities.

To minimize the exposure of Barclays to additional

risks, including storage risk, transportation risk, and legal

and environmental risks, Barclays would not be authorized

to (i) own, operate, or invest in facilities for the extraction,

transportation, storage, or distribution of commodities;

or (ii) process, refine, or otherwise alter commodities. In

conducting its Commodity Trading Activities, Barclays

will be expected to use appropriate storage and transportation facilities owned and operated by third parties.13

Barclays and its Commodity Trading Activities also

remain subject to the general securities, commodities, and

energy laws and the rules and regulations (including the

anti-fraud and anti-manipulation rules and regulations) of

the Securities and Exchange Commission, the CFTC, and

the Federal Energy Regulatory Commission.

Permitting Barclays to engage in the limited amount and

types of Commodity Trading Activities described above,

on the terms described in this order, would not appear to

pose a substantial risk to Barclays, depository institutions,

or the U.S. financial system generally. Through its existing

authority to engage in Commodity Derivatives, Barclays

already may incur the price risk associated with commodities. Permitting Barclays to buy and sell commodities in

the spot market or physically settle Commodity Derivatives would not appear to increase significantly the organization’s potential exposure to commodity price risk.

For these reasons, and based on Barclays’ policies and

procedures for monitoring and controlling the risks of

Commodity Trading Activities, the Board concludes that

consummation of the proposal does not pose a substantial

risk to the safety and soundness of depository institutions

or the financial system generally and can reasonably be

expected to produce benefits to the public that outweigh

any potential adverse effects.

Based on all the facts of record, including the representations and commitments made to the Board by Barclays in

connection with the notice, and subject to the terms and

conditions set forth in this order, the Board has determined

that the notice should be, and hereby is, approved. The

Board’s determination is subject to all the conditions set

9. 12 U.S.C. §1843(k)(1)(B).

10. 12 U.S.C. §1843(j)(2)(A).

11. Barclays would be required to include in this 5 percent limit the

market value of any commodities held by Barclays as a result of a

failure of its reasonable efforts to avoid taking delivery under section 225.28(b)(8)(ii)(B) of Regulation Y.

12. The particular commodity derivative contract that Barclays

takes to physical settlement need not be exchange-traded, but (in the

absence of specific Board approval) futures or options on futures on

the commodity underlying the derivative contract must have been

authorized for exchange trading by the CFTC.

The CFTC publishes annually a list of the CFTC-authorized commodity contracts. See Commodity Futures Trading Commission,

FY 2003 Annual Report to Congress 109. With respect to granularity,

the Board intends this requirement to permit Commodity Trading

Activities involving all types of a listed commodity. For example,

Commodity Trading Activities involving any type of coal or coal

derivative contract would be permitted, even though the CFTC has

authorized only Central Appalachian coal.

13. Approving Commodity Trading Activities as a complementary

activity, subject to limits and conditions, would not in any way restrict

the existing authority of Barclays to deal in foreign exchange, precious metals, or any other bank-eligible commodity.

512 Federal Reserve Bulletin Autumn 2004
forth in Regulation Y, including those in section 225.7

(12 CFR 225.7), and to the Board’s authority to require

modification or termination of the activities of a BHC or

any of its subsidiaries as the Board finds necessary to

ensure compliance with, or to prevent evasion of, the

provisions and purposes of the BHC Act and the Board’s

regulations and orders issued thereunder. The Board’s decision is specifically conditioned on compliance with all the

commitments made to the Board in connection with the

notice, including the commitments and conditions discussed in this order. The commitments and conditions

relied on in reaching this decision shall be 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.

By order of the Board of Governors, effective July 22,

2004.

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

voting: Governor Gramlich.

Robert deV. Frierson

Deputy Secretary of the Board

Popular, Inc.

San Juan, Puerto Rico

Popular International Bank, Inc.

San Juan, Puerto Rico

Popular North America, Inc.

Mt. Laurel, New Jersey

Banco Popular North America

New York, New York

Order Approving the Acquisition of a Savings

Association, the Merger of Depository Institutions, and

the Establishment of Branches

Popular, Inc. and its wholly owned subsidiaries, Popular

International Bank, Inc. and Popular North America, Inc.,

each a financial holding company within the meaning of

the Bank Holding Company Act (‘‘BHC Act’’) (collectively, ‘‘Popular’’), have requested the Board’s approval

under sections 4(c)(8) and 4(j) of the BHC Act1 to acquire

Quaker City Bancorp, Inc. (‘‘Quaker City’’), and its wholly

owned subsidiary, Quaker City Bank (‘‘Quaker City

Bank’’), a federally chartered savings association, both in

Whittier, California.

In addition, Popular’s subsidiary bank, Banco Popular

North America (‘‘Banco Popular’’), a state member bank,

has requested the Board’s approval to merge with Quaker

City Bank pursuant to section 18(c) of the Federal Deposit

Insurance Act (‘‘FDI Act’’) (‘‘Bank Merger Act’’) and

section 5(d)(3) of the FDI Act, with Banco Popular as the

surviving entity.2 Banco Popular also has applied under

section 9 of the Federal Reserve Act (‘‘FRA’’)3 to retain

and operate branches at the locations of Quaker City

Bank’s main office and branches.

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published in the

Federal Register (69 Federal Register 24,602 (2004)) and

in accordance with the Bank Merger Act and the Board’s

Rules of Procedure.4 As required by the Bank Merger Act,

reports on the competitive effects of the merger were

requested from the United States Attorney General and

the appropriate banking agencies. 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 4 of the BHC Act, the Bank Merger Act,

and other applicable statutes.

Popular, with total consolidated assets of $38.1 billion,

is the 35th largest depository organization in the United

States, controlling deposits of $18.6 billion.5 Popular operates depository institutions in California, Florida, Illinois, New York, New Jersey, Texas, Puerto Rico, and the

U.S. Virgin Islands. Popular is the 102nd largest depository organization in California, controlling deposits of

$398 million. Quaker City, with total consolidated assets of

approximately $1.8 billion, is the 47th largest depository

organization in California and operates one depository

institution in the state that controls deposits of $1.1 billion.

On consummation of the proposal, Popular would have

consolidated assets of approximately $40 billion and would

control deposits of $19.7 billion, which represent less

than 1 percent of the total amount of deposits of insured

depository institutions in the United States. Popular would

become the 36th largest depository organization in California, controlling deposits of approximately $1.5 billion,

which represent less than 1 percent of the total amount of

deposits of insured depository institutions in the state.

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.6 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. Popular has committed to conform all the

activities of Quaker City to those permissible under section 4(c)(8) of the BHC Act and Regulation Y.

In reviewing the proposal, the Board is required by

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

acquisition of Quaker City by Popular ‘‘can reasonably be

1. 12 U.S.C. §§1843(c)(8) and (j).

2. 12 U.S.C. §1828(c); 12 U.S.C. §1815(d)(3).

3. 12 U.S.C § 321 (‘‘FRA’’). These branches are listed in the

Appendix.

4. See 12 CFR 262.3(b).

5. Asset data are as of March 31, 2004, and nationwide ranking

data are as of May 31, 2004. Statewide deposit and ranking data are

as of June 30, 2003. In this context, the term ‘‘insured depository

institution’’ includes insured commercial banks, savings associations,

and savings banks.

6. 12 CFR 225.28(b)(4)(ii).

Legal Developments 513
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 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

institutions under the Community Reinvestment Act

(‘‘CRA’’).9

Competitive Considerations

As part of the review under the Bank Merger Act and

consideration of the public interest factors under section 4

of the BHC Act, the Board has considered the competitive

effects of the proposal in light of all the facts of record.10

Banco Popular and Quaker City Bank compete directly

in the Los Angeles banking market.11 The Board has

reviewed carefully the competitive effects of the proposal

in this banking market 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 Banco Popular and Quaker City

Bank in the market (‘‘market deposits’’),12 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 Merger 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 the Los Angeles banking market. Popular would operate the 39th largest

depository institution in the market, controlling deposits of

$1.4 billion, which represent less than 1 percent of market

deposits. After consummation of the proposal, the HHI

for the Los Angeles banking market would continue to be

moderately concentrated at 1081, and numerous competitors would remain in the market.

The Department of Justice has reviewed the proposal

and advised the Board that consummation is not likely to

have a significantly adverse effect on competition in the

Los Angles banking market. The other federal banking

agencies also have been afforded an opportunity to comment on the proposal and have not objected.

Based on these and all other 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 the Los Angeles

banking market or any other relevant banking market

and that competitive considerations are consistent with

approval.

Financial and Managerial Resources and Future

Prospects

In reviewing the proposal under section 4 of the BHC Act,

the Bank Merger Act, and the FRA, the Board has carefully considered the financial and managerial resources

and future prospects of Popular and Quaker City 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. 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 Popular and Quaker City, and

public comments. In addition, the Board has consulted

with the relevant supervisory agencies, including the Office

of Thrift Supervision (‘‘OTS’’).

Popular proposes to acquire Quaker City primarily by

issuing trust preferred securities and debt securities. Popular, Banco Popular, and its other subsidiary depository

institutions are well capitalized and would remain so on

consummation of the proposal.

The Board also has considered the managerial resources

of Popular and Quaker City, particularly the supervisory

experience and assessments of management by the organizations’ primary federal supervisors and their records of

compliance with applicable banking and thrift laws. In

addition, the Board has carefully reviewed the examination

records of Popular and its subsidiary depository institutions, including assessments of their risk-management

7. 12 U.S.C. §1843(j)(2)(A).

8. See 12 CFR 225.26.

9. 12 U.S.C. § 2901 et seq.; see, e.g., BancOne Corporation,

83 Federal Reserve Bulletin 602 (1997).

10. See First Hawaiian, Inc., 79 Federal Reserve Bulletin 966

(1993).

11. The Los Angeles banking market is defined as the Los Angeles

Ranally Metro Area and the towns of Acton in Los Angeles County,

Rancho Santa Margarita in Orange County, and Rosamond in Kern

County, all in California.

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

Quaker City and Popular were a combined entity, the deposits of

Quaker City Bank are included at 100 percent in the calculation of pro

forma market share. First Banks, Inc., 76 Federal Reserve Bulletin

669 (1990).

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

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.

514 Federal Reserve Bulletin Autumn 2004
systems and other policies. The Board also has considered

Popular’s plans for implementing the proposed acquisition,

including its available managerial resources, and Popular’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 as well as their future prospects

are consistent with approval under section 4 of the BHC

Act, the Bank Merger Act, and the FRA.

Convenience and Needs and CRA Performance

Considerations

In acting on this proposal under the Bank Merger Act, the

Board also must consider the effects of the proposal on the

convenience and needs of the communities to be served

and take into account the records of performance of the

relevant insured depository institutions under the CRA.

In addition, the Board must review the records of performance under the CRA of the relevant insured depository

institutions when acting on a notice under section 4 of the

BHC Act to acquire an insured savings association. The

CRA requires the Board to assess each institution’s record

of meeting the credit needs of its entire community, including low- and moderate-income (‘‘LMI’’) neighborhoods,

consistent with the institution’s safe and sound operation,

and to take this record into account in evaluating a proposal to acquire an insured depository institution.14

The Board has considered carefully the CRA performance records of the subsidiary insured depository institutions of Popular and Quaker City in light of all the facts of

record, including public comments on the proposal. Three

commenters opposed the proposal. One commenter noted

that Banco Popular received a rating of ‘‘low satisfactory’’

under the lending test at its most recent CRA performance

evaluation. Commenters expressed concern that the acquisition would negatively affect Quaker City Bank, which

received an ‘‘outstanding’’ rating at its most recent CRA

performance evaluation. All three commenters asserted

that Banco Popular had not served the needs of Hispanics

in LMI communities in its California assessment areas

because the bank had not adequately promoted its remittance program for international money transfers or the use

of the Matricula Consular, an identity card for Mexican

nationals living outside Mexico, as an acceptable form of

identification for opening a bank account.15 Commenters

also expressed concerns about Popular Cash Express

(‘‘PCE’’), a nonbanking subsidiary of Popular that provides check-cashing services. Specifically, commenters

alleged that Banco Popular relies on PCE’s check-cashing

outlets to provide ‘‘second-tier’’ financial products to the

‘‘unbanked’’ Hispanic population in California, while it

uses Banco Popular’s full-service branches to serve the

needs of higher income consumers in its California assessment areas.16

Popular has indicated that on consummation of the

proposal, it plans to evaluate both banks’ CRA compliance

measures and integrate some of Quaker City Bank’s

community-related policies and programs. Banco Popular

expects to maintain Quaker City Bank’s community-related

policies and programs and its strong record of multifamily

home lending. Banco Popular also plans to continue to

operate Quaker City Bank’s branches in retail stores that

serve many LMI residents.

A. CRA Performance Evaluations

As provided in the CRA, the Board has evaluated the

convenience and needs factor in light of the 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.17 At its most recent CRA evaluation by the

Federal Reserve Bank of New York, Banco Popular

received a ‘‘satisfactory’’ rating, as of October 28, 2002

(‘‘2002 Evaluation’’).18 Quaker City Bank received an

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

evaluation by the OTS, as of September 13, 2003.

B. CRA Performance of Banco Popular

Although Banco Popular received ‘‘low satisfactory’’ rating under the lending test, the bank received an overall

‘‘satisfactory’’ CRA performance rating. Moreover, the

bank received ‘‘outstanding’’ ratings under the investment

and service tests, based on its nationwide and California14. 12 U.S.C. §2903.

15. Popular stated that Banco Popular accepts the Matricula Consular identification card as valid identification for a variety of services

offered by the bank. Customers may use the identification card to open

a Banco Popular ‘‘Acceso Checking’’ account, which has no minimum

balance requirement and offers free check-writing privileges and ATM

transactions, or an ‘‘Acceso Savings’’ account, which offers a lowminimum-balance requirement and free ATM transactions.

16. PCE operates 77 offices in California, with 74 of those offices

in LMI census tracts. PCE primarily cashes checks, transmits money,

and sells money orders. PCE does not engage in ‘‘payday lending.’’

Neither the CRA nor other law requires a banking organization to

offer its retail banking products and services through its nonbanking

subsidiaries. The Board notes that 64 percent of Banco Popular’s

branches in its California assessment areas are in LMI census tracts

(11 of its 17 branches), and Banco Popular would operate three

additional branches in LMI areas on consummation of the proposal.

17. See Interagency Questions and Answers Regarding Community

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

18. Popular operates two additional subsidiary banks, Banco Popular de Puerto Rico, San Juan, Puerto Rico (‘‘BPPR’’), and Banco

Popular, National Association, Orlando, Florida (‘‘BPNA’’). BPPR,

Popular’s largest subsidiary bank, received an ‘‘outstanding’’ CRA

performance rating from the Federal Reserve Bank of New York, as of

June 3, 2003. BPNA received a ‘‘satisfactory’’ rating for CRA performance from the Office of the Comptroller of the Currency, as of

July 7, 2003.

Legal Developments 515
based activities.19 Examiners reported that the Banco Popular’s total volume of housing-related and small business

loans demonstrated adequate responsiveness to the credit

needs in its California and other assessment areas during

the evaluation period.20 They also reported that the bank’s

overall distribution of loans among individuals of different

income levels and businesses of different sizes by revenue

was good. Examiners commended Banco Popular’s overall

levels of both community development lending and qualified investments in its California and other assessment

areas. In addition, examiners found that, overall, Banco

Popular’s retail delivery systems were readily accessible

to geographies and individuals of different income levels in

all the bank’s assessment areas.

In its California assessment areas, examiners determined

that Banco Popular demonstrated adequate responsiveness to housing-related credit needs and that the bank’s

overall geographic distribution of housing-related loans

reflected excellent loan penetration in LMI geographies.

Examiners reported that, compared with the level of owneroccupied housing units in LMI areas of Los Angeles, the

bank’s overall distribution of home purchase and refinance

loans across geographies of different income levels was

excellent.21

Banco Popular has provided a substantial proportion of

its housing-related loans to minority individuals. Examiners found that a majority of the number and dollar amount

of Home Mortgage Disclosure Act (‘‘HMDA’’)22 loans that

Banco Popular made in California were extended to minority borrowers, including Hispanics. In 2003, approximately

70 percent of the number and 67 percent of the dollar

amount of Banco Popular’s total HMDA loans in California were made to minority borrowers, and approximately

51 percent of the number and 57 percent of the dollar

amount of the bank’s total HMDA loans in California were

made to Hispanic borrowers. The percentages of Banco

Popular’s HMDA loans to minority borrowers, particularly

Hispanics, were even higher in the Los Angeles Primary

Metropolitan Statistical Area (‘‘PMSA’’). During 2003,

approximately 70 percent of the total number and dollar

amount of the bank’s HMDA loans in the Los Angeles

PMSA were extended to minority borrowers, and approximately 60 percent of the dollar amount of its total HMDA

loans was to Hispanic borrowers.23

With respect to small loans to businesses,24 examiners

reported that the bank’s distribution of such loans to businesses of different sizes in the bank’s Los Angeles CMSA

was adequate when compared with the number of businesses with gross annual revenues of $1 million or less

and the performance of the aggregate of lenders in the

market (‘‘aggregate lenders’’). For the year 2003, more

than 50 percent of the number and dollar amount of Banco

Popular’s total loans in California were to small businesses.25 In addition, examiners noted that the bank’s overall geographic distribution of small loans to businesses in

LMI geographies in the Los Angeles PMSA was excellent and exceeded the aggregate lenders’ performance in

those geographies. In 2003, Banco Popular increased

its total amount of small loans to businesses in the

Los Angeles area by $26 million to a total of approximately $98 million.26

Examiners also characterized the bank’s community

development lending in California as excellent, with

more than $11 million in community development loans

extended during the examination period in response to

assessment-area credit needs. Examples of Banco Popular’s community development loans included a $3.4 million loan to a small business in a low-income census tract

in Los Angeles to provide 90 jobs for LMI individuals and

a $1.5 million construction loan for 12 units of affordable

housing in the City of Commerce as part of a program to

improve the community’s residential housing.

In the bank’s California assessment area, examiners

noted that Banco Popular had an excellent level of qualified investments and grants that exhibited strong responsiveness to credit and community development needs. During the evaluation period, the bank’s qualified investments

in California totaled $1.3 million. Examiners reported that

Banco Popular’s investments showed excellent responsiveness to the most pressing credit and community develop19. Examiners evaluated Banco Popular’s CRA performance in its

nine assessment areas in New York, New Jersey, Illinois, California,

Florida, and Texas. The bank’s California assessment areas included

the San Diego Metropolitan Statistical Area (‘‘MSA’’) and the

Los Angeles–Riverside–Orange County Consolidated Metropolitan

Statistical Area (‘‘Los Angeles CMSA’’). The Los Angeles CMSA

contained 94 percent of the bank’s branches and 93 percent of its

deposits in the California assessment areas.

20. The evaluation period was January 1, 2000, through October 28, 2002. Loan products reviewed included home purchase, home

refinance, home improvement, multifamily, small business loans, and

other loans qualifying as community development lending.

21. One commenter maintained that Banco Popular’s lending

performance for home refinancings for low-income borrowers was

described in the 2002 Evaluation as ‘‘weak.’’ However, examiners

qualified this description by stating that the bank’s lending was

adequate given the large disparity between incomes and housing

prices in the Los Angeles area and that the aggregate performance of

Banco Popular’s competitors also was weak. Examiners also noted

that the low level of refinancings to low-income borrowers generally

reflected the low level of homeownership by low-income families.

22. 12 U.S.C. §2801 et seq.

23. In 2003, Banco Popular made 2,863 HMDA loans totaling

approximately $303 million nationwide. Eighty-three percent of the

number and approximately 70 percent of the dollar amount of the

bank’s HMDA loans were to minority borrowers, with the highest

percentage of those loans to Hispanic borrowers.

24. Small loans to businesses are loans that are originated in

amounts of $1 million or less and are either secured by nonfarm,

nonresidential properties or are classified as commercial and industrial

loans.

25. A small business is a business with gross annual revenues of

$1 million or less.

26. Nationwide, Banco Popular increased the dollar value of its

small loans to businesses approximately 15 percent, from approximately $310 million to approximately $356 million. Banco Popular

represented that it is a nationwide leader in providing Small Business

Administration (‘‘SBA’’) loans and is a leading participant in the

SBA 504 Program in California, which provides long-term, fixed-rate

loans with low down payments to ‘‘certified development companies.’’ Popular also participates in the SBA’s Preferred Lenders Program, which simplifies loan closing and administration for borrowers.

516 Federal Reserve Bulletin Autumn 2004
ment needs in the bank’s assessment areas, which included

substantial investments directed to agencies that support

affordable housing development. Examiners also favorably

noted that more than 25 percent of Banco Popular’s lending activity was directed to economic development to help

provide small business credit, identified as an important

need in the California assessment areas.

With respect to retail services, examiners reported that

delivery systems were readily accessible to geographies

and individuals of different income levels in the bank’s

Los Angeles assessment area. In addition, examiners noted

favorably that 11 of Banco Popular’s 17 branches were in

LMI geographies. Examiners determined that the bank’s

record of opening and closing branches in California

improved the accessibility of its delivery systems, particularly in LMI geographies and to LMI individuals. In addition, they noted that the bank opened two branches in

moderate-income census tracts and closed two branches in

a non-LMI area during the evaluation period. Examiners

also found that the bank’s branch products and services

were consistent across all portions of the bank’s assessment areas, including LMI geographies and to LMI individuals. Banco Popular reported that 67 percent of its

branches nationwide and 83 percent of its branches in

California are in LMI census tracts. Examiners found that

Banco Popular provided a relatively high level of community development services in the Los Angeles assessment

area. Banco Popular stated that it promotes and markets all

its banking services in Spanish and English.

C. CRA Performance of Quaker City Bank

As previously noted, Quaker City Bank received an overall

‘‘outstanding’’ rating for performance under the CRA.27

Examiners characterized the thrift’s responsiveness to the

credit needs of ‘‘highly disadvantaged’’ persons as excellent and commended the thrift for its flexible and innovative loan products.

Examiners rated the thrift’s performance under the lending test as ‘‘outstanding’’ based on its excellent level of

HMDA-reportable lending in LMI geographies, which

significantly exceeded the percentages for the aggregate

lenders, and its record of housing-related lending to small

businesses. Examiners also praised Quaker City Bank for

its loan distribution, noting that the thrift’s market share for

HMDA-reportable loans in LMI census tracts was double

its total market share for such lending in its assessment

area. In addition, examiners characterized Quaker City

Bank as having a good record of HMDA loan distribution

among residential borrowers of different income levels.

Quaker City Bank’s investment test performance was

rated ‘‘high satisfactory.’’ The institution’s qualified community development investments totaled $1.4 million and

included financing for affordable housing for LMI individuals and grants to a number of organizations that provide community development services in the bank’s assessment area. In particular, examiners commended the thrift

for its grant to fund housing for the developmentally handicapped in Whittier.

Examiners rated the institution’s performance under the

service test as ‘‘outstanding.’’ The institution expanded

its branch network by seven during the review period

and offered extended hours in its new in-store Wal-Mart

branches. Examiners noted that the thrift tailored its services to the customer base of the institution’s combined

assessment area by providing a ‘‘totally free’’ checking

account. In addition, Quaker City Bank’s employees provided numerous community development services in the

assessment area, such as offering affordable housing workshops for senior citizens and home-buyer seminars for

other community members in its assessment area.

D. Conclusion on Convenience and Needs and CRA

Performance Considerations

The Board has carefully considered all the facts of record,

including reports of examination of the CRA records of the

institutions involved, information provided by Popular,

public comment on the proposal, and confidential supervisory information. The Board notes that the proposal would

expand the availability of banking products to the customers of Banco Popular and Quaker City, drawing on Banco

Popular’s focus on commercial lending and Quaker City

Bank’s focus on mortgage lending. 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 and the CRA performance records

of the relevant depository institutions are consistent with

approval.28

27. This review period covered January 1, 1999, through March 31,

2001. Loan products reviewed include home mortgage loans, small

business loans, and nonresidential mortgage loans. During the review

period, the principal lending activity of the institution was the origination or purchase of residential and commercial mortgage loans, with

the majority of the institution’s loan portfolio secured by real estate.

Quaker City delineated its assessment area as Los Angeles, Orange,

and Riverside Counties.

28. One commenter also requested that the Board condition its

approval on Banco Popular’s committing to provide a definitive plan

that outlines Popular’s goals for CRA performance, philanthropic

contributions, and contracting with minority suppliers. The Board

focuses on the CRA performance record of an applicant and the

programs that an applicant has in place to serve the credit needs of

its assessment areas at the time the Board reviews a proposal under the

convenience and needs factor. See, e.g., J.P. Morgan Chase & Co.,

90 Federal Reserve Bulletin 352 (2004). The CRA performance

records of Banco Popular and Quaker City Bank and their current

programs for serving the credit needs of their communities are consistent with approval and do not warrant any conditions related to CRA

performance in the future. In addition, the Board notes that neither the

CRA nor the agencies’ implementing rules require that financial

institutions engage in any type of philanthropy. The Board also notes

that concerns related to an institution’s contracting with minority

suppliers for products and services are outside the limited statutory

factors that the Board is authorized to consider when reviewing an

application under the BHC Act. See, e.g., Bank of America Corporation, 90 Federal Reserve Bulletin 217, 223 n.31 (2004); see also

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

(10th Cir. 1973).

Legal Developments 517
Public Benefits

As part of its evaluation of the public interest factors under

section 4 of the BHC Act, 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 currently served by Quaker City Bank

by expanding the number of available branches and providing customers with greater access to the expertise of Banco

Popular in such areas as commercial lending and international transactions. 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 possible adverse effects

under the standard of review set forth in section 4(j)(2) of

the BHC Act.

Other Considerations

As previously noted, Banco Popular also has applied under

section 9 of the FRA to establish branches at the locations

listed in the Appendix. The Board has considered the

factors it is required to consider when reviewing an application under section 9 of the FRA and, for the reasons

discussed in this order, finds those factors to be consistent

with approval. The Board has also concluded that the

factors it must review under section 5(d)(3) of the FDI Act

are consistent with approval.29

Conclusion

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

Board has determined that the notice and applications

should be, and hereby are, approved.30 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 Bank Merger Act, and other applicable

statutes. The Board’s approval is specifically conditioned

on compliance by Popular with the conditions imposed in

this order, including compliance with state law, and the

commitments made to the Board in connection with the

applications process. The Board’s approval also is subject

to all the conditions set forth in Regulation Y, including

those in sections 225.7 and 225.25(c) (12 CFR 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 issued thereunder. For purposes of

this action, these conditions and commitments are deemed

to be 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 merger shall not be consummated before the fifteenth calendar day after the effective date of this order,

and no part of the proposal may 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 the

Federal Reserve Bank of New York, acting pursuant to

delegated authority.

By order of the Board of Governors, effective August 5,

2004.

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

Quaker City Bank’s Branches in California to be acquired

by Banco Popular

Anaheim

8160 East Santa Ana Canyon Road South

Brea

220 South State College Boulevard

Chino

3943 Grand Avenue

29. The record in this case shows that:

(1) The transaction would not result in the transfer of any federally

insured depository institution’s federal deposit insurance from

one federal deposit insurance fund to another;

(2) Popular and Banco Popular currently meet, and on consummation of the proposed transaction would continue to meet, all

applicable capital standards; and

(3) The proposed transaction would comply with the interstate

banking provisions of the BHC Act if Quaker City Bank were a

state bank that Popular was applying to acquire. See 12 U.S.C.

§1815(d)(3).

30. Several commenters requested that the Board hold a public

meeting or hearing on the proposal. Neither the Bank Merger Act nor

the BHC Act requires the Board to hold a public hearing or meeting

on an application. Under its regulations, the Board may, in its discretion, hold a public meeting or hearing on an application. See 12 CFR

262.3(i). 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 matter. 12 CFR

225.25(a)(2). The Board has considered carefully the commenters’

requests in light of all the facts of record. The Board has accumulated

a substantial record in this case that includes examination information,

supervisory information, public records, and information submitted by

Popular. The public has had ample opportunity to submit comments

on the proposal and, in fact, commenters have submitted written

comments that the Board has considered carefully in acting on the

proposal. The commenters’ requests fail to demonstrate why written

comments do not present their views adequately. The commenters’

requests also fail 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 requests for a public

meeting or hearing on the proposal are denied.

518 Federal Reserve Bulletin Autumn 2004
Corona

479 McKinley Street

1290 East Ontario Avenue

Foothill Ranch

26502 Towne Centre Drive

Fullerton

1701 North Euclid Street

Hacienda Heights

3160 South Colima Road

Huntington Beach

8230 Talbert Avenue

La Habra

401 East Whittier Boulevard

1201 West Imperial Highway

La Mirada

12333 South La Mirada Boulevard

La Quinta

79-295 Highway 111

Lakewood

2770 Carson Street

Lancaster

1731 East Avenue J

Long Beach

151 East 5th Street

Murrieta

41200 Murrieta Hot Springs Road

Northridge

19821 Rinaldi Street

Palmdale

37140 47th Street East

Pico Rivera

8500 Washington Boulevard

Placentia

870 North Rose Drive

Rowland Heights

18220 Colima Road

San Marcos

732 Center Drive

Santa Fe Springs

13310 Telegraph Road

Temecula

32225 Highway 79 South Street

Whittier

7021 Greenleaf Avenue

7355 Greenleaf Avenue

13120 Philadelphia Street

15175 Whittier Boulevard

National City Corporation

Cleveland, Ohio

Order Approving the Acquisition of a Bank Holding

Company

National City Corporation (‘‘National City’’), 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 Wayne Bancorp, Inc., Wooster

(‘‘Wayne’’), and its subsidiary banks, The Wayne County

National Bank of Wooster, Wooster (‘‘Wayne Bank’’), and

Savings Bank & Trust (‘‘SB&T’’), Wadsworth, all in Ohio.

National City also has requested the Board’s approval

under sections 4(c)(8) and 4(j) of the BHC Act and section 225.28(b)(1) of the Board’s Regulation Y to acquire a

nonbanking subsidiary of Wayne and thereby engage in

permissible lending activities (12 U.S.C. §§1843(c)(8) and

1843(j); 12 CFR 225.28(b)(1)).

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published

(69 Federal Register 34,675 (2004)). 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 sections 3 and 4 of the BHC Act.

National City, with total consolidated assets of

$130.7 billion, is the ninth largest depository organization

in the United States, controlling $88.3 billion in deposits,

which represents approximately 1.4 percent of the total

amount of deposits of insured depository institutions in the

United States.1 National City is the largest depository

organization in Ohio, controlling $34 billion in deposits,

1. Total asset and deposit data are as of March 31, 2004; nationwide ranking data are as of December 31, 2003; and statewide deposit

and ranking data are as of June 30, 2003. Data reflect subsequent

merger activity through August 11, 2004.

Legal Developments 519
which represents approximately 16.1 percent of the total

amount of deposits of insured depository institutions in the

state (‘‘state deposits’’). National City also operates subsidiary insured depository institutions in Illinois, Indiana,

Kentucky, Michigan, Missouri, and Pennsylvania.

Wayne, with total consolidated assets of approximately

$812.2 million, is the 16th largest depository organization

in Ohio, controlling $689.8 million in deposits, which

represents less than 1 percent of state deposits. Wayne

operates subsidiary insured depository institutions only in

Ohio.

On consummation of this proposal, National City would

remain the ninth largest depository organization in the

United States, with total consolidated assets of approximately $131.5 billion, and would control approximately

1.5 percent of the total amount of deposits of insured

depository institutions in the United States.2 National City

would remain the largest depository organization in Ohio,

controlling approximately $34.7 billion in deposits, which

represents approximately 16.5 percent of state deposits.

Competitive Considerations

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

would further any attempt to monopolize the business of

banking in any relevant banking market. It also prohibits

the Board from approving a proposal that would substantially lessen competition in any relevant banking market

unless the anticompetitive effects of the proposal clearly

are outweighed in the public interest by its effect in meeting the convenience and needs of the community to be

served.3

National City and Wayne compete directly in the Akron,

Canton, Cleveland, and Dover–New Philadelphia banking

markets, all in Ohio.4 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. In particular, the

Board has considered the number of competitors that would

remain in the markets, the relative shares of total deposits

in depository institutions in the markets (‘‘market deposits’’) controlled by National City and Wayne,5 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 Merger Guidelines (‘‘DOJ Guidelines’’),6 and other characteristics of the

markets.

Consummation of the proposal would be consistent with

Board precedent and the DOJ Guidelines in each of these

banking markets.7 After consummation, the Akron, Canton, and Dover–New Philadelphia banking markets would

remain moderately concentrated, and the Cleveland banking market would remain highly concentrated. The change

in market shares would be small and numerous competitors

would remain in all these banking markets.

The Department of Justice also has conducted a detailed

review of the proposal’s competitive effects and has

advised the Board that consummation of the proposal

would not have a significantly adverse effect on competition in any relevant banking market. The appropriate banking agencies have been afforded an opportunity to comment and have not objected to the proposal.

Based on these and all other 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 the four banking

markets discussed above or in any other relevant banking

market and that competitive considerations relating to this

proposal are consistent with approval.

Financial, Managerial, and Supervisory Considerations

Section 3 of the BHC Act requires the Board to consider

the financial and managerial resources and future prospects

of the companies and depository institutions 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 reports of examination, other

confidential supervisory information received from the primary federal banking agency that supervises each institution, publicly reported and other financial information, and

information provided by National City.

National City is well capitalized and will remain so on

consummation of the proposal. Moreover, National City

has indicated that the transaction would be funded from

available liquid resources.

2. The data for National City include consummations of proposals

by National City to acquire Allegiant Bancorp, Inc., St. Louis, Missouri (‘‘Allegiant proposal’’), which the Board approved on March 15,

2004; and Provident Financial Group, Inc., Cincinnati, Ohio (‘‘Provident proposal’’), which the Board approved on June 8, 2004. See

National City Corporation, 90 Federal Reserve Bulletin 236 (2004)

(‘‘Allegiant Order’’); National City Corporation, 90 Federal Reserve

Bulletin 352 (2004) (‘‘Provident Order’’).

3. 12 U.S.C. §1842(c)(1).

4. These banking markets are described in Appendix A.

5. 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).

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

market is considered moderately concentrated if the post-merger HHI

is between 1000 and 1800 and 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.

7. The effects of the proposal on the concentration of banking

resources in the banking markets are described in Appendix B.

520 Federal Reserve Bulletin Autumn 2004
The Board also has considered the managerial resources

of National City and Wayne and the banks to be acquired,

including the assessments of management by the relevant

bank supervisory agencies and the organizations’ records

of compliance with applicable banking laws. In addition,

the Board has reviewed the examination records of

National City, Wayne, and their subsidiary depository institutions, including assessment of their risk management

systems. The Board also has considered National City’s

plans to integrate Wayne and its subsidiaries after consummation of the proposal and the proposed management of

the resulting organization.

Based on all the facts of record, the Board has concluded

that considerations relating to the financial and managerial

resources and future prospects of National City, Wayne,

Wayne Bank, and SB&T are consistent with approval, as

are the other supervisory factors under the BHC Act.

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’’).8 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.

The Board has considered carefully the convenience and

needs factor and the CRA performance records of the

subsidiary banks of National City and Wayne in light of all

the facts of record, including a public comment received

on the proposal. The Board recently considered the convenience and needs factor in National City’s proposals to

acquire Allegiant and Provident. In those proposals, the

Board conducted detailed reviews of the CRA performance

records of the insured depository institutions controlled

by National City and the lending records of all of National

City’s subsidiary banks and nonbank lending subsidiaries,

including analyses of data reported by National City under

the Home Mortgage Disclosure Act (‘‘HMDA’’)9 and

the branch closing policies of National City. The Board

found the records in each proposal to be consistent with

approval.10

The commenter reiterated the concerns it expressed in

the Allegiant and Provident proposals about National

City’s home mortgage lending operations, including the

subprime lending activities of First Franklin Financial Corporation, San Jose, California (‘‘First Franklin’’), a subsidiary of National City Bank of Indiana, Indianapolis, Indiana (‘‘NC Indiana’’). In commenting on this proposal, the

commenter asserted, based on its analysis of data reported

by National City under HMDA for the Canton, Ohio,

Metropolitan Statistical Area (‘‘MSA’’) (‘‘Canton MSA’’),

that National City engages in discriminatory treatment of

minorities in its home mortgage lending operations.

A. CRA Performance Evaluations

As provided in the CRA, the Board has evaluated the

convenience and needs factor in light of the 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.11

As noted, the Board has recently reviewed the CRA

performance records of the subsidiary insured depository

institutions of National City.12 At their most recent CRA

evaluations by the Office of the Comptroller of the Currency (‘‘OCC’’), National City Bank, Cleveland (‘‘NC

Bank’’), National City’s largest subsidiary bank as measured by total deposits, received an ‘‘outstanding’’ rating,

and NC Indiana, National City’s largest subsidiary bank

as measured by total assets, received a ‘‘satisfactory’’

rating.13 In addition, The Provident Bank, Cincinnati, Ohio,

which National City recently acquired, received an ‘‘outstanding’’ rating by the Federal Reserve Bank of Cleveland

(‘‘Reserve Bank’’) at its most recent CRA evaluation.14

National City’s five other subsidiary banks received either

‘‘outstanding’’ or ‘‘satisfactory’’ ratings at their most recent

CRA evaluations.15

The most recent CRA evaluations of NC Bank and

NC Indiana were discussed in the Allegiant and Provident

Orders. Based on a review of the record in this case, the

Board hereby reaffirms and adopts the facts and findings

detailed in those orders concerning National City’s CRA

performance record.

As discussed in the previous orders, the most recent

CRA evaluation of NC Bank characterized the bank’s

overall record of home mortgage and small business lending as excellent and commended its level of community

development lending.16 Examiners noted favorably the use

8. 12 U.S.C. §2901 et seq.

9. 12 U.S.C. §2801 et seq.

10. See Allegiant Order and Provident Order.

11. See Interagency Questions and Answers Regarding Community

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

12. See Allegiant Order and Provident Order.

13. Both ratings are as of February 22, 2000.

14. The rating was as of March 29, 2004.

15. Appendix C lists the most recent CRA ratings of National

City’s subsidiary banks, including the recently acquired Allegiant

Bank, St. Louis, and Provident Bank.

16. See Allegiant Order and Provident Order. In evaluating the

records of performance under the CRA of NC Bank and NC Indiana,

examiners considered home mortgage loans by certain affiliates in the

banks’ assessment areas. The loans reviewed by examiners included

Legal Developments 521
of several flexible lending products designed to address

affordable housing needs of LMI individuals and commended the bank’s level of qualified investments. In addition, examiners reported that NC Bank’s community development services were excellent and praised the distribution

of the bank’s branches.

At NC Indiana’s most recent CRA performance evaluation, examiners commended the bank’s record of home

mortgage lending to borrowers of different income levels

and its community development lending. NC Indiana’s

most recent evaluation also commended the bank’s strong

level of qualified investments and characterized the distribution of the bank’s branches throughout its assessment

area, including LMI geographies, as excellent.

The Board also carefully reviewed the CRA performance records of Wayne’s subsidiary banks at their most

recent CRA performance evaluations. Wayne Bank

received a ‘‘satisfactory’’ rating by the OCC, and SB&T

received an ‘‘outstanding’’ rating by the Reserve Bank.17

Examiners stated that Wayne Bank’s level of overall lending reflected excellent responsiveness to the credit needs of

the bank’s assessment area. In addition, examiners characterized as excellent Wayne Bank’s distribution of home

purchase and home improvement loans to LMI borrowers

and the bank’s geographic distribution of home mortgage

loans and small loans to businesses and farms.18 Examiners

also determined that Wayne Bank’s level of community

development lending and investment was adequate, and

they noted favorably the number of branches the bank had

in moderate income geographies.

Examiners of SB&T characterized the distribution of the

bank’s consumer, home mortgage, and small business loans

to borrowers of different income levels as excellent

throughout its assessment areas.19 They commented that

the bank’s geographic distribution of loans in different

census tracts was more than reasonable, as was its lending

distribution among individuals of different income levels

and among businesses and farms of different annual revenue levels.

B. HMDA Data, Subprime Lending, and Fair Lending

Record

The Board has carefully considered the lending record and

HMDA data reported by National City in light of the

public comment received on this proposal. Based on a

review of National City’s HMDA data in the Canton MSA

for 2002, the commenter reiterated its contentions in the

Allegiant and Provident proposals that National City’s

lending operations were organized to direct First Franklin’s

higher-priced loans disproportionately to minority and

LMI borrowers and in LMI and predominantly minority

communities, as compared with the other subsidiaries of

National City engaged in home mortgage lending, including National City’s subsidiary banks, NC Mortgage, and

NC Mortgage Services (collectively, ‘‘National City

Lenders’’).20

As noted in the Allegiant and Provident Orders, the

Board reviewed HMDA data reported by all of National

City’s subsidiary bank and nonbank lending subsidiaries in

the MSAs that comprise the banks’ major assessment areas.

The analyses included a comparison of the HMDA data

of First Franklin with combined data submitted by the

National City Lenders.21 The Board concluded that the

2002 HMDA data did not support the contention that

National City disproportionately directed First Franklin’s

loans to minority and LMI borrowers or in LMI and

predominantly minority communities as compared with the

National City Lenders. Moreover, the Board concluded that

denial disparity ratios of the National City Lenders for

African-American and Hispanic applicants for total

HMDA-reportable loans were generally comparable with

or lower than those of aggregate lenders in a majority of

the MSAs reviewed.22 Based on its review of the record in

this case, the Board hereby reaffirms and adopts the HMDA

analyses detailed in the Allegiant Order and the Provident

Order.

The Board’s review of the final 2003 HMDA data of

First Franklin, the National City Lenders, and the aggreloans reported by National City Mortgage Corporation, Miamisburg,

Ohio (‘‘NC Mortgage’’) (a subsidiary of NC Indiana); National City

Mortgage Services, Kalamazoo, Michigan (‘‘NC Mortgage Services’’)

(a subsidiary of National City Bank of the Midwest, Bannockburn,

Illinois); and other bank and nonbank affiliates of NC Bank.

17. Wayne Bank was evaluated as of February 24, 2003. SB&T,

the former Chippewa Valley Bank, Wadsworth (‘‘Chippewa’’), was

evaluated as of April 7, 2003. On May 31, 2003, Wayne acquired

Banc Services, Inc. and its subsidiary bank, Savings Bank & Trust,

both in Orville, Ohio (‘‘Old SB&T’’). On July 1, 2003, Old SB&T

was merged into Wayne’s subsidiary bank, Chippewa, with Chippewa

as the surviving bank, and renamed as Savings Bank & Trust. Old

SB&T received a ‘‘satisfactory’’ rating from the Reserve Bank at its

last CRA performance evaluation, as of April 9, 2001.

18. Small loans to businesses are loans with originated amounts of

$1 million or less that are either secured by nonfarm or nonresidential

real estate or classified as commercial and industrial loans. Small

loans to farms are loans with originated amounts of $500,000 or less

that are either secured by farmland or classified as loans to finance

agricultural production and other loans to farmers.

19. The commenter criticized Old SB&T for denying 100 percent

of its applications for home purchase loans by borrowers in LMI

census tracts in the Canton MSA in 2002. As noted, Wayne did not

acquire Old SB&T until 2003 and Wayne’s subsidiary banks did not

have branches in the Canton MSA in 2002.

20. The commenter asserted that First Franklin made more home

purchase loans to African Americans in the Canton MSA than

NC Bank or NC Mortgage. The commenter also criticized National

City for the number of denials of home improvement loan applications

by African Americans in the Canton MSA by NC Bank compared to

the number of home purchase loans originated by First Franklin in the

same area.

21. In evaluating the Allegiant and Provident proposals, the Board

analyzed HMDA data for 2001 and 2002 for the National City

Lenders, First Franklin, and the aggregate of lenders (‘‘aggregate

lenders’’) in the areas reviewed and preliminary 2003 HMDA data for

the National City Lenders. In this context, the lending data of the

aggregate lenders represent the cumulative lending for all financial

institutions that reported HMDA data in a given area.

22. The total HMDA-reportable loans include home purchase,

home refinance, home improvement, and multifamily residential loans.

The denial disparity ratio equals the denial rate for a particular racial

category (for example, African Americans) divided by the denial rate

for whites.

522 Federal Reserve Bulletin Autumn 2004
gate lenders in the MSAs previously reviewed and in the

Canton MSA supports the Board’s conclusions in those

orders. The National City Lenders made more HMDAreportable loans to African-American borrowers than did

First Franklin in the Canton MSA. In addition, the percentage of total HMDA-reportable loans that the National City

Lenders made to African-American borrowers in the Canton MSA was comparable with the aggregate lenders.

Furthermore, the denial disparity ratios of the National

City Lenders for African-American and Hispanic applicants for total HMDA-reportable loans in the Canton MSA

approximated or were lower than those of the aggregate

lenders in 2003.

The Board recognizes 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 and provide only limited information about covered loans. Because of the limitations of

HMDA data, the Board has considered these data carefully

in light of other information, including examination reports

that provide on-site evaluations of compliance with fair

lending laws by National City’s banks and their lending

subsidiaries, including First Franklin.

As noted in the Allegiant and Provident Orders, examiners found no evidence of prohibited discrimination or other

illegal credit practices at any of National City’s subsidiary

banks or the banks’ lending subsidiaries at their most

recent CRA performance evaluations.

The record also indicates that National City has taken

several affirmative steps to ensure compliance with fair

lending laws. National City has a centralized compliance

function and has implemented corporate-wide compliance

policies and procedures to help ensure that all National

City business lines, including those of First Franklin, comply with all fair lending and other consumer protection

laws and regulations. It employs compliance officers and

staff responsible for compliance training and monitoring,

and conducts file reviews for compliance with federal and

state consumer protection rules and regulations for all

product lines and origination sources, including First Franklin. National City also regularly performs self-assessments

of its compliance with fair lending law and provides training in fair lending policy for its employees.23

The Board also has considered the HMDA data in light

of other information, including the CRA performance

records of National City’s and Wayne’s subsidiary banks.

These records demonstrate that National City and Wayne

are active in helping to meet the credit needs of their entire

communities.

C. Conclusion on Convenience and Needs Factor

The Board has carefully considered all the facts of record,

including reports of examination of the CRA records of the

institutions involved, information provided by National

City, a public comment on the proposal, and confidential

supervisory information.24 The Board notes that the proposal would allow National City to provide a broader range

of products and services to Wayne’s customers. Moreover,

Wayne’s customers would have access to an expanded

network of branch offices and automated teller machines.

Based on a review of the entire record, and for the reasons

discussed above and in the Allegiant and Provident Orders,

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.

Nonbanking Activities

National City also has filed a notice under sections 4(c)(8)

and 4(j) of the BHC Act to acquire Access Financial,

Massillon, Ohio, a Wayne subsidiary that engages in consumer lending activities. The Board has determined by

regulation that making, acquiring, brokering, or servicing

loans is permissible for bank holding companies under the

Board’s Regulation Y,25 and National City has committed

to conduct this activity in accordance with the Board’s

regulations and orders for bank holding companies engaged

in these activities.

To approve the notice, the Board must determine that

National City’s acquisition of Access Financial and the

performance of the proposed activities ‘‘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.’’26 As part of its

evaluation of these factors, the Board has considered the

financial and managerial resources of National City, 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 concludes that financial and managerial

considerations are consistent with approval of the notice.

23. The commenter also reasserted criticisms raised in the Allegiant and Provident proposals that National City pays loan brokers

yield-spread premiums and does not have a program for referring to

the National City Lenders loan applicants of First Franklin who

qualify for credit from those affiliates. As noted in the Provident

Order, National City has represented that all loan applicants are

evaluated individually on their credit qualifications and the loans they

receive are based on those qualifications. Moreover, National City has

a substantial compliance program in place to ensure that First Franklin

and the National City Lenders do not engage in abusive lending

practices. The Board also notes that the payment of yield-spread

premiums to brokers is not a prohibited practice.

24. The commenter voiced again a criticism it raised in the Provident proposal about National City’s funding of third-party consumer

lending operations, including payday lenders, pawn shop operators,

and rent-to-own businesses. National City has represented that its

credit evaluations of these types of lenders include, as applicable, the

customer’s reputation and adherence to applicable law, including the

Fair Debt Collection Practices Act. Moreover, National City has

represented that it monitors those borrowers’ compliance with industry best practices through due diligence, including ‘‘blind shopping’’

programs and interviews with management.

25. See 12 CFR 225.28(b)(1).

26. See 12 U.S.C. §1843(j)(2)(A).

Legal Developments 523
The Board also has considered the competitive effects of

National City’s proposed acquisition of Access Financial

in light of all the facts of record. Access Financial engages

in consumer lending through one office in the Akron banking market, and National City engages in consumer lending

through its subsidiary banks in that market. The record

in this case indicates that there are numerous providers of

consumer lending services in the Akron banking market

and that the market for this service is unconcentrated.

Accordingly, the Board concludes that National City’s

acquisition of Access Financial would not have a significantly adverse effect on competition in any relevant

market.

The Board also has reviewed carefully the public benefits of the proposed acquisition of Access Financial. The

proposal would allow National City to provide an expanded

array of consumer loan products and services to customers

of Access Financial. Based on these and other matters

discussed in this order, as well as 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 possible adverse effects under the standard

of review set forth in 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 application and notice

should be, and hereby are, 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 and other applicable statutes. The Board’s

approval is specifically conditioned on compliance by

National City with the conditions imposed in this order and

the commitments made to the Board in connection with the

application and notice, including compliance with state

law. The Board’s approval of the nonbanking aspects of

the proposal is also subject to all the conditions set forth

in Regulation Y, including those in sections 225.7 and

225.25(c) (12 CFR 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

issued thereunder. For purposes of these actions, the conditions and commitments are deemed to be 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 acquisitions of Wayne Bank and SB&T shall not be

consummated before the fifteenth calendar day after the

effective date of this order, and no part of the proposal shall

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 the Reserve Bank, acting pursuant to

delegated authority.

By order of the Board of Governors, effective August 31,

2004.

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

Ohio Banking Market Definitions

Akron

Summit County, excluding the townships of Sagamore

Hills, Northfield Center, Twinsburg, Richfield, Boston,

and Hudson; Portage County, excluding the townships of

Aurora, Streetsboro, Mantua, Hiram, Nelson, Shalersville,

Freedom, and Windham; the townships of Homer, Harrisville, Westfield, Guilford, Wadsworth, and Sharon in

Medina County; Lawrence township and the western half

of Lake township in Stark County; and the townships of

Milton and Chippewa in Wayne County.

Canton

Stark County, excluding Lawrence township and the western half of Lake township; Carroll County; the township

of Smith in Mahoning County; and the townships of

Lawrence and Sandy in Tuscarawas County.

Cleveland

Cuyahoga, Lake, Lorain, and Geauga Counties; the townships of Sagamore Hills, Northfield Center, Twinsburg,

Richfield, Boston, and Hudson in Summit County; Medina

County, excluding the townships of Homer, Harrisville,

Westfield, Guilford, Wadsworth, and Sharon; the townships of Aurora and Streetsboro in Portage County; and the

city of Vermillion in Erie County.

Dover–New Philadelphia

Tuscarawas County, excluding the townships of Lawrence

and Sandy; the townships of Monroe, North, Franklin,

Stock, Washington, Nottingham, Freeport, and Moorefield

in Harrison County; and the townships of Salt Creek, Paint,

Berlin, Walnut Creek, and Clark in Holmes County.

Appendix B

Ohio Banking Markets in which National City and Wayne

Compete Directly

Akron

National City operates the third largest depository institution in the Akron banking market, controlling $1 billion in

deposits, which represents 13 percent of market deposits.

Wayne operates the 12th largest depository institution in

the market, controlling $138 million in deposits, which

524 Federal Reserve Bulletin Autumn 2004
represents 1.8 percent of market deposits. On consummation of the proposal, National City would remain the third

largest depository institution in the market, controlling

deposits of $1.1 billion, which represent approximately

14.7 percent of market deposits. The HHI would increase

46 points to 1,436. Twenty-six bank and thrift competitors

would remain in the market.

Canton

National City operates the seventh largest depository institution in the Canton banking market, controlling $226 million in deposits, which represents 4.7 percent of market

deposits. Wayne operates the 13th largest depository institution in the market, controlling $41 million in deposits,

which represents less than 1 percent of market deposits. On

consummation of the proposal, National City would remain

the seventh largest depository institution in the market,

controlling deposits of $267 million, which represent

approximately 5.6 percent of market deposits. The HHI

would increase 8 points to 1,432. Eighteen bank and thrift

competitors would remain in the market.

Cleveland

National City operates the second largest depository institution in the Cleveland banking market, controlling

$15.2 billion in deposits, which represents 25.6 percent of

market deposits. Wayne operates the 31st largest depository institution in the market, controlling $16 million in

deposits, which represents less than 1 percent of market

deposits. On consummation of the proposal, National City

would remain the second largest depository institution

in the market. The HHI would increase 2 points to 1,933.

Thirty-five bank and thrift competitors would remain in the

market.

Dover–New Philadelphia

National City operates the sixth largest depository institution in the Dover–New Philadelphia banking market, controlling $67 million in deposits, which represents 5.6 percent of market deposits. Wayne operates the 18th largest

depository institution in the market, controlling $7 million

in deposits, which represents less than 1 percent of market

deposits. On consummation of the proposal, National City

would remain the sixth largest depository institution in the

market, controlling deposits of $73 million, which represent 6.2 percent of market deposits. The HHI would

increase 6 points to 1,208. Twenty bank and thrift competitors would remain in the market.

Appendix C

CRA Performance Evaluations of National City

Subsidiary Bank CRA Rating Date Supervisor

1. National City Bank,

Cleveland, Ohio

Outstanding February 2000 OCC

2. National City Bank of Indiana,

Indianapolis, Indiana

Satisfactory February 2000 OCC

3. The Madison Bank & Trust Company,

Madison, Indiana

Outstanding May 1999 FDIC

4. National City Bank of Kentucky,

Louisvile, Kentucky

Satisfactory February 2000 OCC

5. National City Bank of the Midwest,

Bannockburn, Illinois

Outstanding February 2000 OCC

6. National City Bank of Pennsylvania,

Pittsburgh, Pennsylvania

Outstanding February 2000 OCC

7. National City Bank of Southern Indiana,

New Albany, Indiana

Satisfactory February 2000 OCC

8. The Provident Bank,

Cincinnati, Ohio

Outstanding March 2004 Federal Reserve Bank

of Cleveland

Legal Developments 525
North Fork Bancorporation, Inc.

Melville, New York

Order Approving the Acquisition of a Bank Holding

Company

North Fork Bancorporation (‘‘North Fork’’), 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 to acquire GreenPoint Financial Corp. (‘‘GreenPoint’’) and its subsidiary

bank, GreenPoint Bank, both in New York, New York.1

North Fork also has requested the Board’s approval

under sections 4(c)(8) and 4(j) of the BHC Act and section 225.28(b)(12) of the Board’s Regulation Y to acquire

a nonbanking subsidiary of GreenPoint and thereby engage

in permissible community development activities.2

Notice of the proposal, affording interested persons

an opportunity to submit comments, has been published

(69 Federal Register 21,833 (2004)). The time for filing

comments has expired, and the Board has considered the

proposal and all comments in light of the factors set forth

in sections 3 and 4 of the BHC Act.

North Fork, with total consolidated assets of approximately $25.6 billion, operates insured depository institutions3 in New York, Connecticut, and New Jersey that

control deposits totaling approximately $18 billion, which

represents less than 1 percent of total deposits in insured

depository institutions in the United States.4 North Fork is

the seventh largest depository organization in New York,

controlling deposits of $14 billion, which represents

approximately 2.4 percent of total deposits in depository

institutions in the state (‘‘state deposits’’).5 GreenPoint,

with total consolidated assets of approximately $23.8 billion, is the eighth largest insured depository organization

in New York, controlling deposits of $12.6 billion, which

represents approximately 2.2 percent of state deposits.

On consummation of the proposal, North Fork, with

total consolidated assets of $54.1 billion,6 would control

deposits of approximately $31.6 billion, which represents

less than 1 percent of total deposits in insured depository

institutions nationwide. North Fork would become the fifth

largest depository organization in New York, controlling

deposits in the state of $26.6 billion, which represents

approximately 4.5 percent of state deposits.

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.7

North Fork and GreenPoint compete directly in the

Metropolitan New York/New Jersey banking market

(‘‘New York banking market’’).8 The Board has reviewed

carefully the competitive effects of the proposal in this

banking market in light of all the facts of record. In

particular, the Board has considered the number of competitors that would remain in the market, the relative shares

of total deposits in depository institutions in the market

(‘‘market deposits’’) controlled by North Fork and GreenPoint, 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

Merger Guidelines (‘‘DOJ Guidelines’’),9 and other characteristics of the market.

Consummation of the proposal would be consistent with

Board precedent and the DOJ Guidelines in the New York

banking market. On consummation of the proposal, North

Fork would become the fifth largest depository organization in this market, controlling $30 billion in deposits,

which represents approximately 4.7 percent of market

deposits.10 The HHI would increase by only 11 points to

1. 12 U.S.C. §1842.

2. 12 U.S.C. §§1843(c)(8) and 1843(j); 12 CFR 225.28(b)(12).

3. In this context, the term ‘‘insured depository institution’’

includes insured commercial banks, savings associations, and savings

banks.

4. Asset and national deposit data are as of March 31, 2004, and

have been adjusted to account for the merger of The Trust Company

of New Jersey, Jersey City, New Jersey (‘‘TCNJ’’), into North Fork’s

lead subsidiary bank, North Fork Bank, Mattituck, New York (‘‘North

Fork Bank’’), on May 15, 2004.

5. Statewide deposit and ranking data are as of June 30, 2003.

6. This amount includes approximately $5.4 billion in one-time

balance sheet adjustments.

7. 12 U.S.C. §1842(c)(1).

8. The New York banking market is defined as the counties of

Bronx, Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens,

Richmond, Rockland, Suffolk, Sullivan, Ulster, and Westchester

in New York; the counties of Bergen, Essex, Hudson, Hunterdon,

Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex,

Union, and Warren and portions of Mercer County in New Jersey;

Pike County in Pennsylvania; and Fairfield County and portions of

Litchfield and New Haven Counties in Connecticut.

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

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

1000. 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 postmerger 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 limitedpurpose lenders and other nondepository financial institutions.

10. Market share data are as of June 30, 2003, adjusted to include

North Fork’s acquisition of TCNJ, 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 Bulletin 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).

526 Federal Reserve Bulletin Autumn 2004
982, the market would remain unconcentrated, and numerous competitors would remain in the market.

The Department of Justice also has conducted a review

of the competitive effects of the proposal and has advised

the Board that consummation of the proposal would not

have a significantly adverse effect on competition in the

New York banking market or any other relevant banking market. The appropriate banking agencies have been

afforded an opportunity to comment and have not objected

to the proposal.

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 Supervisory Considerations

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 reports of examination, other confidential supervisory information received from the primary federal

supervisors for the subsidiary depository institutions of

North Fork and GreenPoint, information provided by North

Fork, and public comment on the proposal. In addition, the

Board has consulted with the Federal Deposit Insurance

Corporation (‘‘FDIC’’), the primary federal supervisor of

North Fork’s subsidiary banks, concerning the proposal.

North Fork is well capitalized and will remain so on

consummation of the proposal. Moreover, the proposal is

structured as a share exchange and involves no acquisition

debt.

The Board also has considered the managerial resources

and the examination records of North Fork, GreenPoint,

and GreenPoint Bank, including their risk management

systems and other policies; North Fork’s record of integrating past merger proposals; and the proposed management

after consummation, including management of each of its

current and proposed subsidiaries.11 Based on all the facts

of record, the Board has concluded that considerations

relating to the financial and managerial resources and

future prospects of North Fork, GreenPoint, and GreenPoint Bank are consistent with approval, as are the other

supervisory factors under the BHC Act.12

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’’).13 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 banks of North Fork and GreenPoint in light

of all the facts of record, including public comment on

the proposal. A commenter opposing the proposal asserted,

based on data reported under the Home Mortgage Disclosure Act (‘‘HMDA’’),14 that North Fork and GreenPoint

engage in discriminatory treatment of African-American

and Hispanic individuals in their home mortgage lending

operations. The commenter also contended that the banks

do not make their products and services available in lowincome and predominantly minority areas, particularly in

the Bronx, and instead provide financial support to ‘‘fringe

banking’’ businesses, such as check cashers and pawn

shops, in those areas. In addition, the commenter expressed

concern about potential branch closures resulting from this

proposal.15

11. A commenter criticized North Fork’s management of its mortgage operations by referencing an administrative action brought by

the New York Attorney General’s Office (‘‘NYAG’s Office’’) against

North Fork that involved escrow fees improperly charged to 30

accounts. The NYAG’s Office confirmed that this matter was resolved

in May 2003, when North Fork corrected the alleged errors, reimbursed the escrow fees it charged the customers involved, and paid a

small fine.

12. The commenter also expressed concern that GreenPoint Bank’s

subsidiary, GreenPoint Mortgage Funding, Inc. (‘‘GPMF’’), might be

outsourcing certain back-office services to vendors in foreign countries and questioned whether customers’ financial information was

being properly safeguarded. Many U.S. financial institutions use service providers to perform various functions, such as data processing.

The use of service providers, whether domestic or foreign-based, is a

common business practice and is not prohibited by federal banking

laws. The Board expects U.S. financial institutions to manage effectively the risks associated with their outsourcing arrangements and to

comply with all applicable legal and regulatory requirements, regardless of whether these arrangements are with domestic or foreign firms.

U.S. financial institutions have various obligations under federal law

to protect the privacy and security of information about their customers, including information transferred or transmitted to a foreignbased service provider. In supervising financial institutions with outsourcing arrangements, the federal financial supervisory agencies

focus on the ability and obligation of the financial institutions to

maintain controls over the privacy and security practices of their

service providers that have custody or access to customer information.

The Board has consulted with the FDIC and reviewed information

submitted by North Fork and GreenPoint about the banks’ controls

over service providers.

13. 12 U.S.C. §2901 et seq.

14. 12 U.S.C. §2801 et seq.

15. The commenter also expressed concern about possible job

losses resulting from this proposal. The effect of a proposed acquisition on employment in a community is not among the factors included

in the BHC Act, and the convenience and needs factor has been

interpreted consistently by the federal banking agencies, the courts,

and the Congress to relate to the effect of a proposal on the availability

and quality of banking services in the community. See Wells Fargo &

Company, 82 Federal Reserve Bulletin 445, 457 (1996).

Legal Developments 527
A. CRA Performance Evaluations

As provided in the CRA, the Board has evaluated the

convenience and needs factor in light of the 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.16

North Fork Bank received an ‘‘outstanding’’ rating at its

most recent CRA evaluation by the FDIC, as of August 19,

2002.17 GreenPoint Bank also received an ‘‘outstanding’’

rating at its most recent CRA performance evaluation by

the FDIC, as of January 28, 2002. North Fork has indicated

that GreenPoint Bank would be merged into North Fork

Bank after consummation of the proposal.18 North Fork

stated that it would identify the best products and services

currently offered by both institutions and endeavor to make

them available to all customers.

B. CRA Performance of North Fork Bank

North Fork Bank’s most recent CRA evaluation characterized its overall record of home mortgage and small business lending as excellent and praised the bank’s level of

community development lending. Examiners noted favorably the use of several flexible lending products designed

to address affordable housing needs of LMI individuals

and commended the bank’s level of qualified investments.

In addition, examiners commended North Fork Bank’s

community development services and the distribution of

the bank’s branches.

North Fork Bank also received an ‘‘outstanding’’ rating

under the lending test at its most recent CRA performance

evaluation.19 Examiners commended North Fork Bank for

its responsiveness to the assessment areas’ credit needs and

excellent level of lending activity.

Examiners also commended North Fork Bank for the

excellent overall geographic distribution of its lending and

good distribution of its home mortgage loans to borrowers

throughout the assessment areas and noted North Fork’s

use of Modification, Extension, and Consolidation Agreements (‘‘MECAs’’) in addition to HMDA-reportable

loans.20 Examiners found that North Fork Bank’s home

purchase lending in LMI census tracts exceeded the percentage of owner-occupied housing units and the aggregate

lending data. For example, examiners noted that North

Fork Bank made approximately 24 percent of its total

home purchase loan originations during the assessment

period to borrowers in LMI census tracts, which was more

than double the percentage of owner-occupied housing

units in LMI census tracts in the bank’s assessment areas.21

Examiners also noted that approximately 29 percent of

North Fork Bank’s 2000 home purchase loans were made

to borrowers in LMI census tracts, compared with the

approximately 16 percent originated by the lenders in the

aggregate (‘‘aggregate lenders’’).22

Examiners commended North Fork Bank for developing

flexible lending products and programs, such as the North

Fork Subsidy Program, which provides borrowers who

meet certain income guidelines and purchase homes in

predominantly minority communities with closing-cost

grants of up to $3,000; and the North Fork Bank Affordable Housing Program, which combines low downpayment requirements, below market interest rates, and

reduced loan costs for applicants with total household

income of $65,000 or less. In addition, examiners reported

that North Fork Bank participated in several governmentsponsored programs that offered flexible underwriting for

home mortgages through secondary market providers, such

as Fannie Mae, and worked with the State of New York

16. See Interagency Questions and Answers Regarding Community

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

17. North Fork’s other subsidiary depository institution, Superior

Savings of New England, National Association, Branford, Connecticut (‘‘Superior’’), received a ‘‘satisfactory’’ CRA performance rating

from the Office of the Comptroller of the Currency (‘‘OCC’’), as of

September 30, 2002. The OCC has designated Superior as a wholesale

bank. As of March 31, 2004, Superior reported assets of $462 million,

representing approximately 2.1 percent of North Fork’s total assets.

18. The FDIC has approved the Bank Merger Act (12 U.S.C.

§1828(c)) application related to this transaction.

19. The evaluation period for the lending test was January 1, 2000,

through June 30, 2002; the evaluation period for the investment test

and service test was October 1, 1999, through June 30, 2002.

20. A MECA is an agreement under which a lender and a borrower

agree to modify the terms of an existing loan by, for example,

extending the final repayment date. MECAs do not involve lending

additional money and are not reported under HMDA, but achieve

the same results as a loan purchase or loan refinancing and may be

considered in evaluating an institution’s CRA performance. See Interagency Questions and Answers Regarding Community Reinvestment,

66 Federal Register at 36,632 (2001).

21. The commenter asserted that North Fork Bank failed to originate adequate numbers of mortgage loans in LMI areas of Brooklyn,

the Bronx, and Manhattan. Although the Board has recognized that

banks help serve the banking needs of communities by making a

variety of products and services available, the CRA does not require

an institution to participate in any specific loan programs or provide

any specific types of products or services in its assessment area.

Examiners noted that data from the 2000 Census show that a majority

of the housing units in the bank’s assessment areas are renteroccupied. In light of these demographic data, examiners praised North

Fork Bank’s lending in LMI communities and noted North Fork’s

leadership in responding to the credit needs of economically disadvantaged areas, in part through the bank’s multifamily lending activities.

Examiners found that during the evaluation period, North Fork Bank

originated or purchased 265 multifamily loans (including MECAs) on

properties in LMI census tracts, totaling approximately $345 million, which represented approximately 47 percent of the number and

41 percent of the dollar amount of North Fork Bank’s total multifamily lending activities in its assessment areas during the evaluation

period. Examiners stated that the majority of the bank’s LMI multifamily loans were originated in the counties of Kings (Brooklyn),

Bronx, and New York (Manhattan). Examiners also determined, after

a sampling of the rent rolls for these properties, that all the bank’s

LMI multifamily loans involve affordable housing and meet the

definition of community development lending.

22. The lending data of the lenders in the aggregate represent the

cumulative lending for all financial institutions that have reported

HMDA data in a particular area.

528 Federal Reserve Bulletin Autumn 2004
Mortgage Association to offer loan programs focused on

first-time homebuyers or LMI borrowers. North Fork also

provides loan products with special terms to promote cooperative housing opportunities for LMI borrowers.

Examiners characterized North Fork Bank’s willingness

to serve the credit needs of small- and medium-sized

businesses as impressive particularly given the size of

the bank. During the evaluation period, North Fork Bank

originated more than 15,000 small loans to businesses in

its assessment areas,23 totaling more than $1.4 billion.24

Examiners reported that the bank exhibited excellent geographic distribution of small loans to businesses in its

assessment areas compared with the aggregate lenders.25

North Fork stated that North Fork Bank made almost

$800 million in small loans to businesses in 2002, including 280 small loans to businesses totaling more than

$21 million in the Bronx, which made North Fork Bank the

fourth largest small business lender in the Bronx in that

year.26 North Fork also stated that, in 2003, North Fork

Bank substantially increased the number of small loans to

businesses and loans to small businesses in the Bronx.

Examiners commended North Fork Bank for its leadership in making community development loans and in

responding to the credit needs of economically disadvantaged areas, individuals, and small businesses. During the

evaluation period, North Fork Bank originated more than

30 community development loans totaling more than

$83 million in its assessment areas. These loans included

$4 million in credit for a retail development in an LMI

neighborhood in Bronx County, a $14 million loan for

renovations and a permanent mortgage for an industrial

warehouse in an LMI area in the Hunts Point section of

Bronx County, more than $5 million in credit to fund the

rehabilitation of a 48-unit apartment building in an LMI

neighborhood in Harlem, and loans to improve healthcare

facilities for low-income individuals and families. In 2003,

North Fork Bank originated 23 new community development loans totaling more than $76 million.

North Fork Bank received an ‘‘outstanding’’ rating under

the investment test at its most recent CRA performance

evaluation. Examiners commended North Fork Bank for

its excellent commitment to the community development

organizations in its assessment areas and noted the bank’s

leadership in investing in innovative and complex qualified

investments. During the evaluation period, North Fork

Bank made 100 community development investments totaling more than $34 million in its assessment areas. North

Fork Bank’s total community development investments

in its assessment areas, including grants, totaled more than

$66 million. These investments included a $5 million

investment in multifamily housing revenue bonds issued

by the New York City Housing Development Corporation,

a $15 million investment in an industrial revenue bond

supporting the creation of a 147-unit rental facility for

low-income senior citizens in Central Islip, and a $2.3 million investment through the CRA Fund in securities financing the mortgage of a Section 8 housing project in the

Bronx.27 Since the evaluation period, North Fork Bank’s

level of qualified community development investments has

increased to $89.5 million.

North Fork Bank also received an ‘‘outstanding’’ rating

under the service test. Examiners reported that North Fork

Bank offered an excellent level of support to its community

and commended North Fork Bank for offering community

development services not provided by other area financial

institutions, such as the bank’s financial literacy programs.

Examiners stated that North Fork Bank offered a full range

of banking services at its branches and that its branches

and delivery systems provided access to financial products

and services for consumers of different income levels and

in LMI geographies, noting that North Fork Bank had

increased the accessibility of its products and services.28 In

addition, examiners reported that the bank’s distribution of

28 branches and 49 automated teller machines (‘‘ATMs’’)

among LMI census tracts was reasonable. They also noted

that 42 additional branches were adjacent to LMI census

tracts, increasing the combined percentage of branches in

or nearby LMI census tracts from approximately 17 percent to 42 percent of the bank’s total number of branches.

23. Small loans to business are loans that are originated in amounts

of $1 million or less and are either secured by nonfarm, nonresidential

properties or are classified as commercial and industrial loans.

24. The commenter expressed concern that some of North Fork’s

small business lending financed retail check cashers or other nontraditional providers of financial services. According to information

provided by North Fork, North Fork Bank has depository and lending

relationships with entities engaged in retail check-cashing and moneytransmittal activities. North Fork takes steps to ensure that such

companies are appropriately licensed and supervised and that their

principals meet background requirements. North Fork stated that it has

no role in the implementation of the policies or procedures of its retail

check-cashing customers and that it has refused to lend to, or terminated relationships with, nontraditional product providers that North

Fork believed were engaged in questionable practices. The Board

notes that North Fork Bank owns a check-cashing affiliate, CBMC,

Inc., that it acquired as part of a prior bank merger. This affiliate is

licensed and supervised by the New York State Banking Department

(‘‘NYSBD’’) and examined by the FDIC. The Board has consulted

with the FDIC and the NYSBD regarding their most recent reviews of

the company’s activities.

25. Examiners noted that, in 2000, North Fork Bank originated

25 percent of its small loans to businesses in LMI census tracts,

comparing favorably with the aggregate lenders, which originated

approximately 17 percent of their small loans to businesses in LMI

census tracts. During the evaluation period, North Fork Bank also

originated 24 percent of its small loans to businesses in LMI census

tracts, which compared favorably to the fact that approximately

21 percent of the businesses were in LMI census tracts.

26. The commenter asserted that North Fork Bank’s level of small

business lending in the Bronx was inadequate.

27. The Section 8 program provides rent subsidies directly to

landlords on behalf of very low-income families, the elderly, and

the disabled. The program is administered by local public housing

agencies using funds from the Department of Housing and Urban

Development.

28. The commenter expressed concerns about North Fork Bank’s

branch distribution in LMI and minority areas in Bronx County. North

Fork has five branches and six free-standing ATMs in LMI and

predominantly minority census tracts in the Bronx.

Legal Developments 529
C. CRA Performance of GreenPoint Bank

As previously noted, GreenPoint Bank received an overall

‘‘outstanding’’ rating for CRA performance from the FDIC,

as of January 28, 2002.29 GreenPoint Bank also received

an ‘‘outstanding’’ rating under the lending test.30 Examiners commended GreenPoint Bank for its excellent responsiveness to the credit needs of the assessment area and its

excellent level of lending activity. They noted that GreenPoint Bank ranks among the top 1 percent of all HMDA

lenders that reported loans in LMI census tracts in its

assessment area. In addition, examiners commended

GreenPoint Bank for its innovative and flexible mortgage

loan products and for its high level of community development loans, which totaled almost $100 million during the

assessment period.

GreenPoint Bank received a ‘‘high satisfactory’’ under

the investment test and examiners reported that GreenPoint

Bank had a significant level of qualified community development investments and grants. During the evaluation

period, the bank made new qualified investments and

grants totaling almost $12 million. GreenPoint Bank also

added $25 million in funding to the bank’s charitable

foundation, which provides college tuition scholarships

and grants to organizations that provide affordable housing, health, senior citizen, and other community development services. Examiners reported that GreenPoint Bank’s

investments and grants reflected a good responsiveness to

the community’s economic needs, often through the use of

innovative or complex investment vehicles.

GreenPoint Bank also received a ‘‘high satisfactory’’

rating under the service test. Examiners characterized

GreenPoint Bank’s branch distribution among LMI census

tracts as reasonable, reporting that more than 21 percent of

the bank’s 74 branches were in LMI areas. The commenter

expressed concern that GreenPoint Bank’s lack of branches

in the Bronx limited its ability to provide basic banking

services to the area’s LMI individuals. Examiners reported,

however, that GreenPoint Bank provided meaningful community development investments, loans, and services in the

Bronx even though it did not maintain a branch there.

GreenPoint Bank has opened three branches in the Bronx

since its 2002 CRA performance evaluation.

Examiners reported that GreenPoint Bank continued to

be innovative and proactive in responding to its communities’ needs and opportunities for community development

services. In addition, examiners noted that the bank offered

many home ownership seminars, mortgage fairs, and

home-buying counseling sessions, and noted its participation in various community development services, such as

Habitat for Humanity.

D. HMDA Data and Fair Lending Record

The Board also has carefully considered the lending

records of North Fork and GreenPoint in light of comments

on the HMDA data reported by their subsidiaries.31 The

commenter alleged that 2002 HMDA data indicated that

North Fork Bank disproportionately denied home mortgage loan applications from African Americans and Hispanics as compared with applications from nonminorities

in the New York City Metropolitan Statistical Area

(‘‘MSA’’), and that GreenPoint disproportionately denied

home mortgage loan applications from African Americans

and Hispanics relative to applications from nonminorities

in certain other markets where it operates.

The 2002 HMDA data indicate that North Fork’s percentage of total HMDA-reportable loan originations, which

include home purchase, refinance, home improvement, and

multifamily loans, to borrowers in predominantly minority

census tracts32 generally was comparable with or lagged

the percentage for the aggregate lenders in the areas

reviewed. However, North Fork Bank’s percentage of

home purchase loans, a subcategory of its total HMDAreportable lending, to borrowers in predominantly minority

census tracts exceeded the percentage for the aggregate

lenders. North Fork’s denial disparity ratios33 for AfricanAmerican and Hispanic applicants for total HMDAreportable loans generally were comparable with or higher

than those ratios for the aggregate lenders in the areas

reviewed. However, a significant volume of North Fork

Bank’s HMDA-reportable multifamily loans and MECAs,

which are not reported under HMDA, were for properties

in predominantly minority census tracts.34 North Fork Bank

also has purchased a number of home mortgage loans to

minority individuals and for properties in predominantly

minority census tracts.35

29. The evaluation period was January 1, 1999, through December 30, 2001; the community development activities were considered

from May 24, 1999, through January 28, 2002.

30. In evaluating GreenPoint Bank’s record of performance under

the CRA, examiners considered home mortgage loans by GPMF, the

bank’s subsidiary mortgage lender. The commenter expressed concern

that GPMF engaged in subprime lending, but provided no evidence

that it had originated or purchased ‘‘predatory’’ loans or otherwise

engaged in abusive lending practices. North Fork stated that neither

North Fork nor GreenPoint offers subprime mortgage products.

31. The Board analyzed HMDA data from 2001 through 2003 for

North Fork and GreenPoint and HMDA data for 2001 and 2002 for

the aggregate lenders in the New York City and Nassau-Suffolk

MSAs. The 2003 HMDA data are preliminary, and 2003 data for the

aggregate lenders are not yet available.

32. For purposes of this HMDA analysis, a predominantly minority

census tract means a census tract with a minority population of

80 percent or more.

33. The denial disparity ratio equals the denial rate of a particular

racial category (e.g., African Americans) divided by the denial rate for

whites.

34. As noted above, a MECA loan does not involve lending additional money and is not reported under HMDA, but achieves the same

results as a loan purchase or loan refinancing. In 2002, North Fork

Bank originated 175 total multifamily loans and MECAs, including

65 in predominantly minority census tracts totaling $143.4 million.

In addition, almost all the multifamily loans and MECAs originated

by the bank from 2001 to 2003 were in Bronx, Kings, and New York

Counties, the three counties with the highest percentage of minority

residents in the bank’s assessment areas.

35. In 2002, North Fork Bank purchased 330 HMDA-reportable

loans in its New York City MSA assessment area. More than 125

of these loans were to African-American borrowers. The commenter

530 Federal Reserve Bulletin Autumn 2004
The 2001 and 2002 HMDA data indicate that GreenPoint’s percentage of total HMDA-reportable loan originations to borrowers in minority census tracts in its assessment area generally exceeded or was comparable with

the percentage for the aggregate lenders. In addition, the

bank’s denial disparity ratios for African-American and

Hispanic applicants for HMDA-reportable loans in the

markets reviewed generally were comparable with or lower

than those ratios for the aggregate lenders.

Although the HMDA data may reflect certain disparities

in the rates of loan applications, originations, and denials

among members of different racial groups and persons at

different income levels in certain local areas, the HMDA

data generally do not indicate that North Fork or GreenPoint is excluding any race or income segment of the

population or geographic areas on a prohibited basis. The

Board nevertheless 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.36

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 on-site

evaluations of compliance by the subsidiary depository

institutions of North Fork and GreenPoint with fair lending

laws. The Board has reviewed carefully the examination

data and findings of the NYSBD and FDIC. Examiners

noted no fair-lending-law issues or concerns in the CRA

performance evaluations of the depository institutions controlled by North Fork or GreenPoint.

The record also indicates that North Fork has taken steps

to ensure compliance with fair lending laws. North Fork

has instituted corporate-wide policies and procedures to

help ensure compliance with all fair lending and other

consumer protection laws and regulations. Both North

Fork’s and GreenPoint’s compliance programs include

regular internal reviews and audits of HMDA data to

ensure that all prospective loan applicants are treated fairly

regardless of race, ethnicity, gender, or age. North Fork has

stated that its policies and programs will generally apply to

the combined organization, but that it would seek to integrate best business practices from GreenPoint, especially

those pertaining to its mortgage lending activities.

The Board also has considered the HMDA data in light

of the programs described above, such as the banks’ use of

MECAs in their multifamily lending operations, and the

overall performance record of the subsidiary banks of

North Fork and GreenPoint under the CRA. These established efforts demonstrate that the banks are active in helping to meet the credit needs of their entire communities.

E. Branch Closings

The commenter expressed concern about the effect of

potential branch closings that might result from this proposal. The Board has considered these comments in light

of all the facts of record. North Fork has represented that

it is in the process of determining whether it will close

branches in markets where there is overlap and that it will

close or consolidate any branches in accordance with North

Fork’s Branch Closing Policy and Procedures. Under these

policies, North Fork must review a number of factors

before closing or consolidating a branch, including an

assessment of the branch, a profile of the community where

the branch is located, and the effect of the proposed action

on customers. In addition, examiners reviewed North Fork

Bank’s branch closing policy as part of its most recent

CRA evaluation and found that it complied with federal

law.

The Board also has considered that federal banking law

provides a specific mechanism for addressing branch closings.37 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 North Fork Bank, will continue to

review its branch closing record in the course of conducting CRA performance evaluations.

criticized North Fork Bank’s practice of purchasing rather than originating a substantial number of home mortgage loans to LMI and

minority borrowers. The commenter argued that North Fork Bank

should not receive CRA credit for loan purchases and urged North

Fork to increase its loan originations to LMI and minority borrowers.

The federal regulatory agencies’ regulations implementing the CRA

do not differentiate between loan originations and purchases for

purposes of evaluating an institution’s CRA lending performance

because both involve funding the purchase of housing. See, e.g.,

12 CFR 228.22.

36. 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.

37. 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.

Legal Developments 531
F. Conclusion on Convenience and Needs Factor

The Board has carefully considered all the facts of record,

including reports of examination of the CRA records of the

institutions involved, information provided by North Fork,

public comments on the proposal, and confidential supervisory information. The Board notes that the proposal would

expand the availability of banking products and services to

the customers of North Fork and GreenPoint, drawing on

North Fork’s focus on commercial lending and GreenPoint’s focus on mortgage lending. 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.

Nonbanking Activities

North Fork also has filed a notice under sections 4(c)(8)

and 4(j) of the BHC Act to acquire GreenPoint Community Development Corp., also in New York (‘‘CDC’’),

which engages in community development activities. The

Board has determined by regulation that this activity is

permissible for bank holding companies under the Board’s

Regulation Y.38

To approve the notice, the Board must determine that the

acquisition of GreenPoint’s nonbanking subsidiary and

the performance of the proposed activities by North Fork

‘‘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.’’39 As part of its evaluation of these factors, the

Board has considered the financial and managerial

resources of North Fork 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 concludes that

financial and managerial considerations are consistent with

approval of the notice.

The Board also has considered the competitive effects of

North Fork’s proposed acquisition of CDC in light of all

the facts of record. North Fork and GreenPoint both engage

in community development activities. The market for this

activity is local in scope and unconcentrated, and there are

no significant barriers to entry. The record also indicates

that there are numerous providers of these services in the

New York City area. Accordingly, the Board concludes

that North Fork’s acquisition of CDC would not have a

significantly adverse effect on competition in any relevant

market.

In addition, the Board has reviewed the public benefits

of the proposed acquisition of CDC. North Fork’s proposal

to continue CDC’s community development activities

would benefit the communities served by North Fork and

GreenPoint by providing investments in corporations or

projects designed to promote community welfare, such as

economic rehabilitation and development of low-income

areas by providing housing, services, or jobs for residents.

Based on 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) of the BHC Act.

Conclusion

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

Board has determined that the application and notice

should be, and hereby are, 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 and other applicable statutes.40 The Board’s

approval is specifically conditioned on compliance by

North Fork with the conditions imposed in this order and

the commitments made to the Board in connection with

the application and notice. 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) (12 CFR 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 issued thereunder. For purposes of

these actions, the commitments and conditions noted above

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.

38. See 12 CFR 225.28(b)(12).

39. See 12 U.S.C. §1843(j)(2)(A).

40. The commenter also 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 CFR 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 CFR

225.25(a)(2). The Board has considered carefully the commenter’s

requests in light of all the facts of record. In the Board’s view, the

commenter 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. The commenter’s request fails

to demonstrate why written comments do not present the 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.

532 Federal Reserve Bulletin Autumn 2004
The acquisition of GreenPoint 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 the Federal Reserve Bank of New York, acting

pursuant to delegated authority.

By order of the Board of Governors, effective July 20,

2004.

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

SunTrust Banks, Inc.

Atlanta, Georgia

SunTrust Bank Holding Company

Orlando, Florida

Order Approving the Merger of Bank Holding

Companies

SunTrust Banks, Inc. and SunTrust Bank Holding Company (collectively ‘‘SunTrust’’), financial holding companies within the meaning of the Bank Holding Company

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

under section 3 of the Bank Holding Company Act (‘‘BHC

Act’’) to merge with National Commerce Financial Corporation (‘‘National Commerce’’) and to acquire its subsidiary bank, National Bank of Commerce, both in Memphis,

Tennessee (‘‘NBC’’).1 In addition, SunTrust has requested

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

BHC Act and section 225.24 of the Board’s Regulation Y

to acquire the nonbanking subsidiaries of National Commerce, including National Commerce’s subsidiary savings associations, NBC Bank, FSB (‘‘NBC FSB’’) and

First Market Bank, FSB (‘‘First Market FSB’’), both in

Memphis.2

Notice of the proposal, affording interested persons

an opportunity to submit comments, has been published

(69 Federal Register 35,627 (2004)). 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 the BHC Act.

SunTrust, with total consolidated assets of approximately $128.1 billion, is the tenth largest depository organization in the United States,3 controlling deposits of

approximately $85.8 billion, which represent approximately 1.4 percent of the total amount of deposits of

insured depository institutions in the United States.4

SunTrust operates subsidiary depository institutions in

Alabama, Florida, Georgia, Maryland, South Carolina,

Tennessee, Virginia, and Washington, D.C. and engages in

numerous nonbanking activities that are permissible under

the BHC Act.

National Commerce, with total consolidated assets of

approximately $24 billion, is the 43rd largest depository

organization in the United States, controlling deposits

of $17.1 billion. National Commerce operates depository

institutions in Arkansas, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, and West

Virginia.

On consummation of the proposal, and after accounting for the proposed divestitures discussed in this order,

SunTrust would become the ninth largest depository organization in the United States, with total consolidated assets

of approximately $152.1 billion, and would control deposits of approximately $103 billion, which represent approximately 1.6 percent of the total amount of deposits of

insured depository institutions in the United States.

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. For purposes of the BHC Act, the home state of

SunTrust is Georgia,5 and National Commerce’s subsidiary

bank is located in Arkansas, Georgia, North Carolina,

South Carolina, Tennessee, Virginia, and West Virginia.6

All the conditions for an interstate acquisition enumerated in section 3(d) of the BHC Act are met in this case.

SunTrust currently is adequately capitalized and adequately

managed, as defined by applicable law, and would remain

so on consummation of this proposal.7 National Commerce’s subsidiary bank has been in existence and operated continuously for at least the period of time required by

applicable state law.8 On consummation of the proposal,

SunTrust and its affiliates would control less than 30 percent, or the appropriate percentage established by applicable state law, of the total amount of deposits of insured

1. 12 U.S.C. §1842.

2. 12 U.S.C. §§1843(c)(8) and (j); 12 CFR 225.24. All the nonbanking subsidiaries of National Commerce and activities for which

SunTrust has filed a notice under sections 4(c)(8) and 4(j) of the BHC

Act are listed in Appendix A.

3. Asset and national ranking data are as of June 30, 2004, and

reflect consolidations through August 31, 2004.

4. Deposit data are as of June 30, 2004, and reflect the total of the

deposits reported by each organization’s insured depository institutions in their Consolidated Reports of Condition and Income or Thrift

Financial Reports for June 30, 2004. In this context, insured depository institutions include commercial banks, savings banks, and savings associations.

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

total deposits of all subsidiary banks of the company were the largest

on July 1, 1966, or the date on which the company became a bank

holding company, whichever is later. 12 U.S.C. §1841(o)(4)(C).

6. For purposes of section 3(d), the Board considers a bank to be

located in the states in which the bank is chartered or headquartered or

operates a branch. See 12 U.S.C. §§1841(o)(4)–(7) and 1842(d)(1)(A)

and (d)(2)(B). Although National Commerce’s savings association,

NBC FSB, also has offices in Mississippi, it is not a bank subject to

section 3(d) of the BHC Act.

7. See 12 U.S.C. §1842(d)(1)(A).

8. See 12 U.S.C. §1842(d)(1)(B).

Legal Developments 533
depository institutions in each state in which the subsidiary

banks of both organizations currently are located.9 All

other requirements of section 3(d) would be met in this

case. Accordingly, based on 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 proposed bank acquisition 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. In addition, section 3 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 its probable

effect in meeting the convenience and needs of the community to be served.10 The Board also must consider the

competitive effects of a proposal to acquire a savings

association under the public benefits factor of section 4 of

the BHC Act.

SunTrust competes directly with National Commerce’s

subsidiary bank and savings associations in 15 banking

markets in Georgia, Tennessee, and Virginia.11 The Board

has reviewed the competitive effects of the proposal in

each of these banking markets in light of all the facts of

record, including public comment on the proposal.12 In

particular, the Board has considered the number of competitors that would remain in the banking markets, the

relative shares of total deposits in depository institutions in

the markets (‘‘market deposits’’) controlled by SunTrust

and National Commerce,13 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 Merger Guidelines (‘‘DOJ Guidelines’’),14 other characteristics of the markets, and commitments made by SunTrust to divest certain branches.

A. Banking Markets without Divestitures

Consummation of the proposal without divestitures would

be consistent with Board precedent and the DOJ Guidelines in 14 of the banking markets where SunTrust and

National Commerce’s subsidiary bank and savings associations compete directly.15 One banking market would

remain unconcentrated16 and thirteen banking markets

would remain moderately concentrated, as measured by

the HHI, with only modest increases in concentration in

each market.17 Numerous competitors would remain in all

14 banking markets.

B. Banking Market with Divestiture

In the Lawrence County, Tennessee, banking market

(‘‘Lawrence County Market’’), SunTrust is the third largest

depository organization, controlling deposits of $104 million, which represent 22.1 percent of market deposits.

National Commerce is the fourth largest depository organization in the market, with three branches that control

deposits of $62.9 million, which represent 13.3 percent of

market deposits. To reduce the potential for adverse effects

on competition in the Lawrence County Market, SunTrust

9. See 12 U.S.C. §1842(d)(2)(A) and (B). See Ga. Code Ann.

§ 7-1-622.2, S.C. Code Ann. §§ 34-25-50, Tenn. Code Ann.

§45-2-1404, Va. Code Ann. §6.1-399.

10. See 12 U.S.C. §1842(c)(1).

11. These banking markets are described in Appendix B and

include the markets in which First Market FSB competes directly with

SunTrust Bank.

12. One commenter expressed general, unspecified concerns about

the competitive effects of this proposal. Another commenter, National

Commerce’s joint-venture partner in First Market FSB, expressed

concern that the proposed transaction would hamper First Market

FSB’s ability to compete with SunTrust in the three banking markets

in which they directly compete: the Richmond, Newport News–

Hampton, and Fredericksburg banking markets in Virginia. First Market FSB is a joint venture between National Commerce, which owns

49 percent of the thrift’s voting securities, and Ukrop’s Super Markets, Inc., which owns 51 percent. The Board has reviewed the

competitive effects in these three banking markets, taking into account

that under well-established principles of banking law, First Market

FSB is a subsidiary of National Commerce and would become a

subsidiary of SunTrust on consummation of the proposal.

13. Deposit and market share data are based on annual branch

reports as of June 30, 2003, adjusted to reflect mergers and acquisitions through June 17, 2004, and on calculations in which the deposits

of thrift institutions are included at 50 percent, except as noted below.

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 Bulletin 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). The deposits of First Market FSB and NBC FSB are weighted

at 100 percent because the thrifts are owned by a commercial banking

organization. See, e.g., Norwest Corporation, 78 Federal Reserve

Bulletin 452 (1992).

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

a market is considered unconcentrated if the post-merger HHI is less

than 1000, moderately concentrated if the post-merger HHI is between

1000 and 1800, and 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.

15. The effects of the proposal on the concentration of banking

resources in these banking markets are described in Appendix C.

16. The Morristown–Newport, Tennessee, banking market would

remain unconcentrated.

17. The moderately concentrated markets are the Atlanta, Dalton,

Rome, and Savannah banking markets, all in Georgia; the Chattanooga, Cleveland, Knoxville, and Nashville banking markets, all

in Tennessee; and the Fredericksburg, Newport News–Hampton,

Pulaski–Radford, Richmond, and Roanoke banking markets, all in

Virginia.

534 Federal Reserve Bulletin Autumn 2004
has committed to divest to an out-of-market banking organization all three National Commerce branches.18

After accounting for the proposed divestitures, consummation of the merger would be consistent with the DOJ

Guidelines and Board precedent. Although the Lawrence

County Market would remain highly concentrated, market

concentration would not be increased by this proposal, and

the HHI would remain at 2062. Five competitors would

remain in the market, including two institutions that each

would have a market share greater than SunTrust’s market

share on consummation of the proposal.

C. Views of Other Agencies and Conclusion on

Competitive Considerations

The Department of Justice also has conducted a detailed

review of the potential competitive effects of the proposal

and has advised the Board that, in light of the proposed

divestitures, consummation of the proposal would not

likely have a significantly adverse effect on competition

in any relevant banking market. In addition, the appropriate banking agencies have been afforded an opportunity to

comment and have not objected to the proposal.

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 resources in any of the 15 banking markets where

SunTrust and National Commerce compete directly or in

any other relevant banking market. Accordingly, based

on all the facts of record and subject to completion of the

proposed divestitures, the Board has determined that competitive considerations are consistent with approval.

Financial, Managerial, and Supervisory Considerations

Section 3 of the BHC Act requires the Board to consider

the financial and managerial resources and future prospects

of SunTrust and National Commerce, and their subsidiaries, and certain other supervisory factors. The Board has

carefully considered these factors in light of all the facts of

record, including reports of examination, other confidential

supervisory information from the primary federal supervisors for the subsidiary depository institutions of SunTrust

and National Commerce, publicly reported and other financial information, comments received on the proposal, and

information provided by SunTrust. In addition, the Board

has consulted with the Office of the Comptroller of the

Currency (‘‘OCC’’) and the Office of Thrift Supervision

(’’OTS’’), the primary federal supervisors of NBC and

National Commerce’s subsidiary savings associations,

respectively, on the proposal.19

In evaluating financial factors in expansion proposals by

banking organizations, the Board consistently has considered capital adequacy to be especially important. SunTrust,

National Commerce, and their subsidiary depository institutions currently are well capitalized and would remain so

on consummation of the proposal.20 The proposed transaction is structured primarily as a share exchange, but

National Commerce’s shareholders may elect to receive

cash instead of SunTrust shares. The cash portion of the

compensation would be funded by SunTrust through the

issuance of senior notes and from other available resources.

The Board finds that the organization has sufficient financial resources to effect the proposal.

The Board also has considered the managerial resources

of SunTrust, National Commerce, and the banking and

nonbanking subsidiaries to be acquired and the effect of the

proposal on these resources. The Board has reviewed available assessments of management and evaluations of riskmanagement systems by relevant supervisors. In addition,

the Board has considered SunTrust’s plans for implementing the proposal, including its proposed management

after consummation, and the company’s record of successfully integrating acquired institutions into its existing

operations.21

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

considerations relating to the financial and managerial

resources and future prospects of SunTrust and the depository institutions involved in the proposal are consistent

with approval, as are the other supervisory factors under

the BHC Act.

18. SunTrust has committed that it will execute, before consummation of the proposed merger, a sales agreement with an out-of-market

banking organization. SunTrust also has committed that, if it is

unsuccessful in completing the proposed divestiture with a purchaser

determined by the Board to be competitively suitable within 180 days

of consummation of the National Commerce proposal, SunTrust will

transfer the unsold branches to an independent trustee and will instruct

the trustee to sell such branches to an alternate purchaser or purchasers in accordance with the terms of this order and without regard to

price. Both the trustee and any alternate purchaser must be deemed

acceptable by the Board. See BankAmerica Corporation, 78 Federal

Reserve Bulletin 338 (1992); United New Mexico Financial Corporation, 77 Federal Reserve Bulletin 484 (1991).

19. SunTrust’s lead subsidiary bank, SunTrust Bank, Atlanta, is a

state member bank supervised by the Federal Reserve System.

20. A commenter alleged that the compensation for National Commerce’s senior management under severance agreements is excessive.

The Board notes that the severance agreements have been disclosed

to shareholders and that SunTrust would remain well capitalized on

consummation.

21. Some commenters criticized National Commerce’s record

of diversity among its suppliers and asserted that the Board should

encourage SunTrust to commit to implement a supplier-diversity

program and to provide representation by Florida residents in its

management (including its board of directors) that is commensurate

with SunTrust’s percentage of total deposits in the state. Commenters

also contended that the Board should encourage SunTrust to report

publicly the level of minority employees in its middle management.

Although the Board fully supports programs designed to promote

equal economic opportunities for all members of society, the comments about diversity among suppliers and employment are beyond

the factors the Board is authorized to consider under the BHC Act.

See, e.g., Deutsche Bank AG, 85 Federal Reserve Bulletin 509, 513

(1999). The Board also notes that federal banking laws do not impose

residency requirements on the management of bank holding companies. As described above, the Board has carefully considered the

competence and experience of SunTrust’s management in its review

of the proposal.

Legal Developments 535
Convenience and Needs and CRA Performance

Consideration

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

the Board must consider the effects of the proposal on the

convenience and needs of the communities to be served

and take into account the records of the relevant insured

depository institutions under the Community Reinvestment

Act (‘‘CRA’’).22 The Board also must review the records of

performance under the CRA of the relevant insured depository institutions when acting on a notice under section 4 of

the BHC Act to acquire an insured savings association.23

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 depository institutions’ expansionary proposals.24 The Board has considered carefully the convenience

and needs factor and the CRA performance records of the

subsidiary depository institutions of SunTrust and National

Commerce in light of all the facts of record, including

public comments received on the proposal.

A. Summary of Public Comments on Convenience and

Needs

In response to the Board’s request for public comment

on this proposal, 48 commenters submitted their views.25

Twenty-nine commenters commended SunTrust for the

financial and technical support provided to their community development organizations or related their favorable

experiences with specific programs or services offered by

SunTrust. Many of these commenters also expressed their

support for the proposal.

Nineteen commenters opposed the proposal and collectively expressed concern about the CRA performance and

fair lending records of SunTrust or National Commerce.

Many commenters alleged that SunTrust provided a low

level of home mortgage lending to LMI borrowers or in

LMI communities and should provide more small business

lending and community development lending and investment in various communities. In addition, many commenters asserted that National Commerce should engage in

more community development and reinvestment activity in

underserved communities. Several commenters also criticized National Commerce’s record of small business lending, including lending to businesses owned by minorities.

Some commenters contended, based on data reported

under the Home Mortgage Disclosure Act (‘‘HMDA’’),26

that SunTrust and National Commerce underserved minority borrowers and communities and engaged in disparate

treatment of minority individuals in their home mortgage

lending operations in certain markets.27 Several commenters expressed concerns about possible branch closures and

reductions in services resulting from the proposed merger.

B. CRA Performance Evaluations

As provided in the CRA, the Board has evaluated the

convenience and needs factor in light of the evaluations

by the appropriate federal supervisors of the CRA performance records of the insured depository institutions of

both organizations. 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.28

SunTrust Bank received an ‘‘outstanding’’ rating at its

most recent CRA performance evaluation by the Federal

Reserve Bank of Atlanta, as of October 21, 2002 (‘‘2002

Evaluation’’). National Commerce’s lead bank, NBC, also

received an ‘‘outstanding’’ rating at its most recent CRA

performance evaluation by the OCC, as of December 31,

2001 (‘‘NBC 2001 Evaluation’’).29 In addition, the OTS

rated both First Market Bank FSB and NBC Bank FSB

‘‘satisfactory’’ at their most recent CRA performance

evaluations, as of October 30, 2003, and February 4, 2003,

respectively. SunTrust has represented that it would implement its program for managing community reinvestment

activities at National Commerce’s subsidiary depository

institutions on consummation of the proposal.

C. CRA Performance of SunTrust

Overview. As noted above, SunTrust Bank received an

overall ‘‘outstanding’’ rating for CRA performance in the

22. 12 U.S.C. §2901 et seq.

23. See, e.g., North Fork Bancorporation, Inc., 86 Federal Reserve

Bulletin 767 (2000).

24. 12 U.S.C. §2903.

25. Included in this total is one comment that was submitted by

32 community groups.

26. 12 U.S.C. §2801 et seq.

27. Some commenters criticized SunTrust’s relationships with

unaffiliated payday lenders, car-title lending companies, and other

nontraditional providers of financial services. SunTrust noted that

SunTrust Bank and National Commerce lend to a small number of

such companies that are engaged in lawful businesses governed by

state law and regulated and licensed by the states. SunTrust, however,

stated that it was voluntarily revising its credit policies to prohibit

future loans to any business that engages in payday or car-title lending

and that this policy would apply to National Commerce businesses

after the merger. Furthermore, SunTrust stated that it does not

make subprime loans, either directly or through subsidiaries. Under

SunTrust’s alternative lending programs in its consumer lending and

mortgage lending units, applications that have been determined not to

meet SunTrust’s own criteria might be referred to unaffiliated lenders.

Those lenders may offer subprime loans and underwrite the loans

under their own criteria. SunTrust affirmed that the alternative credit

programs represent a small fraction of SunTrust’s overall lending

business.

28. See Interagency Questions and Answers Regarding Community

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

29. In addition, SunTrust’s other subsidiary bank, SunTrust

BankCard, National Association, Atlanta (‘‘SunTrust BankCard’’),

536 Federal Reserve Bulletin Autumn 2004
2002 Evaluation.30 Examiners reported that SunTrust Bank

exhibited a good level of responsiveness to the credit and

community development needs of its overall assessment

areas, and they commended the bank for an excellent

record of serving the credit needs of low-income individuals and communities.

SunTrust Bank received an overall ‘‘high satisfactory’’

rating under the lending test. Examiners found that

SunTrust Bank originated or purchased more than 198,300

HMDA-reportable loans totaling approximately $24.5 billion within its assessment areas during the evaluation

period. They noted that SunTrust made more than 28 percent of its HMDA-reportable home purchase loans to LMI

borrowers. In addition, examiners commended SunTrust

Bank for its use of flexible lending products. During the

evaluation period, SunTrust Bank made more than 32,700

loans totaling approximately $3.5 billion through these

products. In its Georgia assessment area, examiners particularly commended the bank for its good distribution

of loans to individuals of different income levels and to

businesses of different annual revenue levels.

Since the 2002 Evaluation, SunTrust has maintained a

high level of home mortgage lending. In 2003, SunTrust

Bank and SunTrust Mortgage made HMDA-reportable

loans totaling approximately $16 billion. SunTrust continued to make more than 28 percent of its home purchase

loans to LMI borrowers, for a total of $2.6 billion in 2003.

SunTrust stated that the percentage of SunTrust Bank’s

HMDA-reportable loans to borrowers in LMI census tracts

in its assessment areas totaled approximately $1.3 billion

in 2003.

In the 2002 Evaluation, examiners also found that the

bank exhibited a good record of lending to small businesses.31 SunTrust Bank originated approximately 83,110

small loans to businesses totaling $9.2 billion within its

assessment areas.32 Examiners commended the bank for

originating approximately 60 percent of its total number of

small loans to businesses to small businesses. They also

favorably noted that more than 49 percent of the bank’s

small loans to businesses in the Atlanta assessment area

were to small businesses.33

SunTrust has remained an active small business lender

since the 2002 Evaluation. SunTrust reported that its loans

to small businesses had increased to more than 64 percent

of its total small loans to businesses by the end of the first

quarter of 2004. Based on small business data reported

by SunTrust in 2002 and 2003 in its assessment areas

in Florida, Georgia, and North Carolina, SunTrust’s small

business lending compared favorably with the performance

by the aggregate lenders in these markets.34 In 2003, the

percentages of SunTrust’s small loans to businesses in

Florida, Georgia, and North Carolina that were to small

businesses substantially exceeded the percentages for the

aggregate lenders. Although SunTrust’s percentage of

small loans to businesses in predominantly minority census

tracts35 in 2003 somewhat lagged the percentage for the

aggregate lenders in Florida, its percentage matched the

percentage for the aggregate lenders in North Carolina and

exceeded that percentage in Georgia. In 2003, the percentage of SunTrust’s total number of small loans to businesses

in Florida, Georgia, and North Carolina that were in LMI

census tracts was comparable with or exceeded the percentage for the aggregate lenders.

In the 2002 Evaluation, examiners reported that

SunTrust Bank made a relatively high level of community

development loans, totaling $1.2 billion during the evaluation period. They particularly commended the bank for

being a leader in making community development loans in

its Nashville, Tennessee, assessment area, where the bank’s

community development loans totaled more than $52 million. Examiners also noted that Fannie Mae recognized

the bank for its innovative lending involvement with two

major redevelopment projects in the Atlanta assessment

area that provided more than 1,000 mixed-income housing

units.

SunTrust has continued a high level of community

development lending since the 2002 Evaluation. It represented that SunTrust Bank made community development

loan commitments totaling more than $751 million in 2003

and the first quarter of 2004. In 2003, SunTrust Bank’s

community development loans totaled more than $270 million in Florida and more than $145 million in Georgia.

These loans included a community development loan of

$3 million to finance a project to build 116 single-family,

affordable housing units in Miami, Florida.

SunTrust Bank received an ‘‘outstanding’’ rating under

the investment test in the 2002 Evaluation. Examiners

determined that the bank had an excellent level of qualified community development investments and grants. The

bank’s portfolio of qualified community development

investments totaled approximately $620 million, as of

June 30, 2002. The new qualified investments during the

evaluation period totaled more than $161 million in

Georgia, $118 million in Virginia, and $83 million in

Washington, D.C. In addition, examiners favorably noted

received a ‘‘satisfactory’’ rating from the OCC, as of October 16,

2002.

30. The evaluation period was July 1, 2000, through June 30, 2002.

At the time of the 2002 evaluation, SunTrust had 74 assessment areas

in six states (Alabama, Florida, Georgia, Maryland, Tennessee, and

Virginia) and Washington, D.C., including 13 that received a fullscope review. The review also included home mortgage lending data

from SunTrust Bank’s mortgage subsidiary, SunTrust Mortgage, Inc.,

Richmond, Virginia (‘‘SunTrust Mortgage’’).

31. Small businesses are businesses with gross annual revenues of

$1 million or less.

32. Small loans to businesses include loans with original amounts

of $1 million or less that are either secured by nonfarm, nonresidential

properties or classified as commercial and industrial loans.

33. Examiners noted that SunTrust Bank’s level of lending to small

businesses exceeded the performance by the aggregate of lenders

(‘‘aggregate lenders’’) in the bank’s Atlanta assessment area in 2001.

The lending data of the aggregate lenders represent the cumulative

lending for all financial institutions that have reported HMDA data in

a particular market.

34. The 2002 and 2003 SunTrust small business data include data

reported by SunTrust Bank and SunTrust BankCard.

35. In this context, ‘‘predominantly minority census tracts’’ means

census tracts with a minority population of 80 percent or more.

Legal Developments 537
that the bank often acted as a leading investor in or grantor

to various community development initiatives that did not

routinely receive private funding. Examiners also reported

that SunTrust Bank provided $6.5 million in charitable

contributions during its evaluation period.36

SunTrust represented that it made more than $190 million in new community development investments in 2003

and the first quarter of 2004. Most of these investments

were made through SunTrust Community Development

Corporation and financed affordable housing projects

across SunTrust Bank’s assessment areas, such as $15 million in qualified community development investments in

an apartment development for LMI residents in Atlanta. As

of March 31, 2004, SunTrust Bank’s portfolio of qualified

community development investments had increased to

more than $850 million.

SunTrust Bank also received an ‘‘outstanding’’ rating

under the service test in the 2002 Evaluation. Examiners

reported that the bank’s delivery systems, including its

branches and ATMs, were readily accessible to all portions

of the assessment areas. They found that the bank provided

a relatively high level of community development services

and that these services were highly responsive to affordable housing needs. In addition, examiners noted that the

bank’s personnel used their expertise to provide financial

services that benefited residents in the bank’s assessment

areas. Since the 2002 Evaluation, SunTrust reported that

it has continued to provide many community services,

especially through its employees’ service as board members, fundraisers, advisors, and volunteers for numerous

community-based organizations.

Florida. SunTrust Bank received an overall ‘‘outstanding’’ rating for its CRA performance in Florida37 and a

‘‘high satisfactory’’ under the lending test.38 Examiners

reported that SunTrust achieved a good distribution of

loans to borrowers of different income levels and to businesses of different annual revenue levels. Examiners found

that approximately 24 percent of the bank’s HMDAreportable home purchase loans were to LMI individuals.

In addition, examiners reported that almost 60 percent of

the bank’s small loans to businesses in the state were to

small businesses.

Since the 2002 Evaluation, SunTrust has originated more

than 8,100, or 21 percent, of its total number of HMDAreportable loans in Florida to LMI individuals and more

than 12,900, or 65 percent, of its small loans to businesses

in Florida to small businesses.

Examiners reported a high level of community development lending by SunTrust Bank in the Miami and Orlando

assessment areas. They specifically commended the Bank

for being a leader in the Miami assessment area by originating almost $178 million in community development

loans. Since the 2002 Evaluation, SunTrust has made

more than $300 million in community development loans

in Florida, including a $7 million loan to a project in

Ft. Lauderdale, which provided more than 100 new affordable housing units in a moderate-income census tract.

Examiners rated SunTrust Bank’s performance as ‘‘outstanding’’ under the investment test in its Florida assessment areas, noting that the bank made community development investments of more than $91 million in the state

during the evaluation period. They found that SunTrust

Bank exhibited excellent responsiveness to credit and community development needs through its investment activities. In 2003, SunTrust Bank’s community development

investments in Florida totaled more than $30 million.

Examiners rated SunTrust Bank’s performance as ‘‘outstanding’’ under the service test in its Florida assessment

areas. Examiners also commended the bank’s level of

service to its communities in Florida, reporting that its

delivery systems, including ATMs and branch offices, were

considered readily accessible to essentially all portions of

the Florida assessment areas. Examiners commended the

bank’s leadership in providing a high level of community

development services that benefited Florida residents.

D. CRA Performance of National Commerce

1. NBC. As noted above, NBC received an ‘‘outstanding’’

rating for its overall CRA performance from the OCC in

the NBC 2001 Evaluation.39 Examiners also rated NBC as

‘‘outstanding’’ under the lending test.40 During the evaluation period, NBC originated more than 10,600 HMDAreportable loans totaling approximately $977 million.

Examiners noted favorably that the borrower distribution

of housing, small business, and small farm loans was

excellent or good in assessment areas that represented

more than 99 percent of the bank’s deposits. In particular,

36. Some commenters requested that SunTrust increase its philanthropic activities in general. Commenters also suggested that the

Board should encourage or require SunTrust to become the regional

leader for lending to and investing in underserved individuals, communities, and small businesses, particularly in North Carolina and

Florida. The Board notes that neither the CRA nor the agencies’

implementing rules require that financial institutions engage in any

type of philanthropy or be the regional leader for any type of activity.

37. Approximately 10 percent of SunTrust Bank’s total bank

deposits were in Florida during the evaluation period. In evaluating

SunTrust Bank’s Florida assessment areas, examiners conducted fullscope reviews in the bank’s assessment areas in Miami and Orlando

and limited-scope reviews in the bank’s other Florida assessment

areas.

38. Some commenters expressed concern about SunTrust’s CRA

performance in Florida.

39. At the time of the 2001 performance evaluation, NBC had ten

assessment areas in five states (Arkansas, Georgia, Tennessee, Virginia, and West Virginia), including seven that received a full-scope

review. The evaluation period was January 1, 2000, to December 31,

2001.

40. A commenter criticized National Commerce’s lending record

in North Carolina. NBC merged with Central Carolina Bank and Trust

Company, Durham, North Carolina (‘‘Central Carolina Bank’’), in

2000, thereby expanding its operations into North and South Carolina

for the first time. See National Commerce Bancorporation, 86 Federal

Reserve Bulletin 597 (2000). Examiners did not include the acquired

locations in these states in the NBC 2001 Evaluation. The Board

notes, however, that before the merger, the FDIC rated Central Carolina Bank as ‘‘satisfactory’’ at its most recent CRA exam, as of

January 24, 2000.

538 Federal Reserve Bulletin Autumn 2004
examiners commended NBC’s lending performance in

the Knoxville and Nashville Metropolitan Statistical Areas

(‘‘MSAs’’). Approximately 36 percent of the bank’s

HMDA-reportable loans in the Knoxville MSA, and more

than 42 percent of those loans in the Nashville MSA, were

to LMI borrowers.

Since the NBC 2001 Evaluation, National Commerce

reported that in 2002, more than 24 percent of NBC’s

HMDA-reportable loans in its assessment areas were to

LMI borrowers. In 2003, that amount increased to approximately 28 percent. More than 10 percent of the bank’s total

HMDA-reportable loans were originated to borrowers in

LMI census tracts in 2002, and by the first quarter of 2004

the percentage had increased to more than 12 percent.41

NBC originated approximately 2,300 small loans to

businesses during the evaluation period. The examiners

particularly commended NBC for its distribution of loans

to small businesses in Georgia and Virginia. They also

favorably noted NBC’s distribution of small loans to business among businesses of different annual revenue levels

in Georgia and Tennessee. In the Nashville MSA, examiners noted that 75 percent of its small loans to business were

to small businesses during the evaluation period.

Since the NBC 2001 Evaluation, National Commerce

reported that the percentage of the bank’s small loans to

businesses that were made to businesses in LMI census

tracts increased from more than 16 percent in 2002 to

approximately 23 percent in 2003. In addition, the bank’s

business loans with originated amounts of $100,000 or less

represented approximately 78 percent of its total small

loans to businesses in the first quarter of 2004.

In the NBC 2001 Evaluation, examiners commended

NBC’s community development lending and noted favorably that NBC originated community development loans

in greater amounts than projected. They reported that the

bank’s $8 million in community development loans in

Tennessee reflected an excellent level of responsiveness to

the community’s needs.42 Examiners also characterized as

excellent NBC’s level of community development lending

in Georgia, where the bank originated $2.4 million of these

loans. Since the NBC 2001 Evaluation, the bank made

almost $77 million in community development loan commitments during 2002 and 2003.

NBC also received an ‘‘outstanding’’ rating under the

investment test. According to examiners, NBC’s investment activity reflected an excellent level of responsiveness

to its assessment areas. NBC made community development investments totaling more than $11.5 million during

the evaluation period. Examiners commended specific

qualified investments of NBC that significantly benefited

its assessment areas, such as the financial support provided

to the Senior Housing Crime Prevention Foundation that

serves LMI senior citizens in Tennessee. In addition, examiners noted that NBC made qualified investments totaling

$1.4 million in the Knoxville MSA and $3.5 million in the

Nashville MSA during the evaluation period.

In 2002 and 2003, NBC’s community development

investments totaled approximately $42 million, which primarily funded various affordable housing initiatives. As of

March 31, 2004, NBC’s portfolio of qualified community

development investments totaled $63 million.

The bank received a ‘‘high satisfactory’’ rating under the

service test in the NBC 2001 Evaluation. Examiners concluded that NBC provided an excellent level of community

development services. They found that the accessibility

of the bank’s retail service systems was generally good

and that its hours and services were typically tailored to

the convenience and needs of the bank’s communities.43

41. In connection with NBC’s acquisition of Central Carolina Bank

in 2000, Central Carolina Bank entered into an agreement with North

Carolina-based community organizations to improve its lending to

LMI and minority households and neighborhoods. Commenters

alleged that National Commerce failed to meet the terms of the

agreement. Some commenters also expressed interest in SunTrust

entering into a new agreement or setting new CRA-related objectives.

SunTrust asserted that NBC met the letter and spirit of this agreement

by increasing the proportions of its residential, small business, and

community development loans to LMI and minority borrowers and in

LMI and predominantly minority neighborhoods in North Carolina.

SunTrust also represented that NBC’s community development lending in North Carolina increased from $5 million in 1999 to more

than $20 million in 2002 and that the bank originated $49 million in

community development loans from 2002 through June 2004. Moreover, NBC has made 54 percent of its total community development

loans and 68 percent of its total community development investments

in North Carolina since the NBC 2001 Evaluation. SunTrust also

represented that it plans to designate community reinvestment managers in various North Carolina communities to serve as the bank’s

primary points of contact for community groups, local government

agencies, and other parties.

The Board has consistently stated that neither the CRA nor the

federal banking agencies’ CRA regulations require depository institutions to make pledges or enter into commitments or agreements with

community organizations. Moreover, the Board views the enforceability of pledges, initiatives, and agreements with third parties as matters

outside the scope of the CRA. See, e.g., J.P. Morgan Chase & Co.,

90 Federal Reserve Bulletin 352 (2004); Bank of America Corporation, 90 Federal Reserve Bulletin 217 (2004). The Board further notes

that the CRA does not authorize the Board to direct SunTrust’s

CRA-related activities towards specific groups, individuals, or

projects.

42. Approximately 20 percent of NBC’s total bank deposits were

in Tennessee during the evaluation period.

43. One commenter expressed concern about National Commerce’s

branching arrangements with Wal-Mart, under which National Commerce provides banking services through its branches in certain

Wal-Mart retail stores. NBC currently operates 25 in-store branches

in Georgia and Tennessee and plans to open 70 additional in-store

branches in Georgia and Florida, for a total of 95 branches in

Wal-Mart stores. SunTrust stated that NBC runs the operations of

each branch, but that the two parties jointly market the program under

the trade name, ‘‘Wal-Mart Money Center, by National Bank of

Commerce.’’ The branches provide traditional banking services to

customers and are subject to examination by the appropriate federal

banking agency in the same manner as any bank branch. The Board

notes that the OCC concluded that NBC’s operation of branches under

this trade name was consistent with the Interagency Statement on

Branch Names. See Comptroller of the Currency, Interpretive Letter

#977, December 2003. See also Board of Governors of the Federal

Reserve System, Supervision and Regulation Letter 98-14, June 3,

1998.

In addition, the commenter noted general concerns about

Wal-Mart’s treatment of its employees. Employees of the NBC

branches at Wal-Mart locations are bank employees, not Wal-Mart

employees. Moreover, such concerns involving employment practices

are outside the limited statutory factors that the Board is authorized to

Legal Developments 539
In addition, examiners noted that NBC’s record of opening

and closing branches did not adversely affect the accessibility of delivery systems, particularly in LMI census tracts.

Examiners also commended NBC for its service to a number of organizations pursuing affordable housing, small

business development, and community service initiatives

targeted at LMI areas and individuals.

2. First Market FSB. As noted above, First Market FSB

received a ‘‘satisfactory’’ CRA rating from the OTS at

its most recent CRA performance evaluation, as of October 30, 2003. Under the lending test, First Market FSB

received a ‘‘high satisfactory’’ rating. Examiners noted

that the institution’s record of mortgage lending to LMI

borrowers was good and its geographic distribution of

loans was reasonable. Examiners reported that First Market

FSB enhanced its lending performance through the use

of programs and products designed for LMI borrowers.

These programs included First Market FSB’s CRA Home

Improvement Loan Program, an alternative to higher-cost

personal loans, and its Affordable Mortgage Product, which

requires a nominal down payment of $500, allows loan-tovalue ratios up to 100 percent, and uses flexible underwriting guidelines. Examiners also noted that First Market FSB

originated a significant number of business loans and community development loans.44

Examiners rated First Market FSB’s performance under

the investment test as ‘‘outstanding.’’ Examiners reported

that the institution’s level of qualified investments was

excellent. These investments included a targeted mortgagebacked security, a housing development bond, participation

in a loan consortium, and financial donations.

Under the service test, First Market FSB received a

‘‘high satisfactory’’ rating. Examiners reported that the

institution’s delivery system was accessible to essentially

all portions of its assessment area.

3. NBC FSB. As noted above, NBC FSB received an

overall ‘‘satisfactory’’ CRA performance rating from the

OTS at its most recent performance evaluation, as of

February 4, 2003. The institution received a ‘‘high satisfactory’’ rating under the lending test and a ‘‘low satisfactory’’

rating under the investment test. Examiners noted that

NBC FSB’s lending levels reflected a good responsiveness

to the community’s credit needs and its lending to borrowers of different income levels was excellent. Examiners

also favorably noted NBC FSB’s use of two special loan

programs for LMI borrowers through which it originated

25 loans totaling almost $800,000. They noted that NBC

FSB’s performance under the investment test was mitigated by its lending performance and limited investment

authority.

Under the service test, NBC FSB received a ‘‘high

satisfactory’’ rating. Examiners noted that NBC FSB’s

delivery system was readily accessible to essentially all

portions of the assessment area through its two full-service,

in-store supermarket branches and that the institution’s

extended business hours were tailored to meet the convenience and needs of the areas served.

E. HMDA Data and Fair Lending Record

The Board also has carefully considered the lending

records of SunTrust and National Commerce in light of

comments received on the HMDA data for 2001 and 2002

reported by the organizations’ subsidiary banks and their

lending subsidiaries.45 Some commenters alleged that

SunTrust and National Commerce disproportionately

excluded or denied applications for HMDA-reportable

loans by minorities.46

The HMDA data for 2002 and 2003 indicate that the

percentages of total HMDA-reportable loans originated by

SunTrust Bank47 to African Americans and Hispanics generally lagged the performance of the aggregate lenders

in the markets reviewed.48 In addition, SunTrust Bank’s

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 commenter also criticized Wal-Mart’s attempts

to enter the banking system. The Board notes that Wal-Mart does not

control any insured depository institution and, consequently, is not

deemed to be a bank holding company. In addition, National Commerce’s branching agreement with Wal-Mart does not cause the store

to control a depository institution and, therefore, does not make

Wal-Mart subject to the BHC Act.

44. During the review period, First Market FSB originated 387

business loans totaling $48 million, including $27 million in loans

to small businesses, and 6 community development loans totaling

$2 million.

45. Some commenters alleged that SunTrust Mortgage had prescreened applicants and inappropriately directed African-American

applicants to SunTrust Bank. To support this claim, commenters

asserted that SunTrust Bank reported significantly higher denial rates

than SunTrust Mortgage. SunTrust represented that SunTrust Mortgage and SunTrust Bank do not offer different residential mortgage

products to which customers could be directed and that applications

are processed through the same lending channel, regardless of which

SunTrust affiliate received the applications. SunTrust further asserted

that SunTrust Bank performed origination services on behalf of

SunTrust Mortgage in certain markets in 2002.

46. In addition, some commenters expressed concerns that NBC’s

tiered-pricing program for mortgage loans has resulted in a disparate

impact on African-American borrowers and, thus, violated fair lending laws. Under the tiered-pricing system, the bank charges a higher

interest rate for loans of $75,000 or less. Commenters asserted that

through this program, NBC engaged in a pattern and practice that had

an adverse and disparate impact on African Americans, who disproportionately apply for mortgage loans in amounts of less than $75,000.

SunTrust responded that NBC’s pricing structure was not discriminatory and that the bank’s pricing based on loan amount was applied

neutrally and without regard to any prohibited factor. SunTrust stated

that it does not have a tiered-pricing practice and that on consummation of the proposal, mortgage loans originated by all its subsidiaries,

including NBC, would be priced in accordance with SunTrust policies

and practices. The commenters’ fair lending allegations have been

forwarded to the OCC, the primary federal supervisor of NBC and the

agency responsible for enforcing fair lending laws at the bank.

47. For purposes of this review, SunTrust Bank’s HMDA data

include data reported by SunTrust Mortgage.

48. The Board analyzed HMDA data for 2002 and 2003 reported

by SunTrust Bank in MSAs and statewide in Alabama, Florida,

Georgia, Maryland, Tennessee, Virginia, and Washington, D.C. The

statewide data include the relevant data from the MSAs in SunTrust

Bank’s assessment areas in a particular state or Washington, D.C.

540 Federal Reserve Bulletin Autumn 2004
denial disparity ratios49 for African-American and Hispanic applicants in 2002 and 2003 were generally higher

than the ratios for the aggregate lenders in the markets

reviewed.

The HMDA data indicate, however, that the percentages of SunTrust Bank’s total HMDA-reportable loans to

African Americans and Hispanics increased modestly from

2002 to 2003 in most of the markets reviewed. Moreover,

the bank’s denial disparity ratios for African-American and

Hispanic applicants decreased from 2002 to 2003 in most

of the markets reviewed.50 SunTrust Bank increased the

number of loans to African-American and Hispanic individuals and to borrowers in predominantly minority census

tracts in all but one of the markets reviewed during this

time period.

The HMDA data for 2003 indicate that the percentages

of National Commerce’s total HMDA-reportable loans that

were originated to African-American borrowers lagged the

percentages for the aggregate lenders in most of the markets reviewed, but exceeded the percentages for the aggregate lenders in West Virginia and Arkansas.51 However,

National Commerce’s percentages of HMDA-reportable

loan originations to Hispanic borrowers in 2003 exceeded

or were comparable with the percentages for the aggregate

lenders in all but one of the states reviewed. In addition,

National Commerce’s denial disparity ratios in 2003 were

lower than or comparable with the ratios for the aggregate

lenders in the majority of the markets reviewed.

Although the HMDA data may reflect certain disparities

in the rates of loan applications, originations, and denials

among members of different racial groups and persons at

different income levels in certain local areas, the HMDA

data generally do not indicate that SunTrust or National

Commerce excluded any race or income 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

applicants regardless of 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 and provide only limited information about covered loans.52 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 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 on-site

evaluations of compliance with fair lending laws by the

subsidiary depository and lending institutions of SunTrust

and National Commerce. Examiners noted no substantive

fair lending issues or concerns in the consumer compliance

examinations of the depository institutions controlled by

SunTrust or National Commerce.

The record also indicates that SunTrust and National

Commerce have taken various measures to help ensure

compliance with fair lending laws. National Commerce has

instituted corporate-wide policies and procedures to help

ensure compliance with all fair lending and other consumer

protection laws and regulations. In addition, National Commerce has a Compliance Department with 12 full-time

professionals and each mortgage division has a full-time

compliance officer.

SunTrust Bank has taken various steps to increase its

mortgage lending to minorities. To market its mortgage

loan products more effectively to minorities, SunTrust

entered into a one-year agreement in 2001 with Fannie

Mae, called the Multicultural Homeownership Initiative,

under which SunTrust agreed to provide up to $1 billion

in Fannie Mae mortgage loans to homebuyers who are

immigrants or minorities (‘‘multicultural homebuyers’’).

SunTrust represented that it met this goal before the agreement expired and entered into a new two-year agreement

with Fannie Mae in June 2002 to originate $2.5 billion in

loans to underserved borrowers, primarily multicultural

homebuyers. SunTrust further represented that it met that

SunTrust Bank’s percentages of HMDA-reportable loan originations

to African Americans in 2003 were comparable with the percentages

for the aggregate lenders in Alabama, Georgia, Maryland, Virginia,

and Washington, D.C., but lagged the percentages for the aggregate

in Florida and Tennessee. SunTrust Bank’s percentages of HMDAreportable loans to Hispanic applicants lagged the percentages for the

aggregate lenders in Georgia, Florida, and Virginia, but were comparable with or exceeded the aggregate lenders in Alabama, Tennessee,

and Washington, D.C. SunTrust Bank’s percentages of HMDAreportable loans to borrowers in minority census tracts exceeded

or were comparable with the performance of aggregate lenders in

Maryland, Virginia, Tennessee, and Washington, D.C., but lagged in

Alabama, Georgia, and Florida.

49. The denial disparity ratio equals the denial rate for a particular

racial category (for example, African American) divided by the denial

rate for whites.

50. In August 2003, SunTrust purchased and assumed most of the

assets and liabilities of Sun America Mortgage, Inc., Richmond,

Virginia (‘‘Sun America Mortgage’’), which were transferred to

SunTrust Mortgage. Some commenters asserted, based on data from

Sun America Mortgage, that SunTrust disproportionately denied or

excluded African-American and Hispanic applicants. In addition, one

commenter submitted a complaint that SunTrust had not provided

him Sun America Mortgage’s HMDA data as he requested. The Sun

America Mortgage HMDA data cited by these commenters covered a

period before SunTrust Bank acquired any assets or liabilities from

Sun America Mortgage and are not part of SunTrust Bank’s HMDA

data records.

51. The Board analyzed HMDA data for 2002 and 2003 reported

by NBC, NBC FSB, and First Market FSB in MSAs in Arkansas,

Georgia, North Carolina, Mississippi, South Carolina, Tennessee,

Virginia, and West Virginia and the institutions’ statewide data in

these states.

52. 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.

Legal Developments 541
goal in June 2004 and that it is currently negotiating

with Fannie Mae to extend the commitment. In addition,

SunTrust stated that from 2001 to 2004, it offered educational and training programs on multicultural homeownership opportunities to realtors and loan officers throughout

its assessment areas. SunTrust represented that these initiatives have resulted in the improvement noted above in its

overall lending to minorities in 2003.

SunTrust’s compliance programs include the implementation of fair lending policies and procedures,

self-assessments and transactional testing, complaintmonitoring processes, and employee training. SunTrust

Bank and SunTrust Mortgage operate a consolidated consumer compliance function that is under the direction of

SunTrust’s Corporate Compliance Manager. This compliance function is divided into five units focused on mortgage loans, consumer loans, commercial loans, deposit

products, and fair lending compliance. SunTrust stated that

it expects to implement its compliance structure, policies,

and processes throughout the resulting organization.

The Board also has considered the HMDA data in light

of other information, including the CRA performance

records of the subsidiary depository institutions of

SunTrust and National Commerce. These records demonstrate that SunTrust and National Commerce are

active in helping to meet the credit needs of their entire

communities.

F. Branch Closings

Some commenters expressed concerns that the proposal

would result in possible branch closings. The Board has

carefully considered these comments in light of all the

facts of record. SunTrust represented that as a result of the

merger, branches might be closed in those markets where

branches of SunTrust Bank overlap with those of NBC, but

that it has not made any decisions about specific branches

to be closed, relocated, or consolidated.53 SunTrust indicated that branch closings would be made in accordance

with SunTrust’s branch closing policy, which requires,

among other factors, consideration of the proposal’s effects

on LMI communities. In the 2002 Evaluation, examiners

reported that the bank’s record of closing branches did not

adversely affect accessibility to its services, particularly

with respect to LMI areas and individuals. Examiners also

reviewed SunTrust’s corporate branch closing policy and

determined that it met all regulatory requirements. In addition, examiners found that NBC’s record of opening and

closing branches did not adversely affect the accessibility

of its delivery systems for banking services, particularly in

LMI geographies.

The Board also has considered the fact that federal

banking law provides a specific mechanism for addressing

branch closings.54 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 Board, the

OTS, and the OCC, as the appropriate federal supervisors

of SunTrust Bank and National Commerce’s subsidiary

depository institutions, will continue to review each

depository institution’s branch closing record in the course

of conducting CRA performance evaluations.

G. Conclusion on Convenience and Needs and CRA

Performance

The Board has carefully considered all the facts of record,

including reports of examination of the CRA records of the

institutions involved, information provided by SunTrust

and National Commerce, comments on the proposal, confidential supervisory information, and SunTrust’s plans to

implement its CRA-related policies, procedures, and programs at NBC, First Market FSB, and NBC FSB.55 The

Board notes that the proposal would expand the availability and array of banking products and services to the

customers of SunTrust and National Commerce, including

access to expanded branch and ATM networks and internet

banking services. 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 and the CRA performance records of the relevant

depository institutions are consistent with approval.

Nonbanking Activities

As noted above, SunTrust also has filed a notice under

sections 4(c)(8) and 4(j) of the BHC Act to acquire the

nonbanking subsidiaries of National Commerce, including,

among others, NBC FSB and First Market FSB.56 In addition to operating savings associations, SunTrust would

engage in a number of other nonbanking activities that are

permissible for bank holding companies under Regulation Y, including real and personal property leasing, financial and investment advisory services, trust company

activities, community development, and data processing.57

SunTrust has committed that it will conduct these nonbanking activities in accordance with the Board’s regula53. One commenter expressed concern that SunTrust may target

rural branches in North Carolina for closure. SunTrust currently has

no branches in North Carolina and has indicated that this acquisition is

motivated in part by its intent to expand into new markets.

54. 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.

55. One commenter alleged improprieties regarding his mortgage

from Sun America Mortgage. SunTrust stated that no SunTrust entity

is or was a party to this loan, and that the loan was sold before the

SunTrust/Sun America transaction.

56. See Appendix A.

57. 12 CFR 225.28(b)(3), (4)(ii), (5), (6), (12), (14).

542 Federal Reserve Bulletin Autumn 2004
tions and orders approving the activities for bank holding

companies.

To approve this notice, the Board also must determine

that the proposed acquisition of National Commerce’s

nonbanking subsidiaries by SunTrust ‘‘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.’’58 As part of its

evaluation of these factors, the Board has considered the

financial condition and managerial resources of SunTrust,

its subsidiaries, and the companies to be acquired, as well

as the effect of the proposed transaction on those resources.

For the reasons discussed above, and based on all the facts

of record, the Board concludes that financial and managerial considerations are consistent with approval.

The Board also has reviewed the competitive effects of

SunTrust’s proposed acquisition of National Commerce’s

nonbanking depository subsidiaries. For the reasons stated

earlier, and based on all the facts of record, consummation

of this proposal would be consistent with Board precedent

and DOJ Guidelines in the Richmond, Newport News–

Hampton, and Fredericksburg banking markets where

SunTrust Bank and First Market FSB compete directly.

In addition, SunTrust and National Commerce compete

directly in trust company, data processing, investment advisory, and community development activities. The markets

for each of these nonbanking activities are regional or

national in scope, except the market for community development, which is local. The record in this case indicates

that there are numerous providers of each of these services

and that SunTrust and National Commerce’s levels of

participation are relatively small. Based on all the facts of

record, the Board concludes that consummation of the

proposed nonbanking acquisitions is not likely to have any

significantly adverse competitive effects.

The Board also has reviewed carefully the public benefits of the proposed acquisition of National Commerce’s

nonbank subsidiaries. SunTrust has indicated that the

expanded geographic scope of SunTrust’s nonbanking

operations would provide added convenience to current

and future customers of SunTrust and National Commerce,

and that customers of both institutions would have access

to a broader array of products and services.

The Board concludes that the conduct of the proposed

nonbanking activities within the framework of Regulation Y and Board precedent is not likely to result in

adverse effects, such as undue concentration of resources,

decreased or unfair competition, conflicts of interest, or

unsound banking practices, that would outweigh 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 determined that the

balance of public benefits factor that it must consider under

section 4(j)(2) of the BHC Act is consistent with approval

of SunTrust’s notice.

Conclusion

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

record, the Board has determined that the applications and

notice should be, and hereby are, approved.59 In reaching

this conclusion, the Board has considered all the facts of

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

the BHC Act and other applicable statutes.60 The Board’s

approval is specifically conditioned on compliance by

SunTrust with the conditions in this order and with all the

commitments made to the Board in connection with this

proposal, including the branch divestiture commitments

discussed above, and receipt of all other regulatory approvals. The Board’s approval of the nonbanking aspects of the

proposal also is subject to all the conditions set forth in

Regulation Y, and to the Board’s authority to require such

58. 12 U.S.C. §1843(j)(2)(A).

59. A number of commenters requested that the Board deny the

proposal, delay action on the proposal, or extend the comment period

until SunTrust enters into various agreements proposed by the commenters. The Board believes that the record in this case does not

warrant postponing its consideration of the proposal. During the

applications process, the Board has accumulated a significant record,

including reports of examination, supervisory information, public

reports and information, and considerable public comment. The Board

believes this record is sufficient to allow it to assess the factors it

is required to consider under the BHC Act. The BHC Act and the

Board’s processing rules establish time periods for consideration and

action on acquisition proposals. Moreover, as discussed above, the

CRA requires the Board to consider the existing record of performance of an organization and does not require an organization to enter

into contracts or agreements with interested parties to implement its

CRA programs. For the reasons discussed above, the Board believes

that commenters have had ample opportunity to submit their views

and, in fact, they have provided substantial written submissions that

the Board has considered carefully in acting on the proposal. Based on

a review of all the facts of record, the Board concludes that delaying

consideration of the proposal, granting an extension of the comment

period, or denying the proposal on the grounds discussed above is not

warranted.

60. Many commenters requested that the Board hold a public

hearing or meeting 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

any 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 CFR 225.16(e). In addition, the Board’s

rules provide for a hearing on a notice to acquire a nonbanking

company if there are disputed issues of material facts that cannot be

resolved in another manner. 12 CFR 225.25(a)(2). The Board has

considered carefully the commenters’ requests in light of all the facts

of record. As noted, the public has had ample opportunity to submit

comments on the proposal and, in fact, the commenters have submitted written comments that the Board has considered carefully in acting

on the proposal. The commenters’ requests fail to demonstrate why

their written comments do not present their views adequately or why a

meeting or hearing otherwise would be necessary or appropriate.

Their requests also fail to identify disputed issues of fact that are

material to the Board’s decision that would be clarified by a public

hearing or meeting. 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 requests for a

public hearing or meeting on the proposal are denied.

Legal Developments 543
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 issued thereunder. For purposes of

this action, the 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 bank acquisition shall not be consummated before

the fifteenth calendar day after the effective date of this

order, and no part of the proposal may 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 Atlanta, acting pursuant

to delegated authority.

By order of the Board of Governors, effective September 14, 2004.

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

Nonbanking Activities of National Commerce1

(1) Extending credit, servicing loans, and factoring, in

accordance with section 225.28(b)(1) of Regulation Y (12 CFR 225.28(b)(1)), through TransPlatinum Service Corp., Nashville (‘‘TransPlatinum’’);

(2) Leasing personal and real property, in accordance

with section 225.28(b)(3) of Regulation Y (12 CFR

225.28(b)(3)), through USI Alliance Corp., Memphis (‘‘USI’’);

(3) Operating savings associations, in accordance with

section 225.28(b)(4)(ii) of Regulation Y (12 CFR

225.28(b)(4)(ii)), through First Market FSB and

NBC FSB;

(4) Operating a nondepository trust company, in accordance with section 225.28(b)(5) of Regulation Y

(12 CFR 225.28(b)(5)), through First Mercantile

Trust Company, Memphis (‘‘Trust Company’’);

(5) Providing financial and investment advisory services, in accordance with section 225.28(b)(6) of

Regulation Y (12 CFR 225.28(b)(6)), through FMT

Capital Management, Inc., Commerce Capital

Management, Inc., both in Memphis, Trust Company, and Brooks, Montague & Associates, Inc.,

Chattanooga;

(6) Engaging in community development activities, in

accordance with section 225.28(b)(12) of Regulation Y (12 CFR 225.28(b)(12)), through Senior

Housing Crime Prevention Foundation Investment

Corporation, Memphis, and USI; and

(7) Providing data processing and data transmission services, in accordance with section 225.28(b)(14)

of Regulation Y (12 CFR 225.28(b)(14)), through

TransPlatinum.

Appendix B

Banking Markets where SunTrust Bank and National

Commerce’s Subsidiary Depository Institutions Compete

Directly

Georgia Banking Markets

Atlanta

Bartow, Cherokee, Clayton, Cobb, Coweta, DeKalb,

Douglas, Fayette, Forsyth, Fulton, Gwinnett, Henry, Newton, Paulding, Rockdale, and Walton Counties; the towns

of Auburn and Winder in Barrow County; the town of

Luthersville in Meriwether County; and Hall County,

excluding the town of Clermont.

Dalton

Murray and Whitfield Counties.

Rome

Rome and Polk Counties.

Savannah

Bryan, Chatham, and Effingham Counties.

Tennessee Banking Markets

Chattanooga (Tennessee and Georgia)

The Chattanooga MSA, excluding the town of Monteagle

in Marion County, Tennessee.

Cleveland

Bradley County and the towns of Benton and Ocoee in

Polk County.

Knoxville

Anderson, Knox, Loudon, Roane, and Union Counties; the

portion of Blount County northwest of Chilhowee Mountain; the towns of Harriman and Oliver Springs in Morgan

County; the towns of Seymour and Kodak in Sevier

County; and the towns of Blaine, Buffalo Springs, Joppa,

Lea Springs, and Powder Springs in Grainger County.

1. All the named subsidiaries are in Tennessee and include organizations controlled by them.

544 Federal Reserve Bulletin Autumn 2004
Lawrence County

Lawrence County.

Morristown–Newport

Cocke and Hamblen Counties; the towns of Baneberry,

Jefferson City, Jefferson Estates, Leadvale, Talbot, and

White Pine in Jefferson County; and Grainger County,

excluding the towns of Blaine, Buffalo Springs, Joppa, Lea

Springs, and Powder Springs.

Nashville

Cheatham, Davidson, Robertson, Rutherford, Sumner,

Williamson, and Wilson Counties.

Virginia Banking Markets

Fredericksburg

Caroline, King George, and Spotsylvania Counties;

Stafford County, excluding the portion in the Washington,

DC–MD–VA Ranally Metropolitan Area (‘‘RMA’’); the

independent city of Fredericksburg; the town of Lake Anna

in Louisa County; and the towns of Colonial Beach,

Leedstown, Oak Grove, and Potomac Beach in Westmoreland County.

Newport News–Hampton

The Newport News–Hampton RMA; the non-RMA portions of James City and Matthews Counties; and the independent cities of Hampton, Newport News, Poquoson, and

Williamsburg.

Pulaski–Radford

Montgomery and Pulaski Counties and the independent

city of Radford.

Richmond

The Richmond RMA; the non-RMA portions of Chesterfield, Dinwiddie, Goochland, Hanover, Henrico, Powhatan,

and Prince George Counties; Charles City, King and

Queen, King William, and New Kent Counties; and the

independent cities of Colonial Heights, Hopewell, Petersburg, and Richmond.

Roanoke

The Roanoke RMA; the non-RMA portions of Botetourt

and Roanoke Counties; the town of Boones Mill in Franklin County; and the independent cities of Roanoke and

Salem.

Appendix C

Market Data for Banking Markets without Divestitures

Unconcentrated Banking Market

Morristown–Newport, Tennessee

SunTrust operates the fifth largest depository institution

in the market, controlling deposits of $142.7 million, which

represent approximately 10.5 percent of market deposits.

National Commerce operates the 11th largest depository

institution in the market, controlling deposits of $36.5 million, which represent approximately 2.7 percent of market

deposits. After the proposed merger, SunTrust would operate the second largest depository institution in the market, controlling deposits of approximately $179.2 million,

which represent approximately 13.1 percent of market

deposits. Seventeen depository institutions would remain

in the banking market. The HHI would increase by

56 points to 984.

Moderately Concentrated Banking Markets

Georgia Banking Markets

Atlanta

SunTrust operates the second largest depository institution in the market, controlling deposits of $13.8 billion,

which represent approximately 19.1 percent of market

deposits. National Commerce operates the 13th largest

depository institution in the market, controlling deposits of

$549.4 million, which represent less than 1 percent of

market deposits. After the proposed merger, SunTrust

would remain the second largest depository institution in

the market, controlling deposits of approximately $14.4 billion, which represent approximately 19.9 percent of market deposits. Eighty-seven depository institutions would

remain in the banking market. The HHI would increase by

29 points to 1317.

Dalton

SunTrust operates the 14th largest depository institution

in the market, controlling deposits of $4.4 million, which

represent less than 1 percent of market deposits. National

Commerce operates the 11th largest depository institution in the market, controlling deposits of $22.1 million,

which represent approximately 1.3 percent of market

deposits. After the proposed merger, SunTrust would

operate the tenth largest depository institution in the market, controlling deposits of approximately $26.5 million, which represent approximately 1.6 percent of market

deposits. Thirteen depository institutions would remain in

the banking market. The HHI would increase by 1 point to

1390.

Legal Developments 545
Rome

SunTrust operates the largest depository institution in the

market, controlling deposits of $289.2 million, which represent approximately 20.3 percent of market deposits.

National Commerce operates the tenth largest depository

institution in the market, controlling deposits of $40.4 million, which represent approximately 2.8 percent of market

deposits. After the proposed merger, SunTrust would

remain the largest depository institution in the market,

controlling deposits of approximately $329.6 million,

which represent approximately 23.1 percent of market

deposits. Twelve depository institutions would remain in

the banking market. The HHI would increase by 11 points

to 1359.

Savannah

SunTrust operates the third largest depository institution in

the market, controlling deposits of $702.7 million, which

represent approximately 19.3 percent of market deposits.

National Commerce operates the sixth largest depository institution in the market, controlling deposits of

$137.2 million, which represent approximately 3.8 percent

of market deposits. After the proposed merger, SunTrust

would operate the largest depository institution in the market, controlling deposits of approximately $839.9 million,

which represent approximately 23.1 percent of market

deposits. Eighteen depository institutions would remain in

the banking market. The HHI would increase by 146 points

to 1684.

Tennessee Banking Markets

Chattanooga (Tennessee and Georgia)

SunTrust operates the largest depository institution in the

market, controlling deposits of $1.2 billion, which represent approximately 21 percent of market deposits. National

Commerce operates the ninth largest depository institution

in the market, controlling deposits of $141.7 million, which

represent approximately 2.5 percent of market deposits.

After the proposed merger, SunTrust would remain the

largest depository institution in the market, controlling

deposits of approximately $1.3 billion, which represent

approximately 23.6 percent of market deposits. Twentythree depository institutions would remain in the banking

market. The HHI would increase by 106 points to 1448.

Cleveland

SunTrust operates the sixth largest depository institution

with four branches in the market, controlling deposits of

$102.7 million, which represent approximately 8.9 percent

of market deposits. National Commerce opened a de novo

branch in the market on January 21, 2004. FDIC deposit

data reflecting the deposits of National Commerce’s branch

are not yet available. After the proposed merger, nine

depository institutions would remain in the market. The

Board has considered SunTrust’s deposits in the market,

the number of competing institutions and the deposits

controlled by those institutions, and the recent entry of

National Commerce’s branch. The HHI would remain

unchanged at 1579. Based on all the facts of record, the

Board concludes that consummation of the proposal would

have a de minimis effect in this banking market.

Knoxville

SunTrust operates the third largest depository institution

in the market, controlling deposits of $1.3 billion, which

represent approximately 14.4 percent of market deposits.

National Commerce operates the eighth largest depository institution in the market, controlling deposits of

$310.1 million, which represent approximately 3.4 percent

of market deposits. After the proposed merger, SunTrust

would operate the second largest depository institution in

the market, controlling deposits of approximately $1.6 billion, which represent approximately 17.8 percent of market

deposits. Thirty-two depository institutions would remain

in the banking market. The HHI would increase by

92 points to 1215.

Nashville

SunTrust operates the third largest depository institution

in the market, controlling deposits of $3.3 billion, which

represent approximately 16.9 percent of market deposits.

National Commerce operates the ninth largest depository institution in the market, controlling deposits of

$619.4 million, which represent approximately 3.2 percent

of market deposits. After the proposed merger, SunTrust

would operate the largest depository institution in the market, controlling deposits of approximately $3.9 billion,

which represent approximately 20.1 percent of market

deposits. Thirty-five depository institutions would remain

in the banking market. The HHI would increase by

107 points to 1214.

Virginia Banking Markets

Fredericksburg

SunTrust operates the seventh largest depository institution

in the market, controlling deposits of $95.2 million, which

represent approximately 4.5 percent of market deposits.

National Commerce operates the ninth largest depository

institution in the market, controlling deposits of $38.3 million, which represent approximately 1.8 percent of market

deposits. After the proposed merger, SunTrust would operate the sixth largest depository institution in the market,

controlling deposits of approximately $133.5 million,

which represent approximately 6.3 percent of market

deposits. Fourteen depository institutions would remain in

the banking market. The HHI would increase by 16 points

to 1793.

546 Federal Reserve Bulletin Autumn 2004
Newport News–Hampton

SunTrust operates the largest depository institution in the

market, controlling deposits of $847.9 million, which represent approximately 22.1 percent of market deposits.

National Commerce operates the 13th largest depository

institution in the market, controlling deposits of $31.3 million, which represent less than 1 percent of market deposits. After the proposed merger, SunTrust would remain

the largest depository institution in the market, controlling

deposits of approximately $879.2 million, which represent

approximately 22.9 percent of market deposits. Eighteen

depository institutions would remain in the banking market. The HHI would increase by 36 points to 1406.

Pulaski–Radford

SunTrust operates the seventh largest depository institution

in the market, controlling deposits of $98.3 million, which

represent approximately 6.4 percent of market deposits.

National Commerce operates the tenth largest depository

institution in the market, controlling deposits of $21.5 million, which represent approximately 1.4 percent of market

deposits. After the proposed merger, SunTrust would

operate the fourth largest depository institution in the

market, controlling deposits of approximately $119.7 million, which represent approximately 7.8 percent of market

deposits. Ten depository institutions would remain in the

banking market. The HHI would increase by 18 points to

1789.

Richmond

SunTrust operates the fifth largest depository institution

in the market, controlling deposits of $2.4 billion, which

represent approximately 10.2 percent of market deposits.

National Commerce operates the sixth largest depository institution in the market, controlling deposits of

$813.7 million, which represent approximately 3.5 percent

of market deposits. After the proposed merger, SunTrust

would operate the fourth largest depository institution in

the market, controlling deposits of approximately $3.2 billion, which represent approximately 13.7 percent of market

deposits. Thirty depository institutions would remain in the

banking market. The HHI would increase by 71 points to

1619.

Roanoke

SunTrust operates the third largest depository institution

in the market, controlling deposits of $608.3 million, which

represent approximately 13.6 percent of market deposits.

National Commerce operates the fourth largest depository institution in the market, controlling deposits of

$445.2 million, which represent approximately 9.9 percent

of market deposits. After the proposed merger, SunTrust

would operate the largest depository institution in the market, controlling deposits of approximately $1 billion, which

represent approximately 23.5 percent of market deposits.

Fifteen depository institutions would remain in the banking

market. The HHI would increase by 269 points to 1491.

ORDERS ISSUED UNDER BANK MERGER ACT

Gateway Bank & Trust Co.

Elizabeth City, North Carolina

Order Approving the Acquisition and Establishment of

Branches

Gateway Bank & Trust Co. (‘‘Gateway’’), a state member

bank, has requested the Board’s approval under section 18(c) of the Federal Deposit Insurance Act (‘‘Bank

Merger Act’’) to assume certain liabilities and acquire

certain assets of three branches of Provident Bank of

Maryland, Baltimore, Maryland (‘‘Provident’’).1 These

branches are in Elizabeth City, North Carolina (‘‘Elizabeth

City Branch’’), and Emporia and Suffolk, both in Virginia

(collectively, ‘‘Virginia Branches’’).2

Notice of the proposal, affording interested persons an

opportunity to submit comments, has been published in

accordance with the Bank Merger Act and the Board’s

Rules of Procedure (12 CFR 262.3(b)). As required by the

Bank Merger Act, reports on the competitive effects of the

merger were requested from the United States Attorney

General and the other federal banking agencies. 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 the Bank Merger Act.

Gateway, with total consolidated assets of $353 million,

is the 43rd largest insured depository institution in North

Carolina, controlling deposits of $184.2 million. The Elizabeth City Branch controls deposits of $52 million. On

consummation of the proposal, Gateway would remain the

43rd largest insured depository institution in North Carolina, controlling deposits of $236.2 million, which represent less than 1 percent of total deposits of insured depository institutions in the state.3

Gateway is the 119th largest insured depository institution in Virginia, controlling state deposits of approximately

$48 million. The Virginia Branches control deposits of

$90.8 million. On consummation of the proposal, Gateway

would become the 81st largest insured depository institution in Virginia, controlling deposits of $139.6 million,

which represent less than 1 percent of total deposits of

insured depository institutions in the state.

1. 12 U.S.C §1828(c)).

2. See 12 U.S.C. §1831u. The branches are at 400 West Ehringhaus

Street in Elizabeth City, 520 S. Main Street in Emporia, and 2825

Godwin Boulevard in Suffolk. Provident will continue to operate

branches in Maryland, Virginia, Pennsylvania, and the District of

Columbia.

3. Asset data are as of March 31, 2004. Deposit data and ranking

data are as of June 30, 2003, and reflect merger and acquisition

activity through April 20, 2004.

Legal Developments 547
Interstate Analysis

Gateway is in North Carolina and proposes to acquire two

branches in Virginia, as well as a branch in North Carolina.

Section 102 of the Riegle–Neal Interstate Banking and

Branching Efficiency Act of 1994 (‘‘Riegle–Neal Act’’)

authorizes a bank to merge with another bank under certain

conditions unless, before June 1, 1997, the home state of

one of the banks involved in the transaction adopted a law

expressly prohibiting merger transactions involving out-ofstate banks.4 Virginia and North Carolina have enacted

legislation allowing interstate mergers between banks in

their states and out-of-state banks pursuant to the provisions of the Riegle–Neal Act.5 Gateway has complied with

state law requirements, and the proposal meets all other

requirements of the Riegle–Neal Act.6 Accordingly, the

Riegle–Neal Act authorizes the proposed interstate branch

acquisitions.

Competitive Considerations

The Bank Merger Act prohibits the Board from approving

an application if the proposal would result in a monopoly

or would be in furtherance of an attempt to monopolize the

business of banking.7 The Bank Merger Act also prohibits

the Board from approving a proposal that would substantially lessen competition or tend to create a monopoly in

any relevant market, unless the Board finds that the anticompetitive effects of the proposed transaction are clearly

outweighed in the public interest by the probable effect of

the transaction in meeting the convenience and needs of

the community to be served.8

Gateway proposes to acquire a Provident branch in each of

the following markets where Gateway and Provident compete directly: the Norfolk–Portsmouth, Virginia–North

Carolina, banking market (‘‘Norfolk–Portsmouth Market’’)

and the Elizabeth City, North Carolina,9 banking market

(‘‘Elizabeth City Market’’). The Board has carefully

reviewed the competitive effects of the proposal in these

banking markets in light of all the facts of record, including

the number of competitors that would remain and the

relative shares of total deposits in depository institutions in

each market (‘‘market deposits’’) they would control,10 the

concentration level of market deposits and the increase in

this level as measured by the Herfindahl–Hirschman Index

(‘‘HHI’’) and the Department of Justice Merger Guidelines

(‘‘DOJ Guidelines’’),11 and other characteristics of the

markets.

After consummation of the proposal, the Norfolk–

Portsmouth Market would remain moderately concentrated,

and the post-merger HHI would be consistent with the DOJ

Guidelines and Board precedent. Numerous competitors

would remain in the banking market.12

In the Elizabeth City Market, however, the HHI would

exceed DOJ Guidelines on consummation. Gateway is the

second largest insured depository institution in the market,

controlling deposits of $143.3 million, which represent

21.9 percent of market deposits. Provident is the sixth

largest depository institution with deposits of $52 million,

which represent approximately 8 percent of market deposits. On consummation of the merger, Gateway would

become the largest depository institution in the market,

controlling deposits of $195.3 million, which represent

approximately 29.9 percent of market deposits. The HHI

would increase by 349 points to 2014.

Several factors indicate that the proposal is not likely to

have a significant adverse effect on competition in the

market. Nine commercial banking organizations would

remain in the market after consummation. Four of Gateway’s largest commercial bank competitors each would

control more than 9 percent of market deposits and the two

largest competitors would control more than 22 percent

and 16 percent of market deposits, respectively. Although

there has been no de novo entry in recent years, the

Elizabeth City Market has economic characteristics that

4. Pub. L. No 103-328, 108 Stat. 2338 (1994); see 12 U.S.C.

§1831u.

5. See Va. Code Ann. 6.1-44.1 et seq. (effective March 16, 1995);

1999 N.C. Sess. Laws 53-224(11) (effective May 21, 1999).

6. Gateway is adequately capitalized and the resulting bank would

continue to be adequately capitalized and adequately managed on

consummation of this proposal. Gateway and its affiliates 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 amount of deposits of insured depository institutions in

Virginia. See 12 U.S.C. § 1831u.

7. 12 U.S.C. §1828(c)(5)(A).

8. 12 U.S.C. §1828(c)(5)(A) and (B).

9. The Norfolk–Portsmouth Market is defined as the independent

cities of Chesapeake, Norfolk, Portsmouth, Suffolk, and Virginia

Beach in Virginia; and Currituck County, North Carolina. The Elizabeth City Market is defined as the counties of Camden, Pasquotank,

and Perquimans in North Carolina.

10. Market share data are based on calculations in which the

deposits of thrift institutions are included at 50 percent before consummation. 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.

11. 49 Federal Register 26,823 (1984). Under these guidelines, a

market is considered moderately concentrated if the post-merger HHI

is between 1000 and 1800 and 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 thresholds for an increase in the

HHI when screening bank mergers and acquisitions for anticompetitive effects implicitly recognize the competitive effects of limitedpurpose and other nondepository financial entities.

12. Gateway operates the 14th largest depository institution in the

market, controlling deposits of approximately $48 million or less than

1 percent of market deposits. Provident operates the 22nd largest

depository institution in the market, controlling deposits of $42 million. On consummation of the proposal, Gateway would remain the

14th largest depository institution in the market, controlling deposits

of $90 million or less than 1 percent of market deposits. The HHI

would increase by 1 point to 1,325 and 21 institutions would remain in

the market.

548 Federal Reserve Bulletin Autumn 2004
suggest it is modestly attractive for new entry. The market

has experienced above-average population growth relative

to the average of nonmetropolitan areas in North Carolina,

and per capita income and deposits per banking office

exceed the average for nonmetropolitan counties in the

state. In addition, recent rates of increase in population and

bank deposits in the market are higher compared with

national rates.

The Board also has considered that the market has a

large and active credit union that offers a full range of retail

banking products. North Carolina’s State Employees’

Credit Union (‘‘SECU’’) is the second largest credit union

in the United States, with more than $10 billion in total

deposits. Approximately 75 percent of the residents in the

market are eligible to become members of SECU. In addition, SECU operates street-level branches and multiple

automated teller machines that are easily accessible to

residents in the market. SECU controls approximately

$68 million in deposits in the Elizabeth City Market. The

Board concludes that this credit union exerts a competitive

influence that mitigates, in part, the potential anticompetitive effects of the proposal.13

The Board concludes that the foregoing considerations,

including the number and size of competitors that would

remain in the Elizabeth City Market after consummation,

the presence of a large, accessible credit union, the structure and attractiveness for entry of the market, and other

factors, mitigate the transaction’s potential anticompetitive

effects. The Department of Justice has advised the Board

that consummation of the proposal is not likely to have a

significantly adverse competitive effect in the Elizabeth

City Market. The Board also has received no objections to

the proposal from the other federal banking agencies.

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

consummation of the proposed transaction would not likely

result in a significantly adverse effect on competition or on

the concentration of banking resources in any relevant

banking market and that competitive factors are consistent

with approval.

Financial and Managerial Resources and Future

Prospects

In reviewing the proposal under the Bank Merger Act, the

Board has also carefully considered the financial and managerial resources and the future prospects of Gateway and

the Provident branches to be acquired. The Board has

reviewed these factors in light of all the facts of record,

including confidential reports of examination assessing the

financial and managerial resources of Gateway and information provided by Gateway. The Board notes that Gateway currently is well capitalized and is expected to remain

so after consummation of the proposal. In addition, the

Board has considered Gateway’s plans to implement the

proposal, including its available managerial resources.

Gateway has sufficient financial and managerial resources

to consummate the proposal. Based on all the facts of

record, the Board concludes that the financial and managerial resources and future prospects of the institutions

involved are consistent with approval of the proposal.

Convenience and Needs Considerations

In acting on the proposal, the Board also must consider its

effects on the convenience and needs of the communities to

be served and take into account the records of the relevant

insured depository institutions under the CRA. 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.14

The Board has carefully considered the effects of the

proposal on the convenience and needs of the communities

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

Gateway’s CRA performance record and other information from the bank. Gateway received an overall rating of

‘‘satisfactory’’ at its most recent CRA performance evaluation by the Federal Deposit Insurance Corporation

(‘‘FDIC’’), as of April 1, 2001.15 Provident also received a

satisfactory overall rating at its most recent CRA performance evaluation by the FDIC, as of October 1, 2001. In

addition, the Board notes that the three branches to be

acquired are somewhat remote from Provident’s main

operations in Maryland and Northern Virginia. With their

proximity to Gateway’s branches, the bank plans for these

branches to play a central role in expanding its community

banking services in northeastern North Carolina and the

Tidewater region of Virginia.

Based on these and all the facts of record, the Board has

concluded that considerations relating to the convenience

and needs of the communities to be served, including the

CRA performance records of the institutions involved, are

consistent with approval.

Conclusion

Based on the foregoing and 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 Bank Merger Act

and other applicable statutes. The Board’s approval is

specifically conditioned on the commitments that Gateway

made to the Board in connection with the application,

including a commitment to comply with state law. These

13. With deposits of SECU included at 50 percent, Gateway would

be the largest of eleven depository institutions in the market, with

20.8 percent of market deposits, and Provident would be the sixth

largest depository institution in the market, controlling 7.6 percent of

market deposits. On consummation of the proposal, Gateway would

remain the largest depository institution in the market with deposits of

$211.3 million or 28.4 percent of market deposits. The HHI would

increase by 315 points to 1844.

14. Interagency Questions and Answers Regarding Community

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

15. Gateway became a state member bank on October 1, 2001.

Legal Developments 549
commitments are deemed to be 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 proposal may 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 the Federal Reserve Bank of Richmond, acting pursuant

to delegated authority.

By order of the Board of Governors, effective August 3,

2004.

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

Banco de Chile

Santiago, Chile

Order Approving Establishment of a Branch

Banco de Chile (‘‘Bank’’), Santiago, Chile, 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 Miami,

Florida. 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 a newspaper of general circulation in Miami, Florida (The Miami

Herald, October 2, 2003). The time for filing comments

has expired, and all comments have been considered.

Bank, with total assets of $15.3 billion, is one of the

largest banks in Chile.1 Three Chilean entities, LQ Inversiones Financieras S.A., Sociedad Matriz del Banco de

Chile S.A., and Sociedad Administradora de la Obligacion

Sabordinada, directly own 20.2 percent, 18.5 percent, and

42 percent, respectively, of the Bank’s shares.2 These three

entities are directly or indirectly controlled by Quiñenco

S.A., Santiago, Chile, which, in turn, is indirectly controlled by the Luksburg Foundation (‘‘Luksburg’’), Vaduz,

Liechtenstein, Bank’s ultimate parent.3 Bank provides a

wide variety of financial services, including retail and

corporate banking, insurance and brokerage services, fund

management, financial advisory services, securitization,

and trade-related financing. Bank operates approximately

240 branches in Chile, as well as representative offices in

Argentina, Brazil, and Mexico. Luksburg and Bank are

qualifying foreign banking organizations pursuant to Regulation K.

In the United States, Bank operates a branch office in

New York, New York, and an agency in Miami, Florida.

New York is Bank’s home state. Bank proposes to establish a branch outside of its home state by upgrading its

Miami agency into a branch pursuant to section 5(a)(7)(B)

of the IBA (12 U.S.C. §3103(a)(7)(B)). The proposed

branch would continue the business of Bank’s Miami

agency, but would also enable Bank to accept at its Miami

office wholesale and other limited deposits from U.S.

residents.

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 CFR 211.24).4 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 CFR

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 that Bank is subject

to comprehensive supervision and regulation on a consolidated basis by its home country supervisor, the Superintendencia de Bancos e Instituciones Financieras (‘‘SBIF’’).5

Bank continues to be supervised by the SBIF on substan1. Asset data are as of December 31, 2003.

2. No other shareholder owns directly more than 10 percent of

Bank’s shares.

3. Mr. Andronico Luksic Abaroa indirectly controls 56 percent of

the shares of Quiñenco through Luksburg. Two other members of the

Luksic family each indirectly control approximately 13.2 percent of

Quiñenco’s shares. The remainder of Quiñenco’s shares are publicly

traded on the New York and Chilean Stock Exchanges and no other

shareholder owns more than 5 percent of those shares.

4. 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.

5. See Banco de Chile, 80 Federal Reserve Bulletin 179 (1994);

See also, Banco de Credito e Inversiones S.A., 85 Federal Reserve

Bulletin 446 (1999).

550 Federal Reserve Bulletin Autumn 2004
tially the same terms and conditions. Based on all the facts

of record, it has been determined that Bank continues to be

subject to comprehensive supervision and regulation on a

consolidated basis by its home country supervisor.6

The additional standards set forth in section 7 of the IBA

and Regulation K (see 12 U.S.C. §3105(d)(3)–(4); 12 CFR

211.24(c)(2)–(3)) have also been taken into account. SBIF

has no objection to the establishment of the proposed

branch.

Chile’s risk-based capital standards are consistent with

those established by the Basle Capital Accord (‘‘Accord’’).

Bank’s capital is in excess of the minimum levels that

would be required by the 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. Bank has established controls

and procedures for the proposed branch to ensure compliance with U.S. law and for its operations in general.

Chile is a member of GAFISUD (Financial Action Task

Force for South America), which is an observer organization to the Financial Action Task Force. Chile has enacted

laws and adopted regulations to deter money laundering.

Money laundering is a criminal offense in Chile, 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 its auditors

and SBIF.

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 and its ultimate

parent, Luksburg, 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

information. In addition, subject to certain conditions,

SBIF 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.

In order to approve a proposal to establish a branch in a

state outside a foreign bank’s home state by upgrading an

agency pursuant to section 5(a)(7)(B) of the IBA (12 U.S.C.

§3103(a)(7)(B)), the Board is required to determine that

(i) the establishment of such branch is permitted by the

state where the branch is to be established; and

(ii) the agency to be upgraded was in operation in that

state on the day before September 29, 1994, or has

been in operation in that state for a period of time

that meets the state’s minimum age requirement

permitted under 12 U.S.C. §1831u(a)(5).

These requirements have been met in this case.

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.7 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. Approval of this application

also is specifically conditioned on compliance by Bank

and its ultimate parent with the commitments made to the

Board in connection with this application and with the

conditions in this order.8 These commitments and conditions are deemed to be conditions imposed in writing by

the Board in connection with this decision and, as such,

may be enforced in proceedings under applicable law

against Bank and its affiliates.

By order, approved pursuant to authority delegated by

the Board, effective July 27, 2004.

Robert deV. Frierson

Deputy Secretary of the Board

6. In reaching this view, the oversight of Bank’s parent companies

has been considered. Under the Chilean General Banking Law, Bank’s

two immediate parent holding companies, Sociedad Matriz del

Banco de Chile S.A. and Sociedad Administradora de la Obligacion

Sabordinada, are subject to supervision by the SBIF. In addition,

under the Chilean General Banking Law, the SBIF has authority to

request that Bank provide information to the SBIF concerning any of

its parent holding companies. The Chilean General Banking Law and

the Chilean Corporations Law also contain restrictions on transactions

with affiliates.

7. 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.

8. The Board’s authority to approve the establishment of the proposed branch parallels the continuing authority of the State of Florida

to license offices of a foreign bank. The Board’s approval of this

application does not supplant the authority of the State of Florida to

license the proposed office of Bank in accordance with any terms or

conditions that it may impose.

Legal Developments 551